Coming HELOC crisis.

What has been almost completely overlooked by the media is the enormous number of properties with second liens. There are still nearly 12 million home equity lines of credit (HELOC) outstanding. It’s safe to say that 98 percent or more of these properties are underwater. Roughly 30 percent of all HELOCs were originated in
California. There are millions of owners there with HELOC balances in excess of $100,000.

The HELOC boom began in 2003. Most of these revolving lines of credit were interest-only loans for the first ten years. After that, they convert into 15-year fully amortizing loans. This means that beginning next year, these loans start to transform into a fully-amortizing loan. The number of HELOCs which do this increases in 2014 and even more in 2015 and 2016.

What will these homeowners do when their HELOC payment soars from a few hundred dollars per month to more than $1,000. The monthly payments that will go into effect in California are mind-boggling.

Read more: http://www.businessinsider.com/another-housing-collapse-is-coming-soon-2012-5#ixzz20dSZMFxL

There will obviously have to be mortgage modifications on a massive scale (and I'm not talking about the bullshit "modifications" that banks have been doing for many distressed homeowners, which are really just refinances by another name).

If Chase can survive losing $4.8 billion on a single trading loss, they can certainly take a hit on this. It's about time they paid for their mistakes.

There's an awful lot of people who tacked on heloc debt to their homes, many of which can't refinance. Since a 2nd lien is a lien, it would be ironic if they lost their home not due to heir 1st lien but the 2nd.

>If Chase can survive losing $4.8 billion on a single trading loss, they can certainly take a hit on this. It's about time they paid for their mistakes.

Uh oh, they've upset Matt now. Bring out your inflatable rat. http://kellyannsenyei.com/2009/03/27/the-art-of-picketing-new-emphasis-old-tactic/

It's not an inflatable rat; Matthew's from Pittsburg(h): http://www.nytimes.com/2012/07/15/magazine/bronx-economy.html

the banks will pretend and extend or is that pretend extend

I don't think riversiderz understands what ironic iz...

It's not ironic the 237th and the smallest hit of crack killed Whitney Houston, nor is it HELOC #4 that sank a "bubble" owner.

What is ironic and hypocritical is the fact the same riverturd points to all the ways of RE BUBBLE, but believes his COOP in NYC RE WILL NEVER DECREASE!

Like Sandusky saying he's trying to mold young boys into outstanding MEN. Mold away RIVERTURD.

> There will obviously have to be mortgage modifications on a massive scale

it's a much better deal for taxpayers to let those that took on debt pay for it as they are supposed to or default if they cannot do so. the GSE came to the same conclusion when asked about doing mods. it invites bad behavior, it's too expensive and already there's the mechanism to deal with debtors that cannot pay: DEFAULT.

besides, those that default send the right message to all of us down the road: be careful when taking on debt! looks easy on the beginning till the bills come due. amazing people forget this. that way we'll postpone the next credit bubble. that's a great positive externality imho.

agree 1000% w/what you said notadmin. The only way to clamp down on speculation is to allow for failure and spectacular failure, most importantly. Otherwise, if there are no consequences to rampant speculation, then it not only sends the wrong message to go ahead and bet the farm because losses are publicized while profits are privatized but it's ok to repeat the same mistake over and over again. If you don't suffer the risk of losses from speculation while reaping all the rewards, would you stop speculating ?

Capitalism requires responsibility, but notadmin and st33 are looking in the wrong direction. The irresponsible here are the banks and they are the ones who must be required to face the consequences of their actions.

Very few people are capable of determining what is "too much" debt to take on. If the bank, which is supposed to be in the business of deciding if you can afford it and to take the loss if you don't pay, says you can afford it, how many people have the tools to say "no, you are wrong"?

If you actually want to prevent future debt explosions, you need to discipline the professionals, not the amateurs: the lenders, not the borrowers. Forcing the lenders to take losses for their irresponsible loans would create the right incentives. Not incidentally, by freeing up borrowers from the overhang of unsustainable debt, it would allow them to get back to spending, thus creating jobs for the rest of us.

This is the law in business loans, for precisely this reason. For a century, bankruptcy law has allowed a borrower to force lenders to give up a security interest that is no longer backed by value. (The rules for homeowners were changed just a few years ago, after massive lobbying by the banks who claimed that making them irresponsible would reduce interest rates). We should give ordinary people the same rights that we give business. If the home's value has declined to the point where the second lien has no backing, the homeowner -- just like a business -- should be allowed to extinguish it in reorganization. It's worthless now; force the banks to clean up the mess they made now, instead of making zombies out of the borrowers and lenders alike.

The current system allows banks, instead, to hold homeowners as indentured servants, required to make payments on a loan that is no longer providing any value. This inflicts pointless injury on the economy in order to punish debtors who were screwed by the housing bubble, its collapse and/or the recession that resulted. If a cram-down would help some people who borrowed their way to temporary prosperity, that's unfair to those who were only hurt by the housing bubble. But at least they -- unlike the bailout bank bonus babies -- aren't the people who caused problem in the first place.

anyway, the main issues society has to deal with is the fact that home prices are still high with respect to disposable income of the young 1st time home buyer. letting this clean up process get prices to where incomes are is something to celebrate, not to prevent. the other one, imho that created the past homeownership madness, is that households don't save enough and are not, for the most part, financially literate yet to know how to make investment decisions other than "buying a home". which shouldn't even be considered "investment" by now, but "consumption". the young need liquid investable assets that enhance mobility, enough with overpriced money pits. my 2 cents.

> Very few people are capable of determining what is "too much" debt to take on.

is that's true, then debt should be available only to the very few that can pass that requirement. let's face it, if people didn't stop at getting into too much debt was because they took for granted than a greater fool will show up and bid even higher prices when putting the money pit on sale. that's gambling. if you want to make these people whole, that's fine. sure they will be glad to accept your check.

unfortunately it's not the best route for the taxpayers though. those that argue for it are for the most part homeowners themselves that want to keep their own home prices high. they have a bested interest in using other people's money for that purpose. my take is that if all homeowners share this view, then install a special tax from current homeowners to homeowners that cannot pay their debts, call it if you want: "cause homeownership should always be a great deal! no matter how excessive was the price paid". add that tax onto property taxes to make it easy to collect.

> The current system allows banks, instead, to hold homeowners as indentured servants, required to make payments on a loan that is no longer providing any value.

excuse me? any value? again you are assuming that buyers have a right not to lose $ on their purchase. homeowners are paying the debt they signed up for, not more. banks lose when the collateral doesn't cover the entire amount of the loan too. but it beats letting the buyer in the house for +3 years without making any mtg payment (nor property tax payments). the deal they signed up for so far has never been: "your mtg is always below your home's mkt value so that homeownership is always a money making proposition".

