OT walking away from mortgage

[Randy]

My take since I deal with this every day, much to my consternation right now.

Real estate is very much regional/market specific.  There are decent markets, and there are markets that are bad beyond belief.  Portland, Seattle, and Salt Lake are actually decent real estate markets right now, and have been for the past 1-1/2 years.  Miami, San Diego, Las Vegas, Phoenix are bad by historic proportions.
Housing starts have fallen nationwide from 2,000,000 in 2005 to a projected 850,000 this year, and potentially even less than that.  Nationally home prices have fallen on average to 2005 levels, and continue to fall.

What got us to this point?  There is one simple reason.  The Alan Greenspan led Federal Reserve cut the Fed Funds rate to 1% and then increased rates at much too slow of a pace of 0.25% every 6 weeks until they reached 5.25%.  This incredible amount of cheap money needed to find a place to go, and housing is where it went.  By only raising rates at such a slow pace, they extended the cheap money source for way to long. 

As this money flowed into the market, it drove speculative buying.  All manner of new mortgage instruments were created, and ARM's, and interest only loans were made available at very low rates, which increased the pool of potential buyers significantly.  As demand increased faster than supply, prices increased.  As prices increased, more homes were supplied, and new mortgage instruments were created to take advantage of the new supply, and more buyers were now able to buy homes, which increased demand which pushed prices higher, which in turn increased supply even more.  Suddenly a home was the best investment you could have, as it was appreciating at 10-20% a year, far better returns than the stock market. 

This lead to speculation, using some exotic mortgage instrument, which further drove the process.  The expectation was that with ever increasing home prices, you could refinance your mortgage, and the appraised value was now 20%-40% higher than you purchased at, which would allow you to move from subprime to prime, with a better rate etc. Eventually though there was a day of reckoning, when your ARM reset 3-4% higher, or your interest only loan required a balloon payment and a new mortgage.  Some people could not pull it off because they didn't get 20% to 40% appreciation, and they had to double their monthly payment or they would default.  Many defaulted, which suddenly changed the landscape.

Supply was now higher than demand, and when that is the case prices fall.  As prices fell, appraisals for comparable homes also fell, which caused more people who were needing refinance to find out that they were still subprime, and they could not afford the new mortgage payment, resulting in a default.  As more and more homeowners defaulted, this led to significant problems in the market for mortgage backed securities.  Portions of these bundled mortgages were now in default, so these securities were now worth less.  As more and more defaults happened these securities became worth less and less.  Eventually the credit ratings agencies needed to down grade these securities, forcing the holders of the paper to write them down.  This has led to billions and billions of $ written off.  This has also dried up the secondary market for mortgage backed securities.  The result is now it is incredibly hard to buy a home, because you cannot get financing.  This reduces demand, and if supply remains the same while demand falls, prices will fall.  As prices fall, then appraised values become less than the price of the home, meaning that it will move even prime borrowers into subprime.

We are not yet at the bottom of the housing mess, not by a long shot.  Presently there a large number of US Banks that have taken huge write downs, same with a number of Canadian, British, German, French, Swiss, and Aussie banks.  The first big melt down in August was because of Canadian, British and Swiss banks took huge write downs.  Who is missing in all of these write downs?  Who are two of the largest holders of US$?  China and Japan.  The Chinese have huge amounts of US$, and yet not a single Chinese bank has yet announced any write downs of mortgage backed securities.  Do you all believe that China has only been buying US Treasuries, and no US$ commercial paper???  Of course not.  They have a lot of these mortgage backed securities, and since their bankings system is not as transparent as ours we have no idea how much and how bad the debt is.  They have had massive fiscal stimulus going on in China for 8 years, much of it driven by the Beijing Olympics, which is this year.  That $80 billion fiscal stimulus is going to end.  Same with much of the other infrastructure investment that China has been spending.  At some point this huge flow will slow, and this bad commercial paper will flow to the top.  When it does there will be a big correction in China.  If the Chinese are no longer as willing to invest in mortgage backed paper, then there will be less money available to finance US housing, and demand and prices will change again.

