Crony Capitalism for Dummies: Housing and Economic Recovery Act of 2008. How the Bailout will not Help you and Cost you Money. A Deep Look at the 694 Pages of the Bill.

As it stands, the Housing and Economic Recovery Act of 2008 otherwise known as the housing bailout bill is moving quickly through both the House of Representatives and the Senate. This weekend, the Senate overwhelmingly passed the bill with a 72-13 vote and now heads to the White House for President Bush’s signature even though he earlier voiced that he would not sign such a bill. As it stands, the majority of our politicians are backing this bill which as time goes on, will prove to be the biggest and most costly bailout in American history. Time will prove this out.

In this article, I have taken some time at digging through the 694 pages of the bill and will highlight some of the most important mechanics of how this will play out in the country. The initial centerpiece of the bill was a $300 billion FHA-insured mortgage nucleus that would allow cash-strapped buyers and lenders to refinance toxic mortgages. As you will see in this article when we deconstruct this part of the legislation, very few people stand to benefit from this smoke and mirrors. The more troubling aspect of the legislation is a stealth bailing out of Fannie Mae and Freddie Mac with an almost bottomless pit of financial access. The bill practically guarantees a taxpayer bailout for these two.

The problem with our current politicians is this. Democrats with control of the House should have fought harder to simply come out and nationalize the two mortgage giants. If their mission of providing liquidity to the secondary mortgage market and helping provide affordable housing to the American public is so vital, these two should be nationalized, allow shareholders who knew these were quasi-private enterprises take their hit and move on. Unfortunately, the party had no backbone of standing up for fear of being labeled a “socialist” or for fear of their political life come this November. Incredibly the market is the only thing living up to the original mission of the GSEs; ironically lower prices via this correction are making homes more affordable. That is why we have seen some increased action in sales for the Inland Empire where prices have fallen drastically.

Yet the majority of Republicans are playing even a more clandestine game of politics. What the current administration is playing is verbally acknowledging free market capitalism but in reality, what they are doing is nothing more than crony capitalism. Some have called what is currently going on as socialism but socialism by definition is a redistribution of wealth from those at the highest income brackets to the vast majority of those at the bottom. Simply by looking at how the lower to middle class of our country is being on the verge of financial destruction, there is nothing socialist about this. Bailing out Bear Stearns was a targeted effort at propping up a few big key players. The market still ended up going into bear market territory and now here we stand at passing a bill that the current Republican administration strongly said it would not sign.

After looking at the bill, the $300 billion FHA-insured refinance program doesn’t seem like the biggest problem. In fact, I think much of it was to provide bread and circuses for the masses. The unlimited lifeline to Fannie Mae and Freddie Mac will prove to be the undoing. It would in fact be cheaper to nationalize these two entities and be done with it. Why keep up the pretense of free market capitalism? That generation mantra is crumbling and the majority of Americans realize that there is nothing capitalistic about privatizing gains for a few of the most wealthiest and socializing the largest losses on the vast majority of the public.

Here is a brief summary of some the big items in the bill:

-FHA to insure up to $300 billion in new mortgages.

-Federal debt limit increase from $9.815 trillion to $10.6 trillion (this is where I believe most of the Fannie Mae and Freddie Mac boondoggle will be shoveled).

-Raise loan limit of mortgages purchased by Fannie Mae and Freddie Mac to 115% of the local area median price, with a nationwide cap of $625,000.

-Gives the Federal Reserve a monitoring role over Fannie Mae and Freddie Mac over soundness and regulation (put the fox in charge, not a good move).

-First time homebuyer tax credit of $7,500 for those that purchase a home up until June of 2009.

-$4 billion in grant money to state and local governments to buy and rehabilitate foreclosed homes in low to moderate income areas. (Amazingly this is the part the Bush Administration had a major hang up over and not the Federal debt limit increase of $800 billion or the $300 billion FHA part!).

-Federal backstop for Fannie Mae and Freddie Mac. Gives both GSEs a credit line increase and also allows for the U.S. Treasury to have an “equity” stake in the agencies. (This as time goes on will prove to be the most costliest mistake of the entire bill).

-Elimination of down payment assistance programs

-Elimination of OFHEO

It is hard to delve too deeply into the Fannie Mae and Freddie Mac component since the details are so vague and open. Paulson tries to make it seem that this is only a rainy day insurance fund but fails to acknowledge that we are in a major financial hurricane. These two will use this provision and use it to its fullest. The fact the debt ceiling is so high in this new bill is because realistically this is going to be incredibly expensive. Essentially, what is happening is nationalization yet they are still trying to keep the pretense of free market capitalism. That is why I find it hard to believe Democrats did not take this angle. The vast majority of Republicans keep allowing crony capitalism to play out while Rome burns. If anything, that is why candidates like Ron Paul were able to garner support and was able to raise $34.5 million. He tapped into the fiscally conservative wing of the party which Senator Bunning tried to defend. They of course have been marginalized.

So let us now dig into that $300 billion FHA component of the bill which seems to be the biggest lighthouse of hope in stopping the sliding housing market.

