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Housing Bailout Plan

July 26, 2008 by Lucas Lechuga

Bail out


It's official!  The U.S. Senate has passed a housing bailout plan that will end up costing taxpayers an estimated $25B.  This is an estimate that the Congressional Budget Office says could potentially reach $100B.  Now, it's up to George W. Bush to sign on the dotted line to finalize it.

I'm NOT an advocate of this housing bailout plan.  I saw too many people unwisely refinance their properties to withdraw money from the paper profits in their luxury homes in Miami in order to spend the money on new vehicles, surround-sound systems, large plasma TVs, furniture, clothes, etc.  Now, the government wants the country to foot the bill for these people to reminisce about the times that they were living LARGE?

It doesn't sound like a "plan" to me.  Senator Charles Grassley, of Iowa, says it best when he states, "This bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street".  Who are we kidding when we think that we actually have a say in what happens in this country?  Large corporate banks, mortgage companies, real estate conglomerates, developers and any other real estate-related entities have lobbyists that have the upper hand over what the American people actually want.  We're all just pawns with hopes to checkmate, but end up being eliminated after the third move.

For details about the housing bailout plan, take a look at CNN.com's article entitled "Senate Passes Landmark Housing Bill".

You may also want to watch the video of Congressman Ron Paul's comments on the housing bailout plan.  It is quite interesting and makes you see the other side of the story from a true American who cares about this country.

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jcrimes

lucas
something we can agree on. this bill is arguably the worst thing that’s passed since the bankruptcy “reform” act.

broken down to its simplest form, this bill is an utter rejection of economic concepts and social and corporate stewardship. in short, the bill attempts to place a false floor on the pricing of homes (which will only exacerbate and prolong the housing downfall) while at the same time, bails out those that now need to take a punch on the chin.

kim

Sorry fellas, Have to disagree with you on this one. This bill will not affect speculators, nor will it affect most of those who refinanced to the point that they are irretrievably upside-down. The bailout simply allows for ARM’s to be frozen at the teaser rates for up to five years, for those who live in the home as their primary residence and are not more than 30-60 days behind. In other words, this is not going to help those who cannot even afford their current mortgages. Thus, it will only impact a couple of hundred thousand borrowers. I really… Read more »

SwissLuxury.Com

LUCAS, Smart to oppose this expensive waste of taxpayer $$$$……more national debt = higher interest rates to service it & that means higher mortage rates which you guessed it leads to more downward pressure on housing prices and makes it harder to get deals funded…..Brilliant move DC!! Oh well, should help my Swiss Franc and Gold positions.

Lucas, You sound really worked up over this bill. I don’t think I ever read such a scorching critique on anything on your blog. I can’t say that I’m fully on board with your assessment of the situation. For every one person that I know that was irresponsible with their mortgage, I know 3 people that truly didnt know what they were getting themselves into by getting ARMs. Sadly, many have already lost their homes and all their live savings that they used to put as a down payment. Sometimes in life we have to take the good with the… Read more »

Hugo P

I have to agree with Lucas on this one… there might be a VERY small amount of people who trully didn’t know what they were getting into, but come on, a lot of people that got ARM’s were counting on selling their homes at a profit and knew that they were getting into a property that they really couldn’t afford. To me, this is just another bailout of banks like WaMu and Wachovia to help them when their $120 Billion ARM loans reset in 2009-2010! If you made a stupid investment decision, you should pay for it. That’s free markets… Read more »

Grant

I think that Hugo P hit the nail on the head when he said that “this is just another bailout of banks…” This is definitely the case and unfortunately its a necessary evil to support and maintain these banks where we all hold our money and which we intrinsically believe cannot fail. The reality is that the cost of systematic bank failure would really reach into the trillions of dollars and this probably will only cost 100 billion.

