Very interesting - no disclosure and all the negative spin hype... You would think that everyone is walking away from their loans, contracts, and responsibilities from the tone of this article yet that is far from the truth. I wonder what Minyanvilles agenda is exactly... You would also think the 20 state metro area housing price index was actually going down fast when in fact the latest month to month decline was less than 1% after trending down from much higher declines during the first part of the year.

Negative hype.

"Left to the free market, these issues will take years to work through" - Comrad Jeffery

We are looking at the "fruits" (rotten) of decades of government/FED policy that have caused this issue... Slow, clumsy and messy though it may be, the ONLY way to work through these issues is the free market...

As always, democracy and free markets are the "least bad solution". Anyone trying to tell you otherwise is selling something... But they are the LEAST bad - as in all others are WORSE...

Any solution the government comes up with will be paid for with MASSIVE deficits and/or money creation which means that each "dollar" of solution will be multiplied by inflation, taxes adn transaction cost...

It's time to swallow the big bad tasting pill here and stop trying to create impossible growth to the sky without recession economies... Stop trying to treat the symptoms with arsenic and get back to the root cause...

Of course, no one wants to do that and the news media sounds like Karl Marx's tea club these days... Calling for regulating this, bailing that out and sticking it to "the man"...

"A government which robs Peter to pay Paul can always depend on the support of Paul."
– George Bernard Shaw

Thats a terrible idea. Retirement savings are for retirement, period. People already dont save enough. !0% of gross isnt enough. People need to be allowed to put 20% of gross in pre-tax.

The govmts understated inflation, negative real returns over the last 10 yrs for s&P 500, elimination of traditional pensions, have all but insured that coming generations wont retire . Indeed, there is already a marked reduction in the percentage of workers who actually retire, many continue to work to make ends meet.

This is an extremely bad idea. After foreclosure --what happens to dwelling --it is sold to someone who can pay for it and the market corrects itself --Too many people with absolutely no money and no credit were allowed to purchase. If left alone the market will right itself. The people in pain now are the ones who had no savings to begin with. Now the gov't is once again trying to make it easier for people with no money or savings to buy.

I think that the truth is difficult, and MV speaks the truth about real problems. The denial is clear in the market, and emotions get in the way except in credit spreads.

The MV agenda is debt reduction, capital preservation and financial literacy.

These folks were talking about credit problems and the FNM/FRE insolvency well before any mainstream media.

It may sound negative, because it is a very negative financial situation we (a collective we) are in right now. However, MV offers that the other side picture of this crisis as well, and that is what we focus on and watch the path that it takes to get there.

availability is drying up and market rates have been backing up, with incomes faltering amidst a weak labor market, availability is pre Fed easing from last fall. It seems clear any sales bounce may very well have been fueled by foreclosure activity as the banks auction off distressed properties. Many of these cash deals as financing is increasingly onerous.

Ok heres my idea- A 2% government loan of the difference between the sale price and the value of the current loan. If we implemented a loan program similar to student loans we could return liquidity to the houseing market and fortify the banking system at the same time.

for example

If you had a 250,000 loan currently on a home worth 200,000 upon sale the government would make the seller a 2% loan on the 50,000 dollar difference (It would probably make more sense to go 60,000 and include costs)

The 2% would not be attached to the home instead it would follow the seller like a student loan. THis would discourage the current practice of panic short selling which destroys the sellers credit and leaves the bank holding the bag.

This would be an expensive program but I think it is a lot better solution than bailing out fannie and freddie because it leaves the responsibility with the people who took out the loans in the first place. And unlike the bailout the government will actually recoup its money over time although certainly not with killer returns it is better than just writing off the whole fiasco. The loans would also serve as a reminder to the loanies that money is not free!

People are already raiding their retirement savings to get them out of trouble.

Without pensions - taken away by corporations starting in 80's & 90's
SSI in the out house - and going down

You now advocate letting underwater people tap their retirement plans???

What bonehead university did you go to - I know IVY League

This is right up there with helicoptor Bob.

