May 06, 2008


Every homedebtor and housing gambler in America now has the incentive to stop paying their home loan, immediately.

People who pay as promised get nothing. No cut in principal. No reduction in interest rate. Nothing.

People who DON'T pay get everything. Not because Big Daddy Government cares about them, but because it wants to make sure the banks don't fail and home prices don't fall to their natural levels. Bankers and the REIC gave all that money to Dodd and Frank for a reason you know.

Play by the rules and act ethically - the government tells you to go F yourself.

Break your contract, stop making payments, don't honor your commitments - the government is there to shower taxpayer money on you to make sure you don't walk away from your depreciating debt-trap.

This is what's become of America folks. A country whose corrupted Democratic and Republican leaders screw honest, hard working and ethical people every chance they get, doing the bidding of their bank and REIC masters, redistributing taxpayer money from the honest to the dishonest.

Contact Barney Frank and your congressman here. Write letters to the editor. Post on blogs. Show your outrage. Go down with a fight. Our voice can be heard.

Bernanke gives green light to Frank foreclosure bill

WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke gave the green light Monday to congressional efforts to prevent foreclosures of homeowners caught in the recent sharp nationwide decline in home prices.

"Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy," Bernanke said in a speech at the Columbia School of Business in New York.
Legislation to aid strapped homeowners is making its way through the House of Representatives.

The bill has been pushed by House Financial Services Committee Chairman Barney Frank, D-Mass.

It would allow the Federal Housing Administration to back as much as $300 billion in refinanced loans for homeowners facing foreclosure.

Some have questioned the need for the measure, saying that it would punish homeowners who played by the rules and didn't overextend themselves.

Bernanke's support may help Frank sell the measure.


Anonymous said...

If you want the Fed to know what you really think use this link:

Let 'em know there are at least some people who aren't being fooled.

Reality said...


Hear hear. This is the better thread for my ealier post:

How about his idea: Federal incentives to buy homes with substantial cash down payment:

FED provide matching funds for buyers's down payment, dollar for dollar, for transaction price totalling no more than existing 2007 or 2008 tax assessed value. To qualify, money has to be the buyer's cash contribution minus all of the buyer's outstanding secured and unsecured debt.

That way, housing prices drop can be slowed or stopped, and the new owner will have much much lower debt load. The transation price cap is in place to prevent new scams/bubbles and speculations, so that money is directed towards loans that will most likely default (as in house price in decline) Existing home owners will have to find an honest home buyer with cash as the metric disqualifies self-dealing and second-home buying from speculators through cash minus indebtedness matric.

The advantages:

1. Housing price will be stabilized by a flood of new purchases with substantial cash downpayments; so the existing debt can be paid in full without default or loan modification.

2. The sanctity of existing mortgage contracts will be preserved. You never really want a society of gleeful deadbeats or squaterers as any other bailout plan would inevitably entail; in fact, in order to qualify for matching funds, many may work hard to pay off other forms of indebtedness like creditcards as any existing debts will cut into the matching; buyers can't cheat by coming up with cash by borrowing.

3. There will be a flood of dollar repatriation as any individual or insitution that has money overseas will try to put down downpayments to get the matching FED money. Dollar decline and inflation that would result from any bailout plan will be tempered by this flood of dollar repatriation in this case;

4. Yes, the FED will be on the hook for up to one half of 2007-2008 tax assessed value on a house, in case the buyer puts down the maximum capped amount (also why transaction price can be no higher than 2007-2008 tax assessed value). However, the FED will be on the hook for that much sooner or later, if not more, as a 30-50% decline from peak 2006 is very much in the cards. With this massive cash-down payment incentive, the new buyer will be very very reluctant to walk away from the new substantially lower loan in the future . . . unlike any of the Fannie, Freddie and especially FHA loans that still entail way too little borrower's skin in the game.

The beauty of this system is that the bailout money go to new buyer/owner who put substantial amount of their own money down, so they won't walk away from the new debt. Existing homeowners who are way upside down can get bought out without going through bankruptcy, and therefore the banks won't have systematic failures. The FED will still have to come up with the matching funds; the banks and existing homeowners will still get bailed out as they are the ones eventually receiving the funds when all is said and done. However, a new group of home owners will be in place in those houses, ones that have a proven record of financial responsibility as shown by their savings and cash on hand able to make their part of the down payments to be matched. And because their own self-interest will bring in substantial amount of down payment . . . they won't be walking away even if the market continue to drop a little afterwards before reaching the historical P/R ratio.

