Stimulation-Nation! Why the Stimulus Package Hurts Housing and Sneaking in a Raise for Loan Caps.

Don’t you just love how they are calling this fiscal boondoggle a stimulus package? Since we are all about “stimulating the consumer” they will also throw in a few syringes with heroine, methamphetamines, and two Red Bulls for good measure. This way, consumers can load themselves up and spend for 48 hours straight shopping without even pausing for water or sustenance (I guess the government assumes your lifetime goal is to be on the perpetual Wal-Mart hamster spending wheel). I can imagine everyone running to their mailboxes eagerly reaching in with their hands, on a bright sunny spring day and pulling out a nice $600 on a Statue of Liberty watermark check. Thanks Paulson! Just got screwed on the AMT and Social Security but hey, who can argue with a nice watermarked check?

US Treasury

So what do we know so far about the stimulation-nation® package?:

· $150 billion price tag (still not saying where this money is coming from)

· $600 for most single tax-payers

· $1,200 for two-wage households

· $300 per child

· 116 million taxpayers will receive checks of some size

· $75,000 single taxpayer ceiling and $150,000 couple ceiling

· Pro-rated or receiving no tax rebate above the ceiling limit

· These rebates compose about two-thirds of the package

· One-third is tax breaks for businesses (somewhat sketchy at the moment but we can all guess how this is going to look)

· Short-term increase of $625,500 from $417,000 for GSE mortgage purchases

· Lower down payment for FHA loans

· Increase loan caps for FHA-insured mortgages

They actually state in the stimulation-nation® package that their desire is to increase loans to “riskier” borrowers who have not been able to get mortgages since the credit collapse in 2007. That is, let us rinse and repeat the same thing that got us into the current mess. I’ll address the final points regarding the caps being raised at the end of the article since I haven’t heard such anger since the announcement of the FHASecure program proposed in August or the Hope Now Alliance dished out in December. How well are those doing in stopping the oncoming recession? It is full of hot air and political posturing just like Hilary Clinton’s 5-year absurd mortgage freeze. The price tag if these things were to be fully implemented would bankrupt the country but it isn’t stopping these financial desperados from deficit spending. Whatever happened to balancing the budget?

The first assumption is that people are going to fight to keep their homes but we already know many people are simply walking away. The second thing to consider is why do you think that for profit industries will buy toxic mortgage products? These greedy corrupt plutocrats are edging closer and closer to a full out bailout of Wall Street and the real estate industry but they aren’t stupid either. As it stands, the raise in caps will only sound good until people have to show real world incomes for fiction priced homes. This will not create jobs and is equivalent to lenders in our agricultural history loaning money to farmers and calling in loans right before the crop harvested forcing a foreclosure. Only this time, instead of the farm we have McMansions and lenders are trying to figure multiple ways to stick it to the lower and middle class hamster consumers. They want the mass population to make up for their greed and financial mal-investment. Here are a couple of simple solutions that will start working without raising taxes:

1. Allow for mortgage cram-downs and the ability for judges to rewrite loans to affordable measures based on the current owner’s household income. If the goal is keeping people in their homes, this is a win-win. Lenders had a fiduciary responsibility to make sure and verify that buyers could afford their current monthly payment. If their debt-to-income ratio is up in the 50+ range like many in California and the owner is teetering on foreclosure, then too bad for the lenders since they are going to have to eat their own irresponsibility. The owner stays in their home and the lender doesn’t have a complete loss.

2. Aggressively go after companies that did predatory lending, confiscate their assets and those of their Ponzi organizers and create a “trust-fund” to assist those nearing foreclosure. These people made incomes on the back of pushing deliberately dangerous paper that is now imploding. And guess what? Many of the heads of these places are getting off with severance packages in the millions. How politicians are working with these corrupt white-collar criminals is beyond me.