> If you actually want to prevent future debt explosions, you need to discipline the professionals, not the amateurs: the lenders, not the borrowers. Forcing the lenders to take losses for their irresponsible loans would create the right incentives. Not incidentally, by freeing up borrowers from the overhang of unsustainable debt, it would allow them to get back to spending, thus creating jobs for the rest of us.

again, banks do take losses when they have to REO. what you are advocating for is a breach of contract in which irresponsable consumers get out of the hook and learn the next time: "hey, in that NINJA loan i should have inflated my income by 6, not only 3 times!". again, if you and all homeowners think it's the right thing to do, then go ahead and pay for it with a special tax on homeowners.

taxing young renters that didn't drink the kool-aid to support those that bid up prices way above what they should have been so that prices don't drop as they should is a transfer in the wrong direction. if anything, let's give plenty of $$$ and kudos to those brave enough to stay on the sidelines when everybody was screaming: "buy as big a house you can! renting is for losers". well, let's allow homeownership to suck for as long as it needs to, we will all become more financially savvy thanks to it.

> For a century, bankruptcy law has allowed a borrower to force lenders to give up a security interest that is no longer backed by value.

sure, it's call "default" and bankruptcy process. that's what it's available for home-debtors through the foreclosure process. are you aware that when a public company files for bankruptcy shareholders (ie: OWNERS) lose ownership?

i'm afraid you think that asset value risk is assumed by the creditor, not so! it's assumed by the owner/buyer of the asset. guess many people didn't contemplate at all the fact that real estate is cyclical and it mean reverts to where incomes are. we all wish the optimists wouldn't have bid up prices so out of whack with stagnant incomes. this behavior hurt everybody, not only those that need to go through the foreclosure pipeline. weird how you want to reward this reckless behavior.

I agree that the housing bubble was and remains an unmitigated social disaster. But freeing the banks to profiteer is a key part of how it happened, and continuing down that path isn't going to prevent it from happening again.

In contrast, the New Deal rules worked pretty well for the half-century they were in effect. When banks are held to their contracts, they don't lend to people who can't pay and they limit how much fuel they put in bubbles. And unlike the borrowers, they are actually capable of making this calculation and highly paid to do it.

Of course I think that asset value risk should be assumed by lenders. That's what they are paid to do. If they aren't going to evaluate and assume risk, they should lend at the T-bill rate.

The banks' success in shifting risk to people who are unable to calculate (or diversify) is the core of our problem today. Before worrying that some median income family that has not had a real income increase in a full generation might actually get to join in the benefits of economic growth, maybe we should require that the highly paid elite do what it is paid to do.

And no, strategic bankruptcy does not require the shareholders (who own shares, not the corporation) to lose their interest in the firm and in a well-planned one, they often don't. It's usually the union contracts and middle class pension contracts that are breached, instead.

(But I notice from the other thread that you don't think pension contracts should be observed, even though their beneficiaries obviously depended on them in complete good faith -- do you think contracts are only sacred when they benefit bankers, or is it that you generally think the purpose of law is to enable the "savvy" and sophisticated to steal from the naive?)

Bring back the poor farm

Or debtors prison

> Capitalism requires responsibility, but notadmin and st33 are looking in the wrong direction. The irresponsible here are the banks and they are the ones who must be required to face the consequences of their actions.

Agree, UNfinanceguy, the banks need to face the music too besides the speculators. In other words, all actors acting in this tragedy.

>We should give ordinary people the same rights that we give business. If the home's value has declined to the point where the second lien has no backing, the homeowner -- just like a business -- should be allowed to extinguish it in reorganization.

While on one way hand you rile at the banks for irresponsible lending, on the other hand, you give the speculators, the home "owner" with the SECOND lien, a free pass ?

UNfinanceguy, are you a speculator ?

> It's worthless now; force the banks to clean up the mess they made now, instead of making zombies out of the borrowers and lenders alike.

The banks AND the borrowers SHOULD BE ZOMBIEs and rightfully so. Both entered into a SPECULATIVE transaction gone awry and now you want the banks to eat all the losses while the speculator get to walk away scot-free ? That makes absolutely no sense

UNfinanceguy, are you a speculator ?

> The current system allows banks, instead, to hold homeowners as indentured servants, required to make payments on a loan that is no longer providing any value.

Not "no longer providing any value", "providing MUCH, MUCH, MUCH lower value." Yes, there are consequences and all actors involved should face the music. Otherwise, how do you prevent this tragedy from occurring again if banks and speculators are allowed a free pass ? You can't.

> This inflicts pointless injury on the economy in order to punish debtors who were screwed by the housing bubble, its collapse and/or the recession that resulted.

No one forced them to buy a McMansion with NINJA loans! They knew it was too good to be true and still they took part in the frenzy and speculation. The buyers were part and parcel of the housing bubble! They facilitated and encouraged the bubble. Why should these buyers get a free pass ?

Again, UNfinanceguy, are you a speculator ?

> If a cram-down would help some people who borrowed their way to temporary prosperity, that's unfair to those who were only hurt by the housing bubble. But at least they -- unlike the bailout bank bonus babies -- aren't the people who caused problem in the first place.

You are saying the buyers during the bubble years DID NOT caused the problem ? Are you serious UNfinanceguy ?

> weird how you want to reward this reckless behavior.

notadmin, my point exactly! He wants to give the bubble buyers, the speculators, a free pass while he riles on the bank for making the irresponsible lending. As I said, no one "forced" the speculators to buy that McMansion or 800K studio with NINJA loans!! The banks and the bubble buyers should face the music. Asking the banks to bear all the burden is as insane as saying the bubble buyers didn't caused the problem. The banks, through very, very lose lending standards, facilitated the bubble while the bubble buyers took the baton and ran through break walls. Only now do they realize they are bleeding from head to toe and every imaginable orifice.

> But freeing the banks to profiteer is a key part of how it happened, and continuing down that path isn't going to prevent it from happening again.

And allowing the speculators to walk away scot-free, as in [If the home's value has declined to the point where the second lien has no backing, the homeowner -- just like a business -- should be allowed to extinguish it in reorganization. It's worthless now; ], would stop it from happening again ?

Are you delusional UNfinanceguy ? Are you a speculator ?

> The banks' success in shifting risk to people who are unable to calculate (or diversify) is the core of our problem today.

It's part of the problem, it isn't the core of the problem. The core of the problem is both banks and speculators, the bubble buyers, engaged in speculative behaviors. Both should face the music, not just the banks.

"both should face the music, not just the banks."

exactly.

both should be responsible for the behavior. and not expect to be coddled by the government.

if we had a stronger deterrence, this behavior may have been prevented

FG, I'm all for taking banks to the woodshed. But remember that the ultimate guarantor of mortgages has always been the US government. Through Freddie & Fannie, but also through FDIC.

Banks do not have anywhere near enough capital to take the hit on write-downs. You want to argue for Citi wiping out $100B of equity, fine. But what about the rest?

Your choices for payment of moneys owed are the banks, the borrower, or the taxpayer. The banks alone do not have enough money, so why do you prefer the taxpayer over the borrower?

> The banks alone do not have enough money, so why do you prefer the taxpayer over the borrower?