There has to be a cap on transaction prices, because we don't want fraud or new bubble. 2007-2008 tax assessed value seems to be fair, any transaction price above that point should not require bailout of the seller/debtor. Anything below signifies potential upside-downess, where any bailout will be. Cash minus any and all existing debt rule has to be in place to deter serial flippers.

Lady Di said...

This is so wrong.

Between inflation created by the Fed and taxes by the government, we are getting fleeced.

It's time to take this to the streets!

It's time for a taxpayer's revolt!

PCmodem said...

I tried to leave a comment. I spent 30 minutes writing it, and the website error'd out and erased the contents. How perfect. Not like they'd be read anyway.

devestment said...

Not to worry. None of the legislature saves the public. All the aid is for the banks.

Moderate Commentator said...

"Every homedebtor and housing gambler in America now has the incentive to stop paying their home loan, immediately."

That's right. And the economy will get a big boost when all of that mortgage money is spent at local retailers:

"Rent-free homeowners keep economy from stumbling."

"This year, 93,000 California homeowners received a Notice of Default, meaning they had not paid their mortgage for at least 3 months. Since last September, 145,000 borrowers have the privilege of living rent-free."

"If we assume the average mortgage payment is $1500, and the average borrower lives rent-free for 9 months from stopping a mortgage payment to being booted out of his home after the auction, that is (145K * $ 1500 * 9) = about $ 2 billion. Californians have an extra $ 2 billion to spend, because they don't have a mortgage payment."

"I wonder how bad our budget situation would be, without this boost! (I didn't even add all those not paying their HOA dues or property taxes, but I've seen $25K and up annual property taxes go unpaid for several years.)"

"So California alone is adding $ 2 billion in additional spending to the economy, as these "mortgage free" homeowners get to use their mortgage payment on movies, clothes, trips, etc."

"No wonder the economy is not turning down as quickly as economists had expected. Every dollar not paid on the mortgage, is a loss on another bank's balance sheet, but a gain to a retailer somewhere."

But wait! There's more:

Anonymous said...


Barney Fag!


Anonymous said...

Makes me want to just start working under the table and not pay any taxes other than sales tax.

Anonymous said...

There's about to be a revolution. People are getting fed up with The Fed and Washington District of Criminals.

Anonymous said...

I wrote to my congressman using the link Keith provided.

I am OUTRAGED over this bailout proposal. Lie on your mortgage application, make small monthly (teaser) payments for 1 - 3 years, and buy more home than you can afford, and the Government will reward you for your foolish behavior. Tax dollars that I worked my ass off for, going into my lazy-ass worthless next door neighbors pocket so he can take yet another 4 week exotic vacation somewhere. I'm livid!

This was the first time I wrote to my congressman, ever - that's how mad I am. I urge everyone else here who is mad as I am to please write your congress person - please, if only for once in your life.

Keith, thanks for doing such a great job - really.

Yoski said...

Letter to the FED using anon's link:
To whom it may concern,
I am writing you because I am outraged of what has become of the FED. You have turned into a lender of first resort accepting questionable collateral from every get rich quick scheme gone wrong on Wall Street. Instead of listening to quacks like Dodd and Frank you should be protecting honest citizens and the value of the US dollar. Recessions have their place in a healthy economic cycle; its to purge bad debt from the system. The kind of debt we have accumulated in abundance due to wild speculation.
Yes, many speculators, banks, appraisers, rating agencies and mortgage brokers made poor decisions over these last years. Many involved fraud and deception. This is at best a case for the FBI and the judicial system, it is not the FED’s job to bail these people out of their scams gone wrong. Bad businesses, even if that business is a bank, need to fail so that they can be replaced by more efficiently run competitors. This is how capitalism works, it is the only way how capitalism works. You can not shield an entire business sector from the specter of failure and expect that those businesses will be run in an efficient manner any time within the foresseable future. Due to your current actions you encourage even more aggressive financial adventurism in the future. The new paradigm on Wall Street is "worst case scenario the FED will bail us out." This is not how successful financial markets of the future will operate. A quick look to Japan should give you a fairly accurate idea what you're setting this country up for.
I urge you to reconsider your course of action before it is too late.

Anonymous said...

This is all irrevelant. At what point would all this "help" arrive. So much damage has already been done.

I doubt this will even ever happen. It is awful to o so much into debt for absolutley nothing.

Anonymous said...