Requirements for FHA Insured Mortgages

It is useful to go through the requirements for those who will not qualify for loans since it practically rules out nearly 100% of all those in California. Take a look at this:

“The mortgagor shall provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt, and has not knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining any eligible mortgage.”

Well all those that have defaulted would not qualify. Of course this should be obvious. But why should someone today at risk of default benefit more than someone who defaulted last year? Either way, this narrows the scope of who will be helped. Now in the first part of the requirements there is a clear penalty for lying on applications:

“FALSE STATEMENT.-Any certification filed pursuant to clause shall contain an acknowledgment that any willful false statement made in such certification is punishable under section 1001, of title 18, United States Code, by fine or imprisonment of not more than 5 years, or both.”

This comes out quickly in the requirements on page 397 of the bill. This is something that should have always been enforced but unfortunately, it takes a bill in 2008 to state the obvious. Better late than never I suppose. Here is the part that in expensive states like California will do very little:

“CURRENT BORROWER DEBT-TO-INCOME RATIO.-As of March 1, 2008, the mortgagor shall have had a ratio of mortgage debt to income, taking into consideration all existing mortgages of that mortgagor at such time, greater than 31 percent (or such higher amount as the Board determines appropriate).”

31 percent debt to income ratio seems realistic and actually prudent. Yet the vast majority (approximately 80%) of Pay Option ARM borrowers, $500 billion in the United States and $300 billion in California, make only the minimum payment each month. Some of the other provisions which we will look at such as income verification will demonstrate that many of these people never should have qualified and don’t qualify today even with this bill.

Here is a list that is required in terms of borrowing:

– “…be determined by the reasonable ability of the mortgagor to make his or her mortgage payments.”

– “not exceed 90 percent of the appraised value of the property to which such mortgage relates.”

– “All penalties for prepayment or refinancing of the eligible mortgage, and all fees and penalties related to default or delinquency on the eligible mortgage, shall be waived or forgiven.”

This of course is the meat of the proposal. Many of the high YSP mortgage broker products were the most risky to the borrower. The vast majority of mortgage brokers naturally went with the highest commissioned products and could care less about the borrowers ability to pay or remain sustainable. This was proven by what we are dealing with right now. This wasn’t a small fringe group but became the industry standard.

There is some confusion about the principal reduction. The 90 percent principal reduction applies to the current appraised value of the home. Of course, this puts a lot of pressure on lenders to find appraisers that are more willing to make more generous appraisals. In fact, a recent report by the California Association of Realtors showed that the median price of a California home is now down by a stunning 37.7% on a year over year basis. So if a lender was to participate here in California with a median priced home, they would be chopping the price of a home to nearly a 50% loss given that homes are now down 37.7%. 50% in the eyes of many is a crash and not simply a correction.

The waiving of penalties of course is not going to bode well for bringing back any of these toxic mortgages and is only going to put another nail in the coffin of the exotic mortgage product market. This in fact is good. Anyone thinking we will have mortgage chop shops on the scale that we once did is not reading this bill carefully.

One of the major issues may be with second liens on homes. However that is where shared appreciation comes in:

“All holders of outstanding mortgage liens on the property to which the eligible mortgage relates shall agree to accept the proceeds of the insured loan as payment in full of all indebtedness under the eligible mortgage, and all encumbrances related to such eligible mortgage shall be removed.”

The perk of course is the shared appreciation. After all, why would any second lien holder of say 20 percent relinquish their piece of equity? Given the extent of a correction in California, most second liens in the last few years have become worth nothing. In fact, this bill offers the promise of future gains, which of course are not going to happen because incomes are not going to catch up. This program would also require the new mortgage to be a 30 year fixed mortgage:

‘‘(A) bear interest at a single rate that is fixed for the entire term of the mortgage; and ‘‘(B) have a maturity of not less than 30 years from the date of the beginning of amortization of such refinanced eligible mortgage.”

So much for adjustable rate mortgages that only a few years ago seemed to be Alan Greenspan’s favorite kind of mortgage.

Another lovely piece in this legislation is that it is going to destroy the home equity line of credit (HELOC) market and any second liens on homes that do go into this program. Take a look at this piece:

‘‘(7) PROHIBITION ON SECOND LIENS.-A mortgagor may not grant a new second lien on the mortgaged property during the first 5 years of the term of the mortgage insured under this section, except as the Board determines to be necessary to ensure the maintenance of property standards; and provided that such new outstanding liens (A) do not reduce the value of the Government’s equity in the borrower’s home; and (B) when combined with the mortgagor’s existing mortgage indebtedness, do not exceed 95 percent of the home’s appraised value at the time of the new second lien.”

So much for jumping the consumer economy again through the mortgage equity withdrawal market. This effectively puts a hold for 5 years on any 2nd liens. Since home equity withdrawals played such a huge role in keeping our consumer economy up, any loans that do get refinanced into this program will not have the opportunity for 2nd liens. In addition as you will see, there are provisions that will cap any equity gains for the homeowner.