B/c most likely UNfinanceguy was one of those borrowers :) ? I can't think of any other reason to have taxpayers, himself included, take on the burden of paying off someone else's debt bill unless that someone else is a debtor himself. At least the debt is now "shared" instead of solely the debtor's responsible while all the while if the "speculation" paid off, the taxpayer will see absolutely 0 cents of that profit :) What a nice deal ay UNfinanceguy :)

The solution is simple: The 2nd lien holder either forecloses, obtains a deficiency judgment and collects as unsecured or writes-off their balance as noncollectable if there's no money there or they don't have perfected docs allowing them to go after a claim. Doesn't matter if the loan is held by a bank , a trust or another party.

So my more mindane question is how will this affect nyc/metro area. What % of mortgages in this area have heloc loans tied to them. I suspect very few in nyc, since co-op boards don't usually allow for that kind of refinancing. Don't know if condos are eligible for them. Is it really true that 98% of these loans were in California. Also, which segment of the market has the highest % of these loans? I supect that it is the very low end. Anyone with more substantive info?

mym,

Someone posted this video. It answers a lot of your questions, and depending on which side of the fence you are sitting, you may or may not like the answers or facts. Watch the video.

http://ochousingnews.com/news/house-prices-in-new-england-crashing

str33, your crude materialist-determinism is like something out of a Stalinist rant of 75 years ago. Not every argument is based purely in crude self-interest.

Inonada:

A bubble of this size is inevitably going to cause a great deal of pain. The question is how we minimize it, how we avoid doing it again, and how we spread it around. I'm in favor of spreading it via taxpayers when that reduces the total amount of pain and increases the fairness. Generally, that means following capitalist norms rather than the cronyist norms that some of the comments above are proposing.

The first loss should go to the banks, their shareholders, their managers and their uninsured creditors. These are the people who were paid to evaluate the risk and take it. These institutions and their investors failed miserably. We need banks, but we don't need these bankers or these bank investors. Wipe them out, including the creditors the FDIC so assiduously protected in the last crisis. The Greenspan Put is a disaster and the Geitner version is no better.

But we need banks and that means we need to protect ordinary depositors. No need to go back to the old days of self-fulfilling panics and bank runs. So FDIC ought to protect FDIC insured depositors. If that causes problems at the FDIC, clean house there before the taxpayers recapitalize it: obviously it failed to supervise the banks and to properly charge them for the risks they were taking. This will cost the taxpayers, but way less than any alternative. Especially if the recapitalized banks were regulated to stop them from doing this again -- this is, after all, not the first time they've blown up the financial world since we started dismantling the New Deal system.

Now the question is what about all the people who overpaid for their houses, or cashed out because they thought that the bubble was real (as Greenspan and 95% of the private experts were telling them), and are now in trouble because house prices have dropped, wiping out their equity, and they've lost their jobs in the recession or due to health or age.

A whole generation lost the core of their retirement savings just after Wall Street and its Congressional servants invited their employers to kill the pension plans their parents had, replaced them with too small 401ks and then bubbled them away. Fortunately, Bush's plan to do the same thing to Social Security hasn't passed yet, although it is still in the Simpson-Bowles plan.

St33 calls them "speculators" and no doubt some were. However, in the fact-based world, it is obvious that most were ordinary Americans trying to follow the rules as taught by our leaders and financial advisors: homeownership is the path to respectability and security. They were victims of a scam. Like all victims of a scam, they aren't entirely attractive as a group: it is hard to be the victim of a scam without a certain degree of greed and/or blindness (see, e.g., Mercer or LICC's calculations of why buying into the bubble is good investment, or the many posts calling renters "fools" or worse). And while str33 and notadmin seem to think they got away with something, the reality is they are trapped in houses they can't afford -- not exactly nirvana.

Blaming the victim is ugly. But even if you disagree that they are victims, punishing them even more isn't worth the cost to the rest of us.

So long as we have 20% or so of the population stuck with underwater mortgages:
1. underwater homeowners can't move to be near jobs, so we lose the flexible labor market that is the one competitive advantage we still have over the social democracies.
2. underwater homeowners can't retire, so the younger generation can't take their jobs and families can't take large houses occupied by empty-nesters, thus creating a wasteful and unnecessary shortage of housing.
3. underwater homeowners can't refinance, so the Fed's efforts to reduce the debt overhang by lowering interest rates doesn't help them but instead becomes a windfall for the very banks that shouldn't have lent them money in the first place,
4. the income underwater homeowners do have is being sucked up to the banks and into the upper echelons, which (aside from increasing inequality and the already excessive political power of the banks and their investors) acts as a negative multiplier -- it reduces aggregate demand and keeps us in our low-demand recessionary trap, and
5. they don't sell, thus keeping housing prices high and inviting another generation of younger people to overpay.

This costs the taxpayers -- especially taxpayers who want to buy houses, are in the job market or hoping for promotions to more senior positions, have to support relatives who are unemployed or saw their retirement plans go up in smoke, want to create businesses that might compete with unduly politically influential established businesses, or have empathy for Americans who have any of these issues -- far more than would forcing some incompetent banks into FDIC receivership.

Allowing bankruptcy courts to write-down mortgages/HELOCs instead of creating trapped homeowners and useless banks isn't exactly a handout. The usual bankruptcy rule is that creditors that go unpaid are converted into equity holders. That could be done here too: let bankruptcy courts convert underwater mortgages into equity claims. No more interest payments on the underwater part. If the homeowner ever sells for a profit -- few speculators or real homeowners who bought during the latter half of the bubble ever will -- the bank can claim its share then. That's plenty of incentive for whatever portion of the future homeowner class will be affected by incentives.

As for real speculators, the big boys, of course, are already covered by these rules. Trump gave his failed speculations to his creditors and moved on to new things. The little ones mostly were and are wiped out. This isn't going to save them. In any event, there weren't enough of them to make a real difference -- if fixing the rules only for owner-occupants would make the envious happier, in the aggregate the cost wouldn't be very high.

Finally, don't forget the other victims of the bubble: those who didn't buy because prices went up too fast and they couldn't afford to jump in or were too young or too scared (or too sensible, in a small number of cases) to do so.

What they need is a functional housing market in which prices reflect marginal costs and a functional banking system that makes loans to qualified buyers buying fairly priced houses but stops lending when prices get frothy. Protecting the incumbent bankers or blaming the bubble on buyers who overpaid, as str33 and notadmin propose, does nothing to help. Crippling the economy doesn't either. They need the underwater owners to sell, and that isn't going to happen under the current rules.

>> What has been almost completely overlooked by the media is the enormous number of properties with second liens.

Riversider, this is a nutty statement, since this issue has been pretty widely tracked, even by "general interest" housing reporters (of which I've been one).

Google "HELOC problem" and one of the top five hits is an AOL real estate story from two years ago.