You didn't really think the govt would just stand by and do nothing did you? Talk about naive.

Whatever housing crash was going to happen has already happened. And if you keep on renting you will be losing out twice as you'll be paying for someone else's mortgage and you literally will be priced out forever as the govt will just prop up prices for the next 100 years if need be.

Anonymous said...

Read Devestment and then after that read Devestment

Anonymous said...

I just wrote my Congressman too. I know it is useless - it isn't as if he is going to read it!

So my question is to Keith -

Why are we "bitter renters" going to be gloating a few years from now, if the government is going to come in and bail out these overextenders, lower theur payments, etc? This will keep housing prices unaffordable - we'll still be bitter renters.

Anonymous said...

Brilliant. What's next? Legalize organized crime?

DAve Johnson said...

This is the real deal. This Barney Frank is retarded. OK buy a house 700,000 (actually worth at the time 300,000) Now the price drops and you want to just pay the 300,000...The 400,000 just gets paid by the taxpayer. Wow what a great idea. Let me keep my house I over paid, lower my mortgage, and stay in the house. Reality. Pay or move. Yes in the short term iot hurts in the long run everyone wins. over time that 700,000 over price piece of crap hpouse falls to say 190,000. Now someone can get into a house and live there and have a n ormal life without spending there paycheck on mortgage. OK barney idiot franks MY worldcom stock was at 90 bucks in 1999 in 2002 it was 10 cents where is my bailout you idiot same thing as the house market except this was real fraud. NO BAIL OUT .wake up you idiot.america is a FREE MARKET THE REAL ESTATE IS A FREE MARKET . LET IT FALL

Another Great Bush Program said...

Publish a template so we may copy and paste.

I really do not know what to say to Gay Barney that is appropriate.

My outrgae is inestimable.

Anonymous said...

"The advantages:

1. Housing price will be stabilized... "

This is not an advantage, it is an aweful disadvantage. House prices are still unaffordable, they need to come down.

And where is the fundamental rationale for taking tax from renters and existing homeowners and giving it to people buying now? I just don't get it.

Mark said...

Funny - you don't mention this idea is supported by nearly all the DEMOCRATS in the house and senate...(DEMOCRATs actually control the house and senate)

Anonymous said...

This clown Barney Fag is a joke.

Edgar Alpo said...

Stop paying yes, but be sure to take out all your equity first.

Reality said...

Anon 3:09,

My proposal (matching payment for down payment) was predicated upon the assumption that if there is a bailout at all. Of course, no bailout at all will be the best. But if thre is to be a bailout, a far better way is to subsidize new home buyers instead of existing home debtors (actually banks): because then you don't have to deal with the moral hazard of essentially squatering being legalized.

Renters will benefit from my proposal because the cash-minus-all-indebtedness qualification for matching down payment would make the program more or less only directly available to current renters and free-and-clear homeowners. Yes, the homedebtors will benefit too from it, but indirectly, as they sell houses to the subsidized buyers. That's also why there has to be a cap on transaction price, so that homedebtors can get some debt relief but not turning a huge profit again under a new bubble. The price will probably still continue to decline, but the new home buyer will be in it with substantial downpayment of his own, so unlikely to walk away (and he get compensated ahead of time by the matching downpayment), so the banks don't fold.

Let me show you by an example: someone bought a $500k house at the 2005-06 peak with no money down. It's now asking $400k. The person currently has very strong incentive just to walk away! At the same time, would-be buyers are also afraid of further price drops. When he does walk away, the person's credit is in tatters, and the bank is out $500k. If that's a too-big-to-fail bank, or a loan substantially sold to FNM, FRD or FHA, then the taxpayers are out of $500k! It will take some time for the bank to mark that house down to $350k, through multiple quarters before allowing the loss show up.

Now if a current renter-saver who has $100k to put down can get the house for $350k, with another $100k matching from the governernment, the picture changes substantially: the current home debtor can get $450k out of the deal . . . in which case he may be tempted to come up with the remaining $50k to come to the closing table so his credit is not ruined. The new buyer will have an actual cost of $350k with $100k down, so the debt amount will be $250k, essentially cutting the monthly payment in half compared to the current homedebtor. He is also protected for the next $50k price drop. What's more, he already has $100k of his own money in it, so he is much less likely to walk away even if the value drops below $350k. Someone who has saved $100k while renting or owning a property free and clear is probably far more likely to be able to make the payment which itself will be half what it is now for someone who has little saved up and strapped for cash. The cost to the government and the taxpayers? $100k instead of $500k!