The appraisal component will probably be the most important in assessing current value. This is the place were I envision most of the fraud would occur:

‘‘(8) APPRAISALS.-Any appraisal conducted in connection with a mortgage insured under this section shall- (A) be based on the current value of the property;”

Well as many of you know, the current value of homes are declining as we speak. This will be important when it comes to appraising property for this program. There are other parts in the legislation for appraisal standards and this will be important in maintaining integrity with this program.

The legislation will also put an end (at least for mortgages that are refinanced) to no documentation and stated income loans, another good thing:

‘‘(9) DOCUMENTATION AND VERIFICATION OF INCOME.-In complying with the FHA underwriting requirements under the HOPE for Homeowners

Program under this section, the mortgagee shall document and verify the income of the mortgagor or non-filing status by procuring (A) an income tax return transcript of the income tax returns of the mortgagor, or

(B) a copy of the income tax returns from the Internal Revenue Service, for the two most recent years for which the filing deadline for such years has passed and by any other method, in accordance with procedures and standards that the Board shall establish.”

Well there you go. You will now have to show at least 2 years of tax returns to verify your income. No longer can you call a mortgage broker and just make up your salary or have them go on and pull a hypothetical pay scale of what someone in your field would make. Amazingly what this admits is that there has been hardly any verification of incomes in the past decade. These minimal things should have existed.

This bill will also not help any second home and vacation homeowners. Refinances will only work on primary residences. Over the past decade, many people bought second homes to flip so there will be no help for those either. Another good thing:

‘‘(11) PRIMARY RESIDENCE.-The mortgagor shall provide documentation satisfactory in the determination of the Secretary to prove that the residence covered by the mortgage to be insured under this section is occupied by the mortgagor as the primary residence of the mortgagor, and that such residence is the only residence in which the mortgagor has any present ownership interest.”

What has been a criticism of the bill is lenders will choose to unload their most toxic products into the program. This is labeled as adverse selection. There is a part in the bill addressing the concerns of adverse selection yet I’m positive that it will be difficult to enforce. How are you going to be able to tell a legitimate case of someone wanting to keep their home and someone simply seeking to pass the buck to the taxpayer?

There has also been some confusion about the 10% principal reduction and also a 15% reduction. I think the confusion is because the 10% reduction is part of the principal reduction by the lender, a 3% one time premium paid to the FHA, and an additional 1.5% premium paid by the borrower on an annual basis. Either way, the bottom line is lenders can off load the loan if it meets all the above and get 85% of the current appraised market value of the home:

‘‘(i) PREMIUMS.-For each refinanced eligible mortgage insured under this section, the Secretary shall establish and collect-‘‘(1) at the time of insurance, a single premium payment in an amount equal to 3 percent of the amount of the original insured principal obligation of

the refinanced eligible mortgage, which shall be paid from the proceeds of the mortgage being insured under this section, through the reduction of the amount of indebtedness that existed on the eligible mortgage prior to refinancing; and

‘‘(2) in addition to the premium required under paragraph (1), an annual premium in an amount equal to 1.5 percent of the amount of the remaining insured principal balance of the mortgage.”

In addition, I see very little incentive for any California borrower because future appreciation is locked away. If you look at page 410 in the bill you’ll notice a sliding scale of future appreciation. As a borrower, this is almost like a semi-quasi rent/own situation. My doubt is that because of the income requirements, loan verification, and also the shared appreciation that many borrowers will elect not to go with this:

‘‘(1) FIVE-YEAR PHASE-IN FOR EQUITY AS A RESULT OF SALE OR REFINANCING.-For each eligible mortgage insured under this section, the Secretary and the mortgagor of such mortgage shall, upon any sale or disposition of the property to which such mortgage relates, or upon the subsequent refinancing of such mortgage, be entitled to the following with respect to any equity created as a direct result of such sale or refinancing:”

The bill goes on to break down the shared appreciation as such:

< 1 year 100% of equity goes to government/lenders

< 2 years 90% of equity ” ”

< 3 years 80% of equity ” ”

<4 years 70% of equity ” ”

<5 years 60% of equity ” ”

>5 years 50% equity share

Now really, how many borrowers are going to elect to do this? I see this benefiting moderately priced states were a loan might be a horrible Pay Option ARM with a balance of $120,000 but no way do I see this helping the larger than $500,000 market in California. Let us run a 6 year scenario for the sake of argument here.

Home Purchase in California at peak for : $550,000

80/20 financing for full amount (zero down)

Current appraised value: $350,000 (drop of 36.3% consistent with median state price drop)

Assume borrower qualifies with all the above restrictions and lender is opting to go with this program.

New loan amount: $350,000 x .85 = $297,500 30 year fixed mortgage

The second mortgage is wiped out and given the legislation, the only hope of recovery is future appreciation. The first mortgage holder had to take a hit of:

$440,000 – $297,500 = $142,500 loss

Only hope there is for the government and lien holder is future appreciation. The current owner now has a mortgage of $297,500 on a 30 year fixed note. Let us assume in 5 years the home is now valued at $400,000 and the owner sells. How is this broken down?