Of course my preferred method is let these lenders implode and let the market take care of itself. This populist rhetoric of saving homes is sickening since on the back of this language they try to raise caps to $625,500. How do those in middle America feel about this? Our national median home price is roughly $223,800. Heck, even Southern California’s median home price is now near $400,000 and no county in Southern California is even over $565,000. Guess who called for higher caps last year:

NEW YORK, Dec 5 (Reuters) – Countrywide Financial Corp’s (CFC.N: Quote, Profile , Research) chief executive called on the U.S. Congress to temporarily raise the maximum size of mortgages that Fannie Mae (FNM.N: Quote, Profile , Research), Freddie Mac (FRE.N: Quote, Profile , Research) and the Federal Housing Administration may buy or insure by 50 percent to $625,000.

In an opinion piece in the Wall Street Journal on Wednesday, Chief Executive Angelo Mozilo, whose company is the largest U.S. mortgage lender, said the increase from $417,000 should be implemented for up to a year.

He said this would go a long way toward alleviating a nationwide housing crunch, which analysts expect to pinch borrowers and lenders throughout 2008 and probably beyond.

“It should be enacted as part of a broader package of reforms to ensure that these linchpins of our mortgage system can aggressively support the housing market in a time of need, and that the appropriate controls and oversight are in place to protect taxpayers,” Mozilo wrote.

Mozilo had previously called for the cap to be raised to as much as $850,000.”

Bwahaha! Fantastic! The administration is following the lead of Angelo Mozilo. Seems like they pick winners each and every time. I’ll have to call them up next time I go to Vegas. Amazingly, the cap was raised to $625,500, you know that extra $500 is so the government can then send $600 back to you in this wonderful housing circle jerk. It is also being implemented supposedly for a year just as our good respectable friend has called for. If you need anymore proof that Washington needs to change, this is it. Keep in mind that Mozilo was stating in the forth quarter that Countrywide was going to turn a profit. The President listened to Mozilo’s stimulation-nation® idea and now we are going down the path of unintended consequences.

Let us now go back to the $600 many of you will be getting. If you recall, in 2001 a similar stimulus package was put together to rescue the ailing economy:

In 2001, taxpayers received $300 each or $600 for a married couple, as the economy tipped into a recession.

“About half the money got spent,” said Lawrence Mishel, president of the liberal Economic Policy Institute, with the rest going to savings or paying debts. He said the rebate helped to soften the recession, but he said there is a better way to spur the economy.

“Give money to people who are on unemployment or receiving food stamps,” Mishel said. “Those are the people we know who are most likely to spend the money.”

Okay, so people are going to spend $300 while we raise caps by $208,500. This is backward logic and pathological avoidance that you now have major motivation to vote these status quo politicians out of their publicly financed offices! This reminds me of Bush talking about how it is every American’s patriotic duty to spend. With the $600 rebate, you can enroll in a local community college basic finance course for about $100, then with $20 you can purchase a good introduction to money management book, and with the other $480 you can put it into a high-yielding money market account (which will be gone since the Fed is punishing savers). You would think this message would be sent to the American public but instead they want you to strap on your blue suede shoes and go to the mall or Target and buy Chinese made trinkets while banks and Wall Street keeps selling out America to foreigners. Just think of Abu Dhabi buying a 4.9 percent in Citigroup. Yes sir, the fundamentals of this economy are so strong that Ben Bernanke did an emergency c-section Fed cut this week and tried to keep a straight face saying, “hey, nothing to look at here! Just dropping rates by .75 basis points!”

While you Where Sleeping – Raising Caps

Not much news has been shed on the cap raise. Most of the 24 hour media circuit has been ballyhooing about the $600 big ones you are going to get while energy keeps soaring, wages stagnate, and housing keeps on tanking. Instead of asking the hard questions they superficial examine the issue and move on. I keep hearing the damn “it was subprime” line over and over as if that was the one issue that drove this economy to where we are at. No, it is the fact that one rogue junior trader in France can cost a company $7.1 billion by unwinding positions in a hedge fund. That $7.1 billion is 4.7 percent of our entire stimulus package that will reach over millions of Americans. And yet we want to raise caps? Many do not understand that you cannot produce a sustainable economy by becoming perpetual paper pushers and house flippers without producing something of real substance. The cap raise was snuck into the proposal, sort of like all companies announcing abysmal earnings this week while the market was tanking as if no one was going to notice.