Why this won't work just to keep the current homedebtor in place and reduce debt by $100k? His payment is only reduced by 20%, and he has no skin in it. If he is rewarded by not making payment, he will just skip more payment down the road whenever price drops again or whenever he feels like it. That's the moral hazard of abrogating existing contracts. The proposal that I'm making will preserve the sactity of existing contracts, and make everyone work for a better outcome, for homedebtors and current renters and would be buyers alike. The banks will also be saved, which is where politicians get their bread butters; frankly, not many savers want to queue up at the FDIC window either.

Anonymous said...

This is absolute MADNESS Barney Frank!!

The only solution is to let housing prices fall to the level WHERE THEY ARE BACK IN LINE with historical fundamentals.

It's simple!! We allowed housing prices to rise to astronomical and unsustainable highs, and now they must come back down to a level where median incomes support them....REAL SIMPLE.

Will your banker buddies be out of a job...yes.

Reality said...

Another beauty of my proposal is that, the consequent monetary inflation will be much smaller than other bailout plans that subsidize homedebtors and banks directly. The down payment will have to come out of savings accounts or from overseas with foreign currency exchanged for dollar. If the seller then uses the bulk of the proceeds retiring debt (as the transaction price cap would result in), the dollar for dollar matching also works out to reduce the impact of new money on the monetary base, as each newly printed dollar is either matched to a dollar withdrawn from savings or exchanged into some other currency (both reduce the dollar motetary base by the equal amount as newly printed money for this program).

Anonymous said...

Good thing Bernanke doesn't have the power to enact these rules. Only congress does, right? Any it aint gonna happen in congress.

Anonymous said...


Thank you for your well thought out plan. We all agree that the best thing to happen is no bailout and that the free market can come back into play, with consequences to the idiots who lied and cheated their way into a bad mortgage, and the idiot banks that lent them the money.

What you are trying to do is find a way to not reward the cheaters, while giving incentive to those of us on the sidelines to jump into the market and stabilize it.

Here are some points of yours that I liked:

1. Requiring analysis of current debt load and increase incentives for savings and wise credit use

2. Theoretically, it builds in equity for the new buyer.

3. It encourages action now

4. It doesn't allow the seller to walk away with any money and forces them to put more skin in if they want to save their own necks

However, I see some pretty big assumptions that make or break this deal:

1. Most home debtors don't have the difference of the $50K to make this work.

2. You assume everyone cares about their credit score. Many of these debtors already had poor credit, which was why they did no-doc "liar" loans to begin with. Too many people today know that a bankruptcy, etc, is not as bad as it once was. Heck, new credit card offers will be in the mail within months!

3. Your statement, "Buyers cannot cheat by coming up with cash by borrowing." In a nutshell: Where there's a will, there's a way. A lot of people can tap 60-day resources to get money (401k, friends with money, etc.) In your example, if someone only had $50K to put down, and took out a short term loan for another $200K, they could get their house with no mortgage. And, though credit is tight, any bank would take out a home equity for 50% of the value of a paid-for home, which would be used to pay the loan back. Now, this person has gotten $250K from the government with only a $50K investment. They can then turn around and sell the house for $300k (since its value is $400k)and make 100% on his initial $50K! I see another get-rich-quick scheme starting!

4. Finally, most of the government money would not benefit the new homeowner, since they will only be getting $50K value on a depreciating asset. They could likely wait a few years and pick the house up for under $300K when the market hits bottom. So, most of the bailout still goes to helping fund the homedebtor, or more specifically, the bank that made the loan and should be stuck with a depreciating asset.

However, I'd take your plan over Frank's or any other proposed plan out there!

Anonymous said...

Barney is the Queen of the Bankers

Reality said...

Anon 5:55,

Thank you so much for the critique. I too had concerns about potentially new types of frauds. Perhaps, instead of direct payout right away, the matching downpayment subsidy is doled out over time as tax credits at tax time for offsetting federal tax owed and can be carried over years; i.e. not a payout but a tax reduction to zero for a few years. Given our current 2% interest rate, the time value cost to anyone with cash lying around would be low, but to anyone who would have to borrow to get the downpayment the time value cost would be high; also anyone borrowing to get downpayment to qualify for this program will also be deemed fraud and have the tax benefit forfeited plus penalty upon discovery. That will go a long way to screen out potential frauds and limit the number of lenders willing to take a chance on any fraud-facilitating loans and drasticly raise the interest rate they'd charge for special "piggyback" loans designed to game the system.

