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February 19, 2009

Obama Details Rescue Plan for Homeowners

With almost one in ten houses either delinquent or in foreclosure, President Obama unveiled a more ambitious plan than expected yesterday that could end up helping as many as nine million Americans. The $75 billion portion of the plan directed at homeowners has two basic goals: 1) To help the roughly five million homeowners who are current on payments but facing high interest rates and unable to refinance because the value of their homes has deteriorated; 2) To incentivize lenders to modify the mortgages of roughly four million homeowners on the verge of losing their homes. In addition, the Obama administration will pump another $200 billion into Fannie Mae and Freddie to increase the general availability of mortgages. The plan also aims to lower consumers' debt-to-equity ratios overall. “This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.” As The Times reminds us, modifying mortgages doesn't always work.
$275 Billion Plan Seeks to Address Crisis in Housing [NY Times]
O's $75 Billion Housing Bet [NY Post]
President Obama Unveils $75 Billion Plan [NY Daily News]

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Comments

I WANT MY RENT BAILOUT! AND I WANT IT NOW DADDY!

*VERUCA SALT*

Posted by: PitbullNYC at February 19, 2009 9:04 AM

Rob, you'll only get a rent bailout if you took on twice as much rent as you could afford.

Posted by: dittoburg at February 19, 2009 9:09 AM

That picture above makes me feel really happy about not living in suburbia.

Posted by: Biff Champion at February 19, 2009 9:14 AM

quote:
Rob, you'll only get a rent bailout if you took on twice as much rent as you could afford.

lol the funny thing is that this statement is true!

*r*

Posted by: PitbullNYC at February 19, 2009 9:17 AM

I had more wine last night than I can afford. Will there be money coming to help me with that???

Posted by: daveinbedstuy at February 19, 2009 9:19 AM

quote:
That picture above makes me feel really happy about not living in suburbia.

uh what a stupid statement. half of brownstone brooklyn IS all cookie cutter rowhouses just LIKE THAT!. jeez

*r*

Posted by: PitbullNYC at February 19, 2009 9:21 AM

I guess he told you, Biff.

Posted by: daveinbedstuy at February 19, 2009 9:22 AM

that neighborhood should be landmarked

Posted by: joe_the_bummer at February 19, 2009 9:24 AM

Brownstones are schlocks of the 19th Century.

Posted by: bayridgegirl at February 19, 2009 9:26 AM

Freddie Mac sold $10 B worth of 3 year notes yesterday. The deal was 1.3X oversubscribed and yielded 2.247%, .88 above 3 year treasuries.

This is a very good sign.

Posted by: daveinbedstuy at February 19, 2009 9:26 AM

If homeowners are seeing a reduction in their mortgage rates, I want my federal loan interest rates reduced. Right now, they are nearly twice the interest rates on my private loans.

Posted by: bkbella at February 19, 2009 9:28 AM

I'd be interested to have a mortgage expert chime in on how this action will affect Mortgage rates available to those with healthy credit scores looking to refinace. Up until last week, I've seen quotes at 4.875 - 5.15 on 30yr non-jumbo refinance. Will this action push rates down further? I know LTV and credit scores much more important now, but just interested in mortgage rate trends.

Posted by: lambretta at February 19, 2009 9:30 AM

BRG;

I want royalties every time that you use the word "schlock"!!

Am I the only one who thinks that Obama's housing plan is complete lunacy? I was particularly taken aback by this line: "In addition, the Obama administration will pump another $200 billion into Fannie Mae and Freddie to increase the general availability of mortgages." The use of the word "pump" is telling. In other words, let try to re-inflate the housing bubble which got us in this mess to begin with!!!

Perhaps I'm just too drunk with Sake. Tonight I went to dinner in a 200 year-old restaurant in Tokyo. It was great -particularly the sake. I'm going home tomorrow, and I'm looking forward to it.

Posted by: benson at February 19, 2009 9:33 AM

Rob, I assume you also think Applebee's steaks are the same as those served at Peter Lugers.

Posted by: Biff Champion at February 19, 2009 9:38 AM

of course it's lunacy. and i want student loan aid too. the government (and my university) actually DID trick me into thinking i needed to take out more loans that i really did (im not being snarky here) im being serious. i didnt need to take out that much in loans. i didnt need rebate and refund checks from my loans at the end of every semester. but i was poor, and 18, and didnt know any better! grrrr. if there is any kind of victim it's me, back then, taking out loans for a useless education i get no benefit from anyway.

*r*

Posted by: PitbullNYC at February 19, 2009 9:39 AM

What was your major?