This bill has been seriously floating around sometime and got traction in September of 2007 when it was pushed by Senator Charles Schumer. The plan was stupid then and nothing has changed that fact. Someone making a 20 percent down payment and going with the current conforming loan limit of $417,000 could finance a home worth $521,250. With prices massively declining in California, you are actually over the median price for a home in the state. What other state is more expensive and has the sheer number of homes that we have? None. Do we really need to raise caps? Of course not.

This is the same political posturing like the 5-year rate freeze. The only way this is going to have any teeth is if the government suddenly starts going no income, no documentation, and starts buying Pay Option ARMS. Keep in mind most FHA loans have been performing well in contrast to other loans. Single-family mortgages purchased by Freddie Mac in 2006 had a mean FICO score of 720 and a mean LTV of 73 percent. Fannie Mae has similar numbers with a mean FICO of 716 and LTV of 73 percent. However overall jumbo loans during this period had a FICO of 697 and a LTV of 77 percent that would qualify for Enterprise purchase. These are only loans that would qualify. You can only painfully imagine how some of the other loan portfolios look. The government will be taking on more credit risk if they raise caps. The door is being left open for bailouts.

Now there is nothing wrong in buying larger mortgages so long at the loan-to-value ratios make sense. Fannie and Freddie have been extremely cautious in buying IO mortgages and negative amortizing ARMs and it would appear that there is no reason that they should start doing so in the current climate. They are a business and operate for a profit so unless the government forces their hand to buy subprime loans or Pay Option ARMs currently on the market, I don’t see them doing so. However, that is why this is such a pathetic attempt for a bailout with marginal benefits for the economy that I say we scrap it all together and start confronting the brutal facts. Straight talk right?

Also, there is clamoring that now refinances are going to go through the roof. Not exactly. If you haven’t paid attention Southern California is now down by double-digits. The credit crisis only hit in August of 2007 and already we are sinking like a submarine. There are now many homeowners under water on ridiculous mortgage products. For example, someone has a $500,000 mortgage on a home that is valued at $400,000. Just take a look at a Real Home of Genius for an example. Even if they want to refinance, they can’t unless they want to pony up some money. What idiotic lender will give you $500,000 at better terms on an asset that is valued at $400,000? Knowing how the government is currently operating I wouldn’t be surprised.

I did a post way back in November of 2006 when Option ARM loans were still popular briefly stating that the mortgage mentality was based on Pinto economics. Pinto economics? Well the loud argument at the time was everything was dependent on the monthly nut. The overall price didn’t matter. Hence the popularity of Pay Option ARMs and Interest Only products since they targeted the monthly nut and artificially lowered prices. Yet my main argument was that the underlying asset is what matters, not the monthly price. You can buy a Pinto and pay $50 per month over 20 years at 0 percent interest and it is still a horrible deal.

Also without any equity, the mortgage equity withdrawal (MEW) market is now DOA and not coming back. This was a much bigger boom on the economy than a pathetic $600. We had folks putting on the proverbial ATM machine on the side of their home via a HELOC of Home Loan and getting $50,000 out of thin air. This isn’t coming back. If anything this may help a few qualified buyers with adequate income and credit purchase a home with a nice conventional loan but I can assure you there are not many out there. And those that do have the income know prices are going to fall further so why would they jump in? Now we will put the economy to the test and see if buyers really have the income and see if our economy isn’t built on a house of cards. Government bought mortgages are vetted (at least currently they are) and require actual underwriting. None of this Wall Street secondary market with asinine financial alchemy. No longer can you do a wink-wink analysis and end up getting a loan based on your imaginary budget. Sorry fly by night mortgage brokers and lenders, I know many of you thought this was going to be the Tan-man coming on a tanned horse to save the day but he’s setting his sites elsewhere, probably nowhere in your neck of the woods. After all, the idea to raise caps was first espoused by him and apparently the government is now taking advice from CEOs who push companies to the verge of bankruptcy and pass the bill to others. Now that is what I call stimulation.