You must still be drunk in Jackson Hole - go back to bed

According to data compiled by the Census Bureau, in 2005 the collective balance in Americans' 401k accounts stood at $1.2 trillion. If homeowners were allowed to tap their retirement funds without penalty to pay for their negative equity, 75% of our retirement war chest would remain intact - and the economy could begin a real healing process.
----------------------


Kevin:
The collective balance of 2005 does not reflect its true value as a large portion of this is tied up in equities. Try to draw down on this 1.2 trillion for the purpose of bailing out homeowners upside down and we will find out that the liquidity of this money will be just as tight as the banks. The 2005 number is already down 20% in face value from the markets decline plus another negative 25% in dollar value due to the falling dollar. It's a catch 22 as the cash for stock liquidity is leveraged as much as all the complex debt instruments are.

The answer is to stop the dividends. Stop the bonus money to these inept Wall Street people. Roll back all the excessive millions of dollar salaries ( Its quite obvious by now that these folks were not worth what they were paid and never were or will be) We have lost track of what the dollar should be valued at in part due to greed and excessiveness.
Stop the constant bickering between the political parties. Stop the illegal migrant population from diluting our incomes. By working under the table for cash and taking jobs from Americans we take a double whammy. They don't pay taxes don't contribute to social security use our schools for free. It's an endless process of losses for American citizens. Millions of illegal workers were put to work building all these homes and now Americans can't afford them because they have had their wages diluted to poverty levels. We are a nation of pansy assed liberals afraid to speak up. Our politicians are busy sucking up to the voters with false promises to pass any effective measures that would help us see our way through this mess. Perhaps the best way is to let it burn and have the chaos that follows sort it out. I'm also sick of the folks who gloat about paying hundreds of millions for a home or the folks that actually brag about making hundreds of millions a year in wages and bonus's thinking they actually earned it. I for one am sick of worrying about it and can't afford the time to hate the idiots who got us in this mess any more then I do already. The world is full of arrogant piss ants that are about to get what they truly deserve.

Lots of love

JPM

Do you believe in consequences?

If so, what should the consequences be

for a nation that continues to spend more than it takes in each and every month;

for a nation that allows banks to give loans to people they knew couldn't pay them back;

for a nation that promotes over-consumption rather than savings;

for a nation that allows companies like GM (and labor unions) to over-promise their employees and mortgage their future;

for a government that refuses to address the coming Social Security and Medicare debacles;

for a nation that lowers interest rates so home builders can build McMansions just before the impending retirement, down-sizing and eventual death of baby boomers;

for a nation that sends 100's of billions of dollars overseas for oil rather than conserve and invest in alternative energy sources;

for a nation that squanders trillions of dollars to fight a fictitious 'war on terror' to scare its people and maintain the 'stability' of dictators around the world;

for a nation that allows its manufacturing base to be moved overseas because it benefits the top 10% (temporarily);

and ultimately, for a nation that has forgotten the value of sacrifice and hard work so that future generations can even hope for some semblance of the life we've enjoyed these last 50+ years?

Do I sound negative? Well, maybe its because it disgusts me to see the work and sweat equity of our ancestors wasted on the majority of people who have become little more than spoiled, greedy, trust-fund babies! Arrogance is distasteful enough but when combined with ignorance it is downright nauseating.

I would be interested in hearing any alternative versions of the truth out there.

Bri,

My comments reflect my experience in the real estate market, talking each day the people in the trenches, trading delinquent mortgages, looking at actual real estate transactions and talking to troubled borrowers.

Home price declines may fluctuate from month to month, and any recent pullback in declines can be attributed to distressed asset trading and Wall Street money being poured into the market, not some fundamental recovery that's imminent.

My goal is to counter the constant and unfounded bottom-calling that is so prevalent in the financial media. Trust me, I'd love to be out there calling a bottom if I saw one on the horizon - when I do, I will, but not before.

Andrew

David, fantastic post.

The irresponsible path up the slope in 10 easy bullet points.

Mike,

"... While this is the healthiest path economically, it's also the least acceptable politically." And unfortunately politics trump economics, especially in an election year and with a new administration coming into office.

Which is more free market, strict rules about how I am allowed to invest for retirement or a rule saying that if I so choose, I can use my own money to get myself out of a tough situation. Not sure how more financial freedom is akin to Communism.

This "government" solution empowers people to make choices for themselves, and live with the consequences. Isn't that what the free markets are all about?

Andrew

"A 2% government loan of the difference between the sale price and the value of the current loan."- Brad O'Neill

Actually, Brad (above) makes a valid point. The burden of getting out of this mess is for all involved to take a step back, take a deep breath and then agree to share in the responsibility; government, banks and homeowners.
One way to do that would be to float these government-backed personal loans for people who would opt to keep their places in hope that the prices will come back one day.