Posted by: daveinbedstuy at February 19, 2009 9:41 AM

yeah, I am not 100% sold on the "Stimulus Plan" or all the pumping of money into all the different housing sectors. The bottom line is aren't we just rewarding bad behavior, or is this because this mess is just too widespread that we have to do something?
That Frontline/PBS piece on the economic meltdown was fascinating.
Also interesting was that piece in the NY Times about UBS cooperating to reveal the names of wealthy Americans who had been stashing billions in Swiss Bank Accounts evading the IRS
Looks like the Gov't is really trying to pick up cash where they can find it

Posted by: gemini10 at February 19, 2009 9:41 AM

i doubled majored in psychology and visual arts.

*r*

Posted by: PitbullNYC at February 19, 2009 9:48 AM

The poor have disproportionately high credit card debt and interest rates. Will we be seeing something to reduce those interest rates?

Posted by: dittoburg at February 19, 2009 9:48 AM

i do like the idea of helping homeowners by lowering monthly payment to keep them in their homes rather than foreclose. i am concerned with the phrase 'pump' b/c like benson said, this seems to be that loosening of credit that helped make this mess, or am i misinterrupting that?

Posted by: bkny at February 19, 2009 9:57 AM

"And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

Why is this a good thing? Falling housing prices would be great for renters who are looking to buy. Using taxpayer money to keep houing prices unaffordable doesn't strike me as such a great idea.

Posted by: Sparafucile at February 19, 2009 9:58 AM

Everyone wants free money, but only home buyers of the last few years (with help from the banks and realtors) have managed to create a mess big enough to be a threat to their neighbors.

The social consequences of someone not paying back their student loans or credit cards or of someone overpaying for them because they were too stupid to deal with them and end up with penalties and compounding high interest is pretty much nil.

The social consequences of foreclosures are more serious.

If I don't pay my credit cards, my neighbors have no particular reason to know or care.

If I don't pay my mortgage, my house gets foreclosed and their property values go down.

So, the moral here is, if you want free money, you need to make sure your neighbors will be upset if you don't get it.

Posted by: northsloperenter at February 19, 2009 10:05 AM

my thoughts: I think freddie borrows so cheaply now because they were nationalized. it's really the treasury borrowing, not necessarily a good credit market sign.

The program in theory should help mortgage rates, because the "supply of credit" grows, but I wouldn't look for a direct effect. more likely the treasury will target mortgage rates by intervening in long term markets.

anyone who is upside down will not be able to refinance, except a few who are 5% under and will fall into the new subsidy. your credit score won't do squat for you unless you want to inject new money into the deal.

I hate that the government is taking bargains away from me too, but the systemic risk of mass forclosures is truly frightening, and a depression is worse than missing out on a bargain

I don't mind the word 'pump' -- that's what you do for a dying patient in the hospital.

Posted by: joe_the_bummer at February 19, 2009 10:13 AM

The government plan is largely aimed at helping people who cannot refinance because their house is worth less than the owe on it.

The more property prices fall, the more people there are who fit this category, the more it costs the government to try to fix the problem.

Also, the more property prices fall, the less interest people have in buying property since they expect the price to be lower in a few months.

Falling property prices creates a self reinforcing cycle leading to more foreclosures and cheaper prices which makes more people "underwater" on their mortgages and fewer interested in buying which leads to more foreclosures and cheaper prices etc.

The government seems to be trying to approach the problem from both sides -- preventing foreclosures to limit supply and easing credit to increase demand.

Obviously, if they end up encouraging more bad loans to people it will only make things worse, so loans standards will need to be much higher, but it seems that change has largely occurred already as the banks have decided that loaning people money to buy property that costs 5-10 times their annual income is dumb.

Posted by: northsloperenter at February 19, 2009 10:24 AM

"The government plan is largely aimed at helping people who cannot refinance because their house is worth less than the owe on it"

North Slope Renter.

This is not so. Please read the Times' story. This bailout is aimed at folks who cannot afford their payments and are in danger of foreclosure, NOT for folks who are meeting their payments, but are underwater (homes worth less than the mortgage). This latter class of folks is much larger in number, but this bailout is not aimed at them

Posted by: benson at February 19, 2009 10:29 AM

hey north slope renter, I'm a north slope renter too. I've always been irritated by all of the RE broker storefronts on 7th ave -- it's like we live in some kind of mall for apartment shoppers. there are SO many (12? 13?) that for a while I saw it as the surest sign that the bubble had reached apocalyptic proportions. the marketing of RE ownership is SO pervasive that you can't possibly rent in any of these neighborhoods without remorse. I visited BH recently for the first time in years, and found the same thing (it was like a parallel universe)

I try to avoid feeling joy at the misfortune of others (what's that darn german word again?), but when will those stores finally be gone? They'd make great cafe's and charming little toy stores.