$400,000 – $297,500 (this will be less because of principal pay down but let us assume this for this example) = $102,500 (50/50 split here) – $51,250

So in the end, the borrower would be the biggest winner but again the likelihood of prices jumping up that high is extremely remote. Many of the lenders will eat the cut upfront and this is enough to sink many institutions. They are banking deferred interest from Pay Option ARMs as income and this would force a mark to market reality. In fact, I would suspect many lenders here in California would rather take the home back and take their chance with a foreclosure or hope the market turns around later.

These are crude number breakdowns but as you can see, this isn’t the part of the bill to fear the most. In fact after reading the details should it be enforced as stated, I see very little help coming from this. Some of the legislation I stand behind strongly and it is about time that we have this stated. Yet this is mixed bag of good, bad, and ugly stuff.

What the CBO estimates is that the FHA will insure approximately $68 billion in loans for about 325,000 borrowers because that is how many would qualify given the above guidelines. The real disaster is with the Fannie Mae and Freddie Mac backstop since it is nearly unlimited. It isn’t clear if they are going to provide support for the share price or how that will work. If the housing market continues to deteriorate, Fannie Mae and Freddie Mac will be put at even a higher risk and assuredly this will cost the taxpayer an amazing amount of money. These two GSEs cover about half the mortgags in the United States with a combined debt of about $5.1 trillion.

I’m surprised that the $300 billion part of the bill isn’t so bad. In fact, I agree with many of the measures. What shocks me most is in the last 2 weeks this knee jerked response to bailout 2 GSEs and the blind acceptance from the bulk of our politicians. Why didn’t the nationalization case get debated? Why wasn’t this bill looked at more closely (there is 649 pages! I was only able read about 50 pages and skim the rest)? Do you really think some in Congress read this entire bill?

This is a major win for Wall Street and as time will show, another major loss for the average American citizen. If you think income inequality isn’t a problem you need only look at the Gini Coefficient over the past 50 years. The Gini Coefficient is used in economics to measure the income inequality in nations:

Gini Coefficient

*Source: Wikipedia

As you can see from the chart, the USA being highlighted by the yellow line, income disparity has steadily been increasing since the late 1970s and early 1980s. Where 0 is perfect equality and 100 is perfect inequality the US has been steadily becoming more unequal. And with crony capitalism like this, is it any wonder?

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35 Responses to “Crony Capitalism for Dummies: Housing and Economic Recovery Act of 2008. How the Bailout will not Help you and Cost you Money. A Deep Look at the 694 Pages of the Bill.”


    Sorry, just had to get that out. Wait…

    AAAARRRRRGGGGHHHHHHH!!! I guess it’s not out yet. Over on Calculated Risk, one string of comments made note that tax collection might decrease as the formerly law-abiding, saving, non-speculative tax-payers finally wise up that we are getting screwed by this – and start to go off the grid. Then watch as taxes continue to rise, and enforcement attempts increase, as the tax revenue drops and is insufficient to cover the promises that legislators pass.

    And when that happens, the slide from the rule of law, to the rule of (wo)man – that is, the rise of an imperial presidency and the disintegration of the cultural and legal foundations on which the USA is – was – based – will be complete.

    Does anyone honestly believe that the next president will actually implement serious Justice Department investigations and prosecutions for the criminally negligent IB’s and Bush administration cronies who fostered this mess?

    Yeah, I didn’t think so, either.

  • Doc –

    How can they run this program off the current “appraised” value of the house? Assuming that the house would sell today at it’s curent appraised value why give all these dopes a 10% premium on the “current” value? Hell, I want to buy something for 10% below market.

    This whole thing sucks and if there is any justice in the world George Bush will go on a bender, steal the Presdiantial helicopter and fly it into the Capitol while Bernanke and Paulson are spewing another batch of lies, killing all 3 of them and every member of Congress that voted for this piece of garbage.

    I think we need to start a tax revolt. If every person who opposes this bill changed their withholdings to 15 tomorrow and didn’t pay next April 15th we could bankrupt the country and then demand a bailout, as it seems the only requirement to get assistance from the government is greed and stupidity.


  • I like the review you did of the relief act. I am one of the thousands in California with a Mortgage that I cannot afford. My problem is Credit card debt. When we bought our home, we had $30,000 in credit card debt. In April, that grew to $75,000. We took out an ARM loan in 2005. Our stupid logic was that we were going to make the minimum payment on our mortgage so that we could pay down our credit card debt. Instead of paying down any debt, we just spent more and more. Now we are way upside down in our house. Our mortgage resets in February to a payment that we cannot come close to making.

    While we would like to save our home, we have come to the realization that we will probably be foreclosed on. The chances of this hosing bill helping us is slim and none.

    Our lender will probably pick the foreclosure route because of how far upside down we are.

  • There is no way that the banks could survive that many write downs at once. There stocks would be worth nothing.

  • But why are they forcing a 30 year fixed, what’s wrong with a 15 year mortgage? Yes I know noone in L.A. can afford a 15 year mortgage, yea well noone in L.A. can afford a 30 year fixed at current prices unless their household income is at least 6 figures either. Do you really want to make insanity (the L.A. housing market, even now) the basis of comparison?

    In some parts of the country a 15 year fixed would make sense (especially if you were a high earner).