There is no real chance of saving homedebtors who are way over their head, aside from bankruptcy protection. This program is geared towards saving people who are marginally under-water. More importantly, motivate new buying. The more private savings that can be mobilized, the more relevant the program can become. For example, on a house with $500k loan and now asking $400k, someone with $200k cash to put down can get the house now with $200k down, $200-250k loan right now, and have $200k back in tax credits in the years to come. The total cost of the house will end up being $250k or so, with future tax credit paying for mortgage payments for a few years :-)

What we really need today is a system that will induce savers to put money into downpayments, so that the new homeowners will have their skins in the house. Obviously, the current price level is not enticing at all for folks who can crunch numbers and save+invest. Waiting for further price drop is like waiting for the paint to dry as the banks dream up all sorts of book cooking to obscure the non-performing loans . . . and any general FED printing will just cause massive inflation everywhere else except for the most recently busted bubble -- housing. Any buyer now will also be looking to have as little skin down as possible, especially if there is bailout plan for those who do not pay. There has to be hefty incentives and downside protection before people will hold their noses and buy houses at any price level that doesn't lead to systemic bank failures. Just like FED underwrte 29 billion downside protection for JPM to buy BSC, the federal government can underwrite downside proteciton for new home buyers; an amount equal to buyer's downpayment sounds fair and will motivate people to help themselves first and have their own skin in the game. IMHO, this just might just be the ticket to get people coming off the sidelines. Like you said, the key is to come up with a way to prevent fraud; I think the tax credit method might just be the ticket.

Anonymous said...

Yes, this idea is idiotic. But like all ideas before it proposed by members of the government, it still just comes down to political pandering.

And this will have no effect on the decline in housing prices other than stretching the decline over a longer period of time. House prices still have to come down for the simple notion of affordability. Keeping people in an overpriced asset is merely a bandaid. Unless the government is planning on issuing a whole slew of 1% mortgages to NEW homebuyers, the end result is still the same.

People that think this housing situation is over are both naive and stupid. We are merely at the beginning of this debacle. This will take YEARS to play out, with government intervention or not. Considering that this bubble had its origins in 1997-98 reaching is zenith in 2005-6, does anyone here honestly think only a mere two years or so of correction will bring us back to equilibrium? For a market as illiquid as real estate? Please. It took the NASDAQ 2 1/2 years to find its bottom and that's a stock market index!

We are looking at between 3-5 more years AT LEAST of declines in housing before there is even a remote possibility of stability. Longer in some areas where bubble prices became stratospheric.

In the mean time, the government will bungle and debate on how to "solve" the crisis. And like all interventionist government policies in the past, they will merely delay or exacerbate the inevitable.

Anonymous said...

nasdaq up 1% yet again today

bailout is a done deal

HP regulars crying in their beer

Anonymous said...

"Why are we "bitter renters" going to be gloating a few years from now, if the government is going to come in and bail out these overextenders, lower theur payments, etc? This will keep housing prices unaffordable - we'll still be bitter renters."

FINALLY!! You idiots are starting to understand what's happening. You will live in your shithole 1 bed 1 bath for the rest of your miserable lives.

Anonymous said...

some of you people have way too much time on your hands....i'm talking to you reality

hey i know...maybe if you spent less time blogging and more time working you too could afford a house

Anonymous said...

"There's about to be a revolution. People are getting fed up with The Fed and Washington District of Criminals."

NOT ! The American sheep are a big bunch of dumbed down pussies !

MRS. BENTLEY said...

Likewise, I tried the federal site, wrote my 2-cents and got a reject message that there was an error. I think the error is in our Federal Reserve Board, and our five o'clock news, and our roadapple-for-a-president.
I don't trust much anymore and, thankfully, my own husband is starting to "wake up" and smell the crap he reads in the newspaper and watches on TV. Man, it was hard watching him float around in a coma for so long. At least his coma is over and we can reall TALK about this crap leadership.

Come on BoA, wake up too.

Anonymous said...

"Now if a current renter-saver who has $100k to put down can get the house for $350k"

Come on, how many first time buyer/renters have 100K in the bank? Not many, because the f'ing boomers do not want to pay us shit and we have no money because we are paying off absurdly high student loan balances.

F this, I'm taking my ball.

Anonymous said...

"The American sheep are a big bunch of dumbed down pussies."

