Thursday, February 26, 2009
Stimulus, bailout and your coop apartment
LOOKING AHEAD by Wally Dobelis
Thinking about stimulus and bailout is a stepwise process. A week ago the $75B mortgage protection plan came out. Working people whose houses are “under water” (worth less than the mortgage) and who spend more than a prudent percentage of income on housing can have their interest and sometimes the principal reduced to a bearable amount. Speculators will not benefit , but the regulators must watch out for properties in suburbs that sprung up overnight, involving reckless purchasers, wash sales, cheating realtors, walkaway straw buyers and artificially boosted prices, accepted by bonus-bribed underwriting managers at fast-growth WaMu, Wachovia, Golden West and similar unscrupulous fast-growth firms.
The marketplace did not like the taxpayer-supported bailout for 9M mortgages. Jimmy Diamond of Chase approved of the new mortgages aspect but wanted everyone to understand that basics of business should not change. You are responsible for what you bought, unless cheated. Exuberance does not count. Pay your debts, and suffer. All of us Adam Smith people agreed.
So why should this breach of basic rules of economics happen? Well, risk analysis, a new discipline, comes in. You do it for the greater good. If the government forces banks to accept the unwarranted loss, it is for their own good. Foreclosing and auctioning off the severely underwater buyers’ homes will depress the area real estate values more, and more owners will “short-sell” (below mortgage) and move out, depressing comparable property prices and snowballing to more short sales and foreclosures, and lose more. Imagine, if in your coop an owner is forced to sell way below market value, what that will do to your property? It seems preferable to accept the stabilizing effort on some properties and protect the area, the state and the nation from a truly snowballing price drop. The plan envisions refinancing five million under-water mortgages through Fannie May and Freddie Mac, who back some two-thirds of the nations’ homes. There are incentives for banks to lower mortgage payments for subprime borrowers to 38% of income, or if the bank is willing, to 33%, the government matching the difference, and for actually modifying loans (Treasury guidelines are coming). Loan servicers can earn d incentives for loans remaining current for three years, up to $1,000, likewise borrowers can earn annual principal deductions of $1,000 for being on time, to five years.
As a nation, we have some 75M households owning homes, of which 16 %, or 12M. or 1 in 6, are under water, as compared to 4% in 2006 and 6% in 2007, Of new buyers in past 5 years, 29% are underwater. Some 64M homes have equity, including 24M owned free and clear. New York and Atlanta real estate purchases have lost under 10% of value since peak, Boston slightly more, with 10-20% of those bought in 2004 and later under water. San Diego, Las Vegas, Los Angeles, Phoenix, Miami, S.F. and Washington are in the 20-33% value loss area, and have under 44% of the 5 year and later purchases valued below mortgage (50% plus in San Diego and Las Vegas). In metropolitan areas, neighborhoods with short travel to work are holding up better than commutes.
National statistics show that home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%. The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter 2008, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
The stock market slump, driven by bank share values radically decreasing, is due to the additional burden imposed by the homeowner stability effort on bank recovery. This brings up the previously unspeakable suggestion of nationalizing the most affected giant banks, by buying up the shares, and reselling them back, after recovery. This was the Swedish model of recovery some time ago. The US banks most affected seem to be Bank of America and Citigroup. It is hard to imagine the latter, the creation of bailout expert Sanford Weill, going under. Weill in 1962 started as a broker in Carter, Berlind, Weill and acquired Shearson Hayden and Loeb Rhodes, which he sold to AmEx. Not succeeding in taking AmEx over, he bought Commercial Credit from Control Data, and added insurers Primerica, the peculiar A. L. Williams Co., huge Travelers Insurance and the property/casualty arm of Aetna Life & Casualty. He also acquired brokers, Smith Barney, Shearson (again), part of Drexel Burnham Lambert, and Salomon Brothers. In 1998 his Travelers Group merged with the huge bank, Citicorp, founded in 1812. The company expanded after overturn of the limiting Glass-Steagall Act, but during the 2002 economic downturn Weill was replaced, cashing in $300M worth of shares. So there.
WD thanks AP, WSJ, Moody’s Economy.com, First American CoreLogic Index and Internet news sources.