I have witnessed the housing market rise in many areas -- it's simply the law of supply and demand.  Some areas became overinflated and people made a real killing -- some people are having a hard time unloading their homes in areas right now. 

When I moved to Vegas, I got there right as a flood of Cali residents sold their homes in Cali and moved to Vegas paying for their homes in Vegas with the cash they made in selling.  This drove up the real estate market but Vegas was one of the fastest growing cities at that time.  We made about a 10% profit when we sold after 4 years as a homeowner.  Vegas is still a fairly good market right now.

When I moved to the Seattle area, I went into sticker shock -- I was amazed at the price of homes even a hour from Seattle.  However, it was great for me -- after four years in Seattle, I netted a 25% profit on my home.  The area has struggled a bit but jobs continue to be available and the area is a real draw (both continentally and internationally).

I was offered a job in Merced, CA (but decided to take one back here close to family in the Midwest) and was amazed at what had happened with their real estate.  They were just opening a new college there and had experienced a 2% per month increase in real estate over the past two years at the time of my interview.  In 2 years, they had a 48% increase in real estate costs.  Why?  Because people couldn't afford homes in the bay area and were buying homes in Merced and commuting the 2-3 hours each way to work.  Amazing, isn't it?

We are seeing a real problem in our economy right now and the housing market only tells part of the story.  We are seeing families not being able to afford homes in some area (I had a job offer from the bay area and didn't even consider it after looking at real estate costs).  Part of the problem with the housing industry (foreclosures) come from a mix of those who tried to buy more house than they could afford by taking on types of mortgages that don't even make sense -- thinking about today without thinking about tomorrow.  There were also some banks making some really stupid loans and some mortgage companies offering mortgages that shouldn't be legal, IMO.  I know of a family who just lost their job -- I really feel sorry for them but it's really a mess of their own making.  They bought a home they couldn't afford and therefore got an adjustable mortgage -- when the rates went up, they couldn't afford the payments (they could barely afford the payments at the beginning with a 4% beginning adjustable rate).  The bank tried to work with them for 6 months but they finally had to foreclose.  The family got very angry at the bank for "not trying to make it work."  Anyway, there are stories like this all across the country.  There are also stories of people who got taken by the type of mortgage they were offered.  It's a mess.  I hate that the government feels like they have to "bail" out everyone -- I would like to see the government help out homeowners but I don't want to have to pay someone else's mortgage just because they decided to buy a house they couldn't afford.  There are many exceptions that I wouldn't mind helping with financially but there are a lot of people who were way beyond their 33% housing standard and it was dumb of banks to offer them the loan (and there are many who were at 33% at the beginning of an adjustable loan with a very low interest rate that was set to renew at 5 years).

It's a mess -- I just think when the government gets involved, it becomes a bigger mess.  When did we begin to assume that it was the government's job to fix our mess?  Probably the same time that we begin to say that people aren't responsible for their own actions (and the consequences that come with them).

[Lurker]

There was also another side driving all the exotic financing schemes...the investor side.  With interst rates so low and the stock amrket stuck inneutral investors were looking for solid returns on their money.  So they went into mortgage backed securities which were considered very safe.  Especially if backed by the quasi-government agencies like Freddie Mac and Freddie Mae.  Also VA backed loans.  The common thought was that people just don't give up their home that easily.  Even the teaser ARMs had higher interest rates from an investor point of view than any type of conventional savings (money mkt, CD).

Government involvement is not the answer.  The market still has sound fundamentals and should be allowed to shake out those that were stupid.  It will be a shame that some people lose their homes but then where were they before they bought more than they could afford?  Obviously not living on the streets.  Unless they lost their job at the same time (in which case they probably would have lost their home anyway) they still have the means to find shelter.  And speculators deserve nothing from the government...that is the whole thing about speculating - there is the chance it will go bad and you lose.  Speculating is just a fancy term for gambling.  If those people would have put all their money on the line in Vegas they wouldn't expect the govt to bail them out.  This isn't any different.