Nervous Renter

J Crimes wrote : “… in short, the bill attempts to place a false floor on the pricing of homes…” I too wonder about the logic of this bill… who’s really behind this bill. As long as families and children have a roof over their heads, who really cares how much a home costs… the prices are falling simply because they should, and if more people can afford a roof over their heads, then doesn’t that work for AMERICA? Why prop up higher housing prices? For who? The people who’ve lost their homes will rent probably cheaper than owning. The… Read more »

carbonblackcab

The government “had” to something. They could not just sit there and watch this train wreck. Looking at the details, only a few people will qualify for this program. I am sure many investors will be helped by this, but so will people who really need help.

This bill will help blunt the force of the foreclosures. It will not change the state of the housing market in any significant way.

Frustrated American

This bill represents everything that is wrong with this country. Why should the country take on more debt (already ~ $10 TRILLION) to bail out people who made a bad investment? Where is my money from the federal government (taxpayers) when I lodt money investing in some stocks? This bill’s main aim is to lubricate the wheels a bit for the system and delay th e inevitable. Why should congress give more power to the Fed and the Treasury when they aren’t elected and they set up the table for this mess. Yes the politicians had to ‘do something,’ They… Read more »

gables

Our government and press are waaaaay toooo concerned about the people who are in over their heads in this housing downturn. Anybody who purchased from say 2004 and on are in trouble. Compare that number with the number of people like myself (responsible people who did not buy into the bubble), and I bet you will see more than enough pent up demand to offset the foreclosures. Granted the price we will pay considering the risk is in the neighborhood of 2001-2002 prices, but that is the way capital markets work. This pent up demand will put a floor on… Read more »

moretroops

The housing bill means that, while profits from the great housing ponzi scheme were privatized — going to aggressive “flippers” and fund managers — the losses shall be socialized. Seems kinda unfair.

Click Broker

Keep in mind the $300B is in the form of FHA mortgage guarantees for refinancing into fixed rate loans. Lenders would have to write down principle to 85% of the current appraised value, and the borrower would have to pay FHA a 1.5% annual fee on the unpaid balance. The homeowner would also have to pay the government a portion of any appreciation. As long as the appraisals are reasonable, the government should not lose too much. And the Feds might actually make a profit.

I remember having a dinner meeting about 3 years ago with a very successful mortgage broker. She told me that most of the loans that she made at the time were negative amortization loans. She would explain to her clients the various loan products that were available as well as the pros and cons for each of them. She told me that most of her clients would select the negative amortization loan because it had the lowest monthly payment and that her clients were betting on the continued appreciation in real estate. There may be some cases where buyers were… Read more »

Frustrated American,

Thank you for the Ron Paul video. I added the video to the bottom of my post. I’m an advocate of Ron Paul. I feel that he best represents the opinions of the American public. I just wish he were still a presidential candidate.

From the CNN link “The Congressional Budget Office on Tuesday estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie’s and Fannie’s losses could cost the government $100 billion. ”

If the CBO (Congressional Budget Office) is pegging a 5% chance on an ultimate 100 Billion Freddie/Fannie cost, I’ll officially put the Over/Under at 200 billion and take the Over.

Richard

600 pages of legal mumble jumble and congress says that looks good to me. The Iraq war is 40 times the government estimate–lets hope this estimate is closer to being correct.

Ha!

This won’t help the failed Miami flippers as most do not live in their condos. Miami RE has a way to fall. This will take years.

F.R.

This post surprised me, and in a good way. You truly do have a head on your shoulders.

Wish I would have had you as my agent when I bought my property.

M.C.

One good element of the bill is that the conforming limit will be raised to $625,K enabling those buyers of homes in the $500K to high $700Ks to obtain more affordable loans.

Note: I am not weighing in on the whole bill but on one positive aspect.