The ability of homeowners to stay where she is right now would automatically end speculation about what is coming down the pike. End the rampant uncertainty and come up with an idea and everything can return to some semblance of normalcy.
Stability can become a self-fulfilling circle in that if we all knew that everyone could pretty much stay where they are, then home prices would correct much quicker.

The pin-action from that would be decreased volatility, a more stable financial market (maybe to the point where they can all come together for the inevitable "you-show-me-yours-I'll-show-you-mine" meeting to clear up all this derivative overhang), happier Realtors and on and on.

As for your idea regarding using retirement savings for this purpose, the effects would basically be the same. However, the government would probably have to accept a political deal to levy lower taxes on those monies later if people put their own money to work now.
I suspect the cost of floating personal loans as opposed to taking a tax-revenue hit later on would be a less costly path for the government to take.
Besides, it would be much cleaner, more efficient and much less open to fraud.

Brad, in your example - we can be certain the homeowner owes 250K; but how can we know what the house is worth, without price discovery ? That is, without the property being sold, for what the market will bear ?

Mike,

Its an unpleasant solution to be sure, but allowing these properties to sell is the only way for the price discovery you describe. If upside down homeowners can repay the bank for the negative equity they can sell the house - but not until.

They can then sell at a market price, rather than leaving the house on the market at a price that's too high. Until that happens, the economy will continue to spiral and social mood will continue to sour.

Andrew

Brad,

I like the idea - I think the important aspect of any plan is that people need to opt into the program, take control of their finances and have some choice in the matter.

Right now its either walk away and ruin your credit or nothing.

Andrew

David- The loan would be based on the actual sales price of the home. If someone wanted to do a loan on a home they were not selling the program would become far more expensive as most savy homeowners would take advantage of 2% money as opposed to paying the 6-8 percent they are paying now. But values can be determined through appraisals being in the real estate business I know this is fraught with danger Appraisals can very widely and fraud is a legitimate concern. It should definetly be limited to a one per tax payer limit.

Tapping the 401k market would send the stock market plummeting imagine 25% of equities being sold off in a short period and it would destroy retirement accounts (a hedge against bankruptcy) So I think I would be opposed to such a measure. I miight be open to using the 401k equity as collateral for a low interest loan.

Olexsandra- As for keeping people in their houses for longer periods this will have a negative effect on home values if people are forced to stay as homes tend to deteriorate when people stay too long. We need to keep liquidity in the market to encourage renovations and positive growth in the neighborhoods. I do agree with you that the stability is an important factor and I think the psychological benefit of knowing you can leave even if you don't have too would greatly add to the average home owners sense of freedom and overall happiness.

I'm advocating more choice, if people want to use their retirement savings to save their credit they should be allowed to do so. As long as we depend on the government or pensions for our retirement, we'll never truly be financially independent.

"This "government" solution empowers people to make choices for themselves, and live with the consequences. Isn't that what the free markets are all about? " -Andrew Jeffery

Choice is indeed, but the trouble is the more often than not the Government choice is a false one. That is the full cost of the government solution/choice is almost invariably masked to the "consumer"... and if known on a net basis, most rational people would say "no"...

Case(s) in point:
1. The first-time homebuyer "credit" in the most recent legislation.

2. SS which has a negative real return (and that ignores the societal cost of paying out SS when there is no money in the "trust" earning). Not only do "investors" lose money after inflation, EVERYONE pays for it in the form of interest on the national debt... So, its WAAAAAAY underwater...

3. IRA and 401Ks that have corrupted price discovery in the market and fostered excessive investment relative to debt levels for so many Americans (the best way to invest if you are in debt is to get out of debt first, not to keep pumping the money into the 401K while your CC bills rise).

4. College and home lending by GSEs - the ever increasing proportion of lending backed by these organizations has led to the drastic (well ahead of inflation) increase in the cost of the underlying "product"...

College can keep rising exponentially in cost so long as people can borrow to pay for it. If "most" people had to pay out of pocket or "work their way through", the price would function along with supply and demand. The "curious" nature of college pricing is only "confusing" and "outside" supply and demand if you ignore the influence of GSE liquidity pumped into the market (along with HELOCs recently).

So, while the immediate treatment provided by a government not constrained by solvency, profit, long term sustainable economics might seem good - so good that you can't rationally make any other choice - the end result is the credit crash we have now and the decades of credit impairment we will suffer in the future...