Posted by: joe_the_bummer at February 19, 2009 10:39 AM

I've said it before and I'll say it again: I am no financial guru. And, perhaps, I shouldn't even be commenting on this thread, but I'm really interested to know what those of you in the know think. Several threads back I read where someone (may have been Ringo) said that this type of action is essentially pointless because if you can't afford the home now, a few points of interest deduction won't really help you afford it tomorrow or in the long run (sorry if I misread his argument). I've also read where some feel like the foreclosures should be allowed to play themselves out, as the propping up of the housing market is foolish. I'm tempted to agree with that, except I get that feeling of 'guilt gut' when I think about the homeowners (not the irresponsible ones) who will lose their primary residence in the crash. I've read all the criticisms of the bailout and the current state of the housing market. I've read all the gloom and doom reports about where we are and where we are likely headed. What I haven't heard yet is someone willing to put forth a viable alternative that could help out the deserving homeowners while not continuing to prop up an over-inflated housing market. I saw where some suggested going through the 'paper trail' to determine which homeowners got in a bad situation through no fault of their, but is that really feasible? To me, that has all the hallmarks of typical government wasteful spending (ie. spending millions on a study that shows that people who have lower levels of education make less money - no shit sherlock! - instead of spending that study money on bolstering education). How much time and money would that cost to make those determinations? Who is to make those determinations? Are there bright-line rules or is it subjective?
So, I've thrown out the question. Feel free to answer if you wish.

Posted by: InsertSnappyNameHere at February 19, 2009 10:51 AM

I guess "regret" is more the word I was looking for, not "remorse". It's hard to keep up with all these humanities majors...

anyway, if you're a renter, real estate has been so in your face for so long that it will be great if all the noise just shuts off for a while. Should there really be a whole section in the NY Times about real estate? bigger than "arts"? I think that's f*cked up.

Posted by: joe_the_bummer at February 19, 2009 10:55 AM

snappy, I think it's a nearly impossible problem -- I did read that they're going to sharpen the pencil as much as possible -- including disqualifying anyone who lied about their income on their mortgage application, and anyone who took out a refi loan to spend the money on other things. sounds pretty smart, but already you run into trouble for people whose brokers changed the income entry on the application, and people who were sold a refi by predatory lenders.

Politically their hands are tied. they have to bail out people because they've already bailed out banks. That doesn't necessarily hold water economically, but if these guys want to get re-elected, they'd better start cutting checks.

Posted by: joe_the_bummer at February 19, 2009 11:07 AM

Very good questions, snappy. I also wonder about what the solution is and I keep thinking that all these foreclosures are not about people who got in over their heads. It's about people who were responsible, and kept their bills paid and worked hard, only to see it fall apart with the crash of the economy. Sure there are those who should never have bought houses- and I blame the lenders who told them they could. But millions of people have lost jobs they've held for years, gone through their savings and are treading water- should they be punished for the financial excesses and greed of the banking industry?

And then there are all of us renters who are trying to keep our heads above water. None of this is right or fair- so to all those naysayers who would rather see foreclosures happen- what's your "people" solution? Because as far as I can see, the desire to punish failing homeowners for real or imagined transgressions seems to be more popular with some folk than actually finding solutions that work.

Posted by: bxgrl at February 19, 2009 11:12 AM

Something has to be done to stop home deflation before things get worse, like 25% unemployment. No plan is perfect, and I'm sure this is not either.

Funny tho when we pulled the 'moral hazard' thing with Lehman just about every conservative publication (WSJ, for example) and economist has called that a huge mistake.

Pretending the free market rules and just let things happen and it will all come out for the best will not work right now, as has already been demonstrated. Even Greenspan has been chastened.

Posted by: denton at February 19, 2009 11:15 AM

we need more public housing. REAL affordable to the lower and lower middle class public housing. NOT more welfare recipient housing, just working class housing. i dont think that's a popular sentiment though, nor do i know if it would help with anything.

*r*

Posted by: PitbullNYC at February 19, 2009 11:18 AM

bx -- I think anyone who makes a 30yr financial commitment should plan to be unemployed for at least a couple of years of that. I think to NOT do that, you'd have to be willfully blind.

anyone in foreclosure can go rent a similar house cheaper now, so I don't really buy the "social cost" thing. I think the big worry in government is that walking away from an underwater mortgages becomes "no-longer sleazy", and everyone just does it -- then all the banks fail and the motor breaks, or breaks worse. propping up prices is an attempt to prevent a mass sleazyness from drowning the economy.