[rickortreat]

Ah, but it IS different, because the banks and mortgage companies acted irresponsibly when it came to establishing proper standards of credit worthiness.  And further the easy money that became available for these mortages didn't have to be created!

This is where things get a little complicated- but you need to understand this to understand why the government is culpable. 

In spite of all their statements about belief in free market, we don't have one.  Interest rates aren't based on supply and demand, they are based on models from the Federal Reserve.  These interest rates are the basis for most transactions in the country, as financing is part and parcel of large ticket items. (Not to mention credit cards)

Now cheap money - that is money that is easy to borrow and pay back is highly stimulative to an economy.  This is a well-known phenomenon. What is also known is that the economy adapts to the lower interest rates and continues to expand as long as more cheap money is available. The Fed knows this and they were the originators of the cheap (Below fair market rates for political reasons)

The only reason the cheap money went away, is because of the way the lenders covered their exposure to the earlier loans they gave out.  The UNREGULATED derivative market gave these lenders the ability not only to insure their loans, but use the performing loans as the basis to lend out even more.  For a given economy, their is an upward limit of consumption that can be maintained, depending on the ability of the consumers to continue to make payments.  Once a certain percentage can't make those payments- the bubble created by excessively accomodative finance starts to implode.

This is where we are on a national scale- all because the people responsible for the stability of the financial system were asleep at the wheel; or even worse actively engaged in fraud, selling contracts that they never had the wherewithal to cover, and relied on their models to believe they would never have to.
 
Now that there is concern about the safetey of these mortgages, the structured finance tools banks used to come up with additional money to loan no longer have a market.  The end of cheap money means the end of the bubble.

Inevitably home prices will slide until the economy grows enough to put credit worthy people into the available homes.  The question is, how many more homes were built than could be accommodated by the population.  Foreclosures bring the price of all homes in the neighborhood down.

It is true that real estated is a local phenomenon, and some markets are fairly stable.  But the entire system for real estate finance is national and it is dysfunctional.  Even places where the market is good, people are having trouble getting mortages now, which will only exacerbate the problem down the road.

Now I believe that you should be responsible for your own actions, so I am not in favor of government bailouts.  But what about the responsibility of lenders to ensure the money they lend is SAFE!  The bailouts will be proposed as helping homeowners, but what it will do is get the lenders off the hook, and that is why it seems likely that something will be done.

I would prefer they did nothing and allowed home prices to collapse.  It will enable me to get the property I want cheaper.

[ziggy]

Existing home in January are off 30% from 2005.

Median home price in 2006 was $222,000.
In January median home prices was $201,100.
That is a 9.4% drop median home prices.

Prices fell from December to January 2.85%, in ONE MONTH.

This situation is very bad, and we are a long ways from the bottom, not when you are still having these kind of monthly drops.  We are not in a housing recession, we are in a housing depression.

[rickortreat]

We're also in an economic recession, as a large part of the domestic economy was in real estate!  The US does not export enough to earn it's way out of this.  Prices in housing will have to come down to where salaries made by workers in the area can afford to buy.

The Financial world is falling apart at the seams- and if there actually was proper accounting, many of the parties would be declared bankrupt.

Get out of debt as much as possible, live within your means, and make sure you verify the solvency of the institutions where you keep your money.  If your bank declares bankruptsy, you will have a hard time getting your money right away!

The Stock Market should be crashing, but the authorities are intervening to keep it from going down further.  The market is very choppy in a narrow range. The Indu's or Dow Jones index is stuck below 12,500. 

When a financial bubble pops, the things that rose in the bubble loose value and go through a long period to come to a valuation the market can be comfortable with.  Because of the uncertain economic outlook, it doesn't appear that there will be a stabilization in the housing market for quite some time.

The entire economy of the past several years had a lot to do with credit creation and the increasing values in the areas where the lending occurred, primarily real-estate and the stock market.  Since there isn't a lot of additional credit coming into these markets, it is reasonable to assume that they will decline.  While goods and services coming from outside the US, can be expected to rise as the world adjusts to a poorer US.

