Another help for those mortgages underwater.

[Marcus Aurelius]

Originally Posted by ms. julie

http://www.marketwatch.com/story/pri...k=MW_news_stmp

but BoA announced a new plan this week that would forgive up to 30% in principal on certain mortgages....I'm not sure what the terms of the program are...hell I'm not sure BoA knows what they are....


It's a fabulous way to market but until the banks actually properly place capable employees to handle this new process expect more chaos.

Bad link.

[Rudyard K]

Originally Posted by ms. julie

http://www.marketwatch.com/story/pri...k=MW_news_stmp

but BoA announced a new plan this week that would forgive up to 30% in principal on certain mortgages....I'm not sure what the terms of the program are...hell I'm not sure BoA knows what they are....


It's a fabulous way to market but until the banks actually properly place capable employees to handle this new process expect more chaos.

Agree the link is bad. Nevertheless, while 30% seems like a pretty hefty forgiveness, it might be economical...at least for a bank.

Banks are inherently bad marketers of forclosed assets. They are bankers with little entrepreneural knowledge. I had an employee in the early 1990's who got forgiven some mortgage debt. But only after he engaged a real estate broker to sell his house, he marketed it for a period of time, he handled the showings and such, and in the end, he was motivated to get the most possible for the house. Once he had gone through that process, and had an offer that was as good as he could get, but less than his mortgage, his bank allowed the sale and forgave his shortfall. In other words, they got him to work for free and get the best price that was available. If they had foreclosed him out, they would have had to devote time and money to the sales process, would probably end up in the same place on the sale, and as such would have yielded less money.

Through each of these type downturns, the banks end up taking on a bunch of assets that they don't know how to run or sell. Some smart guy talks them out of that asset at a discount, and then works on it and makes some money out of it. Someone had to absorb that loss.

We seem to forget that at the end of every trail of loss is a human being. Whether the homeowner takes the hit, and saves the bank from taking it...or the bank takes the hit and employees have to be laid off or shareholders lose money...or the government steps in and takes the hit and raises taxes to pay itself back....or some combination of the above.

It doesn't really matter, at the end of the day, some person (or persons) is gonna take the hit. Everyone else just passes it along until there is an individual found that can write the check to take the hit. There is no way to circumvent that entire circle.

Most all of the rhetoric is just everyone telling why it shouldn't be them.

[atlcomedy]

Originally Posted by Rudyard K

Banks are inherently bad marketers of forclosed assets. They are bankers with little entrepreneural knowledge. I had an employee in the early 1990's who got forgiven some mortgage debt. But only after he engaged a real estate broker to sell his house, he marketed it for a period of time, he handled the showings and such, and in the end, he was motivated to get the most possible for the house. Once he had gone through that process, and had an offer that was as good as he could get, but less than his mortgage, his bank allowed the sale and forgave his shortfall. In other words, they got him to work for free and get the best price that was available. If they had foreclosed him out, they would have had to devote time and money to the sales process, would probably end up in the same place on the sale, and as such would have yielded less money.

I think they call them "Short Sales" these days

[pjorourke]

And lets also remember that for everyone who sells at a loss, someone buys a bargain.

[TexTushHog]

Originally Posted by pjorourke

Conceptually, how do we justify helping homeowners who "lost money" by over leveraging their property. Consider two people, with the same incomes, that bought a house for $400K. A put 40% down and has a mortgage of 240K. B took a 95% loan and has a mortgage of $380K. lets assume that the market value of both homes are now $300K.

Both homeowners have suffered a 100K hit to their net worth. One lost 100K of equity, the other lost 20K of equity and has 80K of mortgage in excess of their value. Same $100K hit. How is it fair to help B and not A? Suppose further that A&B each had $160 to put down, but while A but it all in his home, B left $140 in a money market account. What now?

When you start down this slippery slope, where do you stop? I'm dying to hear TTH's take on this question.

I generally agree with you that it creates all kinds of unfair outcomes and moral hazard issues. It also pisses me off because I am very tight with my personal money and very debt averse.

About nine years ago, I bought a second home (my first had been paid off for years). It cost $285k roughly. I put $150k down because I didn't want to end up with negative equity and wanted to be in a position to go to my bank if my finances got tough and ask not to be able to make payment for a while. I only financed over 10 years and paid it off in 5 just because I hated having a debt. But folks that are conservative with debt, as I am, get the short end of the stick in these types of bailouts.