Posted by: joe_the_bummer at February 19, 2009 11:26 AM

More middle class housing is something you won't see. Knowbody is fighting for the middle class... As for this bailout of people who bought too much house ,it is another scam to make our money worth less and give welfare to those who didn't play by the rules. I thought living within my means was the right thing to do. Sheesh I should have just bought that Brooklyn Heights townhouse for 4 MILLION a year ago and just asked the Gov for help this year...

Posted by: HOBOKENROCKS at February 19, 2009 11:26 AM

Rob- welfare recipients are not the cause of the crash. They are the least of our worries- and many of them are suffering even more than you know.

joe- I honestly don't know enough about this sort of thing to know what anyone should plan for. I think though, that if people had to wait to have enough money in the bank to be unemployed for a few years no one would own a house. It's a great idea- and I think most people actually did have a cushion- but when things like this happen, or you have a medical disaster- all those things you can never prepare for no matter how responsible you are- the only response I have is Sh*t Happens. I know- it happened to me and everything I had was wiped out- who cared I had worked hard all my life, was always responsible and saved money? And I never lived large, as it were- I never spent thousands of dollars on stuff, or ran up humongous bills. I never even took a vacation in over 15 years. Still got wiped out by circumstances I had no control over, and thought I had some reasonalbe preparation "in case of."

That said, i think foreclosure will be a relief to some, but they will still be punished in credit ratings, etc. I guess what makes me angry is that those who stand to get hurt the most are getting punished the most. Where's Madoff? Still living in his fancy apartment. Where are all the CEO's and finance people who overreached? Most of them still have their very substantial savings, and homes and granite countertops.

Posted by: bxgrl at February 19, 2009 11:38 AM

I am also interested in Lambretta's question: how will this affect current interest rates for refinancings in general? There had been a lot of previous talk about gov't intervention to lower the rates further, but this plan seems to be more about permitting a greater % of owners to take advantage of rates as they now stand. Can any mortgage brokers out there take a guess, or will we have to wait until March 4th to find out?

Posted by: petunia at February 19, 2009 11:40 AM

bxgirl, I guess I am just a total wuss. I always figured two years of cushion was a bare minimum. that's why I rent. I never knew I was such an outlier. arg. I would have bought in 2000 if I wasn't such a f#$@g p$#@ssy.

petunia, I think the fed is effectively going to set the rates. a mortgage broker won't be able to predict this any better than you can. see my 10:13. you still won't be able to re-finance if you don't qualify for the plan and you're under water, unless you give the bank more cash.

Posted by: joe_the_bummer at February 19, 2009 11:52 AM

"This bailout is aimed at folks who cannot afford their payments and are in danger of foreclosure, NOT for folks who are meeting their payments, but are underwater (homes worth less than the mortgage)."

Actually, that does seem to be what's happening here, Benson:

http://www.nydailynews.com/news/politics/2009/02/18/2009-02-18_queens_homeowner_pleads_i_need_your_help.html

Posted by: East New York at February 19, 2009 12:04 PM

benson -- the plan will encourage refinancing for people whose mortgages are underwater and therefore would normally not be able to refinance (because of their lack of home equity).

joe -- all the banks and real estate offices in retail space on 7th are a pretty clear sign of how much money is being skimmed off the surface of real estate transactions. They may or may not go away. There will still be a lot of churn in the real estate market even if prices come down.

rob -- public housing has generally done no one any good. It traps people in miserable places to live that get the bare minimum of maintenance and drives up costs for people on the next rung of the economic ladder. Also, I think a lot of these shiny new condos will be affordable middle class housing in a year or two.

In any event, the government is already officially backing Fannie and Freddie and unofficially backing all of the big banks which means that the government can't walk away without doing something about the mortgage crisis.

Keeping people in their homes works both financially and politically and sounds much better to me than handing money "no strings attached" to every big bank in the country and watching them give each other bonuses.

Posted by: northsloperenter at February 19, 2009 12:08 PM

I refinanced my brownstone just a couple of weeks ago at Brooklyn Federal Savings Bank at 4.75% 30 year Jumbo, they posted this rate for one day. I had no problem with the re-financing. They told me if you have a credit rating above 700 you can get easy financing.