I don't know what media you're reading, but I'd suggest USA Today or Ilyce Glink for general interest, and maybe Lily Shum Leung at the San Diego U-T and Jon Prior at Housing Wire if you really have an appetite for this stuff.

ali r.
DG Neary Realty

PS: That long essay was just a rehash of Dean Baker, http://www.cepr.net/index.php/beat-the-press/ , who is the dean of this stuff, if you want to get it from a real expert.

> str33, your crude materialist-determinism is like something out of a Stalinist rant of 75 years ago. Not every argument is based purely in crude self-interest.

Come on financeguy, you have to admit, that was a logical conclusion! You rile against the banks but not the speculators ? Makes absolutely no sense :)

> St33 calls them "speculators" and no doubt some were. However, in the fact-based world, it is obvious that most were ordinary Americans trying to follow the rules as taught by our leaders and financial advisors: homeownership is the path to respectability and security.

In the fact-based world, financeguy, it is obvious "most" were speculators. Thanks to a fellow SE poster for posting this link, watch the video

http://ochousingnews.com/news/house-prices-in-new-england-crashing

I will save you the trouble, fast forward to around the 7:30 minute mark! Data from both the Fed & private institution, the presenter said 35% of all homes NATION-wide bought homes with MORE THAN ONE FIRST lien, worse (45%) for bubble areas like Nevada, CA, FL, etc, and started as early as 2000. If 35% or 45% DON'T CONSTITUTE speculators, WTF does ?

My advice, watch the video, get your fact straight!!!!

> And while str33 and notadmin seem to think they got away with something, the reality is they are trapped in houses they can't afford -- not exactly nirvana.

I don't wish anyone to be in that situation!!! But the fact of the matter is, most who bought, obviously NOT ALL of the bubble buyers, were speculators.

> Blaming the victim is ugly. But even if you disagree that they are victims, punishing them even more isn't worth the cost to the rest of us.

How can you call them victims if they signed NINJA loans and are living in McMansion ? OK, these same "victims" caused their fellow bubble buyers to pay more than what the house is worth! These same victims caused their fellow bubble buyers to remain "trapped" in their underwater homes. They made their beds and now you want IKEA to deliver a brand new one like nothing has happened ?

Makes absolutely no sense. We are debating whether their situation is causing hardship. There is no disagreement this is causing hardship but most were adults with a greedy mentality that they can own a McMansion for nothing! It's like a kid caught with his hand in the cookie jar and now the kids is crying foul that cookie jar was placed on the kitchen counter and not by the side-table so he can reach in more easily ? Can't have your cake and eat it too financeguy.

> What they need is a functional housing market in which prices reflect marginal costs and a functional banking system that makes loans to qualified buyers buying fairly priced houses but stops lending when prices get frothy. Protecting the incumbent bankers or blaming the bubble on buyers who overpaid, as str33 and notadmin propose, does nothing to help. Crippling the economy doesn't either. They need the underwater owners to sell, and that isn't going to happen under the current rules.

Watch the darn video!

More like the kid's parents and teachers were urging him to eat more cookies as a matter of health, patriotism and fundamental decency, repeating every day that the surest way to health (and to attract members of the opposite sex) is to eat more cookies. While changing the recipe to make it as tasty as possible, installing fans to waft the odor throughout the kid's neighborhood, and placing signs everywhere saying "this way to the cookies." And cutting back the size of his regular meals. And offering to pay him if he'd just eat up the cookies already. And calling him a fool and a loser for hesitating.

But in your view, it's all the kid's fault, and punishing the child (and protecting the cookie makers, etc.) is so important that we must beat him even if it means that the rest of the family misses our dinners too. Why?

> More like the kid's parents and teachers were urging him to eat more cookies as a matter of health, patriotism and fundamental decency, repeating every day that the surest way to health (and to attract members of the opposite sex) is to eat more cookies. While changing the recipe to make it as tasty as possible, installing fans to waft the odor throughout the kid's neighborhood, and placing signs everywhere saying "this way to the cookies." And cutting back the size of his regular meals. And offering to pay him if he'd just eat up the cookies already. And calling him a fool and a loser for hesitating.

financeguy, unlike your example, in real life, the kids are greedy adults who thought they can own a McMansion with NINJA loans. There is a big difference. The bubble buyers and speculators are NOT as INNOCENCE as you portray them to be.

> But in your view, it's all the kid's fault, and punishing the child (and protecting the cookie makers, etc.) is so important that we must beat him even if it means that the rest of the family misses our dinners too. Why?

And to take your argument to the illogical conclusion, when a driver (bubble buyers) buys a Ferrari (the McMansion) and drove the car onto the sidewalk injuring pedestrians, the driver can sue the car maker (banks) for making a fast car (giving out the loan) while no one but the driver was behind the wheel (signed that NINJA loan) and pressing the pedal to the metal (HELOCs to boot) ? Do you see the absurdity of your argument is ? Yes, the bank is to blame for the very lose lending standard but to say the driver are fault-less makes me asked my original question, are you one of these underwater speculators ?

so in your view everyone who is underwater on their mortgage was a speculator?

> Of course I think that asset value risk should be assumed by lenders. That's what they are paid to do. If they aren't going to evaluate and assume risk, they should lend at the T-bill rate.

Equity risk is always with the owner and shareholder, not directly the creditor. The creditor faces "credit risk" which basically means the risk of not getting paid back. When this happens, if collateral value fell below debt owed, the bank faces the risk of not being made full. The contractual obligation the borrower signs up for is for the loan amount, never the minimum between the loan amount and the collateral value. That's why the lion share of the risk of over-bidding for credit-based assets belongs to the borrower directly, to the creditor indirectly through impacts on recovery rates when credit risk went bad. I suggest you change your name from "financeguy" to "not-so-financeguy" if you don't understand this.

But honestly, it sounds to me that you bought into the narrative that "homeownership always pays, renting is for losers". That's BS. This lesson has to be learned the hard way. Till that doesn't sink in, the bubble is still with us.

except of course in non-recourse states and more importantly in commercial real estate transactions.

> so in your view everyone who is underwater on their mortgage was a speculator?

You have several different types of people underwater. There's those who bought homes for a tiny amount (with respect to what home prices are now), HELOCed like there was no tomorrow and used that $ for non-discretionary spending. That's speculating in the sense that they believed somebody down the road will be even more financially illiterate than themselves through willingness to pay for those non-house related bills. Those that HELOCed to do renovations that were thought of "investments that enhance home values" did the same thing.

Those that bought homes with a monthly carrying cost higher than what homes were renting for were also willing to spend more on a monthly basis speculating on again, again, the expectation that a bigger moron will come along. The definition of speculating is buying an asset due to the belief that it will go up in value enough to make a buck regardless of fundamentals (disposable incomes, comparable rents, cost of construction). So yes, for the most part, they were speculating.

