Redstate

can't recall the name of it. Larry Kudlow talks about this all the time on his show. It pressured lending institutions to give loans to traditionally shut out groups, even if they did not meet loan criteria.

This is probably only a small part of the problem though. I think what we had here was a classic speculative bubble. Driven mostly by upper middle class consumerism, and speculation.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

but you have no trouble paying for it?

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

n/t

If this happens trust me, I'm going to have trouble paying it. Weighing a disappearing nick on my credit report versus federal largess, I'll take the nick on my credit report.

"A man does what he can and endures what he must."

...but unprecedented things have been happening in the policy realm.

A short description would be that the Federal Reserve are exchanging risky assets held by private sector, for risk-free assets from the Fed's own inventory.

They're doing this on a grand scale, with their eyes open, and in "sterilized" (non-inflationary) ways.

We're nationalizing private-sector risk. Other countries have a long tradition of doing this, but the US doesn't.

The political risk of a "New New Deal" is now extraordinarily high. There will be winners and losers. The economy as a whole may or not emerge as a winner. Freedom will definitely be a loser.

"We're nationalizing private-sector risk. Other countries have a long tradition of doing this, but the US doesn't."

It don't fully understand what that statement means, but it sounds pretty signficant.

Would you mind elaborating on that point- What other countries have done this, in what manner have they done this, and how its impacted their economies.

Thanks for the always informative analysis.

n/t

...and partly because abnormally high market illiquidity makes values even lower still.

There is a lot of mortgages out there (option ARMs, etc) that will reset at higher rates as time goes on. The theory behind these deals when they were made is that since house prices never fall, the mortgages could be refinanced on a higher equity base in the future, and the higher interest rates would never kick in.

But it turns out that house prices actually do fall. So no refinancings are possible now, and people are stuck with the higher rates.

In many cases, people can't afford the higher rates and face foreclosure. And in many cases, people are paying a mortgage with a higher principal amount than the current value of the home. That makes people feel like someone screwed them, even if they can actually afford the payments.

What no one wants to do is to take the hit from the decreased home values. The people who stand to gain the very most from a mortgage bailout are the bankers who made the loans in the first place, because for them, a bailout will erase the losses from loans they should never have made.

There are people out there who calculate that they have more to lose from a damaged credit rating than they do from paying a lot more money for their house than it's actually worth. And there are people who figure it the other way and will quite rationally default on their mortgages.

If I decide that I got screwed and I'm going to stop paying mortgage - then what happens? Doesn't the sheriff come out and post an eviction notice on my door so I have to move somewhere else but I can't buy because I've just trashed my credit--so now I've got to go rent somewhere or move back in with mom.

I see the emotional incentive for folks to walk away from a loan they no longer like. But I also see a lot of disincentives in the poor credit they will have to deal with.

So I guess I just don't see how someone could conclude that they are better off defaulting on a mortgage. Maybe it has to do with the costs of renting being so low as to make renting disproportionately attractive?

and it just reset, for some people it might not be a case of making a decision to pay or not to pay; some of these people simply may not be able to afford the higher rate, period, so the hit to the credit score may be a secondary consideration at best, and these people may be moving into rental units, rather than buying a new home.

When folks got into the ARM, the broker would have said something like "the rate will be 4% for the first 3 years and then it will reset to prime+3, which is currently 8%. It will adjust annually..." I'm making up the numbers.

What I am curious about is the 'which is currently x%' part. Have those reset rates increased significantly over the reset rate on the day those mortgages were signed? (e.g., has the basis for those adjustable rates made a big move) I didn't think they had and folks who entered these agreements are really getting reset rates as good as they could have reasonably expected. I do understand that the refinance option is not available and if they were counting on refi they're screwed.

...but I'd guess that today's reset rates are a lot lower than they were two years ago.

I think the resets don't go by the prime rate (which is less and less meaningful these days), but rather by LIBOR, since that more closely matches the rate at which portfolios of mortgage-backed securities can be financed.