People who lost thier jobs are the only ones who should be helped. If you bought too much house and make too little money to pay the mortgage you should lose the house and be evicted. Now if you were conned by a predatory lender you should get some help also. But thats it....

Posted by: harrythehat at February 19, 2009 12:24 PM

NSR -- true that. but with with volumes and profits low I'm sure the RE agents will finally want to cut costs.

I take issue with the desirability of intervening in markets -- "keeping people in their homes" is only a marketing slogan. What the govt cares about is a mass ditching of obligations under contracts, and they're trying to stop the spiral that would cause that. it is never ideal for the government to intervene in markets, with the narrow exception of conducting monetary policy.

also, it's part of the0 mission of the Fed to be "lender of last resort". the only difference is that now it's actually acting in that capacity. it doesn't make them any more obligated to bail out irresponsible borrowers.

Posted by: joe_the_bummer at February 19, 2009 12:28 PM

"Marlo Saab bought a $555,000, two-family home... no money down... He makes $80,000 a year..."

Enough said.

Posted by: SnarkSlope at February 19, 2009 12:34 PM

"ob -- public housing has generally done no one any good. It traps people in miserable places to live that get the bare minimum of maintenance and drives up costs for people on the next rung of the economic ladder."

NSR - do you actually KNOW anyone who lives in public housing? I do, and have growing up in NYC, I can honestly say that your comments on this subject are broad generalizations and as such, inaccurate.

Posted by: East New York at February 19, 2009 12:35 PM

harry, really? that's great. can I ask what your ltv is?

Posted by: joe_the_bummer at February 19, 2009 12:38 PM

ENY -- OK, I'm sure public housing has done some people some good at some time in some circumstances.

But in general, I think it drives up housing costs for others and gives some people an easy excuse for under achieving or managing their finances poorly.

I feel the same way about rent stabilization even though I lived in a rent stabilized place for several years.

There may be a role for public housing and rent stabilized housing in the city, but it needs to be small and limited. I think there are generational consequences of government provided cheap housing that benefit neither the government nor the people in the housing.

Posted by: northsloperenter at February 19, 2009 12:44 PM

joe -- I think the government already intervened in the market when it backstopped fannie and freddie and decided not to let anymore big banks go under after lehman.

At this point, it is not a question of whether or not the government will intervene or not. It's just a question of how effective it will be.

Arguing about whether or not the govt. should be involved in the "free" market at this time seems pointless. Reminds me of the old joke:

Man (to woman): Would you sleep with me for $1,000,000?

Woman (shocked): Uh, oh... uh, well... I guess for a million I would...

Man: Would you sleep with me for $100?

Woman (offended): What!? Of course not! What do you think I am? A whore?

Man: Madam, we have already established that fact. Now we are just haggling about price.

Posted by: northsloperenter at February 19, 2009 12:50 PM

Snarky - did you see that he's still sending his kids to a $10,000 a year private school?

I'd rather tax dollars go to help section-8ers trying to survive than help this guy trying to maintain an unnecessary luxury.

Posted by: dittoburg at February 19, 2009 12:53 PM

Agreed ditto. I have no sympathy for this guy. He bought way more than he could afford in the first place, and pays his mortgage with his credit cards rather than put his kids in public school.

Posted by: SnarkSlope at February 19, 2009 1:13 PM

"But in general, I think it drives up housing costs for others and gives some people an easy excuse for under achieving or managing their finances poorly.

I feel the same way about rent stabilization even though I lived in a rent stabilized place for several years."

I happen to agree with you about most of this, and I've never lived in public housing or had a rent-stabilized apartment. Like you, I think public housing and rent stabilization need to be limited and tightly controlled. But to say public housing "has generally done no one any good" and "traps people in miserable places to live that get the bare minimum of maintenance" is simply untrue.

Posted by: East New York at February 19, 2009 1:17 PM

Where the hell did he find a $10,000 a year private school? They're all over $30K a year for the good schools in Manhattan and BH.

Posted by: Biff Champion at February 19, 2009 1:18 PM

Nobody said it was a good school, Biff.

Posted by: SnarkSlope at February 19, 2009 1:24 PM

Bif - it's a catholic school. I was using the term private school as I would do back home, perhaps its not accurate to describe it as that in the US.

Posted by: dittoburg at February 19, 2009 1:26 PM

Many Catholic schools are very good. I went to one and look how I turned out!!!

>>>Enter What [stage left] with a baseball bat.

Posted by: daveinbedstuy at February 19, 2009 1:31 PM

So this the Obama skittles plan, huh? Man we are in a world of hurt! The whole Banking system is going down the toilet and they have stopped loaning money to retards!