Those the taxpayers should be concerned about are not the underwater guys that speculated and lost on their gamble, but those that fall behind in payments due to unemployment. If they in turn over-bid on homes, it's best to facilitate foreclosure and help with relocating costs to a cheaper rental or with family/friends. Unemployment risk is with the debtor too, I'm afraid that was also an optimistic mistake people made. Some of those that over-stated their incomes to get a bigger / more expensive homes might have thought that they will get to that high level of income soon. Debtors might over-estimate job security, even if they work in a discretionary sector.

Policy wise, taxpayers might be better served by making it illegal to lenders to provide more than 30% DTI ratios (including in Debt all seconds, HELOCs, not just the 1st). Maybe even a 25% DTI ratio limit on those that work in cyclical sectors. Also basing income on the lower of the last 2 federal income tax returns would be an improvement. Many of those that inflated their incomes were self-employed. Don't know how many observers realized, but allowing them to state income above what they report to the IRS is to condone and reward tax evasion.

Homeowners might not like this, as in their eyes it will help to bring prices down to where incomes are, but they should be reminded that they are taxpayers too. And as such, they are themselves guaranteeing most of the mortgages originated nowadays. It's not a good deal for them long-term to underwrite FHA-type loans, with 3% downpayments. Even if temporarily they help sustain the unsustainable prices. Down the road, the inevitable defaults will cost them dearly. Prices will revert to incomes no matter what. It's an act of futility to underwrite and not to foreclose in the hopes to sustain current home prices imho, akin to throwing good money after bad.

was that a yes or a no?

Why bring poor Sandusky into this?

He stands behind every member of his team...& means it!

"More like the kid's parents and teachers were urging him to eat more cookies as a matter of health, patriotism and fundamental decency"

The kid had cookies and carrots available. Some ate cookies, some went for carrots. Those that ate cookies bragged to those that ate carrots: "you are a loser! you don't understand the game!". Few years later, those that ate the cookies are obese and have diabetes. They complain "I didn't sign up for this!". Those that ate carrots are clearly better off while being asked compensation by cookie eaters. What should those that ate carrots do about it?

All they should do is to say: "learn your lesson, your wounds are self-inflicted, here are some carrots available to you". The losses from obesity and diabetes will stay with the cookie-eaters, it's part of the learning process. I tell you more, the kids of the cookie-eaters will grow smarter to the extend that their parents acknowledge their role as supposed to behave like victims. They will not repeat the mistake their parents made. They will make different ones, chances are, smaller. Financially speaking, it's hard to do worse than paying double or tripple as one should on the biggest purchase.

> The bubble buyers and speculators are NOT as INNOCENCE as you portray them to be.

I get it that they think they are victims being stuck in denial. But the over-bidding they engaged in with a smile was not harmless to those that did the math and hence had to opt for staying on the sidelines. Wonder why those on the sidelines don't blame them more openly for this.

but you still haven't answered the question: do you think that all underwater mortgages are a result of speculation?

Shorter notadmin:

Going forward, we should limit the scamsters slightly. But we should never forget that a scam is always the mark's fault. Long live Grifter Finance!

> But in your view, it's all the kid's fault, and punishing the child (and protecting the cookie makers, etc.)

assigning responsibility where it's due in the case of bubble-buyers and HELOC addicts doesn't mean agreeing with bailing out the banks that engaged in bubble-lending. in fact, breaking them up and allowing those that didn't engage in this behavior of crazy lending to reap the benefits after the crash would have been a good idea.

Shorter notadmin #2: Laws, like taxes, are for little people.

> I don't know what media you're reading, but I'd suggest USA Today or Ilyce Glink for general interest, and maybe Lily Shum Leung at the San Diego U-T and Jon Prior at Housing Wire if you really have an appetite for this stuff.

Thanks for these tips Ali!

"Still, “Live Richly” won out. The advertising campaign, which cost some $1 billion from 2001 to 2006, urged people to lighten up about money and helped persuade hundreds of thousands of Citi customers to take out home equity loans — that is, to borrow against their homes. As one of the ads proclaimed: “There’s got to be at least $25,000 hidden in your house. We can help you find it.”

http://www.nytimes.com/2008/08/15/business/15sell.html?pagewanted=all

What percentage of Americans own vs rent? What percentage of that group has a mortgage? Now what percentage of that group has a mortgage that is underwater?

Shocking that there is a debate about giving free money to a limited special interest group.

"You have several different types of people underwater. There's those who bought homes for a tiny amount (with respect to what home prices are now), HELOCed like there was no tomorrow and used that $ for non-discretionary spending. ... Those that bought homes with a monthly carrying cost higher than what homes were renting for were also willing to spend more on a monthly basis speculating on again, again, the expectation that a bigger moron will come along. The definition of speculating is buying an asset due to the belief that it will go up in value enough to make a buck regardless of fundamentals (disposable incomes, comparable rents, cost of construction). So yes, for the most part, they were speculating."

***

Actually, they weren't. MOST of those people you call "speculators" were paying a premium because they wanted to OWN THEIR OWN HOME, not because they were planning on flipping it and making a ton of money.

***

"Those the taxpayers should be concerned about are not the underwater guys that speculated and lost on their gamble, but those that fall behind in payments due to unemployment. If they in turn over-bid on homes, it's best to facilitate foreclosure and help with relocating costs to a cheaper rental or with family/friends. Unemployment risk is with the debtor too, I'm afraid that was also an optimistic mistake people made. Some of those that over-stated their incomes to get a bigger / more expensive homes might have thought that they will get to that high level of income soon. Debtors might over-estimate job security, even if they work in a discretionary sector."

***

Wrong again. The vast majority of people who fell into foreclosure because of unemployment did NOT overstate their incomes to get into homes they could not afford. They were just ordinary people who bought well within their means. Unfortunately, if you rely on a paycheck to survive in this world, NOTHING is "within your means" if you lose that paycheck for two years.

Matt's brilliant point is unemployment is bad. That's why he belongs to four unions.

moral of this story -- keep renting-- dead cat bounces-- housing prices have a lot further to fall in NYC/LI--

watch the video

> The kid had cookies and carrots available. Some ate cookies, some went for carrots. Those that ate cookies bragged to those that ate carrots: "you are a loser! you don't understand the game!". Few years later, those that ate the cookies are obese and have diabetes. They complain "I didn't sign up for this!". Those that ate carrots are clearly better off while being asked compensation by cookie eaters. What should those that ate carrots do about it?

Hahaha, simple, F*U cookie eater .. eat s**t and die :) You made the bed, now sleep in that rat and insect infested hole.

> it's hard to do worse than paying double or tripple as one should on the biggest purchase.

Could be a lot worse ... seriously

> I get it that they think they are victims being stuck in denial. But the over-bidding they engaged in with a smile was not harmless to those that did the math and hence had to opt for staying on the sidelines. Wonder why those on the sidelines don't blame them more openly for this.

Exactly notadmin, this is the mentality that is shameless and downright "criminal." Caught driving drunk and injured the innocence and now you want to blame the innocence for not avoiding your swirling car ? How idiotic or more appropriately, shameless ?

> Actually, they weren't. MOST of those people you call "speculators" were paying a premium because they wanted to OWN THEIR OWN HOME, not because they were planning on flipping it and making a ton of money.

