Thread: Obama Foreclosure Plan

Originally Posted by Walking Dead

http://www.cnn.com/2009/POLITICS/02/...lan/index.html



Now, I generally prefer to not debate the economy, as I am far from being an economic expert. However, this foreclosure plan seems ridiculous.

While I agree with the questions posed by the Republicans, and find them to be excellent, in the context of the recent years, I want to solicit some opinions as to what this plan will do to the market itself.

As a person who has been trying to buy a house in the Los Angeles area for two months, I am appalled at this measure. Currently, the local market is FLOODED with foreclosed homes and homes on "short sale." My wife and I have put three offers on three properties and:

- Were outbid on one
- Rejected for the other due to VA financing (subject I don't even want to get into)
- Lender is stalling on one of the offers waiting for the word on this VERY SAME handout.

Currently, any property of value, in the Los Angeles market, which is a foreclosure or a short sale, already has multiple offers, and it is very difficult to find something that does not have pending offers. In my view, the market is fully functioning and the demand that is out should soon start bringing up the home price values.

This brings me to my main point - all the foreclosures and short sales are the evidence of the market correcting itself. This means that once the prices of the assets go down, people will start buying them, and drive the prices up gradually, resulting in the leveling off of the market. Now, the foreclosure handout plan, is a MAJOR interferrence with the market forces because it will result in the homes being pulled from the foreclosure market and short-sale market and back into the hands of thousands of original owners who should not have owned the damn thing in the first place. What will that do? I want to refer to the questions the Republicans posed regarding this bill. IMHO, that will only stall the market from naturally dropping in price until low price will increase the demand. I say stall because I believe the banks will not modify foreclosures with the government funds lower to what they would be able to obtain for the price of the foreclosure. This will results in the people in those homes to again default on their payments and go back to the same situation they are in now. To continue, the banks will pull their properties off the foreclosure market, which would IMO constitute a large number, depending on the chunk of money they get from the handout, and this will result in the market prices being driven up unnaturally (as a result of interference), as a result of diminished supply of foreclosed homes. This will continue until the people default again thus, putting us in the same situation we are in now, and completely delaying the correction of the market.

Now, I know that was a lot. I hope it made sense, and I hope it sparks a conversation.

We have almost no activity where I live. I think the plan goes as far as it can without creating a huge moral hazard. I saw the writing on the wall and sold las year. Everyone told me I was nuts taking the offer I did. Now the places list for 30k less. What those people who are paying there mortgage and have equity get is a higher bottom in housing prices. You'd think maybe maintaining another 5 percent or even 10 percent of value would be enough. 20k isnt enough for Cantor? He wants everyones house to drop further in price than it would without aid?

Let's tax everybody to pay for those who bought too much home.

Originally Posted by Shek

Let's tax everybody to pay for those who bought too much home.

Oooh I like that idea. Let me buy a bigger house, quit my job, and wait for the dough to roll in.

I bought a house 3 years ago. I guess I should have bought much more than I could afford, since the government would like to keep me in it on your dime.

One comment in the article I had not considered before is the potential for risk premiums. So those responsible people get screwed twice.

Originally Posted by Shek

Let's tax everybody to pay for those who bought too much home.

I think that's a bad idea....
cant we just tax millionaire investment banker's 2009 bonuses at a 99 percent rate rather than cap gains rate....lower than my rate

i'd like to see details on the plan. as it is, i'm against it.

http://meganmcardle.theatlantic.com/...eet_home_5.php

Home sweet home
18 Feb 2009 03:56 pm

So, the Obama plan to prevent foreclosures. What to make of it?

Well, the obvious point is that it represents a massive transfer to borrowers from lenders and the rest of us. As far as I can tell, there is no penalty for having borrowed more than you could realistically afford to repay--not so much as a speck of dirt on the credit report. The administration's release talks a lot about "responsible homeowners", but very few responsible homeowners have payments that amount to 43% of their monthly income. There are exceptions, of course, such as people who have just lost their jobs, but most of the people being helped are, nearly definitionally, people who bought more house than they could afford in the belief that prices would keep rising indefinitely and they would make big bucks. It was leveraged investing, just like a hedge fund, and often at the same kind of leverage ratios.

It's hard to muster too much sympathy for lenders who made loans to these speculators, except of course for the fact that "borrower-friendly" rules like the ability of bankruptcy judges to cram down mortgages means that those of us who have not been speculating in real estate get to pay higher mortgage rates when we do buy. Expect Chapter 13 bankruptcy to become extremely popular over the next year or so. Also expect your own credit card lines to be cut and interest rates to rise as lenders attempt to minimize their exposures to those bankruptcies.