[ziggy]

S&P: US Home Prices Down Sharply
Tuesday February 26, 11:11 am ET
Key Home Price Index Shows Record Declines in 2007, Double-Digit Drops in 8 Metro Areas

NEW YORK (AP) -- U.S. home prices dropped 8.9 percent in the final quarter of 2007 compared with a year ago, Standard & Poor's said Tuesday, the steepest decline in the 20-year history of its housing index.

"We reached a somber year-end for the housing market in 2007," said one of the index's creators Robert Shiller. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak."

The S&P/Case-Shiller home price indices, which include a quarterly index, a 20-city index and a 10-city index, reflect year-over-year declines in 17 metropolitan areas with double-digit declines in eight of them.

The 10-city index also set a record annual decline of 9.8 percent in December, while the 20-city index dropped 9.1 percent.

Home prices also plunged 5.4 percent from the previous three-month period, by far the largest quarter-to-quarter decline in the index's history. The previous record was the revised 1.8 percent drop in the third quarter of 2007.

The quarterly index tracks prices of existing-family homes nationwide compared with a year earlier.

Miami continues to lead the weakest markets, posting a 17.5 percent annual decline. Las Vegas and Phoenix followed with a 15.3 percent drop each. Los Angeles, San Diego, San Francisco, Detroit and Washington, D.C. all recorded double-digit annual declines.

Only three metro areas -- Charlotte, N.C., Portland, Ore., and Seattle -- showed year-over-year increases in prices, but Seattle's growth was up a slim 0.5 percent.

[ziggy]

The Fed talks about how they are being diligent on inflation, and then you see this kind of data, and you recognize that what they are saying to total bulls!*t.  We have a major inflation problem in the country, and cutting rates will only make it worse.  A recession as bad as it is, is nowhere near as bad as high inflation.  Getting both at the same time, because of reckless Fed actions, is a recipe for disaster.  Mark my words the Fed will ignore this data, say inflation is not a great concern, and cut rates 50 basis points in a couple of weeks.


From Haver Analytics
http://www.haver.com/
U.S. PPI Total & Core Strong
? Finished producer prices surged 1.0% during January following a 0.3% dip in December. The latest increase was triple Consensus expectations for a 0.3% rise. At an annual rate the PPI is up 13.5% during the last three months.

? Less food and energy this measure of core prices rose 0.4% and it was double expectations. At an annual rate core producer prices have risen 3.7% during the last three months.

? Energy prices made up half of December's decline with a 1.5% rise (+23.7% y/y). Gasoline prices rose 2.9% (48.1% y/y) after a 7.6% December drop. Home heating oil prices surged 8.5% (48.% y/y) and natural gas prices rose 0.7% (0.6% y/y) after five consecutive months of decline.

? Finished consumer food prices jumped 1.7% (8.2% y/y) after an upwardly revised 1.4% December surge. During the past three months food prices have risen at a 12.0% annual rate.

? Prices of core finished consumer goods rose 0.4% (2.7% y/y) lifted by a 0.8% rise (-0.5% y/y) in passenger car prices and a 0.4% (1.6%) gain in prices of household appliances. Core consumer nondurables prices were strong again and rose 0.4% (3.9% y/y). The three month gain in these prices is 3.9%. Pharmaceutical prices have been quite strong but apparel prices have been flat.

? Capital equipment prices also rose 0.4% (1.6% y/y) after a 0.1% December uptick. Heavy truck prices rose 0.4% (3.3% Y/Y) but prices for light trucks fell 0.2% (+0.2% y/y), down for the second consecutive month. 

? Intermediate goods prices surged 1.4% after a modest 0.2% December decline. Excluding food & energy prices also were strong. They posted a 0.8% increase led by strength in industrial chemical prices which have risen 40.7% (AR) over the last three months. Steel mill prices also have been strong but copper prices have been down.

? The crude materials PPI surged 2.5%, more than double the strong December rise. Crude energy materials prices jumped 1.8% (40.9% y/y). The core crude materials PPI surged 4.0% (21.0% y/y) as prices for iron & steel scrap as well as prices for aluminum scrap have been quite strong.