Here we go! Playing the role of a victim! BULLSH*T .. if your unit appreciates at 100% in 2 years, F*U for saying you wouldn't have sold it for the gain! That's a blatant lie and you know it.

> Wrong again. The vast majority of people who fell into foreclosure because of unemployment did NOT overstate their incomes to get into homes they could not afford. They were just ordinary people who bought well within their means. Unfortunately, if you rely on a paycheck to survive in this world, NOTHING is "within your means" if you lose that paycheck for two years.

Playing the role of the victim again!! Knuckle head, 35% of all home NATIONWIDE in 06, that's NATIONWIDE, was bought with a 1st lien already!!! In other words, 1/3 of all the homes bot back in 06, NATIONWIDE, was for speculation! Anyone who said they are buying a 2nd home back them to LIVE is full of SH*T!

Here's the video with all the facts

http://www.youtube.com/watch?v=24ILTltr-W

Actually most people who took out subprime loans mortgages to pay back their loans. Borrower fraud and originator fraud are quite different. That doesn't mean the borrowers weren't stupid, but they either lied or took on too much debt under the mistaken belief they could/would pay it back. The mortgage brokers, lenders etc on the other hand didn't care or engaged in falsifying data for the purpose of selling that debt for more than it was worth. Even if they bought on speculation they thought they could flip and pay back.

And while the borrowers deserve the punishment of full recourse of the loan, those on the other side deserve the full recourse of the law should hey have falsified data or intended to commit fraud.

"The vast majority of people who fell into foreclosure because of unemployment did NOT overstate their incomes to get into homes they could not afford. They were just ordinary people who bought well within their means. Unfortunately, if you rely on a paycheck to survive in this world, NOTHING is "within your means" if you lose that paycheck for two years.

Playing the role of the victim again!! Knuckle head, 35% of all home NATIONWIDE in 06, that's NATIONWIDE, was bought with a 1st lien already!!! In other words, 1/3 of all the homes bot back in 06, NATIONWIDE, was for speculation! Anyone who said they are buying a 2nd home back them to LIVE is full of SH*T!"

***

Since you clearly don't understand math, I'll explain it to you.

If 35% of buyers used a second mortgage, that means 65% did NOT.

That's the MAJORITY of buyers, since 65 is bigger (substantially, at that), than 35.

See how that works?

> Since you clearly don't understand math, I'll explain it to you.
> If 35% of buyers used a second mortgage, that means 65% did NOT.
> That's the MAJORITY of buyers, since 65 is bigger (substantially, at that), than 35.
> See how that works?

Am I surprise by this nitpicking again ? In the bubble areas, 45% of the purchasers was bot with a 1st lien already. Close to enough now or no, it has to be 50.000000000000000000000000000001% to be consider a majority. I love it when all you have to go with is to nitpick some details.

Bottom line, folks who are underwater today, a MAJORITY of them knew what they were doing back that. They are where they are because of either greed or stupidity. I don't wish this hardship on anyone but this is part of life decisions. You make the bed, now sleep in it! Stop crying foul that you were fooled into buying that overprice studio because you weren't and you knew it. No one forced you to sign on that bottom line. Plenty of responsible people didn't and it's shameless to say that you were.

How does being stupid qualify as knowing what you're doing?

"Bottom line, folks who are underwater today, a MAJORITY of them knew what they were doing back that."

You have documentation to back this up, or you're just pulling it out of your ass again?

bottom line, a guy born in Hawaii (which was occupied by USA ILLEGALLY, thus it's NOT part of the USA) will bail out the flippers again, there won't be any heloc crisis at all

> Actually, they weren't. MOST of those people you call "speculators" were paying a premium because they wanted to OWN THEIR OWN HOME, not because they were planning on flipping it and making a ton of money.

if they weren't speculators they would be happy to make mtg payments on their homes even if their market values went under the amount their borrowed. guess not many are willing to be politically incorrect around here.

> moral of this story -- keep renting-- dead cat bounces-- housing prices have a lot further to fall in NYC/LI--

+1. renting might suck, but buying a house for a higher price than one should accept sucks even more!

a great lesson for many thanks to this bubble is that buyers are a key part of the price setting mechanism. if prices are high, buyers should say: "thanks, call me when you are ready to sell for 20% less, or 40% less... (or whatever it takes to drop it to DTI < 30%)". the more gullible buyers behave, the more pain they will endure down the road.

here many posters believe that those that participated in the over-bidding that lead to DTI > 30% are victims. even worse, those that walked away from crazy prices should make them whole, even if they had to stay on the sidelines due to the easiness these guys took on debt. funny i don't remember homeowners profiting from the bubble sharing their riches with renters. aren't they behaving like those disturbing bankers: "my profits are mine, my losses are ours"?

> Stop crying foul that you were fooled into buying that overprice studio because you weren't and you knew it. No one forced you to sign on that bottom line. Plenty of responsible people didn't and it's shameless to say that you were.

No kidding!!! Back in 2005 i openly asked who the hell was buying at those prices. the answer i've got was: "you don't know the game, renters is for losers, it's throwing money down the toilet. You cannot go wrong with RE". According to some here this behavior doesn't constitute speculating. Unfortunately, it does.

Not only day traders (flippers is teh RE version) are speculators. You are speculating when you buy something mostly on the hopes that somebody down the line will buy it for a higher price. Speculation is based on the hope that a "greater fool" will show up when desired.

Those that bought their home without speculating are those that didn't make the decision based on expected future selling price and instead, they just plan to pay it down and pass it to the kiddos free and clear. The old fashion way. Those guys keep on paying the mortgage when the market value is lower than the amount owed cause they don't care about mkt values at all, they already bought based on the imputed rent, not based on future capital appreciation.

The ones that speculate are those that bought for a higher monthly that what renting a similar unit would have cost based on "real estate always go up" (that implies speculation). Those that buy a REO that doesn't cash flow on the hopes that they will be able to sell if for a profit once the mkt "recovers" are also speculating, not investing, even though the media calls them "investors".

Most people drunk the kool-aid and are still in denial about housing deflating during the next decade. So phrases that include speculative behavior ("you cannot go wrong with real estate!", "real estate always goes up!") are considered still "normal" instead of speculative. The idea that the back-to-normal process can be made painless is ludicrous. This was the biggest bubble in recorded history! Buyers weren't behaving more rationally than those that gambled in the stock mkt during the roaring 20s that lead to the depression. Bet after the crash many were asking the government to help out those that engaged in gambling too. And many thought no doubt "if we only bring more gamblers to the game, we can bring those great years back!".