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21 Responses to “Stimulation-Nation! Why the Stimulus Package Hurts Housing and Sneaking in a Raise for Loan Caps.”

  • I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.

    - Sue.

  • Doc, I think that’s exactly what the politicians know — that boosting the cap will have zero actual impact, but non-zero perceived impact. They want to appear as if they’re being proactive and “saving” folks who are already on death row. Obviously, It’s not going to work, but they play their games.

    –S

  • Dang…and yet I would be the a**hole if I went up to a Wall Street I-banker and just socked him in the face.

  • The government should just mail those rebate checks directly to the banks. That’s where people will be forwarding them on to anyway, in the form of credit card payments.

  • Cram downs might be the only real way to “solve” this problem. The lenders were professionals and, as long as there wasn’t fraud by the borrower (a stretch in these days of no doc, but …), new loan supported by the borrower’s income might work to stem the tide of foreclosures. It would be expensive (almost a mini-BK workout) and there are a lot of details to sort out, but it sounds like a good idea to me.

  • I think you are way to harsh on our dear elected officials. I was wondering how I was going to raise the funds for my bankruptcy attorney…. Now I know.

  • Dear Doctor Housing Bubble: Check this out, might be worth another column. Things are really going to get interesting now:

    http://news.aol.com/business/story/_a/pepsi-super-bowl-ad-features-silence/20080124173309990001?ncid=NWS00010000000001

    Regards

    Abrey

  • Look for Fannie and Freddie to change direction and start buying large packages of loans from banks, including many that would not otherwise qualify to be issued today – I’m guessing this is how the bailout will go down. Banks will not go under, but some government-sponsored entity (i.e., the taxpayers) will end up holding the bag. Of course, how they prop these entities up once defaults reach critical levels, I don’t know, and I don’t think anyone else does either…

  • With a limit of $417,000 Freddie Mac already gets more than 14% of their volume from Califorbnia. This is 7 times the average state (100% divided by 50 states =2% per state.) California has 49% of the country’s jumbo and non-conforming loans. So, are we going to see conforming loans go 25-30% to California.
    As one who tries to qualify people for loans every day here in California, I can tell you that high prices are the problem, and this increase will not help, and will hurt by keeping prices from dropping as much as they should. It will help keep prices artificially high. Also, the high limit itself will not help as much as it would in the recent past, because most people cannot qualify for loans from 417,000 to 625,000 without overstating their income, or using option-ARM low payments.

    So, if you want to see Freddie and Fannie’s risk exposure to California double, lets’ increase the limits, and let them do stated income, interest-only loans. Maybe they can increase their losses from only a couple billion to some real nice double digit billions. Thank you, rest of the country for your future tax payer bailout to help things here in California.

  • I agree with JimatLaw. The unseen Plunge Protection Team directive is to salvage the too-big-to-fail lenders like Countrywide and WAMU, who as Doc has pointed out have about 1/2 their portfolios in California. So the cap raise isn’t aimed so much at borrowers who still don’t qualify (though it will help a certain few with lower payments) – it’s aimed at bailing out the lenders, just as the 6 benjamins will go to the credit card issuers.

    Note that the MSM hasn’t said a single word about what Ron Paul’s views are on the stimulus package.

    Paulson should be wearing a toga and fiddling – Rome is burning.

  • I love 2 types of articles that you write. First is the ones with a lot of Charts and Graphs and the second one is the article with a lot of Graphs and Charts. This one left me wanting more.

    Later, from Sunset Beach, around the corner from Mother Bar.

  • So we have Nancy Pelosi ( D-SF) slipping in an ‘earmark’ for her district for an illegal subsidy of her and Barbara Boxer ( D- Marin) homes in the form of this increase in conforming loans. San Francisco and Marin happen to be two of the very few areas in this country where the median price of a home is $700,000+.