 

By Tom Moeller


   

[Randy]

It's a tough climate for the US but we have been asking for this for YEARS!  

Some of the areas that have the toughest hit are those areas that were overinflated -- you know that has to end at some point.  And there are many other factors that have added to this:  
1) loss of middle management jobs in the US (big companies continue to pay more to top management and get rid of middle management in order to do so);
2) stupid, stupid, stupid mortgage practices (by both lenders and borrowers).  Lenders have made stupid loans without really following the formula they put into place and some lenders have used mortgages that shouldn't even be legal, IMO.  Lenders not only loan money to people to buy houses but allow them to max out the mortgage value.  They pay little attention to the fact that the borrowers have maxed out their spending capital and are using credit to pay their monthly bills.  Borrowers have also made some horrible decisions by taking mortgages with balloon payments, adjustable interest, etc. just in order to purchase a house that they can't afford.
3) the rise if monthly food/gas costs -- fossil fuel prices have gone up while the US has chosen to talk rhetoric instead of finding alternative energy sources.  Too much lobby money goes to keep our country dependent on fossil fuel and neither side (dem or rep) really is interested in curing this problem -- they just keep putting political bandaids on the issue.  The latest laughable fix is ethanol -- this is just the latest in a long laughable bandaids for the crises we find ourselves in -- the push for ethanol has caused all of our food products to rise (anything made with grain -- which includes dairy, beef, etc.) and while ethanol burns cleaner in vehicals, I question whether the entire process of making ethanol is any more "green" friendly than fossil fuels.  The process to make ethanol is more complex and longer and it not only creates probably as much environmental problems as it helps -- in addition to use LARGE quantities of water (which is becoming a more valuable resource with each passing year).
4) I could go on and on about different topics -- about the outsourcing of jobs to other countries -- about the horrendous import/export imbalance that continues to exist in our country -- about the ridiculous amount of money spent and earned in the pharmaceutical industry -- about the ridiculous number of huge lawsuits filed and won each year that drive up insurance rates.

I think our country is in a place that we aren't going to fix based on the ramblings and maneuverings of politicians.  I have little hope that anyone running, at this point, will really make much difference in the way things are going.  We seem insistent about bailing out every individual in our country (and every country in our world) and people aren't learning much in the process.  Healthcare takes up more and more of the average persons salary and cover less and less every year.  But our country provides those who make less with free healthcare -- which of course WE pay for in the long run (so we pay for healthcare more than once).  

Things are pretty dismal but I don't think we are going to help anything by simply bailing people out for making stupid decisions with their money.  All we will do is enable them to make some more stupid decisions with OUR money!

[rickortreat]

Randy, you are absolutely right that bailing them out will only further encourage the behavior.

The US has a systemic problem- it is no longer earning it's way in the world.  The flow of goods and services is not equal or in balance.  The problem is the trade policies and economic policies aren't facilitating a stable economic environment.

The US could be entirely self-sufficient if it chose to be.  Considering that when we deal with the rest of the world, we keep getting poorer, it might be a good idea.

[ziggy]

3) the rise if monthly food/gas costs -- fossil fuel prices have gone up while the US has chosen to talk rhetoric instead of finding alternative energy sources.  Too much lobby money goes to keep our country dependent on fossil fuel and neither side (dem or rep) really is interested in curing this problem -- they just keep putting political bandaids on the issue.  The latest laughable fix is ethanol -- this is just the latest in a long laughable bandaids for the crises we find ourselves in -- the push for ethanol has caused all of our food products to rise (anything made with grain -- which includes dairy, beef, etc.) and while ethanol burns cleaner in vehicals, I question whether the entire process of making ethanol is any more "green" friendly than fossil fuels.  The process to make ethanol is more complex and longer and it not only creates probably as much environmental problems as it helps -- in addition to use LARGE quantities of water (which is becoming a more valuable resource with each passing year).