That being said, I'm still probably better off having these bailout and paying my share through taxation than allowing the economy to go completely off the rails (either through excessive foreclosures or through massive bank failures when they have to write off huge debts that they can't collect), settle into a liquidity trap depression, and see the value of my $300k second home crash to $150 or $125. (Not to mention what it would do to my other assets.)

The real lesson is that we need to be aware of the causes of market failure and regulate against it in those markets where sound economics show it can happen or where it has historically happened. Finance is one of those markets, primarily because of market participants underestimate the probability of black swan type events (as well as asymmetries of information, principle/agent interest conflicts, etc.).

[pjorourke]

Say TTH, I have this bridge I'm selling...

[charlestudor2005]

Originally Posted by pjorourke

Say TTH, I have this bridge I'm selling...

You should check to see if the bridge is underwater. You might be able to get some fed help.

[pjorourke]

bridge 1 (brj)n.1. A structure spanning and providing passage over a gap or barrier, such as a river or roadway.


Well if the bridge was under water, it wouldn't be a bridge would it? But I am sure there is a government program somewhere that will pay me money for it.

[Marcus Aurelius]

Originally Posted by pjorourke

bridge 1 (brj)n.1. A structure spanning and providing passage over a gap or barrier, such as a river or roadway.


Well if the bridge was under water, it wouldn't be a bridge would it? But I am sure there is a government program somewhere that will pay me money for it.

Bridge under water in Sweden.
http://qualityjunkyard.com/2009/04/1...rwater-bridge/

[charlestudor2005]

Originally Posted by pjorourke

Well if the bridge was under water, it wouldn't be a bridge would it? But I am sure there is a government program somewhere that will pay me money for it.

Check out Rhode Island about now. I'm sure the government has funding to fix those bridges.

[Texas Contrarian]

Originally Posted by TexTushHog

...liquidity trap depression...

I disagree with the notion that a liquidity trap was ever much of a risk, believing instead that excessive government efforts to counter it (such as the foolish, mostly wasteful $787 billion "stimulus" package) create far larger problems. The concept of a "liquidity trap" has been widely reported, but is often misunderstood -- even by people who should know better (such as Paul Krugman).

Originally Posted by TexTushHog

The real lesson is that we need to be aware of the causes of market failure and regulate against it in those markets where sound economics show it can happen or where it has historically happened.

I largely agree with you here, but would add that perhaps an even more important lesson is that we must have stable monetary policy. The Greenspan Fed began extremely easy monetary policy to mitigate the severity of recession in 2001 and kept stepping on the accelerator, shoving the policy rate all the way down to 1% in early 2003 and leaving it there for a long time. Although a number of other factors (foolish loan approval practices, overleveraged banks, sleeping rating agencies, institutional moral hazard, etc.) obviously existed, the Fed provided the fuel. Without extremely easy money and low interest rates, the bubble never would have been created.

Originally Posted by TexTushHog

...market participants underestimate the probability of black swan type events...

Not only that, even if they DID think a black swan type event was a serious risk, many of them had no disincentive to leverage up and take what now obviously look like crazy risks!

A lot of executives and star traders looked at it like this:

If this stuff works out profitably, I'll make bonuses totalling tens of millions of dollars. (In some cases, hundreds of millions of dollars.) If it doesn't work, I'll probably get booted out of here -- but not before drawing a few million bucks in salary!

If guys are offered a chance to play "heads I win, tails taxpayers lose" games with very big money, a lot of them will do just that.

In the good old days, investment bankers actually had personal skin in the game. In fact, many of the firms were structured as partnerships. If a deal went belly-up, a principal might even lose his mansion and yacht. Sort of focuses the mind!



Concerning the residential real estate market, I don't think we can possibly have real price discovery until there's confidence that the housing market (and the overall economy, for that matter) is no longer on a sugar and caffeine high. We've stimulated, stimulated, and stimulated some more for about nine years now (both fiscally and monetarily). The key question is whether we'll see confidence that the housing market can remain standing -- and find a bottom from which to begin a new ascent -- after the eventual withdrawal of ZIRP and various homebuyer incentives.

You might also note that the yield on 10-year treasuries has climbed by about 25 basis points over the last couple of weeks. A possible continuation of that trend will produce more headwinds, since a lot of mortgage rates are determined by applying a margin over its current yield.

[pjorourke]

Originally Posted by CaptainMidnight

A lot of executives and star traders looked at it like this:

If this stuff works out profitably, I'll make bonuses totalling tens of millions of dollars. (In some cases, hundreds of millions of dollars.) If it doesn't work, I'll probably get booted out of here -- but not before drawing a few million bucks in salary!