    “On a $650,000, 30-year fixed-rate mortgage, the savings could be $417 a month, according to California Sen. Barbara Boxer’s office.”

    But only if you live in one of the favored communities like the Bay Area, Southern California or, surprise surprise, Washington, D.C. Now this is going to get interesting because 90% of the country will be excluded from Senator Boxer’s
    wonderful $417 per month savings but they have builders, realtors and expensive
    homes in flyover country too.They also have Senators and Congressman who might not like this subsidy to the richest areas of the nation.

    Consider Washington,D.C. Its outer suburbs reach almost to Baltimore, Md. and
    Richmond, Va. Imagine a person considering the purchase of a $700-800,000 home in the Richmond and Baltimore area learning that if he buys another house a few miles up or down the road his payment will be $400/month less if he acts
    now. Imagine the poor builder or realtor in Hanover or Towson reaction to this bit of federal ‘red lining’?

    Will Santa Barbara be included but not San Luis Obispo. Santa Clara but not Santa Cruz. If Bank of America or Wells Fargo tried this their CEO’s would be put in prison for violating Fair Housing laws. But Nancy Pelosi and Barbara Boxer
    are proud of their discriminatory handiwork. Lets see if the rest of the Congress and the Federal Courts are just as pleased.

  • The analysis on this website is just fantastic. I agree with many who post about the real problem in California real estate being the ridiculous prices which are not supported by economic fundamentals. The government can increase loan caps all they want, it still won’t prop up the overinflated house prices in Los Angeles. The truth of the matter is that people do not have the income nor a large enough cash downpayment to afford these FHA loans. The bubble mentality of buying a house and having 20% annual appreciation has also popped. The actual people who can could qualify for these type loans will continue to sit on the sidelines and wait for decent price declines. This bailout is for the banks. The government is hoping that the masses will come out and sign on for huge mortgages for an overinflated asset whose price will deflate. I can’t tell you the number of people in Los Angeles who are hurting financially. They only maintained the illusion of “wealth” because of HELOC’d money. They spent beyond their means and now the ATM machine is closed.

  • I like the Pinto analogy. To add fuel to that fire (pun!), The whole deal explodes when you get rear-ended by the markets.

    Also, the average community college course is up to $300 per class and the average finance text book will set you back about $150. Times have changed.

    When will the financial raping of America stop?

  • I just sent e-mails to both of my senators asking them to kill Fannie and Freddie limit increases in any stimulus package. I asked them not to allow the cost of bad loans for overpriced California and Florida houses to be passed on to the rest of the country, especially taxpayers in our state.

    How many of you have done the same? Only a fraction of a percent let their lawmakers know what they think.

  • It’s about time, our median price is at 800K and raising the cap to 625k will ease the purchases of homes in our area and it will have a definite positive impact on our local economy. This stimulus package makes the most sense. Let’s remember that we are where we are at today because of the mortgage and housing industries. It’s time for a serious clean up of the system.

  • From Lou Barnes over at Inman news (http://www.inman.com/inmannews.aspx?ID=65907):

    “The stimulus package has had similarly destabilizing results. At best it will be harmless. More likely, late, adding stimulus after the need has passed. The new mortgage limits, $625,000 for Fannie and $750,000 for FHA, will be intercepted by a 125 percent-of-median-prices lid in each Metropolitan Statistical Area.”

    From me-

    Dear Sellers: Your listing is over the 125 percent-of-median-prices lid for Los Angeles so no one can get a conforming Freddie/Fannie loan to buy your house. But your rush to list has added massive inventory to the market and fueled panic this Spring. Much appreciated. -Buyers.

  • Since I make over the ceiling. . .and will not receive a refund. . .I am going to subtract that amount from my 1040 at next tax date 2009!!

  • Change Fred and Fan? Yawn……. There are still these slight problems called:

    DTI – yep, caps on the % of income going to mortgage and % of income for all fied debts are in fashion again.