The increase in the price of oil is one of the biggest frustrations I have with what is going on today.  We are told over and over and over that the price of oil is being driven by excess demand, mainly China and India, and a falling supply.  This is an absolute fraud.
The price of oil is being driven by excessive monetary inflation in the US, driven by reckless monetary policy at the Fed, of cutting rates too low, not raising them high enough and now aggressively cutting rates today.  Compare oil prices in 2002 to today, and look at the value of the US$ against every major currency in the world, over the same time frame. 
The US$ has dropped like a rock against every major currency in the world.  The Euro, the Canadian $, the Swiss Franc, the Aussie $, the NZ$, the Brazilian Real, the Chilean Peso etc.  Oil is traded in US$, so if you consider the price of oil in Aussie $ for instance, converted through US$, you see a change from say $30 to $45.  The difference between $45 oil and $100 oil is all about the weak US$ because of excessive liquidity from an over accommodating US Fed.  Our problem with oil is because of the Fed monetary policy.

The Feds actions has caused an oil price shock, which has lead to stage two actions which are creating price shock in all sorts of other commodities.  The most obvious is ethanol, which has driven corn prices higher which has driven meat and dairy higher.  We are taking a less efficient fuel source in ethanol, and using it to replace a artificially high price in a better fuel source in oil, all as a result of excessive liquidity because of Fed actions.

[jn]

Yours truly will be one of the people wading through the mountain of lawsuits pictured herein.  As the article states, default cases are skyrocketing right now.  I've been at this particular job for about 8 years now and the volume of cases has been unreal.  The dot com bubble bursting was absolutely nothing compared to what is going on right now. 

http://www.startribune.com/local/15907357.html

[Randy]

See. this is EXACTLY my point -- a guy decides he can't afford his current mortgage rate and so he takes out an adjustable rate mortgage and then gets MAD because the interest jumps up?  Duh, it was at a fantastic low -- most people who stopped to think about it would have realized that it was going to go up -- all the indicators were there. 

So then what does he do?  He starts spending money in credit cards that he also can't pay.  And then he stops paying everything altogether realizing that he is going to have to file bankruptcy and that means -- yep, you and I get to pay the bill!

Then let's look and see what will happen -- he will continue to receive as many credit card applications and he is willing to fill out.

Banks have made some really stupid loans and the credit cards are one of the worst.  Most people are living $100 beyond their income and living on credit.  I've heard that 60% of the people in this country are three paychecks away from bankruptcy.  That's dumbfounding, IMO. 

Banks and lenders have been as stupid as the consumers -- and somehow it's up to those who have been more responsible to bail them out.  IMO, this is going to become a weight around the necks of those of us who are in the middle income bracket that is going to cause us to drown.

One of these days we are going to realize that people (and businesses) need to be held responsible for their actions and allow them to experience the natural consequences of their actions.

[ziggy]

How insane is this?  Has Bernanke gone completely off his rocker?  I am sorry, but when I read this I went completely off the deep end.  This is simply a bailout of the banking and financial service sector, and this will do far more damage to the US economy than just about anything I can think of.  With all the debt this country has, to even consider this type of proposition is absolute madness, and I mean that in the harshest terms possible.


Bernanke Calls Plan to Buy Mortgages `Worthwhile' (Update2)

By Alison Vekshin

Feb. 27 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said it's ``worthwhile'' to consider letting the federal government buy distressed mortgages if the worst housing slump in a quarter century deepens.

``I think that it is worthwhile to be thinking about possible approaches one might take if the housing situation were to get much worse,'' Bernanke said today in response to a question during his semiannual appearance before the House Financial Services Committee in Washington.

The Fed chairman acknowledged regulators made ``mistakes'' in mortgage-market oversight and said he is working ``very hard'' to address the subprime-mortgage crisis. The Fed is also developing rules to improve consumer protection against ``unfair and deceptive'' credit-card practices, Bernanke said.

Taking note of the call for increased safeguards, committee Chairman Barney Frank lauded Bernanke for ``a very significant change'' in policy from his predecessor, Alan Greenspan. Frank criticized the Fed last year for failing to use its authority to write consumer-protection rules, and won House passage of a plan to extend those powers to two other bank regulators.

