60 minutes condensed sub-prime vid

[JayB]

I don't care what race, color, creed, nationality, marital status, or sexual preference you have, getting sucked into the sub-prime mortgage mess and signing on the line for more than you can pay for should be YOUR responsibility, NOT MINE as a taxpayer.

 

We already bailed out the banks because they fucked up loaning to these people, why shouldn't we bail out the others?

 

Avalanches are statistical phenomena as well. Some people knowingly take risks and suceed, some people are stupid and suceed, some people knowingly take risks and fail, some people are stupid and fail. Calling all participants stupid shows you are the stupid one

 

http://www.bos.frb.org/economic/wp/wp2007/wp0715.pdf

 

 

[JayB]

I don't care what race, color, creed, nationality, marital status, or sexual preference you have, getting sucked into the sub-prime mortgage mess and signing on the line for more than you can pay for should be YOUR responsibility, NOT MINE as a taxpayer.

 

We already bailed out the banks because they fucked up loaning to these people, why shouldn't we bail out the others?

 

Avalanches are statistical phenomena as well. Some people knowingly take risks and suceed, some people are stupid and suceed, some people knowingly take risks and fail, some people are stupid and fail. Calling all participants stupid shows you are the stupid one

 

Where would you draw the line for inclusion in the bailout, btw?

 

Second home purchases and other "investment" properties? All cash out refis, even those conducted in the absence of documentable hardship? Incomes over 100K? Any exclusions for fraudulent applications?

 

 

[sobo]

'...Our first point, about the outcome of subprime purchase mortgages addresses the many commentators who have questioned whether borrowers who need to use subprime loans to buy homes really should be buying homes at all. For example, financial historian Niall Ferguson writes:

 

“Maybe, just maybe, not everyone is cut out to be a property owner. Maybe, just maybe, we should not be bribing and cajoling people at the margin into taking out mortgages and buying houses. And maybe, just maybe, a day of reckoning is approaching, when the costs of this policy will have to be borne not just by a minority of over-burdened households, but by everyone.” (July 15, 2007, Telegraph.co.uk)...'

 

That's about all I needed to read...

Edited April 12, 2008 by sobo

[Hugh Conway]

Whatever, Carl. I would posit that knowingly entering hazardous avalanche terrain is stupid on any/all counts, even for a rescue.

 

What's the uniform definition for hazardous terrain? Is that when the avalanche risk scale is 5? Or when it's 3? I can introduce you to some nice people south of the Mason Dixon line who think entering when it's 1 is stupid because skiing is stupid and dangerous.

 

Like avalanche risk financial risk is a continuum. Some people mark certain lines as "stupid" or "smart" but those depend on personal tolerance and skill. Should we regulate who can go into avalanche terrain and at what levels? That's what prohibiting subprime loans would be.

 

This leads to JayB's question. Where would I draw the line? I'd have loved to see the banks, the homeowners and everyone else fucked but that would lead to other not so nice consequences. For those who are bailedout perhaps a cap on the appreciation that could be realized on subprime properties with amounts in excess being returned to the taxpayer (bailerout)?

[JayB]

If you inserted language into the bailout legislation that stipulated that the bailee had to transfer any appreciation up to the amount of money the government extended to keep them in their home a pre-condition for assistance, that'd make for an interesting experiment.

 

Judging by the results of the fed-study, I suspect that there'd be a substantial percentage who'd sooner accept foreclosure than make the sacrifices necessary to make an infinite succession of mortgage payments if there was no financial upside, or someone else got first crack at the majority of it.

 

 

[Hugh Conway]

Judging by the results of the fed-study, I suspect that there'd be a substantial percentage who'd sooner accept foreclosure than make the sacrifices necessary to make an infinite succession of mortgage payments if there was no financial upside, or someone else got first crack at the majority of it.

 

I suspect you are correct.

 

As with Bear Sterns is the short (or perhaps not so short) term pain be worth maintaining the long term balance?

[JayB]

One of the most loathesome and wholly unnecessary elements of the current bailout provision to surface thus far has been the extension of the "loss-back" provision for the big home-builders.

 

If it passes, they'll be able to book the losses on the excess land that they purchased at the height of the bubble, the spec McMansions they threw up on the said land, etc - count the losses that they realize on these transactions against profits that they made up to four years ago - and have Uncle Same send them checks equal to the tax differential between their pre and post loss-back profits.

 

 

[olyclimber]

i'm going to eat some thai food. could you help me out with a graph?

[JayB]

Judging by the results of the fed-study, I suspect that there'd be a substantial percentage who'd sooner accept foreclosure than make the sacrifices necessary to make an infinite succession of mortgage payments if there was no financial upside, or someone else got first crack at the majority of it.

 

I suspect you are correct.

 

As with Bear Sterns is the short (or perhaps not so short) term pain be worth maintaining the long term balance?