If the government choice offered was one based on competition, sustainable economics and profit, then fine... But if that were the case, why would they be offering it?

Virtually all government programs rob from the future to make the present more attractive/palatable to voters and donors... That's why they don't work. They don't have to prove themselves in the "natural selection" of the markets because they have "sovereign immunity" which lasts as long as the ability of a government to borrow and no longer...

I don't know how we get back to rational economics without a depression when even rational, well educated people are so scared, confused and mis-informed about the big-picture that they jump at the first loaf of bread the government tosses their way without looking for the bear trap waiting for them when they grab it...

I think my response got lost in my broader critique of the artificial "choices" government offers...

Specific to the proposed program of 401K/IRA money to "shore up" the loan - if this becomes an option - it will no longer be a "choice". The Banks will expect you to do this...

So, instead of having the leverage of "walking" and forcing them to deal (work out) with their rather poor risk mathematics in having lent to you and your underwater house (20% down should have made that pretty rare, but who was putting 20% down?) - THEY now have an option to counter your leverage...

Much like you have a "choice" to not borrow money to go to college - but it costs more than many/most can earn, borrow from family and save... So, you don't really have a choice...

You have a choice to buy your house in cash, but the cost of houses has risen along with the ability to borrow money, so only a select few have the "option" of buying in cash - even the "highly compensated" can't afford most houses outright in an area where they can support their salary...

Prof. Jeffrey,

Home prices have declined 15% from the peak, but not every home was bought at the peak. Many homeowners enjoyed part of the boom prior to the bust. Many more bought after the peak and did not suffer the entire 15% of decline. Many of those who are underwater do not need to sell and can afford to wait for prices to recover, even if it takes a decade.

So I am uncertain if taking 15% of $1.6T is even in the ballpark of the amount of equity required to be wiped out. It might be a tenth of that; it might be more, but I doubt it.

"If homeowners were allowed to tap their retirement funds without penalty to pay for their negative equity,"

Ok, I know I'll sound like a nitwit, but in what way is the homeowner who is able to make the monthly payment on their no-equity home better off robbing their retirement to get rightsized on their mortgage?

Why not just pay the monthly bill and wait it out? If some crisis occurs and they must sell, they can re-visit the decision then to raid the piggy bank.

I just don't see why anyone should put more money into a home not worth what they paid.

I can understand why their lender would like that to happen.

But that's a different story...

Dean some homeowners went with equity loans (helocs) during the hype and some even borrowed as much as 120% the percieved value of their homes. The crises is very real. It won't affect responsible borrowers accept to lower their home values as their neighbors get forclosed on. Most people who have owned a home for more than 5 years are still way ahead it is all the people that bought in or borrowed in the last 3 years that are in trouble. When you combine High debt with an unstable job market you could have disaster. If you lose your job and can't afford to move what do you do?

the prices have fallen 25% here in Phoenix and similar numbers in Las Vegas, New york, San Diego etc. that is where this will shake out.

The real catalyst is who is left to buy? two years ago anyone with a pulse could get a loan. Atleast half the former buyers are completely excluded from the buying process right now and probably won't be back. A number of homes in Phoenix are investor owned and we have a double whammy with the rediculous crackdown on Illegal alliens our low end apartments are all empty also in addition to our single family homes. A ton of medium range apartments were out of circulation while they were being converted to condominiums that no one wants to buy and are now flooding the market as either rentals or super cheap condos being auctioned off to anyone with cash. (the buyers of these type properties no longer qualify for the financing that was available when the renovations started.)

The wheels are off the bus the only question is will we flip on the side of the road or go off the bridge into the gorge!

I forgot about HELOCS and most of those are ARMS which may be resetting.

Illegal immigrants are a pet peeve of mine; there is no way in Hot Hades they are not, in net, taking jobs from Americans and depressing wages. If the low-income rentals are empty perhaps it is time to reduce rents and give the working poor a break. I'm sorry but I have grown kids who find themselves competing for jobs with illegals while trying to put themselves through school. Illegal immigration is a direct subsidy of the upper classes by the lower classes.

What this article misses is that the problem goes far beyond people who bought homes.It is about people who refied (and refied, and refied...) into crazy loans and used their homes like an ATM. They are waaay underwater, and the boats, RV's and 100K kitchen remodeling money ain't coming back

I meant that price stability would come when people do not feel that they are forced to leave their homes. Of course, the matter is a choice the homeowner has to make.