Frank, a Massachusetts Democrat, yesterday unveiled a $15 billion proposal that would let the government buy loans to help as many as 1 million struggling homeowners.

Bernanke said he supports addressing the housing slump through private-sector efforts, reforming the Federal Housing Administration to refinance troubled mortgages and improving oversight of Fannie Mae and Freddie Mac, the government-backed companies that are the biggest buyers of U.S. mortgages.

`Different Alternatives'

``We need to be thinking about different alternatives and preparing for contingencies,'' Bernanke said in response to a question about the mortgage-purchase plan.

Separately, Bernanke said the Fed will propose new rules to curb abuses by credit-card issuers ``this spring,'' using its authority under the Federal Trade Commission Act.

``We are actively reviewing potentially unfair and deceptive practices by issuers of credit cards,'' Bernanke said.

He said the Fed plans to finish the rules this year along with steps requiring card issuers to give consumers more notice before increasing interest rates or fees.

The central bank also will move by July to bolster consumer protections in mortgage lending, Bernanke said today.

The mortgage-lending rules were proposed by the Fed in December after Senate Banking Committee Chairman Christopher Dodd demanded the agency use its authority under a 1994 law to develop new consumer protections. The rules would ban low- documentation loans, limit penalties for borrowers who prepay debts and require lenders to determine whether borrowers can repay.

Foreclosure-Prevention Plan

Bernanke criticized a foreclosure-prevention measure that would let judges modify mortgages in bankruptcy proceedings.

The plan, part of legislation Senate Democrats aim to advance this week, would ``have some conflicting effects'' and lead to higher mortgage rates, Bernanke said.

[rickortreat]

The problem with doing nothing is that it will force a lot of people out of their homes, which will increase the vacant housing stock, which will in turn, lower the cost of available housing to balance supply and demand.

This is the only real economic solution to a bubble - prices collapse to a sustainable level.

This is why you need to prevent bubbles from occurring in the first place- they cause massive harm to people caught with the wrong assets at the wrong time, and rewards speculative behavior at the expense of more productive activities.

I have no problem seeing all these people made homeless and all of these bankers ending up without jobs.  But this will lower the tax base and undermine the rest of the economy.  Politically it is suicide to put that many people out of their homes and jobs.  So they will talk about it and talk about it, but there is no practical way to deal with the problem of people not having enough money to pay for the things they bought except to help them find jobs by stimulating the economy.

It's hard to pay a mortgage when you don't have a job.  Fewer jobs means fewer homes can have their debt serviced.  In a declining economy with fewer jobs, it is axiomatic that house prices will come down.

[ziggy]

The problem with doing nothing is that it will force a lot of people out of their homes, which will increase the vacant housing stock, which will in turn, lower the cost of available housing to balance supply and demand.

This is the only real economic solution to a bubble - prices collapse to a sustainable level.

This is why you need to prevent bubbles from occurring in the first place- they cause massive harm to people caught with the wrong assets at the wrong time, and rewards speculative behavior at the expense of more productive activities.

I have no problem seeing all these people made homeless and all of these bankers ending up without jobs.  But this will lower the tax base and undermine the rest of the economy.  Politically it is suicide to put that many people out of their homes and jobs.  So they will talk about it and talk about it, but there is no practical way to deal with the problem of people not having enough money to pay for the things they bought except to help them find jobs by stimulating the economy.

It's hard to pay a mortgage when you don't have a job.  Fewer jobs means fewer homes can have their debt serviced.  In a declining economy with fewer jobs, it is axiomatic that house prices will come down.

I understand your point Rick and I am not promoting the idea of putting hundreds of thousands of people out on the streets.  What has to happen, is the owners of the mortgage securities have to see the value of these assets decline.  This reduction doesn't mean that people will be put out on the street.  The owners of the securities, will lose more if they force people out on the streets and they know it.  It is much better for them to renegotiate these deals, that will work for everyone, and homeowners won't be kicked out, and the security holders will just hold a somewhat less valuable asset.