  • @Chris: prepare for the flaming… your situation is what we rail against in these comments! -> meanwhile, I (the “other Chris”) have managed to grow my income, pay down my debts, save some cash and continue renting. Nothing personal buddy, but you are not deserving of a bail out. $75K of CC Debt is pure stupidity. Thankfully, I will be able to buy your house for a song around 2010-2011, presuming we still are running a country.

  • Chris in Cali, let’s not be too hard on the other Chris: Credit Card Chris makes a point I’d like to make:
    What is the basis for the moral superiority of mortgage debt over other debt, especially if you borrowed way more than your income could support? We already subsidize it by tax exempting it. I have somewhat more sympathy for the young worker who needed to buy clothing for work or a car for work on credit cards. Or tried to finance a new business. Or paid for groceries during a period of education or un/underemployment on credit cards. These people were trying to pay their needs or improve their earning power, unlike people who had a good income but gambled by playing “flip that house” or bought a “boob job for their house” (credit Dr. Housing Bubble).

  • Riverside Renter-turned-Owner

    @Chris–Took guts to post this. Thanks. Gives some insight into what went wrong here beyond the “greedy speculator” model. Also, I love this line: “The chances of this HOSING bill helping us is slim and none.” Don’t know if this was a typo or deliberate, but your name for it so much more apropos.

  • Credit Card Chris –

    Your story is not unique, but it in my mind it certainly does not make you worthy of any assistance. There will be others who acted like you did, though, who will get help, and guess what? Once you are booted from your place YOU WILL GET TO PAY TO BAIL THEM OUT!

    How does that make you feel? Better? Or worse?

    Just out of curiousity, what the hell did you buy when you spent 75K on credit cards? The minimums maust have been in the thousands – what, exactly, did you buy, and where are those thing now that they are costing you your house?

    Nothing personal but I don’t have any sympathy bro.

  • Hubbert- I understand where you’re coming from, but I’d have to agree with Chris in Cali. Nothing personal against the other Chris, I would also say collecting THAT much CC debt is just plain bad planning. And it sounds like he’d agree with, too, so I hope I don’t come off as entirely insensitive here. the fact is, there are other, better way to leverage oneself than with credit cards. And stepping into a mortgage with 30 G’s in the red already, and with accruing a minimum of 15-20% APR (but most likely more) is just asking for trouble. Doing so with the situation being such that a foreseeable drastic increase in debt payment requirements is basically financial suicide. To credit card Chris, I’ll say this: One of my best friends is in a similar situation. He bankrupted on his CC payments and has been in default to his mortgage (about $620000 to a house that MIGHT get 200-300 now) for the last year or so. He says he plans to stay there until the Sheriff kicks him out. Funny thing is, Cuntrywide seems to be letting him pass for now. I don’t know if they’re overworked or they think he might be able to come back or if they’re just dealing with uninhabited properties before going through all the rigamarole of evictions but he might just be there for a while longer. After that, I hope he (and you, if it gets to the same situation) can find a landlord willing to deal with the inevitably low FICO he’s going to end up with.

  • I still can’t fathom how two neighbors in identical homes can end up with one paying down a $297,500 FHA mortgage because he didn’t pay his original mortgage and the poor chump next door is still stuck with, lets say a $420,000 mortgage because he put 20% down and made his payments. How can this be legal, let alone fair? If the deadbeat gets to opt out of his original deal so should the diligent homeowner be allowed the same deal. If anyone is to share in any putative ‘appreciation’ in the value of the deadbeat’s house it should be his neighbor who did his best to maintain his communities property values. As to the GSE bailout. Fannie and Freddie have become immense hedge funds albeit
    more leveraged than any hedge fund could ever be. They should be wound down and any new mortgage guaranty business done by private banking interests on commercial terms. Banks can already offer their mortgages to the fed for credit abeit with a 5% discount so the Fed is essentially underwriting new mortgages now.We got into this mess by trying to push ‘homeownership’ too far down the income ladder. Dr. HB’s statistic from 1940 that revealed only 44% of Americans then were homeowners was very interesting in that homes cost less then relative to manufactured goods. Today the opposite obtains and as Dr. HB points out income distribution is going in the wrong direction. The great postwar housing boom was made possible by working class families being able to buy small but adequate homes as their real incomes grew through the 1950’s and 60’s. For a lot reasons, including globalization, American factory and other blue collar workers no longer enjoy the same privileged position they once had. To imagine they and other lower paid white collar workers can buy the bigger more costly homes of today is foolish.

  • Step 1 – Get a phony appraisal (Shouldn’t be hard as there is a lot of experience out there)

    Step 2 – Get the loan into the program ASAP before accurate appraisals on comparable properties show up.

    Step 3 – Look for country with no extradition.

  • The new housing Deadbeat Bill is truly…it’s just…ugh, words fail me.

    Scott’s point is the one I wanted to make, but in a slightly different way. My husband and I were looking at photos of our grandparents’ houses. Golly, they were small. So were our parents’.