The 10-year Treasury-note rate also strongly impacts mortgage rates, since short sales of the 10-year note are the method of choice for hedging long positions in mortgages.

Both LIBOR and the rate on the 10-year note are now substantially lower than they were two years ago.

Mortgage rates are powerfully influenced by factors in the overnight money markets, which are boring and arcane, so they fly far below the media radar.

Retail mortgage rates have increased sharply during the first three months of this year. Late last week, they plunged in the wake of the Fed's moderately successful Term Securities Lending Facility auction. The TSLF auction had the effect of sharply reducing supply in the secondary mortgage market, which raised prices and reduced interest rates.

I have seen language for these that states 'after 3 years, your rate will be prime plus X%' or, alternately, your rate will be 'x%' after 3 years. As the overnight rate has dropped recently, it could have the effect of slightly helping some people.

The only real advantage I have seen to get an ARM is if you are buying a house to 'flip' it. ARM's can often start at a lower rate than even a fixed rate, and a friend of mine actually did this for a living (he got out of the market about 3 years ago.)

Actually, if you can afford the cash flow risk than floating rate debt should be cheaper in the long run on average. Obviously there are a lot of variables but you are taking a bigger bet on future interest rate movements by locking yourself in than by letting it float - if you can afford the biggest expected increase in paymetns for a given year.

I've only used ARMs and have save a decent amount over the long run.

...you can refi a fixed-rate if rates fall.

But I'm not the one to talk. I hate debt. I don't have a mortgage, and the only money I ever borrow is to buy stock on margin.

That is true and you just ahve to account for transaction costs - which are higher in mortgage refi's than most other finance vehicles individuals work with. But you could do the same thing with an ARM and have the lower rate at all times. For example, last time I refinanced at 3.99% in 9/03 in a five year arm. It resets in September, if it reset today it would be at 4.5 - still way below what I could get a fixed for. I was lucky this time in that the ARM bridged valley to near-valley at least. But, even if it would reset higher I could still refinance into another ARM at a lower rate than into a fixed rate and wait it out.

So in a long winded way, you can use ARMs to reduce your expected frictional costs of a fixed rate refinance plan - and, so long as cash flow isn't the issue, historical models suggest you are actually decreasing risk.

Now, you ahve to explain how you can hate debt but borrow to buy stocks on the margin - that doesn't seem normal. Me, I love debt so long as my net equity keeps it in check.

My bride and I got an ARM in 2002. There was a lot of argumentation involved, however...

One of my friends' father was a financial backer of a mortgage broker (I think that's the right term... the business was responsible for trolling for mortgages and finding the best one for people for a nominal fee).

This company first found us a mortgage where we were paying 3% for the first year and then it could go up 5% in a year (with a cap of 10%). I told the guy (paraphrased) "Are you (redacted) (redacted) you (redacted) (redacted)?"

He did some more digging and found us a 5.25% fixed rate mortgage. We *JUMPED* on it... but it fell through when we went in to sign paperwork. So he did some more digging and found us an ARM that had pretty decent terms.

First year would be 3.25%. After that, it could go up 1% a year, but not more than 1% in any given year, and not more than 5% total. On top of that, the rate would be indexed to whatever prime was so that our adjustable rate would always be better than what we could get fixed. (When I was a kid, mortgages were double-digit critters and when we moved out here in the early 90's, mom got a mortgage of around 9%... so I was thinking that, in a worst case scenario, I'd still be paying less than my mom's old fixed rate mortgage).

Well, we agreed.

And the first year taught us to budget. We went from paying around $525/month in rent to around $850/month in mortgage payments. But, let me note, when we liven in an apartment, we were constantly going out. Let's go out to eat. Let's go out to the mall. Let's go out to Mediaplay. Let's go to the movies. Let's just get out of this dinky, depressing apartment. When we became homeowners, we did the "what do you want to do?" "I was kind of hoping to sit quietly in the basement." "Oh, good. Me too." thing.

And, like clockwork, our rate went up 1% after a year. Hey. 4.25% is still pretty g-darn good.

And we got even better at budgeting.