Thinking about stimulus and bailout is a stepwise process. A week ago the $75B mortgage protection plan came out. Working people whose houses are “under water” (worth less than the mortgage) and who spend more than a prudent percentage of income on housing can have their interest and sometimes the principal reduced to a bearable amount. Speculators will not benefit , but the regulators must watch out for properties in suburbs that sprung up overnight, involving reckless purchasers, wash sales, cheating realtors, walkaway straw buyers and artificially boosted prices, accepted by bonus-bribed underwriting managers at fast-growth WaMu, Wachovia, Golden West and similar unscrupulous fast-growth firms.
The marketplace did not like the taxpayer-supported bailout for 9M mortgages. Jimmy Diamond of Chase approved of the new mortgages aspect but wanted everyone to understand that basics of business should not change. You are responsible for what you bought, unless cheated. Exuberance does not count. Pay your debts, and suffer. All of us Adam Smith people agreed.
So why should this breach of basic rules of economics happen? Well, risk analysis, a new discipline, comes in. You do it for the greater good. If the government forces banks to accept the unwarranted loss, it is for their own good. Foreclosing and auctioning off the severely underwater buyers’ homes will depress the area real estate values more, and more owners will “short-sell” (below mortgage) and move out, depressing comparable property prices and snowballing to more short sales and foreclosures, and lose more. Imagine, if in your coop an owner is forced to sell way below market value, what that will do to your property? It seems preferable to accept the stabilizing effort on some properties and protect the area, the state and the nation from a truly snowballing price drop. The plan envisions refinancing five million under-water mortgages through Fannie May and Freddie Mac, who back some two-thirds of the nations’ homes. There are incentives for banks to lower mortgage payments for subprime borrowers to 38% of income, or if the bank is willing, to 33%, the government matching the difference, and for actually modifying loans (Treasury guidelines are coming). Loan servicers can earn d incentives for loans remaining current for three years, up to $1,000, likewise borrowers can earn annual principal deductions of $1,000 for being on time, to five years.
As a nation, we have some 75M households owning homes, of which 16 %, or 12M. or 1 in 6, are under water, as compared to 4% in 2006 and 6% in 2007, Of new buyers in past 5 years, 29% are underwater. Some 64M homes have equity, including 24M owned free and clear. New York and Atlanta real estate purchases have lost under 10% of value since peak, Boston slightly more, with 10-20% of those bought in 2004 and later under water. San Diego, Las Vegas, Los Angeles, Phoenix, Miami, S.F. and Washington are in the 20-33% value loss area, and have under 44% of the 5 year and later purchases valued below mortgage (50% plus in San Diego and Las Vegas). In metropolitan areas, neighborhoods with short travel to work are holding up better than commutes.
National statistics show that home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%. The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter 2008, the median home price of about $203,000 was 1.9 times average pretax household income, according to Economy.com. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.
The stock market slump, driven by bank share values radically decreasing, is due to the additional burden imposed by the homeowner stability effort on bank recovery. This brings up the previously unspeakable suggestion of nationalizing the most affected giant banks, by buying up the shares, and reselling them back, after recovery. This was the Swedish model of recovery some time ago. The US banks most affected seem to be Bank of America and Citigroup. It is hard to imagine the latter, the creation of bailout expert Sanford Weill, going under. Weill in 1962 started as a broker in Carter, Berlind, Weill and acquired Shearson Hayden and Loeb Rhodes, which he sold to AmEx. Not succeeding in taking AmEx over, he bought Commercial Credit from Control Data, and added insurers Primerica, the peculiar A. L. Williams Co., huge Travelers Insurance and the property/casualty arm of Aetna Life & Casualty. He also acquired brokers, Smith Barney, Shearson (again), part of Drexel Burnham Lambert, and Salomon Brothers. In 1998 his Travelers Group merged with the huge bank, Citicorp, founded in 1812. The company expanded after overturn of the limiting Glass-Steagall Act, but during the 2002 economic downturn Weill was replaced, cashing in $300M worth of shares. So there.
WD thanks AP, WSJ, Moody’s Economy.com, First American CoreLogic Index and Internet news sources.
# posted by Wally Dobelis @ 11:12 AM 