    When we bought, we were looking in the 1500 sf range, which we considered quite large. The smallest place we could find that was build recently enough to be in good shape but long enough ago to still have solid materials (in our market) was 2400 square feet. Which we considered mammoth, but apparently that square footage now qualifies as a “small house.”

    Our number one consideration was closeness to job, this one sat on the market because it was decorated by people who were apparently both insane AND blind, and we got it at 10% under the price, after two reductions. This was during the sales dip of early 2002. Also, the house was built to be unusually energy efficient: zone-electric heated, so with a woodstove heating the living area, and our taste for sleeping cool, we need heat only one other space: the 100 s.f. room where the parrot lives.

    What this bill is propping up–and no one seems to note this–is the wretched builders’ industry. Which has cranking out fungal inflatable neighborhoods full of cathedral-ceilinged energy-wasting-vectors. And telling people that these hideous clapboard barracks are The American Dream. This bill strives to keep prices artificially inflated. It’s more of the same stupid thinking. And the same punishment of people who acted responsibly and kept their financial commitments.

    I mention this because here in WA State our incumbent governor–who has shown a taste for prudent financial thinking and tough decisions, so that this state has a considerable rainy day fund she socked away–is going to be challenged again by the hand-picked candidate of the builders’ lobby–one Dino Rossi. You heard it here first. Watch for the GOP to play dirty tricks as they did in the last election, to get their man in office. Then watch Dino ride the state budget surplus gravy train, with handouts to his puppeteers, the big builders and the realtors. This bill is carte blanche for that developers’ mafia.


  • Hey everybody don’t worry. Mr. Paulson and Wells Fargo, Citibank, Bank of America and JPMorgan Chase all got together in a little hand holding session and issued a statement saying they were going to fix the whole mess with covered bonds. Don’t you feel better now?
    Or, er, wait…..

  • Check out the OC Register article linked on Links on the 28th of July on the blogroll sidebar. It’s the prototype for what we’ll be seeing. A house on a street where everything else has been selling for 300K was just sold for $625K. It was sold to some people who were given 30K to buy it. The sellers up the $125K down into escrow. So now when it goes into foreclosure, the idiots at Wells Fargo can unload it to the government for 85% of the $625K appraisal that the idiot Wells Fargo appraiser gave it. Wells Fargo has a loan for $500K on the house. The government takes it over for up to 85% of appraisal ($531K) so Wells Fargo is safe. But when the government goes to resell it, it’s really only worth $300K so us taxpayers take a $230K hit. The sellers bought it for $300K and sold it for $625K less $125K provided for down and $30K inducement for the “buyers” so they make around $170K on the deal. The “buyers” make 30K on the deal. Wells Fargo makes maybe a little on loan origination fees. The taxpayers get shafted for $230K. I’m thinking we’re going to see lots of this.

  • I am scared that they are going to succeed in propping up the prices and I really will be priced out forever in SOCA.

  • Stan, was that the article where the story was entirely translated from Spanish because all the participants were Mexicans*?

    I think I first started to understand the true magnitude of illegal immigration circa 2005 when I read about the government (FDIC?) allowing illegal aliens to get mortgages. I remember thinking “That’s odd: I’m a US Citizen with an engineering degree, and I don’t think I’m set up to buy a house…how can unskilled people who are here illegally and could be deported at any moment be ‘buying’ houses?”

    Is it a coincidence that the states with the biggest drops are those which were most throughly colonized by Mexico: (California, Nevada, Florida, Arizona)?

    Is this bailout yet another way that Joe Taxpayer is subsidizing unskilled illegal aliens. If so, I have to admit that Mexico’s political leadership is smarter than ours. Ironically, much of the justification for illegal immigration is that “we” needed the cheap labor to build these huge, flimsy, energy hogging exurban McMansions.

    *”Mexican” refers to a person who is a citizen of Mexico who predominantly identifies with the language and culture of Mexico, though he may reside outside his country.

  • The price drop in your example is too drastic. A drop in the median price of homes sold is not the same thing as a drop in the price of homes. Jumbo loans have become much more expensive, causing fewer expensive CA homes to be bought/sold. This alone will cause the median price of homes in CA to fall, even if the price paid for those homes has not changed.

    The change in the median price overstates the real shift in prices. That’s why the media loves reporting it, it’s more exciting than the truth.

  • Will the new price be shown in public records? For example, a loan at 450,000, is now 297, will 297 show up for comparables?

  • Increasing energy prices in natural gas and electricity may compound mortgage payment problems in the future.

    Not only world oil production may have peaked recently but US natural gas production peaked in 2001 according to EIA.

    We’re active participants in what PNM [New Mexico] proposes to do with future electric production and coal and natural gas supply.

  • If peak oil is as big of a problem as the people preaching it I wont be worried about my house.

