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Friday, October 31, 2008

The Wrong Way to Prevent Jingle Mail

If this is the way to stop the profligate from mailing in their keys, the old Wall Street adage rings true on Main Street: "Bulls make money, Bears make money, but Pigs make more money than anyone."

"The Federal Housing Administration began Hope for Homeowners on Oct. 1, aimed at making as many as 400,000 mortgages affordable. Under the program, lenders will refinance loans to 90 percent of a house’s current value, automatically giving the owner 10 percent equity.
The loans will be insured by the government, which will take a share of any gain when the house is sold. If a sale occurs in the first year, the government takes it all. The second year, it takes 90 percent; and so on down a sliding scale. After five years, it takes half the gain."


WTF? I don't have a problem with helping people manage their bad bets if that's going to stabilize the housing market. But why give away the upside?

Would not a better plan be to create a personal recourse lien on the real estate, that accrues no interest (aside from some kind of indexed adjustment which is capitalized), requires no monthly payments, and is only repaid upon reversion?

An example: Joe the Dishwasher bought a $500,000 house with no money down during the bubble. Joe's house is now worth $400,000. For some strange reason he's now unable to pay his mortgage. Miraculously, dishwashers can support payments on a conventional $400,000 mortgage. Let’s recast the mortgage to $400,000, and continue getting payments from Joe. The $100,000 for which we’ve shown forbearance will be returned to us later as part of the reversion, or if there’s still a deficiency, we’ll garnish Joe’s wages. This keeps Joe locked into his house, he doesn’t want to carve up that fat dishwasher paycheck.

The current plan is partly a subsidy to business to artificially create labor mobility, and mostly a farce to prop-up property prices. Joe can now dump his castle for $360,000, walk away clean, and all the denizens of the ‘hood will see their assets re-priced accordingly. Once again, they’ll petition FHA to forgive and recast their mortgages under the threat of Jingle Mail, and we’ll continue our spiral down.

16 comments:

  1. I don't have a problem with helping people manage their bad bets if that's going to stabilize the housing market.

    Woody, wouldn't this all be a lot simpler if they just cut you a check for $1 million and we all went home?

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  2. Yes, Bob, it would, in Woody's eyes (I am guessing). Woody has always been one of my more cynical friends... but, nevertheless, an intelligent and true friend. I'm not as cynical as he is, but I always appreciate his unique viewpoint.

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  3. Gene, we can't draw in more of Sullivan's readers if you keep defusing tensions!

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  4. It's not much, but I'd like the million bucks, and I'd enjoy it for a while. I'm not sure it's enough to make me keep my mouth shut for too long.

    Honestly, if I could find a way to get upside down on my house I'd do it, but even if I fully tapped my credit line I'd still have equity. I downsized during the bubble, and I paid mostly cash for my house, so you can why bailouts would piss me off. Pigs should make more money than anyone? What will that mean for the next housing bubble? There will be another housing bubble, there always is.

    How much would it take for you to sell out?

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  5. How much would it take for you to sell out?

    Silas would say, "Some number less than or equal to his current earnings."

    And just to clarify, what I meant was, you have said on this site a few times that you support government aid to the housing sector because it benefits you personally. So my lame joke just meant, instead of you recommending "sensible" ways for the gov't to throw billions at this issue, why don't they just send you a million.

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  6. BTW Woody, I don't know if this changes your mental model of me, but we need a huge snorkel on our house right now. I think my kid would need to be in the hospital for me to think about applying for the feds to revise my mortgage.

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  7. BTW Woody, I should add that I'm not trying to sound judgmental. I was 95% making a joke with the first thing, and then just now I mentioned I was underwater only because I thought that would interest you. I.e. you are mad that you can't get underwater, and I am mad that I bought a #(%#$ house in the fall of '06.

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  8. I hear ya' Bob, I have said that I support government support of the housing sector. I don't support the creation of extreme moral hazard. If you're going to create liquidity, you should create it for qualified buyers.

    I believe there was a predatory loan problem, and I'm ok with recasting some of these interest only, negatively amortizing loans into conventional loans. We're in a serious liquidity trap, so even with the $700 billion bailout the banks are not lending.

    Some people have to lose their houses. That's part of the correction, and part of a healthy recovery.

    I think if that if you $#%#ed up, you should pay for your mistake. Anyone who bought a house from 2004 - 2007 made a mistake. The FHA seems willing to forgive your mistake entirely with forgiveness and a 90% recast. I've made bad trades, lot's of them, and I don't think there's any shame in making a bad trade, it's a just a shame (and moral hazard) when the government tries to make these trades good.

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  9. Andy Stedman1:17 AM

    I bought in April 04, and I'm far from upside-down.

    Speaking of which, what's up with Zillow? It used to be reasonable, now it's gone crazy.

    In my neighborhood, there are homes for sale in the $160k range surrounded by homes that Zillow thinks are worth $250k-$300k. Almost all that "gain" (up 50%) is since February of this year. It's crazy.

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  10. Zillow seems to work best in a tract-style subdivision. Even in a modern suburb it can be off 20% or more, and its values are clearly following the market down. It also seems to be biased upon the last sales price, and assumes it was at the market and arms-length. Automated valuation models are fine with good loan to value ratios, like 50%. Banks should go back to hiring local experts and getting physical inspections of collateral before lending.

    I bought my house in April 2004 and I'm not even close to upside down, but I also made a 70% cash downpayment. Were I to sell today, I think I'd "break even" if you exclude commissions. Let's see there's also the $30k I paid for a roof, $11k on pool rehab, the wood floors, the new mechanicals... I'm a loser on my investment, even if I'm not in the worst market. I'm also an honest certified property appraiser, I know when I'm licked, all over.

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  11. Andy Stedman1:00 PM

    I've dug deeper. A home that I know for certain sold in May 2008 for $163,250 (a friend's parents' house, and the county recorder website agrees with me)has a "Zestimate" of $277,000, and lists a sale in May 2008 for $245,250. Something is broken. Any conspiracy theories? Stupidity theories?

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  12. Andy Stedman1:03 PM

    Just look at this crap.

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  13. Now that's a mess!

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  14. Anonymous7:38 AM

    Talk about making bad trades good....The Spanish government just proposed a plan that would allow unemployed homeowners and some retirees to postpone payment of half of their monthly mortgage bill for two years... AND the government would pay companies 1500 euros a year for hiring an unemployed worker supporting a family.

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