True - and the ones that stand up for themselves are labeled lunatics and crazies.

Refuse to buy overpriced said...

"reality" may have a point.

Congress is tempermentally incapable of not intervening. Perhaps the best that can be hoped for is a plan which rewards good behavior. It might not sit well with Libertarian purists, but it would be better than current plans which reward bad behavior.

So, how about rewards for responsible buyers screwed by the bubble?

Who was screwed hardest by the bubble?
First time home buyers who bought a house in 2005-2006, particularly a low end house below local median since these were proportionately the most overpriced.

Definition of responsible buyer:
1. Made a substantial downpayment, preferably 20% but at least 5%.
2. Did not lie about income on loan application.
3. Did not use unethical means to boost credit score to obtain loan.
4. Loan did not have an "interest only" period.
5. House was purchased as a primary residence, not second home or investment.
6. Has not missed or been late on a payment since closing.

A second round of stimulus checks for people like this would reinforce responsible behavior, and Congress would feel like they were doing something.

Reality said...

Anon 8:15 and 8:56,

Stop projecting. Coming up with 20% cash down payment on a million-dollar house would be a cake walk for me. I just don't find the five-bedroom house that I'm current renting is worth more than doubling the rent that I'm paying. The difference between renting a million-dollar house for only $3.2k a month vs. taking out a mortgage to buy it plus another $1k a month for property tax is enough to keep a full-time home-office assistant, who can keep all the chores of life in order while I do things that I enjoy, including blogging . . . while the returns on the $200k allocated to other asset classes making much higher returns than a house would for the next 10 years or more.

Yoski said...

House prices will return to historic norms with or without bailout. That's entirely not the point. There's is no way the FED or Congrss or whoever can fight the market forces. Japan tried, see what happend to their economy and their real estate prices.
The point is that after real estate returns to its normal historic valuation the FED & government spend a bunch of money on bailouts while accomplishing exactly ZERO. That's how it will end, nobody can fight the market forces on the long run.
So what, they reduce the $500K mortgage to $300K. Then the house falls to $200K 'cos it's still way too expensive and nobody can get any credit. Then what? The home debtor still walks and the place goes into foreclosure. Now, Fannie/taxpayer is the bagholder instead of some bank/investor. That's how it will end. Instead of Citibank, Wells Fargo, Countrywide, etc. taking it on the chin, the taxpayer will take it on the chin. All this will have little to no effect on actual pricing of houses, just on who pays for the mess.

Anonymous said...

So what happens to those whose homes are already foreclosed ?

Do they get free homes?

Reality said...

"Come on, how many first time buyer/renters have 100K in the bank?"

People with no money to put down buying homes now will only lead to more foreclosures in the near future. As the data show, income and affordability are only secondary to how much of the borrower's skin is in the game. To prevent cascading foreclosures and bankruptcies, houses have to go into strong hands who have substantial amount of their own money in the game. $100k savings for a 30-35yo couple renting for the past decade shouldn't be too hard. $3-5k a year IRA contribution each person each year work out to around $80k for the couple. Most jobs have 401k plans that allow more contribution than that. IRA withdrawal for first-time home purchase is tax free, no penalties and doesn't have to be put back. If a pair of renters have not been contributing to their IRA's to the fullest amount, or have alternative investment/saving plans while renting for 10 years, including understandable circumsttances like student loans, they have no business buying homes in this declining market. More weak hands will only lead to more foreclosures in the future.

What we need today are strong hands who can buy house with substantial amount of money down, so they have their own skin in the game. Banks will be much safer when those new owners make up the loan portfolio. Letting those people to buy houses with their own money (with incentives) will also sort out what were hopeless mortgage frauds and what were marginal cases that could be saved.

Reality said...

Refuse to buy overpriced,

Thank you for your input. My plan definitely will definitely help out the honest first-time buyers far more than the out and out fraudsters. . . because the honest buyers, with a transaction price that was not outlandish to begin with, especially after their 20% down, have much less mortgage. If they do need to sell, the new buyer with the downside put option in place, will much more likely to pay them enough to cover their outstandig loan. If no sale necessary, then no rescue is necessary. People make mistakes and are allowed to pay the price and correct them just like in stock market crashes. Having a government official to step in and judge who was an honest dupe who was not would be rather tedious and prone to corruption. The existing homeowners already signed the contract; invalidating it without bankruptcy proceeding would only lead to irresponsible behavior in the future.