The most important psychological impact of stability is not involving the homeowner at all. Rather, stability in the market place would send a signal to bank loan officers, investment bankers and venture capitalists that we get it; that everything is cool; there is no more panic.

Once everyone calms down, then it will be possible for everyone to "come clean" regarding thier portfolios. Until all the CDO-cubed derivatives are accounted for, no one is going to have any idea what someone else is holding over them. The most important thing about market stability is that it will show the <i>investment community</i> that Joe Six-Pack ain't freakin' out. That may give them the confidence to clarify this Sword of Damocles overhanging the market.

Until that happens, a panic to making ginormous mistakes are far more likely.

Im with you Olexsandra.

Dean- Think of Illiegal immigrants as future prospects not competition In America people can produce more than they use so they add to the economy. Even the lowliest laborers add value to our society and their children typically grow up to be the next rung on the ladder. I worked alongside illegals as a young man and these people work harder than most people ever have to. They have dreams and aspirations many of these people will produce much more for us than they ever take. I am not a bleeding heart liberal I own shares of Oil companies and will be voting for MCCain even though I would of preferred a more conservative candidate. Sorry I got way off topic here and Dean I respect and value your opinion and still have a message you sent me a while back so even though we disagree here just wanted to let you know most of the time I am on your side.

Every solution I hear, short of letting the free markets work, seems ridiculously wrong-headed. Doing ANYTHING to attempt to put a floor under prices will only make the situation worse and make it last for a longer period of time. People can't afford their homes even before resets on a lot of these mortgages. So how will keeping prices where they are help anything (except for maybe helping the paper wealth of some)? The people who got themselves in over their heads deserve nothing more than a good lesson in home economics and responsibility, which is what they are getting if they lose their homes and go back to renting.

Instead of trying to use the GSEs to prop prices up (increasing the limits and all of the other ridiculous rule changes), the low natural volume of home sales we are experiencing would have made this a perfect time to put the GSEs into runoff (wind them down), as the only way to fix the GSEs is to get rid of them. Instead, they're stuffing the pipeline with garbage and compounding the problem making the ultimate cost to everyone greater. How can you promote affordable housing by making availability of money easier? Answer: You can't because the cost of money is inversely related to the other half of the equation (home prices), especially if left at ridiculously low levels for years. It's also the perfect time to take building capacity out of the market, but the builders are looking for bailouts too.

As Toddo and others say all the time - "Time and price." Anything that keeps prices from falling will extend the amount of time this goes on. People are overextended because home prices are still way too high. When folks get back to the point where they can pay their mortgage while also being able to afford food, clothes and transportation, without the use of credit and without unnatural taxpayer support (no one deserves a special rate on a mortgage because they got in over their heads, and low downpayments are the problem not the solution), then we will be poised again for growth and we will all be better for it.

And what's with this idea that recessions are unacceptable? Obviously constant growth without any contractions is an utterly unnatural state of affairs.

John you make very good points. There is a clamor to do something in congress. I am offering a way for people to still be responsible instead of the current momentum which is debt forgiveness but I understand your logic. I take it you are not from the compassionate conservative camp! I could accept your plan if the Ceo's and executive officers of Fannie Mae and Freddie Mac were forced to relinquish all of their ill gotten gains and the companies were allowed to fail.

I'm not sure I follow the logic, Brad. What you're proposing sounds like a bailout for the banks (don't need to recognize losses because the government funds the MTM loss and then charges the homeowner a below-market interest rate on the loan), but what is the motivation for someone to take this deal? When you sign a mortgage you make a deal - if I can't make the payments, then you get to take the house. Walking away is obviously the better choice than to carry around your losses with you (but you no longer live in the house). I can't see how anyone would view this as a better choice to walking away, unless they are very sensitive to their credit score. Let the prices fall and let people go back to renting. We don't need liquidity in the mortgage market. We need to relearn discipline.

"Compassionate consevative" = political panderer.

My plan is just a brainstorm I meant it as a start not a complete solution. I am not looking to bail out the banks I am under the opinion that the government is going to bail them out with or without us I am just trying to present strategies that might be more fair to the tax payer. I think if you borrow the money you should pay it back. The banks should eat some of these costs maybe they should be forced to carry the 2% loans after all they were the ones that put out the zero down, interest only, stated income, adjustable rate mortgages in the first place.