The What

Someday this war is gonna end...

Posted by: Return of The What at February 19, 2009 1:47 PM

"Marlo Saab"

Anyone with a made-up, yuppie-sounding name like this should be denied re-financing on that basis alone! OK, I need to do some work today.

Posted by: East New York at February 19, 2009 1:59 PM

It's a middle eastern name. Does the man still have a job? He should be able to handle the rent on the two family UNLESS it had an ARM that reset that he didn't know about. I bet it does!

Posted by: mopar at February 19, 2009 2:22 PM

quote:
rob -- public housing has generally done no one any good. It traps people in miserable places to live that get the bare minimum of maintenance and drives up costs for people on the next rung of the economic ladder. Also, I think a lot of these shiny new condos will be affordable middle class housing in a year or two.

it helped my grandmother who raised me.

*r*

Posted by: PitbullNYC at February 19, 2009 2:36 PM

"we need more public housing. REAL affordable to the lower and lower middle class public housing. NOT more welfare recipient housing, just working class housing. i dont think that's a popular sentiment though, nor do i know if it would help with anything." says Rob

Rob, let me clue you in on another New York factoid. The 'projects' were built as working class housing, NOT as welfare housing. When they were built welfare barely existed, outside of surplus cheese and peanut butter. The rise of the welfare class was not forseen then. Everyone had a job working in factories, driving trucks, etc.

Anyone who says the projects are 'poorly maintained' in NYC is not correct. NYC PJs are admitted to be the best managed and maintained public housing in the country.

There's a reason there's a multi-year waiting list to get into the pjs, and that's precisely BECAUSE they are so well maintained, much better than any private owner would do.

And rob, if you don't want to research the history of PJs in NY, next time you walk by one, ask yourself why do they have parking lots? They have parking lots because they were supposed to be the entree to the American Dream, which included working and car ownership.

Posted by: denton at February 19, 2009 2:58 PM

Back to the homeowner plan, here is a question for you Wall Streeters that has been bugging me since this whole mess began.

Suppose, for a mortgage-backed security, that over the life of the security, 50% of the mortgages are paid more or less on time and 50% end up in foreclosure. And suppose for the 50% in foreclosrue that the banks end up recovering an average of 50% of the principle underlying the mortgage. Why wouldn't the security in that case produce something close to 75% of what investors anticipated? And, if so, why are they now valued so much less? If I'm right, why wouldn't someone end up making a killing buying these things at 60% of the original value, and why wouldn't investors sell at that price rather than write the whole thing down? Does the market really think that risk underlying these securities is much worse than I have hypothesized (I know I will get a Ding Ding Ding from the what for this question)? It seems that I have hypothesized a much more severe scenario than what is actually happening out there. Why is the market so freaked out about these assets?

Also, as loans get reworked, doesn't that increase the value of the securities again? Foreclosures are reduced and even those borrowers who end up foreclosed after reworking their loans will at least have made some payments in the meantime?

Meanwhile, forgive my ignorance and naivete. I am curious to read informed answers on this point.

Posted by: slopefarm at February 19, 2009 3:24 PM

I posted earlier but it seems it didn't get through...

ENY and rob -- forgive my gross over generalization. Public housing has certainly done some people some good, but in the aggregate, I think having a lot of public housing is not in the best interest of the city, the working class, or many of the people who end up living there.

My comment about people getting trapped in badly maintained living spaces was more inspired by my experiences with rent stabilization than public housing. I lived in a crappy dive for years and I know other people who have stayed in such places for decades.

Posted by: northsloperenter at February 19, 2009 3:30 PM

"Suppose, for a mortgage-backed security, that over the life of the security, 50% of the mortgages are paid more or less on time and 50% end up in foreclosure. And suppose for the 50% in foreclosrue that the banks end up recovering an average of 50% of the principle underlying the mortgage. Why wouldn't the security in that case produce something close to 75% of what investors anticipated?"

I don't work in finance, but my understanding of the MBS problem is that they split those mortgages into 3 different packages: the good, the bad, and the ugly.

The good will have few if any defaults containing the top 33% of the mortgages.

The bad will have the middle 33% of the mortgages and will have foreclosure rates of 50% or so.

The ugly will have the bottom 33% of the mortgages and will have foreclosure rates of 85-100%.

For a very amusing and slightly profane explanation, try this link:

http://docs.google.com/TeamPresent?docid=ddp4zq7n_0cdjsr4fn&skipauth=true&pli=1

Posted by: northsloperenter at February 19, 2009 3:43 PM

im fully aware of the history of projects in nyc and how they are very well maintained for the most part. im not against them i dont know how someone concluded that. like i said it helped my grandmother raise me. i think they serve their purpose. i think my words were being twisted or i didnt explain it correctly.