 

I think the two scenarios are different enough to warrant different approaches. It seems likely that the government assisted liquidation of Bear Stearns may have made things better, and it seems possible that an attempt to legislate the transfer the losses from homeowners to other parties could actually make things worse.

 

Housing prices will come down to their equilibrium level one way or another, and that level will likely be at prices where the tax adjusted costs of renting and owning are much closer to one another than they are now.* This will happen irrespective of the actions the government takes to modify the loans of individual mortgage holders. Even if the government forces the lenders to take a big enough haircut on the principal to put the home-owner in the black, and gives them a subsidized loan - the value of the home will revert to its equilibrium level.

 

The only action that they could take that would conceivably maintain the rent-own delta at its current levels would be to crank up the subsidies to the point where the tax-adjusted costs of owning and renting are roughly equalized.

 

The gap between current home values and this equilibrium point is probably somewhere in the 1-2 trillion range, and the only question is who is going to eat the losses. If you force feed a disproportionate share of the losses to lenders or mortgage bondholders, there's a real risk that credit will contract even more severely than it would have as a result of the losses that lenders had to eat because of the idiotic lending decisions that they made. This could ultimately drive home values even lower than they would have gone if the government had done nothing - which would drive the costs associated with any bailout still higher.

 

There's the separate question of a housing driven recession, but I think that's also inevitable, and any policy changes that exacerbate the already staggering capital misallocation into real-estate will ultimately have greater economic costs than the said recession.

 

Since it looks like there will be a bailout of some kind, I'd like to see tight limits on who gets the money (which would exclude the examples given above, and far more), and enact conditions that would transfer the upside)(up to the amount of the aid) to the government in the event of a recovery.

 

*There will probably be a lingering tax-adjusted premium that people are willing to pay to own in many places, but that will be substantially less than at the height of the bubble.

 

 

 

 

[Hugh Conway]

It seems likely that the government assisted liquidation of Bear Stearns may have made things better, and it seems possible that an attempt to legislate the transfer the losses from homeowners to other parties could actually make things worse.

 

At $10 a share I'm not sure "liquidation" is an accurate term. The government stepping in because Bear's counter party risk was simply to great suggests that there is no risk for people doing business with bad companies. If there's no risk for people doing business with you, why not run a bargain basement shop?

 

Your neighbor got a $200k home on a subprime; Cayne got a floor at the Plaza for $25 million cash from BSC

[JayB]

I pretty much agree with you, but I'm not sure what else they could have done. Looked to me like they thought we might be on the verge of a global run on investment banks, and the IB equivalent of the FDIC is still languishing on a whiteboard somewhere in academia, I suspect.

 

Most financial institutions that played the subprime game, especially with leverage, have gotten a royal cornholing, and have had to beg for capital infusions. We definitely need to reform the rules to increase transparency, compartmentalize risk, etc - and I would have liked to see more pain and contrition, but it's not as though they've been so thoroughly shielded from the pain that the old status quo has persisted.

 

Anyhow - at the end of the day, I just don't think you can make the same "systemic risk" argument on behalf of the guy with the neg-am, I/O, pay-option ARM on his McMansion. Perhaps that's not the way things out to be, but that's the way they are.

[Hugh Conway]

Anyhow - at the end of the day, I just don't think you can make the same "systemic risk" argument on behalf of the guy with the neg-am, I/O, pay-option ARM on his McMansion. Perhaps that's not the way things out to be, but that's the way they are.

 

I think it's a semantic argument.

 

"systemic risk" to me is people believing in the great realestate ponzi scheme that will make them rich so buying a $1.1million 2.5 bed home is a good investment guaranteed to appreciate when someone can rent a 1 bedroom closer to the beach for $900/mo. That is a great systemic risk

 

"pointsource risk" to me is people believing that BSC and company's like will ever be allowed to fail so there's no risk in being BSC or doing business with BSC.

 

The profit for point sources tend to be higher so they earn more ire from me.

[JayB]

Anyhow - at the end of the day, I just don't think you can make the same "systemic risk" argument on behalf of the guy with the neg-am, I/O, pay-option ARM on his McMansion. Perhaps that's not the way things out to be, but that's the way they are.

 

I think it's a semantic argument.

 

"systemic risk" to me is people believing in the great realestate ponzi scheme that will make them rich so buying a $1.1million 2.5 bed home is a good investment guaranteed to appreciate when someone can rent a 1 bedroom closer to the beach for $900/mo. That is a great systemic risk

 

"pointsource risk" to me is people believing that BSC and company's like will ever be allowed to fail so there's no risk in being BSC or doing business with BSC.

 

The profit for point sources tend to be higher so they earn more ire from me.

 

Uno Mas...

 

http://www.cepr.net/index.php/publications/reports/the-cost-of-maintaining-ownership-in-the-current-crisis/