And, like clockwork, our rate hit 5.25%. This irritated me because rates were still pretty low and we kept going up full points instead of, say, half points. Anyway, we got even better at budgeting.

The following year, 2005, the rate hit 6.25% and I hit the roof. The letter from the mortgage company explained why the rate went up despite the agreement we'd signed and they used mathematical formulas and everything but I gave my bride an ultimatum and we went mortgage shopping and we got the house appraised and got a fixed mortgage at 6%, the house appreciated enough that we no longer had to pay mortgage insurance, and our payments went down by about $50.

So we may have been the only people on the face of the planet who did the ARM thing the way that Greenspan envisioned way back when. We did it right.

But it was an ordeal getting an ARM with terms that didn't make me feel like cursing.

Man is free at the moment he wishes to be. --Voltaire

that what he have had is a classic speculative bubble. All bubbles eventually burst and like a chain letter the people caught holding the bag are the one's who lose, while those who cashed out early are big winners.

Lower housing prices do have a silver lining. 1) young first time homeowners finally get a chance to afford something decent.
2) people with cash can now buy low and then wait for the prices to go back up again.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

I hasten to add that in a lot of cases, they should take a hit. Or at least be placed on more austere procurement and expansion tracks. Those services can also in many cases look for alternative means for raising money other than property taxes. I'm in the printing and mailing business and we are definitely seeing an uptick in mailings for things like volunteer fire departments and first aid squads. These institutions have traditionally not been primarily taxpayer-supported, and at a time when many municipalities are going to be facing budget shortfalls due to decreasing property tax revenues, a very good answer for maintaining critical services is to MAIL to people and ask for a small donation, instead of pushing through higher tax rates.

For starters, money is one of the greatest inventions ever. I favor it.

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"If we want to take this party back, and I think we can someday, let’s get to work." – Barry Goldwater

...Gold Standard in! Hey, that's catchy; maybe there could be a Presidential campaign based on that!

...issue here. The government requires that we pay our taxes in US dollars.

That, and only that, is the reason why a piece of paper with green ink has any value at all. People need greenbacks in order to fulfill their legal obligations to the government, so they trade their own labor and their own capital to other people in order to obtain greenbacks.

There's no way to start over and re-do this system without destroying all of the structure that has been built up around it.

And the only way to do that, is involuntarily, through war or collapse.

And God help us, it might someday come to that.

The counterargument which is rapidly advancing, however, is this:

"We don't have time to let the mortgage market sort itself out and re-equilibrate. If we don't do something now, we'll have an extremely long and painful recession."

Politically, this position is extremely attractive because there's no downside.

If we get a protracted recession (or even a depression), the Democrats will say that the Republicans caused a problem too big to solve. They will be able to say this whether or not the cure causes the recession, rather than the disease, because only experts will be able to tell the difference.

If the situation does resolve (either because or in spite of a bailout), the Democrats will get the credit.

For these reasons alone, we're going to get a bailout. Unless Senate Republicans block it. In which case the Democrats will win big in the fall elections.

where W offers compassion and well-publicized (albeit modest) relief initiatives and stern JMac plays the wrathful deity "we can only afford so much and not a penny more".

If the stars are aligned, this will get us to the election and the reality that the sky is not falling, after all.

...don't the ability to withstand a Democratic legislation package (even with opposition from Senate Republicans) and they decide that half a loaf is better than nothing.

Even if there is no action till next year, I worry that conventional wisdom among ordinary people will settle around the consensus MSM view, which is that only stupid people don't concede the need for a bailout. That's a lot of political pressure on the wrong side.

then the economy might just right itself and the pressure to "do something" would be off.

I can hope anyway.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

Your points are valid that the declining house market doesn't just hurt the overextended. However, the issue at hand is whether the government should or even can do anything to help.

If Rudy can revitalize the US housing market I wish him godspeed.

He got crushed in the primaries you know.

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"If we want to take this party back, and I think we can someday, let’s get to work." – Barry Goldwater

2004 and 2006, this is a non sequitur.