Seanjohn

Lucas While I agree with your overall point in some ways the bigger problem is the build up to what caused these political taxpayer paid bailouts. Lets face it, the only winners in the rampant home price inflation & subprime mortgage issuance of the lastr 5 years are realtors & mortgage brokers. Two groups that certainly could see the idiotic financial overextension that many buyers happily succumbed to. These groups are not responsible for the mortgage calamity but I have to think crying foul now is a little redundant especially since if all goes according to plan these two groups… Read more »

I’d rather have the bailout money get put in a fund to go after the criminals (mortgage brokers/appraisers/”investors”) who broke the law and seize their assets. There’s quite a few people walking freely around the streets right now that are knee deep in recent RE mortgage fraud activity. The only good that can come out of this is to fully prosecute and chase down the criminals to set an example for the future. You don’t set an example by letting 95% of the criminals go free and by propping up a few overextended homeowners nationally. What’s ironic about this push… Read more »

Free. Market. Economy?

Ha!

Don’t worry people. This bailout will delay, but not prevent the inevitable reversion to mean. Just wait until interest rates hit 9%. That is going to DESTROY resale values.

Renter Tom (against the bailout)

Just met someone who is stressed about house they need to sell because of divorce. Bought it in 2005 for $650K with $40K down and with a conforming non-jumbo loan with a second loan to cover the difference. Well, the current list price is $400K and they are working with a lawyer to do a short sale. Meanwhile both ex-spouses are living in expensive rentals ($3K+ per month each). They think they can do a short sale and let the bank hold the loss??? What?!?!? These two people are each living a high lifestyle driving $50K+ cars! Won’t the banks… Read more »

Mr Waverly

JL Don’t get me started.. The FBI tracked 18 cases of fraud starting in September 2006 in one building alone. I don’t mean after the fact, some of those deals were in contract and could have been stopped. Instead of stepping in to prevent the activity they allowed it to build their cases. Buyers walked away with $200,000 plus in their pockets at each of those closings. Lenders like Countrywide, IndyMac and WaMu were also sent notices of the activity and still they allowed it. Consumers were greedy and wanted to live large even if it meant beyond their means,… Read more »

Mr Waverly

There are four “short sale” units at Waverly right now all by he same owner. The owners bought all over $600K and now wants the banks to suffer the loss for their bad investment decision. All units are listed with the same Agent who by the way asked our client to pay a $700 fee (non-refundable) for the Seller’s Attorney to negotiate any offers. Like Renter Tom I too will be sick if these units are sold as short sale with the lenders absorbing the loss. Yesterday I was expressing my frustration with a friend, mostly about the state of… Read more »

Mr Waverly, I too have heard of 3-4 units at Vue at Brickell that are now short-sales that are owned by the same owner. It’s insane! Some of the advocates of this housing bailout who left comments earlier are saying that the bailout is not directly assisting speculators. However, it is doing so indirectly. The bailout is assisting Fannie Mae and Freddie Mac, two large entities that would not be experiencing so much hardship if there wasn’t so much mortgage fraud and speculation going on in the industry a few years ago. I think the government should have allowed the… Read more »

Mr Waverly

So has Hernan Gould of Fortune Interntional..
Just my opionion from the shady contracts I witnessed.

Renter Tom

Just a Dude – Hey, feel free to donate your money to help these people out that got in over their heads. Geesh. Just keep your mitts off my hard earned money. Why the heck should renters pay for homeowners??? (although I do actually own a home in another state, I am just renting in FL until the prices shake out). Seriously, if you took on too much debt, that is just too darn bad for you. It isn’t like the interest rates are 25% or something. You can drag out the pity cases all you want, but the fact… Read more »

Mr Waverly

Renter Tom,
You are correct in saying why should we pay for those who made bad decisions. I have a three part plan..
1. for those who qualify with current income, all resets shall remain the same, with a min of 5.5%.
2. for those who do not qualify with current income, reset to 35, 40 or 45 years. Stretch it out to lower the monthly payment.
3. for all others, they should lose their homes NOW. The banks should then have sixty days to sell off that loss.
Homeowners, Lenders, Government and Consumers would benefit from this plan.

Ha!