What I'm getting at is an incentive program to get people pitch in new private funds voluntarily to save the financial system (and some argue, social stability). It's a little like tax incentives for blighted areas and disaster zones. Frankly, the housing and mortgage industry is a blighted disaster zone right now. IMHO, it's a better approach than just having the government print up a ton of money and hand over to people who lost their homes to disasters. . . that would lead to widespread construction in places that they shouldn't build to begin with due to disaster risk. Instead of such routine direct bailouts, giving tax breaks to charity and rebuilding efforts after the disaster is very different.

Reality said...


Very good points. A 17+ years long decline to sort things out like Japan has been going through would be a disaster indeed. Frankly, I don't think Americans are cut out to be as docile as Japanese when the economic nightmare drags out that long. Even for Japan, there has been a significant rise of random violence due to civil discontent after the one-decade mark.

I also agree that eventually, when housing price go back to the historical level where it can be sustained by rent income generation, a typical $500k house in 2006 will be worth about $200-250k, inflation adjusted, as the current rent on such a place is only $2000 a month (100x monthly rent was the standard metric when I started looking for income properties in 1995). That's a huge gap to cross (from $500k to $250k). The homedebtors are tapped out, and the banks are tapped out, too. The only solution the governmet officials are talking about is massive inflation to fill the gap. Any money they print up through the normal money creation channels will go to the young and perky bubble called commodity speculation first instead of reflating the old saggy housing. FED would be pushing on a string.

IMHO, there is a better way, like I mentioned above. Matching new buyer downpayment will go a long way towards incentivizing people to put money towards housing to cushion the fall with their downside partially covered; yet because it's not another put option and the new buyer would have to put down substantial money to get the benefit, the new buyer will have incentive to shop for value responsibly (weeding out the outstanding mortgage frauds in the process). Banks will be saved in most cases, but will pay for the existing mortgage fraud cases, beteen them and the fraudsters. The new buyers will probably still lose most of the incentive money in the years to come simply because housing prices will continue to drop until price can be justified by rent income. However, we will have responsible homeowners in place much sooner to prevent neighborhood decay; current home debtors will be out of a debt trap, and be able to rent and save while waiting for prices to fall. Government will probably spend less money in this way than if it had to bail out all the loans in the banks' books. It also beats direct subsidy to existing homeowners because a mortgage reduction would still have little of the current occupants' financial skin in the game, unlike a new buyer with substantial downpayment would . . . not to mention $100k to current owner with $500k debt would only reduce mortgage payment by 20% (probably not enough to counteract the full amortization adjustment); what's to prevent the current occupant stop paying again the next month? Whereas $100k matching $100k downpayment from a new buyer would reduce the mortgage payment by 40% even if the buyer pays the full loan amount and effectively bails out both the current homedebtor and the bank entirely! With $100k of his own money in the game, he'd much less likely to default; not to mention his track record of savings proving his ability to manage finances. He will be much likely to succeed in handling the resulting smaller debt than the previous occupant who would have to handle a bigger one.

Reality said...

BTW, just for the record, IMHO, banks and central banking are not worth saving . . . risk evaluation is the bank's job number one. Nobody would suggest a bridge engineer whose bridge collapsed should have his career saved to design a new bridge another day; in all likelihood, he'd be in jail!

However, seeing that central bank is created to bailout bank follies, and we do have central banking laws the require all of us to accept the fiat money at face value . . . the reality is that we are in real danger of hyperinflation and thorough destruction of the economic prosperity that Americans have taken for granted for over three generations. I just think we need some creative solutions that will do the least amount of damage before the nuclear button is pushed at the FEd. When hyperinflation hits, none of us will gloat, not even the ones with hundreds of cans of food and thousands of rounds of ammo. At $6-10 a gallon, the truckers will stop working; at $20-30 a gallon, freight trains will stop running; most parts of the country can't grow enough food to keep themselves alive.

deepcgi said...

This kind of Fed action will make matters worse by postponing the pain. They can't stop the crash. 300 billion new dollars will not save the market. It will continue to destroy the dollar and likely trigger hyperinflation. It literally will be hurting everyone to save an undeserving few.

Anonymous said...

What happens when the next bubble bursts in our economy.Bubbles are part of the economic fabric.Big Daddy (Govt) will set a precedent for the future that will have repercusions and ripples in all other areas. Any bad decision will demand a govt mop-up.If someone sells the bailed out house for a profit will the profit be paid back to the taxpayer. I think not.Hold on to our hat America it's going to be a bumpy ride.Family, morals,homes,all the things that represent the glue or mortar that bind a society together are begining to unravel.Someday Ancient Rome and the USA will be mentioned in the same breath unless we wake up

Anonymous said...