    So how many potential buyers of these ‘junbo’ houses can really qualify if they can only spend 28-31% of gross income on mortgage taxes and insurance; and only 41% of gross income on the house, credit cards, car loans and other fixed debts?

    Answer: probably not any more than could qualify for a fixed rate mortgage for such loans during the past few years, and that is only around 26-30% of all buyers.

    That $625,000 mortgage will need actual proof of an income of at least $180,000 if the interest rate is 6 % on a 30 year loan. At 8%, that same mortgage would have needed a $216,000 income to stay within a 31% cap on mortgage, taxes and insurance.

    No matter how you cut it, that mortgage is only affordable for a buyer who has an income in the upper 3.9% of households. $180,000 is the upper 3.9% and $200,000 is the upper 2.67%. Even in CA, only 7.4% of households have an income of $180,000 and above, and 5.33% have an income of $200,000 and up.

    LTV – no more 0 down kiddies. And Freddie and Fannie are increasing the required down payment in ‘distressed’ areas with falling markets. If the down would have been 5, F & F now want 10; if 10, they want 15; if 15, they want 20….. So how many prospective buyers will have $69000 (10%), $103,000 (15%), $138,000 (20%) etc sitting in their piggybanks?

    Answer: no more than did before which was only that 26-30% of buyers.

    Only thing it will do is IF interest rates drop some for the ‘jumbos’, is allow those who have the income, have the DTI, and have the LTV to refinance and save some interest on their payment.

    Not going to bring in a lot of buyers. They simply do NOT have the income or moeny to put down.

  • Longtime lurker, and I’ve always enjoyed this site whenever its updated. After going through full days and hearing the talking heads say one thing and having your common sense say another, it’s good to see reality rear its head and let the truth be told. Without that reminder, it’s hard not to begin seeing yourself as the one who is crazy and delusional, so it’s a healthy breath of fresh air. Thanks for it.

    But I’m posting because of this quote:

    “Many do not understand that you cannot produce a sustainable economy by becoming perpetual paper pushers and house flippers without producing something of real substance.”

    When I read the above line, I promise that I nearly flipped, almost like a Real Home of Genius would’ve been around 2005. Anytime the subject of the “thriving” economy has surfaced over the past several years, I’ve told friends, family, coworkers, and more the same, only to get puzzled looks as if I asked what’s the inverse cosine of a chimichanga. My words usually are, “Don’t trust an economy where nothing is made,” or “If I, an engineer, promised perpetual motion, I’d be laughed out of the room. Why not the same for an economist, banker, or broker?” Anytime things are booming beyond belief, it’s beyond time to ask yourself, “Where is the original wealth coming from? What’s powering this thing? And for how long can it sustain itself?” If you can’t explain that in a few paragraphs, then you may have serious problems.

    In other news, I’m elated that I didn’t buy that house that was a “must-buy” in 2005 or 2006. I’m in the Midwest, and while affordability is less of a problem, many have still used the lax financing standards to overpay for their homes and gently nudge the prices above that which is merited, plus to upgrade to vinyl McMansions in the midst of former fields while leaving a glut of homes in the city and inner suburbs (i.e. anything within 20 minutes of the actual city). It’s now becoming more obvious as local home prices have dipped and inventory has risen to be 15% higher than it was this time last year and continues to rise. Never mind the fact that population growth here has been stagnant for decades. What new wave of buyers will clear this inventory as this turd hits the ceiling fan and spackles the crown moldings, granite countertops, and stainless steel appliances? Will the growing commute times still be worth it? Given that I still hope to change cities within a year or so, that anchor could’ve left me stuck here for quite some time.

    Thanks again, and give ‘em hell.

  • Actually, the loan refinancing thing (500k loan on a 400k) house would work if they start allowing 40 year mortgages. Give people a loan they can actually handle the payments on. Not that this is a great solution, but it could keep some people solvent.

    And, everyone knows, owning is better than renting
    /snark

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