Obama's in a tough political position. If he simply gives money to mortgage lenders to compensate them for modifying bad loans, taxpayers will scream. On the other hand, if he further impairs their balance sheets, it will cost the taxpayers in other, potentially much worse, ways. He chose the politically easy route. Me, I think if we think homeowners should get free reductions in their interest rates, we should pay for it, not make a law forcing someone else to do so. But this is why I am a reactionary bourgeois tool of the capitalist system.

http://www.marginalrevolution.com/ma...sing-plan.html

What to think of Obama's housing plan
Tyler Cowen

The ever-worthy Mark Thoma rounds up reactions and analyses, including some critical remarks from CalculatedRisk and some praise from Felix Salmon. Willem Buiter is negative (worth a read). Simon Johnson says it's not enough. WSJ surveys a few reactions as well. I'll add some observations:

1. Housing prices ought to be lower, and as quickly as possible. So aiding homeowners cannot be justified on the grounds of propping up prices, which is difficult to accomplish anyway. Such aid has to be justified in some other way. The main argument is that our ex post procedures for foreclosures are not what we would have chosen ex ante, had we known that such a severe housing and financial crisis could be possible. That opens up some room for beneficial intervention, but a good plan it still hard to pull off.

2. When it comes to refinancing the Fannie and Freddie loans, and expanding those agencies, how many foreclosures will this avoid? We should be reducing the size of the mortgage agencies rather than putting another $200 billion into them.

3. We should not be helping people stay in their homes if their mortgage payments are at 43 percent of their income. (The bill requires banks, in such cases, to lower interest rates until monthly payments are at 38 percent of income. The government then steps in to lower payments to 31 percent of income.) I don't feel moral outrage (although it is morally outrageous), I just don't think it is a good use of money. I also wonder how it works when your income is quite variable year to year. Are they sure there is no way to game this?

It will in the short run prevent some (enough to matter?) foreclosures. But it won't keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity. It adjusts interest rates on the payments, not principal on the loans (thank goodness).

Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.

One source, by the way, suggests that lenders will have veto rights over these "renegotiations" by choosing to foreclose instead of accepting the lower payments. But foreclosure is quite costly for the bank, so I don't feel so much better.

By the way, aren't we trying to help the banks?

4. Sellers receive various bonuses for modifying eligible mortgage loans. This is ideally a Pareto improvement if more of these contracts could be modified than is currently the case. My doubt is whether the subsidy will affect many modification decisions; so far I don't see that lenders are putting a lot of effort into renegotiations. Here is a good article on when modifications work and when they do not. I doubt if an extra 1k will make much difference.

5. Guidelines for modifying eligible mortgage loans are established. Ideally this could give more scope to the Coase theorem, but see my reservations under #4.

Felix Salmon, who likes the plan, nonetheless offered up a scary bit:

But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.

The bottom line: #3 is a deal-killer for me. Just say no, and you don't even need a moral hazard argument (they are overrated, anyway) to see why this is troubling. I'd like to see the plan's proponents predict how many foreclosures it will forestall and be willing to take their lumps if they are wrong.

Originally Posted by Shek

http://www.marginalrevolution.com/ma...sing-plan.html

1. Housing prices ought to be lower, and as quickly as possible. So aiding homeowners cannot be justified on the grounds of propping up prices, which is difficult to accomplish anyway.

So I was not that far off it seems. The sooner prices will go down, the faster we will recover.

It will in the short run prevent some (enough to matter?) foreclosures. But it won't keep up the long-term price of homes or prevent eventual foreclosures when the home has negative equity. It adjusts interest rates on the payments, not principal on the loans (thank goodness).

Exactly -the handout will only have a temporary solution to stall the inevitable.

Most of all it is a bad precedent which we will live to regret. It is a significant move away from the idea of commercial decisions based on contract.

Now that is a good point.

I'd like to see the plan's proponents predict how many foreclosures it will forestall and be willing to take their lumps if they are wrong.

Exactly.

Real Estate prices in my area are dirt cheap anyway. I bought land, and had a small house (1800 sq feet) built on the land for $130,000 with a VA loan. Some of the people I work with have twice as large a house as I do, with the same size family. I just don't get it? Why buy so much more house than you need?

Originally Posted by Johnny W

Real Estate prices in my area are dirt cheap anyway. I bought land, and had a small house (1800 sq feet) built on the land for $130,000 with a VA loan. Some of the people I work with have twice as large a house as I do, with the same size family. I just don't get it? Why buy so much more house than you need?

So you can hide from your wife!

Some folks that aren't too happy about the plan )

http://www.cnbc.com/id/15840232?video=1039849853

From what I understand, the best case scenario will still result in 40% defaulting again within 6 months time. So we're throwing away at least 40% of the money right out of the gate.... and that's the optimistic numbers.

RE Shek's article above: My credit line was recently slashed in half. I've had one credit card which I've used for 15 years, building up a decent credit line. Never made a late payment, and my credit score is over 800. I understand it's a defensive move on the part of the bank (Citi) to limit risk and get the books straight, but I still feel slighted. I'm not the high risk customer they need to be dealing with. Then when I hear about bailing out irresponsbile homeowners, the sting is only heightened.

And for others out there, pay attention to your credit lines. If you don't have a "no preset limit" spending card your credit line is reported and used to calculate your debt/credit ratio. This affects your credit score. I feel bad for the people whose lines got cut through no fault of their own and just got their debt/credit ratio raised substantially as a result. There's probably people who aren't even aware of this happening. They never bothered to inform me. I found out on my own.