Bush has just announced he WILL VETO THIS PLAN!! (which will be the one decent thing he accomplishes)!!!

WHY can't our leaders be honest about the absolute mess we are in and what it will really take to fix it.

PRICES crashing back down to their natural levels will restore affordability to housing. It is the CURE for the DISEASE. Anything else is a placebo!

txgman said...

Here is my letter that I sent to my representatives:

I am writing to you to express my concerns about the ongoing housing/mortgage problems, and policymakers’ repeated attempts to interfere with the natural course of free markets. I am appalled by the entire situation, and by the pandering response from Washington lawmakers, who continue to insist that something must be done to assist borrowers in danger of losing their homes, as if somehow these people are “victims” of this mess.

The fact is that these people did not get into this situation by an act of god, terrorism, or other unforeseen event. Almost all the surge in foreclosures is due to borrowers either taking on loan terms they knew they could not afford, not bothering to read or understand the contract they were signing, using their home as a personal ATM machine, or lying about their income to get a loan they could not afford. In almost all these cases, the borrowers gambled on higher home prices, and now that the gamble didn’t work, they are justifiably in jeopardy of losing their home.

If the free market was allowed to work, many of the borrowers in trouble would do what other responsible borrowers do – cut back on spending, take a second job, or otherwise find a way to make the payments they are obligated to make. Many others will lose their homes, but they won’t become homeless – they will become renters like many Americans who had enough personal responsibility not to take on an unaffordable mortgage.

Instead, Washington is considering another travesty bill that would use taxpayer money to assist these irresponsible and undeserving people. The current Barney Frank proposal would allow them to stay in their comfortable homes, essentially giving these people a purchase price that was not offered to the rest of us that would have liked to buy a home when those people overpaid, but made THE RIGHT DECISION and walked away. Furthermore, this ludicrous proposal actually provides an incentive for borrowers to default, as the defaulting borrower would get tens of thousands of dollars reduced from their mortgage, while the responsible borrower who continues to meet payment obligations gets nothing! If such a bill passed, I suspect a large number of Americans will suddenly develop trouble meeting their next mortgage payment. It is bad enough that these people will not face a tax consequence for any mortgage forgiveness offered by the lenders, a poorly construed piece of legislation that basically amounts to tax breaks for gambling losses.

Politicians appear to be blind to the fact that a clear message is being sent by their actions: In order to get what they want, American citizens should lie and/or agree to terms they know that they will not be able to meet, take on risks without concern for consequences, and then cry to elected officials for relief when the bill comes. Hardworking, responsible citizens are being taught that honesty, personal responsibility, and playing by the rules are just naïve ideas for suckers.

Please do not insult the intelligence of your constituents by parroting the ridiculous arguments that bailing out these people is somehow good for the economy, or that no one wins when homes are foreclosed. Foreclosure is a justifiable consequence for gambling borrowers who made the decision to overextend their finances. In addition, foreclosures will result in a much faster “mark to market” for real estate prices, something that is desperately needed in order to make homes affordable for responsible American families utilizing realistic mortgage terms. In essence, one irresponsible family’s loss of the “American Dream” of home ownership is a more responsible family’s gain of that same dream. It is an economic inevitability that prices WILL correct to match average incomes and rents, but continued high housing prices is only forcing more borrowers into loan terms they cannot afford.

In closing, I would like to say that I finally understand the frustration that caused the Sons of Liberty to dump crates of tea into the Boston Harbor 235 years ago. Honest, responsible Americans are receiving inadequate representation in Washington’s preposterous rush to reward a group of citizens driven by materialism and greed in a bonfire of irresponsibility, fraud, and deceit. I have no doubt that our country’s forefathers would be shaking their heads in disgust at the actions by our current public servants in Washington.

Anonymous said...

Let's all just quit paying our mortages and use the money we save to buy Gold, Gold, and more Gold. Don't get mad. Get Even!!!!

Anonymous said...

Let's all Quit paying our Mortgages and use the money we save to buy Gold, Gold, and more Gold. That'll drive gold prices through the roof and make central banks look bad on inflation. I propose a subprime gold bomb. Don't get mad! Get even!!

Anonymous said...

Thank txgman.

I hope you don't mind I used the same letter for my reps in AZ