Who cares about short sales. Those are actually good because they force the comps DOWN DOWN DOWN. Then more and more speculators dump their 2-3 properties/building, further forcing down prices. Lucas is out of his mind if he thinks that “prices will trend sideways”. There were 40% more units built than people in Miami-Dade to occupy them. Population is actually shrinking in fact. Check out the county tax records and you will see in nearly every building most people own 2 or more units. What do you think they will do once the comps are 150K below their entry price?… Read more »

Cyrus

well, since there’s been 8 years of horrible management of this country’s affairs (if you can even call it “management” …), this is just another temporary patching of a huge problem that is not being properly dealt with – which means further down the road, we will all pay for it in a far bigger way. just like these dumb checks that have been sent out (again, another temporary patch). they just refuse to DEAL with the problems because that may require some actual sacrifice! we’ve become the world’s laughing stock. bottom line is you just canNOT thrive until oil… Read more »

ha!

8 years? You mean 28 years of mismanagement….but this can present great opportunities for savers. Mortgages are linked to 10 and 30 year treasuries. The world is already demanding higher rates for our debt …. Eventually the rates will skyrocket. What do you think this does to condo prices ? 9%….12%….15% interest will CRUSH prices….save your money in Swiss francs or gold and pick up some firesale condos in a few years.

cyrus

no. i meant exactly 8 years.

and take a good look at the 10yr treasure and overlay it on where the 30yr mortgage rates have been and you’ll see the correlation is gone.

Un-Related

Renter Tom and Mr. Waverly,

I totally agree with you guys! Everybody should have the honor of sinking or swimming on their own, ESPECIALLY on VOLUNTARY PURCHASES of anything, including housing!

Bush should have NOT caved in on this. God help us if we wind up with four years of Obama’s socialist “nanny state”. You only THINK things are terrible now!

cyrus

un-related, SOMEONE has to clean up all this mess…so spare us the anti-obama nonsense. we’re ALREADY a ‘nanny state’ – consider a country that is bailing out it’s corporations with tax payer money AND sending out checks to it’s citizens … what would you call that? and yes, things WILL get tougher because someone has to fix all this mess and those decisions are not popular but in the long run, it’s the best thing that could happen for this country. i’d rather have someone run the country that has it’s citizens in it’s best interest. take a long hard… Read more »

jcrimes

cyrus i think you’re being a little biased here throwing this whole mess at the feet of the current administration. the housing bubble is a function in part of greenspan’s low rates and the overabundance of leverage. in effect, greenspan moved us from the tech bubble to the housing bubble. as for the current housing bill, it’s a bipartisan effort that in large part emanated from congress, not the executive branch. the sole stinkbomb is the fannie/freddie aspect, which is paulson’s brainchild. as much as i hate the housing bill, i’ll give paulson a little respect based on his goldman… Read more »

cyrus

jcrimes, i do agree with that – but one thing to remember is that greenspan is one part of it (a large part, albeit, one part). and many tend to forget that while lately (past 2 years) it has been bipartisan…but the residue we are dealing with are not the result of the past year and a half – it’s the residue of FULL control of a republican congress under bush. the congress right now is not responsible for what’s going on … partially yes, because they are not allowing anymore horrible policies to go through (w/the exception of passing… Read more »

bubbleRefuge

Note, I like Ron Paul but he, most of the mainstream financial press , and the comments in this forum are wrong about fiscal policy and government deficits. 1) Government deficits are needed in order to support private sector consumption. 2) The government doesn’t face any insolvency risk because it can and does print money and can do so ad-infinitum. 3) The government does not tax and then spend. It spends and then taxes. It doesn’t need taxes to fund itself. This includes entitlement programs like social security and medical care. 4) The only issue with running large pro-active deficits… Read more »

Renter Tom

I agree that the only “fix” that should be offered is (1) an easier way to convert to a fixed rate mortgage (as if there isn’t already enough incentive, unless of course you can do a short sale with no consequences to personally) and (2) extend the payment terms to 40-50 years instead of 30. Stocks, just like housing, are subject to supply and demand regardless of its perceived “actual value”. If Obama gets elected we will see the stock market continue to dive (both as the election approaches and right afterward) for one simple reason that he has promised… Read more »