If guys are offered a chance to play "heads I win, tails taxpayers lose" games with very big money, a lot of them will do just that.

In the good old days, investment bankers actually had personal skin in the game. In fact, many of the firms were structured as partnerships. If a deal went belly-up, a principal might even lose his mansion and yacht. Sort of focuses the mind!

Word!

[TexTushHog]

Originally Posted by CaptainMidnight

I disagree with the notion that a liquidity trap was ever much of a risk, believing instead that excessive government efforts to counter it (such as the foolish, mostly wasteful $787 billion "stimulus" package) create far larger problems. The concept of a "liquidity trap" has been widely reported, but is often misunderstood -- even by people who should know better (such as Paul Krugman).

Well, Paul and I would say that you are the one who should know better. And we both mean liquidity trap in the more modern sense rather than the pure Keynesian sense -- zero or near zero interest rates where monetary policy can no longer be effective (not a horizontal demand curve for money, as Keynes thought of)



Not only that, even if they DID think a black swan type event was a serious risk, many of them had no disincentive to leverage up and take what now obviously look like crazy risks!

A lot of executives and star traders looked at it like this:

If this stuff works out profitably, I'll make bonuses totalling tens of millions of dollars. (In some cases, hundreds of millions of dollars.) If it doesn't work, I'll probably get booted out of here -- but not before drawing a few million bucks in salary!

If guys are offered a chance to play "heads I win, tails taxpayers lose" games with very big money, a lot of them will do just that.

This is what I referred to in my initial post as principle/agent conflicts. The agent (the brokers) have a interest that is at variance with the interests of his principle (the bank or investment company). This is an area where most of the work has been in political science and management, but it hasn't been entirely ignored by economics (often under the rubric of "agency costs) and is one well know cause of market failure.

.

[Texas Contrarian]

Originally Posted by TexTushHog

Well, Paul and I would say that you are the one who should know better. And we both mean liquidity trap in the more modern sense rather than the pure Keynesian sense -- zero or near zero interest rates where monetary policy can no longer be effective (not a horizontal demand curve for money, as Keynes thought of)

I think we all know Krugman's definition of a liquidity trap. He has written of it time and again for at least a dozen years or so.

Perhaps you misunderstood my post:

Originally Posted by CaptainMidnight

I disagree with the notion that a liquidity trap was ever much of a risk, believing instead that excessive government efforts to counter it (such as the foolish, mostly wasteful $787 billion "stimulus" package) create far larger problems.

The salient point is that excessive government efforts (read: massive spending increases) -- not the imaginary existence of a "liquidity trap" itself -- represent the real problem. In other words, the prescribed medicine is worse than the perceived malady. But Krugman has repeatedly written that the huge "stimulus package" signed in February of 2009 was too small! (Yes, he actually said that.) But he says very little about how the bill was designed by congressional hacks to be a political stimulus, not an economic one. In other words, he believes that we should have borrowed and wasted even more money!

The whole idea of these "stimulus packages" is based on thoroughly discredited economic doctrine. The reason it's so popular with politicians, who generally know nothing at all about economic history, is that it provides cover for what these people really want to do -- which is to spend trainloads of money.

Originally Posted by TexTushHog

Well, Paul and I would say that you are the one who should know better.

So how is it that "you and Paul" think that I should know better? Do you think I "just don't get it" because I'm not on board for the idea of accelerating America's progress toward a fiscal train wreck?

Originally Posted by TexTushHog

This is what I referred to in my initial post as principle/agent conflicts.

Maybe no one who read that had any idea what in the world you were talking about. Perhaps they thought you were referring to some internal conflict between agents and their ethics or personal beliefs.

(Look up principle and principal in a dictionary.)

Originally Posted by TexTushHog

The agent (the brokers) have a interest that is at variance with the interests of his principle (the bank or investment company).

In the case of activities such as those I described, that's clearly not the case. In fact, the traders' interests were exactly congruent with those of management. Trading activity was generally carried on with full knowledge (and encouragement) of everybody, including CEOs. No one had any incentive to police the activities of anyone else, since there was abundant moral hazard and no real penalty for failure. Everyone was making lots of money! (At least until the music stopped.)

[Marcus Aurelius]

Herd mentality. Get on the train while it's at full steam.
Make tons of money because if there are penalties they won't ad up to squat compared to what you rake in. Fuck the little man. Greed is good eh?