*r*

Posted by: PitbullNYC at February 19, 2009 3:44 PM

denton -- I don't see why it matters what you call it. a subsidy is a subsidy. if people are waiting years to get into the projects, we're spending too much on them. they should suck. they're meant prevent shantys and slums, not as a reward for people who can outlast a waiting list. There are some who literally can't help themselves -- people with illnesses and injuries, some single moms, etc...but beyond that, everyone can live in this city in a market rate apartment. why should I help pay to support people to live in manhattan when they can't afford it at market rate?

Posted by: joe_the_bummer at February 19, 2009 3:44 PM

P.S. By "slightly profane" I meant "actually quite profane and probably not best to watch at work with hyper sensitive, nosy co-workers around"

Posted by: northsloperenter at February 19, 2009 3:47 PM

Check this out from Craigslist:
this must be one of those "predators" who sneaks subprime loans past unsuspecting but totally responsible homebuyers, right?

---------------

$1 Why Rent? Buy Instead ! With No Money Down. (All of NY)

Government Programs Available for First Time Home Buyers

Must be Employed or Self-Employed for 2 Years

Must Have Verifiable Income

Bad Credit or NO Credit

Bankruptcy Chapter 7 Discharged 2 years or Chapter 13 Current

Gift Funds OK

Seller's Concession Up to 6% OK

Find Out How You can Buy The Home of Your Dreams With NO MONEY DOWN!

No Cost and NO Obligation Pre-Approval within 2-4 Hours

Call Toll Free or
Visit WWW.THELOANDOCTOR.COM

Posted by: joe_the_bummer at February 19, 2009 3:49 PM

NSR, did you assume my numbers? Your explication taken in aggregate results in 50% of homes underlying MBSs going into foreclosure. Is that what the market thinks?

Posted by: slopefarm at February 19, 2009 3:55 PM

north slope you are close. It's like this: say there's three investors in the pool. the "good" is entitled to get paid interest and principal from the whole pool first, the "bad", second, and the "ugly", last. The investors are not mapped to borrowers, instead they subscribe to priority of payments referencing the entire pool.

In a realistic example, the ugly (in subprime pools) is the bottom 10%, the bad is the 10-20%, and the good is the 20-100%. What happened was that banks RE-POOLED the "bads" to create other investments, which they also divided up. In those second-generation securities, it doesn't matter if you invested in the "super good" part, because the entire thing was made up of "bads". Well, pool default rates were above 25%, so the bads got wiped out, and pools of bads got wiped out too.

The way AIG went down was exposure to the "Super Good" parts, just as I described. They are literally worth pennies on the dollar now.

Posted by: joe_the_bummer at February 19, 2009 4:01 PM

I have voters remorse :(

Posted by: maranello16 at February 19, 2009 4:06 PM

"NSR, did you assume my numbers?"

Yeah, I was just assuming mortgages 1-50 were OK and 51-100 went plock.

joe's explanation is better (it must be because it matches the cartoon better than what I said!).

Posted by: northsloperenter at February 19, 2009 4:06 PM

by the way, for anyone looking to relate market jargon to that last post, the good, bad, and ugly are called "mortgage backed securities", and the second-gen product is a "CDO".

you can "reference" either of these, or any other debt instrument or borrower (eg a company) , with a Credit Default Swap (CDS). All that means is you design a contract to mimic the cash flows of the referenced asset, so that you can take exposure to it (long or short) without burdensome funding operations. Folks like AIG used Default Swaps to gain their exposure, but the contracts are wrongly blamed for causing the crisis. if they hadn't existed, people would have just bought the assets and financed the purchase through some other means, leading to the same over-leveraged result.

Posted by: joe_the_bummer at February 19, 2009 4:12 PM

it got blocked for me. is that the one where the stick figure says "we f*cked up"? that is hilarious and actually pretty spot on.

Posted by: joe_the_bummer at February 19, 2009 4:14 PM

joe -- yes it is.

Posted by: northsloperenter at February 19, 2009 4:16 PM

Thanks everyone. In naive layman's terms, I am still stuck with the nagging feeling that the fear of how bad the bad stuff is far outweighs how much bad stuff there really is out there compared with the relatively good stuff. That, as much as we had a bubble, we now have some weird kind of anti-bubble that is at least as equally divorced from the reality.