    Im more worried about the next earthquake

  • Dan, you’re right in principle about median price distorting things. The median price kept going up after the market had turned in Orange County because only high priced homes were selling. Now perhaps the median price distorts because mostly low price homes are selling. That’s why Case-Shiller is valuable, or price per square foot numbers. I’m not sure who you’re responding to, when you say “The price drop in your example is too drastic.” The OC Register has been profiling what’s happened on Camille Street (“The Street of Broken Dreams) for some time now. 920 Camille sold last October at auction for $304,500 and was resold to Mario and Paula Gomez for $625K in January. The Gomez put nothing into the deal. The seller deposited $150K in escrow and promised the Gomez $30K plus a big screen TV to sign the papers. Wells Fargo carried a $500K first. Go to the blogroll on the right, click on Links, go to the 28th toward the bottom and select the article on the 625K house from the Register. The price drop wasn’t “too drastic.” It’s the price rises that were too drastic.

  • The equity cut has a good chance of being worth something — picture how much money the Fed is going to have to print to cover this. Picture median california prices being x10 the current prices….

  • @Hubbert

    Last I checked, Mozilo, Paulson, Bernanke, Perry, and the rest of the Wall Street guys are not “Mexican”. If you want to assign blame, consider doing just a *wee* bit of research on the driving forces which underpin the financial system.

    To blame illegal immigrants for this mess is not only racist, it’s also ignorant. It allows the real perpetrators to walk off blame-free, while the rabble – that is, the rest of us – point fingers at each other. It’s not the Mexicans fault, or the blacks, or the Asians, or any racial subset of immigrants. The fault lies with the investment bankers and their ilk, who, as it turns out, happen to mostly be white men, though there are now inroads of people of color in that strain. Equal opportunity thievery. Don’t misunderstand me – this is not about blaming ‘white men’ – this is about blaming the f’ing crooks who set this whole Ponzi scheme up. There are plenty of white people who are getting just as screwed. Get it? It’s NOT about color other than the color green. So quit blaming illegals for this mess. Don’t be stupid. The highest level of culpability belongs on Wall Street.

  • Jeff Buettner

    I like your blog. Its a nice read. Expect me back soon! thanks for writing.

  • Hubbert,

    Looks like the crook is the seller, not the so called “Mexicans”.
    I would say the order of fault goes to the Seller, Wells Fargo and then the Gomez.

  • Robin: I don’t think they can succeed in propping up prices, the government can only go bankrupt in the process.

    But if somehow against all odds they did succeed, the only sane response is just to throw in the towel, que sera sera, you’re dealing with forces outside of your control (and not just your own ability to work and save) by that point.

    And be a happy renter or a happy ex-Californian :).

  • hey dutchtrader: you got your wish!

  • Did anyone else notice that the $7500 “credit” for new homeowners that puchase by the end of June 2009 is not really a credit but an interest fee loan from the govt. Again..nothing to help us smarter more responsible people on the sidelines. That credit has to be paid back over 15 years.
    What the heck..I’ll take it and invest it if I buy before then.
    Oh yeah..I have to be a first time buyer…good thing my wife is not on my current title.I wonder if we qualify?


    I am not going to preach… yes, this site doesn’t have a lot of sympathy
    for you but there is light at the end of the tunnel.

    I don’t need to know your finances or income to come to the conclusion
    that you spend most of your pay check just keeping up with the min.
    payments for the credit cards and mortgage.

    The housing bill will not be of any help to your situation.
    There is another stipulation that hasn’t been discussed yet.
    You also must “retire” any secondary debt (HELOC, refi-mortgages, etc.)
    before you can qualify for this kind of help and since your total income to
    debt ratio can’t be higher than 31% you are way beyond their help.

    What to do?

    I am going to get heat from everybody for suggesting this, but with
    75K worth of credit card debt alone you must be already under so much
    stress and probably not sleeping very well at night.

    Here is the honorable way:

    Cut up all Credit Cards.
    Call up your creditors and cancel them. Then ask them to freeze
    the interest rate or eliminate interest completely, so you can make
    payments towards principal debt without incuring more thru interest and
    penalties. If possible – consolidate all credit card debt onto one card.
    (who am I kidding… your balance is 75K…)
    If they don’t go for it… threaten with Bankruptcy… you will be surprised
    how fast they change their tune.

    Call your lender and see whether they will extend your time period
    before your ARM resets. Start making higher payments towards principal

    You tried and neither Credit Card Co. nor Mortgage lender gives in:

    OK… here is the not so honorable way:

    Sit down with your spouse and have a FINANCE TALK.
    What I am about to suggest can only work if you both agree to
    the consequences and it would be unfair to your spouse to ruin her
    credit for the next 7 years without her knowledge or agreement.

    2 options: Bankruptcy – doing it the legal way
    Get a copy of your credit report, gather all bills from all creditors
    find a bankruptcy attorney – HAND OVER ALL BILLS, and start
    the process. With that much CC debt you should be able to do Chapter 7.

    Immediately stop paying your credit card bills. Your attorney should be
    sending out letters to your creditors already.

    Remember to exclude your house from this. With the extra money
    you have available now start making payments towards your mortgage
    that are high enough to chip away at your principal.

    If you have car payments… get rid of the cars and turn them in.
    Buy a cheap clunker with cash – make sure the “new” car isn’t worth
    crap so they don’t take that too. Cancel your current car insurance and
    buy the bare minimum insurance for the “new” car.