And the government is helping, or trying, in the futile attempt to bring prices up, helping those underwater be less so, for a while at least. Which really, isn't that great at the end. A prompt default and start all over is better than dragging it. Those underwater now can rejoice that they might have a chance to see home prices stabilize, but they will be hit by the bill when the FHA goes bust. Is that smart? Whatever it takes to keep the dream alive? The flood of 4% mtgs with 3.5% down-payments is like giving martinis to an alcoholic. Oh well!

imho it'll take about a decade for people to learn the lesson of this bubble, first 5 years totally wasted trying to keep prices up. Not least cause it relates with the precious money pit, on which many have emotional attachments and great hopes, like making up for the lack of savings for retirement. Just think about this crime, not only GenX and GenY have to deal with unfunded aging costs (unaffordable entitlements, public pensions, guaranteeing private ones that go bust, $1 Trillon deficits per year to be paid eventually) they also HAVE to buy a home for 3 times as much as their parents bought for. Cause the generation of their parents didn't save enough for retirement.

Nobody I know ever publicly took on this non-meritocratic wealth transfer from the wealthier old ones to the poorer young ones. On the other hand, the young are given great incentives to quit this game becoming hippies and squatting. Guess that's called "occupy wall street" nowadays. Or better yet! Buy a house in the NYC metro area for 3.5% down using the FHA with a bunch of friends but without the slightest intention to ever make a single payment and live free for +3 years. Move abroad to an interesting city with the savings. Guess that's the optimal way to play this game for those younger than me. Squatting a la FHA!

FG, fascinating commentary. I think we fundamentally disagree the extent to which homebuyers were unwilling pawns. My experience with individuals I know and people here on SE point to speculation, pure and simple. It doesn't take much to understand out-of-whack price-to-rents, why home prices should go up with inflation long-term, why cost of capital is not 0%, etc.

While the banks, our government, the credit agencies, mortgage brokers, real estate agents, etc. all have their share of blame, speculation by the masses is at the center of every bubble. In the historical narrative of what went wrong, the media / govt / people have removed the essential ingredient required of all bubbles -- mass speculation -- and blamed it on a few eternal scapegoats.

"Allowing bankruptcy courts to write-down mortgages/HELOCs instead of creating trapped homeowners and useless banks isn't exactly a handout. The usual bankruptcy rule is that creditors that go unpaid are converted into equity holders. That could be done here too: let bankruptcy courts convert underwater mortgages into equity claims. No more interest payments on the underwater part. If the homeowner ever sells for a profit -- few speculators or real homeowners who bought during the latter half of the bubble ever will -- the bank can claim its share then. That's plenty of incentive for whatever portion of the future homeowner class will be affected by incentives."

Interesting plan, but you've got three problems. First, where do the trillion dollars come from? Second, shouldn't the new equityholder under your plan be paid something for rent (minus expenses)? That'd be how it normally works when creditors become shareholders. Third, how do you think the plan would go over once the equity goes up in certain cases, and we hear more stories about how the banks "screwed" the "homeowner" out of their rightful gains.

What does your plan offer over a foreclosure / rent-back? Well, I guess your plan as-stated would be more like foreclosure / rent-free-after-expenses. But then I'd be left wondering why my trillion in tax dollars are choosing this particular set of people for the benefit of free rent, and what to do about the masses that would stampede for more writedowns to sign up for the same deal.

Fight the good fight, notadmin. Amen!

yea what he said

And the government is helping, or trying, in the futile attempt to bring prices up, helping those underwater be less so, for a while at least. Which really, isn't that great at the end. A prompt default and start all over is better than dragging it. Those underwater now can rejoice that they might have a chance to see home prices stabilize, but they will be hit by the bill when the FHA goes bust. Is that smart? Whatever it takes to keep the dream alive? The flood of 4% mtgs with 3.5% down-payments is like giving martinis to an alcoholic. Oh well!
- - - -

The policy is not meant to help the under-water home owner but an attempt to prevent the bank from being stuck with another worthless loan.

"And the government is helping, or trying, in the futile attempt to bring prices up, helping those underwater be less so, for a while at least. Which really, isn't that great at the end. A prompt default and start all over is better than dragging it."

This is a point on which we disagree. Say Underwater Joe bought a place for $600K with a $480K loan, but the value of the home is now $400K with govt propping of prices. Underwater Joe is unlikely to default and will earn to pay his way out of the hole, and prices will remain at $400K for the decade (no inflation benefit). If the govt removes support, value drops to $300K and now it makes sense for Underwater Joe to default. Taxpayer is left holding the bag.

I.e., I think current govt policy is minimizing govt bailout cost. Sucks if you want to buy / upgrade, but it is what it is.

"The policy is not meant to help the under-water home owner but an attempt to prevent the bank from being stuck with another worthless loan."

Not "bank" but "govt". Remember, US guarantees most mortgages being originated and FDIC guarantees most deposits in banks that would stand to lose once the bank's equity is summarily wiped.

if you're trying to figure out whether those that bid up home prices with easy financing were speculating, just look at how many of them walked away from their homes or lived in them without making payments, expecting to have their loans written down and refinanced for them - about diabetes and cookie eaters, now, now, now, now - let's remember, diabetes and obesity have now been reclassified as epidemics - that way no one is responsible - I sat next to you on a bus and you gave me obesity, and if I don't stay home from work today I might give it to my coworkers, and Lord knows THEY don't need to battle obesity, because they're already fat

Inonada -- Baker's plan is exactly a foreclosure-plus-rent-back and that seems to me to meet all my policy goals.

I don't see a lot of difference between that and the proposal I was making -- Conversion of the unsecured security interest into a (secured) claim on profits at sale. In the second plan, the bank would continue to receive interest on the part of the loan that it would be able to recover in an immediate foreclosure; that's the basic bankruptcy rule. For the part of the loan that it would lose in an immediate foreclosure it gets a bonus: a (zero-dividend) equity interest recoverable on sale. The bank does better than it would in foreclosure and doesn't have to create a rental management division. The homeowner gets to continue to believe in the American dream of homeownership without the humiliation of becoming a renter or foreclosure, but is now down to zero equity and thus can sell, move and maybe even refinance. The rest of us get a far quicker end to the zombie economy. Everyone should be happy except for notadmin, who wants to punish the people who played in the bubble and lost, or believes that upward redistribution -- forcing borrowers to pay loans that should have been foreclosed -- is so important that it trumps getting the economy going again.

As for the costs. Banks and their investors should be the first source, since they failed at their job, which is to allocate capital. After that, the Feds. Right now, as you may have noticed, the Feds can spend at no opportunity cost, since we have idle capital and idle labor. If the Feds move some of that idle capital into recapitalizing the banks so they can make sound loans, we'll all be better off.

re unwilling pawns, victims, etc.

Any reader of Streeteasy knows both that the bubble cheerleaders continue to spread misinformation and that many people are confused by it. It is also obvious that quite a bit of the confusion is self-induced blindness. I completely agree that a bubble requires large numbers of buyers/investors/speculators who believe in the bubble as a source of something-for-nothing-wealth -- either a perpetual motion machine, or a long line of greater fools, or both.