Posted by: slopefarm at February 19, 2009 4:22 PM

slopefarm -- I dunno...it's pretty f'n bad. the thing is, picture Citigroup: when they originated those CDOs, they never sold the "super good" parts, they kept them. but those supergoods make up 80% of each CDO deal. and they took down at least 30-50 billion of those supergoods. Well, even if Citi has a trillion in assets, they have just torched 50 billion. Why is that bad? because that trillion in assets is only supported by about 7% capital, meaning about 70Bn in actual money that's theirs. the rest they borrowed. so they're down 50 out of 70, before you consider losses that will come out of god-knows what: commercial real estate, corporate lending, whatever. They are hosed. You know why the banks won't lend the tarp money? because they're insolvent and they need it to restore their capital.

Guys like Bernanke pride themselves on never saying rash things, and they're totally freaking out.

Posted by: joe_the_bummer at February 19, 2009 4:47 PM

Hi folks;

I'm back (I'm actually in Tokyo, so it's morning time here). I'd like to make a few more comments:

-North Slope Renter and ENY: I stand corrected on my previous comment about who is helped with this plan. As you pointed out, it does seem to also help those who are underwater, by providing an option for refinancing.

-I continue to maintain that this plan is a very bad idea. I am well aware that folks are hurting out there in this economic situation. I can understand the political desire to do something to help ordinary folks who have been hurt by this economic tsunami. I think that some of this relief was provided in the recent stimulus package: tax cuts, giving unemployed folks the options to sign up for medicare, extending unemployment benefits, etc. Perhpas more needs to be done. This bill,however, is a bad idea because it is trying to prop up an unhealthy economic situation, namely, housing prices are still not in conformance with income levels. In order for the housing market to revive, it is necessary for pricing to settle to its natural level at which the local income levels can support it. By trying to prop up pricing, you are just prolonging this process and the pain that goes with it. Moreover, it is unjust to those folks (perhaps like Joe the Bummer) who are waiting to buy his place. Because of this bill, he will have to either forestall a purchase, or pay a higher price. How is that fair to these folks? This bill disincentivizes the whole point of thrift.

As Ringo put it so well a few days ago: help folks get back on their feet, but please don't artificially prop up the remains of a housing bubble.

Posted by: benson at February 19, 2009 5:41 PM

Well said, Benson.

Posted by: SnarkSlope at February 19, 2009 6:22 PM

I agree with Mr. Snark (FYI snarky, i was with 1 1/2 other SOTDers today!- we missed you!). It was well said, benso and I can't disagree with your point about propping up what was wrong in the first place. But On the other hand, I think the stimulus can also be thought of as fixing the leg of a broken chair until you can get a new one.

In some ways we don't have a choice because the people who will get hurt the most are the ones who can least afford it. It isn't just the economy that needs fixing- its our whole way of thinking.

Posted by: bxgrl at February 19, 2009 7:25 PM

Folks;

Just read the Interntaional Herald Tribune with my morning coffee. I came upon this column, which really hits the nail on the head:

http://www.iht.com/articles/2009/02/19/business/col20.php

Posted by: benson at February 19, 2009 8:39 PM

" 'keeping people in their homes' is only a marketing slogan. What the govt cares about is a mass ditching of obligations under contracts, and they're trying to stop the spiral that would cause that." - joe_the_bummer at February 19, 2009 12:28 PM

Allow me, What.

Ding ding ding!!! We have a winner!!!

***Bid half off peak comps***

Posted by: Brownstones Half Off at February 19, 2009 8:51 PM

BTW, $75B does jack.

***Bid half off peak comps***

Posted by: Brownstones Half Off at February 19, 2009 8:52 PM

VIVA Rick Santelli from CNBC! I say we make hime a saint. I am planning a bus trip to Chicago in July when he is having the Chicago Tea Party. Great of him to call homeowners losers. If you can't afford your home go rent!. If you are a renter don't buy yet let the home prices fall even more. Renters it is our defining moment!

Posted by: hannible at February 19, 2009 9:36 PM

Schadenfreude

Posted by: sweetheart at February 19, 2009 10:43 PM

"If you can't afford your home go rent!"

It's cheaper and you'll (not you personally, hannible) be happier. Your credit is already ruined. It'll take seven to ten years to reset your credit but that's at least how long we'll be in this depression and how long it'll take for you to save 20% down + 6 months of reserves.

Again, this is a rescue package for banks. As futile as it is.

***Bid half off peak comps***

Posted by: Brownstones Half Off at February 20, 2009 10:12 AM

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February 19, 2009

Obama Details Rescue Plan for Homeowners

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