    Cancel your current phone and then turn around and get a new phone
    and a new number.
    Give this phone number only to people that you trust. (Don’t forget to give
    it to your lawyer).
    Buy a prepaid cell phone and give that number to your employer.
    As a precaution: Never answer your phone stating your name,
    never acknowledge that you are so and so if some stranger calls.
    Caller I.D. hardly works with collection agencies… they block their number.
    Any incoming “blocked call” that you choose to answer should go like this:

    You: Hello?
    Collection Agency: Can I talk to Mr. so and so?
    You: Hold on a minute, I can barely hear you… have a noise maker ready
    and/or start whistling into the phone… after the “noise in the line simply
    and innocently get back on the phone: Goodness… I could not hear a word
    you said, may I ask who’s calling?
    Collection Agency: I need to talk to Mr. so and so
    You: Never heard of this person, sorry you got the wrong number.
    click – hang up

    They can’t tell you who they are unless they are absolutely sure
    that they have you on the phone. So, if a caller doesn’t want to
    identify themselves… who says you have to?

    Get calls at your work?

    Here is your standard reply: I am at work and my employer does not
    allow collection agencies to call. Click, and hang up.

    They call back: Immediately ask them to identify themselves with
    Companies name, address and phone number then tell them that they
    will receive a letter in the mail that will tell them in writing that by law
    they are not allowed to contact you at work. then hang up.

    The trick is not to let them get a word in… hang up, you are at work
    and on your employers time not your own time. Therefore you don’t have
    time for them.

    Being that I am an employer… I used to have loads of fun screening
    Collection Agencies calls for my employees. I could fill a book with all
    the useless threats these people spew… They are just that: Empty Threats.

    This way you might… just might… keep your house.

    There is another way… but I am sure you can figure it out for yourself.
    I am not ready to get lynched by my fellow blog posters for suggesting
    to walk away from it all.

  • Oops… got one thing wrong.

    The mortgage payment has to be at least 31% of your income or higher.
    to qualify for the “relief” bill.

    I stated that your total income to debt ratio couldn’t be more than 31%.
    My bad…

  • Did I understand the following part of the law correctly that nobody who owns a second residence can get of these new FHA mortgages? It says at the end: “such residence is the only residence in which the mortgagor has any present ownership interest” Is a cabin in the woods enough to disqualify a homeowner who is deep underwater on his primary residence? Does timeshare disqualify, too?

    ‘‘(11) PRIMARY RESIDENCE.-The mortgagor shall provide documentation satisfactory in the determination of the Secretary to prove that the residence covered by the mortgage to be insured under this section is occupied by the mortgagor as the primary residence of the mortgagor, and that such residence is the only residence in which the mortgagor has any present ownership interest.”

  • Great advice-wish I had it here in SW FL. I HOPE the ECA helps me, and would love to hear more from any/all of you, especially REENA, and especially, the “other way” not explained. My question is will the ECA help me and SHOULD it and, basically, what do people who are obviously smart and responsible with money think I should do?
    History: In 1996, I was a teacher in TX with a 15 yo daughter and ex- with a family – in FL, I had a car wreck, was suposed to die, went home paralyzed, wound up losing everything, sent my daughter to live with dad & family in FL, spent three years recovering, did, miraculously, recover, went back to work, started over, after discovering “true menaing of life” knew I had to be near my daughter, she wouldn’t come to TX, fell in love, etc., so I moved to SW FL in 2000, discharged bankruptcy in 02, began rebuilding, watched home prices soar for 8 years, knew I had better buy ASAP or never would be able to and was getting old, so, took BAD 80/20 in June 2006 to buy a 335,500 BARGAIN, figuring it would escalate in value before 2 yr ARM hit and I could refinacne using equity as DP, home values startd to decline in JULY 2006 and dropped dramaically, now 6 of 10 houses on my block are in foreclosure, my ARM reset, I bring home $4400 and pay $3200 mortgage, have borrowed $60k to make payemnts up to now, from STUDENT LOANS (living expenses) which I can NEVER discharge in bankruptcy (I am so stupid- a Language Arts teacher, obviously) and am about to “hit the wall” and not be able to make payments. I have no credit card debt, and have about $3000 saved and $15,000 in available credit card credit that I don’t use. I am not irresponsible, just not too financially smart/wise, nor do I have any help, I am 51, single, no family other htna my daughter, who I just helped finsihs college, now she id a married, working RN, so I “did my job” as a mother and hope, somehow, I can survive the poor choice I made to buy this house. It is “tax appraised at $240,000, I owe $331,000, after 2 years of NEVER late payments of $72,000, I have only reduced principle about $5,000. Will ECA help me? Should it? Should I just walk away and file bankruptcy again? Could I? I truly confess I have not been lucky, firtunate, nor wise, and wish, for once, I could make a good decision.
    Thanks for any suggestions!

  • Here is a link to a free online directory of the new housing law which can be read or downloaded.

    * First time home buyer tax credit on pages 628-637.
    * Changes to qualifying a second home for tax exemption on pages 690-693.
    * Starting on page 394, you’ll find Help for Homeowners and the requirements for refinancing.

    The directory has the new law organized by 5 sections, each with a handy table of contents.

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