Renter Tom

bubbleRefuge – “In a gold standard model there is a cost to running deficits because you have to acquire the gold.” You did not just write that implying that there is no “cost” to printing more money cause the value of all the existing currency to decline. There is no free lunch. You either buy the gold or you devalue your currency… While I do not advocate going back to the gold standard, I do advocate a balanced federal budget taking into account economic cycles. The other problem with your thinking is that the government isn’t reducing its outstanding deficits… Read more »

Cyrus

bubble refuge, the gold standard SHOULD return because with the fed running the show, you are looking at a few people in charge of your money supply – which is why dollar is where it is. with these clowns controlling your money supply, while trying to bail out every institution that took horrendous risks … guess where your dollar is. try to find one civilization in history that has been able to devalue it’s currency into prosperity. IF this is how they’re going to run things, then the stability that the gold standard would provide is welcomed! again, not sure… Read more »

Visionary

AJ,

Where are you ?
I miss your posts.

jcrimes

guys
you can move people into a fixed mortgage all you want, or for that matter, give them a payment plan they can afford to keep the house…but the simple fact remains. if the house is worth less than the outstanding debt owed, regardless of the fact that people can afford to live in that home, there is a strong likelihood that they will turn in the keys and walk.

that’s why this whole bill is a gimmick. you need to let value go back to fundamentals.

ha!

Bubble refuge, you are very observant. The govt can’t keep doing this unless it wants some sweet sweet hyperinflation. They just might do such a thing….in that case we’ll be buying condos for $1 billion/sq foot….
In other news Case Shiller is out and Miami is down 28.3% yoy. We are in a death match with Vegas which is down 28.4% yoy. 2000 prices and lower, here we come!

bubbleRefuge

No! We should not go onto a gold standard. The government would go bankrupt ( default on gold obligations) as it did in 1934. We would have deflationary recessions and possibly depressions. A balanced budget makes no sense in our floating non-convertible currency regime. It is not an unbalanced budget that necessarily causes inflation. Today we have commodity based inflation due to Saudi Arabia and possibly Russia hiking oil prices and acting as monopolistic producers and with enough worldwide oil demand to allow them to do so. Our fiscal balance has little to do with this. Remember Japan has run… Read more »

Renter Tom

See Bankrate article below….looks like this will be just another negative factor to consider when buying a second home in Florida….one negative factor among many and yet another headwind that the Miami housing market faces….it just can’t get a break can it? It just makes it less attractive and people will be less enthusiastic about buying a second home which is one thing that helped drive this housing bubble. Pop! ———————— Second-home sellers take hit Second-home sellers take a tax hit You’ve probably already read Bankrate’s top story today, “What does the housing bill mean for you?” In it, my… Read more »

gables

Great to see all of the comments on this blog-it goes to show the readers here are diverse but still quite educated on our world of real estate and finance. If mortgage interest rates begin to climb higher-say to near 8% by year end, how quickly will that impact the price declines. i still see too many condos priced beyond $300k, and at 8% the payments are still way to high for even a $75k/year income. How quickly will REO drop their prices? Renter Tom, i disagree to an extent with your arguement regarding capital gains taxes impacting the market.… Read more »

Renter Tom

gables – While I respect your posts, I have to disagree. Markets are made AT THE MARGIN. Right now there are enough people at the margin that will cash in for the lower cap gains rate…if they were going to cash in within the next 24-48 months anyway, they may just consider doing it before year end. Having 24-48 months worth of these people cashing out in a 4 month period will have a larger then expected impact on stock prices which will further erode confidence, investment, and could instill some panic. It is the people at the margin that… Read more »

ha!

Bennigans and Mervyns are out of business. This recession is going to destroy the service sector. This has been the growth area since Reagan, Bush, Clinton, Bush gutted our manufacturing….this recession is going to be a DOOZY.

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