Obviously, many of the bubble buyers were speculators pure and simple: flippers buying simply to sell. Many more were people looking for a home with a little speculation on the side: why not stretch a bit when you'd not only get a nice house but also make some money. Others, especially outside of NY, simply faced the failed rental market in most of the US -- in most of the country, it is virtually impossible to rent, long term, housing suitable for people in the upper half of the income distribution especially if children or a job in a smaller city make moving every couple of years difficult. Borrowing -- whether a first lien or a second -- doesn't distinguish between these groups. Plenty of people bought with HELOCs because it was cheaper or because after prices started bubbling it was the only way to afford the home that people in their income bracket could afford easily a couple of years earlier.

Foreclose and rent, or conversion to equity don't help the speculators, who will still be wiped out.

> "Bottom line, folks who are underwater today, a MAJORITY of them knew what they were doing back that."
> You have documentation to back this up, or you're just pulling it out of your ass again?

the documentation is that NINJA loan that you signed!!!!! ROFLMAO .. ROFLMAO

> if they weren't speculators they would be happy to make mtg payments on their homes even if their market values went under the amount their borrowed.

ROFLMAO .. that's right, as Matt said "They just want to OWN THEIR HOME" until the value started declining and they realize there is no greater fool than themselves .. now "OWNING THEIR HOME" is no longer the "raison d'etre" .. ROFLMAO ... owning a home .. such BULLISH*T

The bitterness about the people who won in the bubble is completely understandable. After all, some people made a lot of money, and every penny of it was simply redistribution from other Americans. The homeowners and speculators who sold into the bubble produced nothing useful. All they did was take from other homeowners and speculators, while forcing others to remain renters. And, of course, the lenders and RE professionals made far more money than the bubble-sellers, and did even more damage.

But punishing underwater homeowners by special rules that require them to bail out their lenders doesn't actually retrieve any of the ill-gotten gains. It just adds to them, since the banks now get to continue collecting interest --at rates far above market -- on loans they never should have made in the first place.

And, since the banks have powerful incentives not to foreclose and the underwater homeowners can't sell, it keeps inventory low and house prices up, hurting yet another generation of prospective homebuyers (few of whom, at this point, are likely to be bubble speculators, despite the examples on f Streeteasy).

Prices still need to drop by half in NYC and 15% or so nationally to get to fundamentals. Punishing the losers makes that readjustment harder, not easier.

> here many posters believe that those that participated in the over-bidding that lead to DTI > 30% are victims. even worse, those that walked away from crazy prices should make them whole, even if they had to stay on the sidelines due to the easiness these guys took on debt. funny i don't remember homeowners profiting from the bubble sharing their riches with renters. aren't they behaving like those disturbing bankers: "my profits are mine, my losses are ours"?

That's what makes this discussion disturbing. When you were a KID, sure, cry foul! No problem. YOU ARE A F*K*G ADULT ... you made your bed (bought that overprice piece of crap of a condo), now sleep in it (deal with the losses like a F*K*G MAN MATT or FINANCEGUY!!!) Stop being a cry baby like a girl!

Again, I don't think any poster on this board wishes any hardship on anyone else BUT you made the bed, sleep in it .. those who were renting did the same thing! It's this F*K*G "ENTITLEMENT" mentality that what YOU WANT is WHAT YOU GET .. GROW THE F*K UP MATT and FINANCEGUY ... Sheeshush!!!

thought this was worth repeating from FG, "Prices still need to drop by half in NYC"

Inonada: The quangos are now guaranteeing virtually all new loans. But at the height of the bubble, a rather large percentage of the worst loans were not guaranteed -- including all the subprimes (by definition). Those loans were sold into the CMO market. They need to be wiped out for the greater good of all of us. The longer it takes to teach sophisticated investors that CMOs, let alone the derivatives based on them, need to be analyzed properly, the longer it will be before markets begin serving their proper functions.

Moral hazard is a serious problem here. But Wall Street works by finding and exploiting moral hazard. Individual homeowners (and speculators) are far less efficient exploiters.

Lowery - Any plan that allows underwater homeowners to convert to renters or to reduce their payments so they can stay in their house will NOT help the group you are talking about. It helps the others: the people who are paying a mortgage that any rational investor/speculator would have walked away from long ago.

> Guess that's the optimal way to play this game for those younger than me. Squatting a la FHA!

ding ding ding

"The homeowner gets to continue to believe in the American dream of homeownership without the humiliation of becoming a renter..."

Oh, the shame.

FG, regarding moral hazard, read some postings from dealboy. He really believes his drivel.

> if you're trying to figure out whether those that bid up home prices with easy financing were speculating, just look at how many of them walked away from their homes or lived in them without making payments, expecting to have their loans written down and refinanced for them -

Exactly! REAL homeowners, Matt & Financeguy, DO NOT WALK away from their homes!

> Obviously, many of the bubble buyers were speculators pure and simple: flippers buying simply to sell.

Financeguy, then why don't you lay the blame on the speculators also ? You simply want to lay the blame on the banks and the banks only. Like common sense says, it takes TWO to tangle!

FG: Your plan sounds fine, you just want to rename foreclosure & rent-back & put a cherry on top. The problem is that when the "homeowner" has been given the suger-coated version and washed his hands of ever speculating, I'm gonna have to hear shallow stories on CNN about how the homeowner was screwed out of bis "rightful" equity after "paying" his mortgage every year. So let's just call it what it is and package foreclosure & rent-back. I'm OK with Underwater Joe having to live with the shame of being a renter like you & me. Somehow, 100+ million Americans live with the stigma.

> thought this was worth repeating from FG, "Prices still need to drop by half in NYC"

Someone stole FG's password .. it can't be FG writing "Prices still need to drop by half in NYC" ... we need to save this for posterity!

> "The homeowner gets to continue to believe in the American dream of homeownership without the humiliation of becoming a renter..."

What's wrong with you FG ? You been brainwashed with comments like "Life passes you by and opportunity lost if you don't buy ?" Sheeeshush!!!

Inonada-- I concede; foreclose and rent back is probably a better idea. Simpler anyway and there is something salutary about challenging the moral supremacy of homeownership. Too bad we are more likely to get stasis.

On the second point, Dealboy (and LICC, and Mercer, and others) are part of the reason why I don't think moral hazard is a useful way to think about the bubble buyers. While many of the brokers seem to combine dishonesty with stupidity, the buyer-bubblers mainly seem to believe the stories they've heard. Mercer was trying to do a calculation using a tool provided by the NYT, which once was a reputable source of information. As far as I could tell, he believed in good faith that perpetual motion machines are possible, because the NYT calculator told him that he'd bought one. I don't think they are manipulating the system; they are being manipulated. And I assume that's even more true of people who bought when the bubble was younger, the profits more obvious, and Alan Greenspan was urging them to take out adjustable mortgages.

The top professionals, on the other hand, knew exactly what they are doing: "you have to dance while the music is playing." And if they didn't, all the more reason why they should pay the price of their incompetence.

people buying a home to live in and speculators are not mutually exclusive categories

FG, have you considered the possibility that the Mercers of the world are in fact these very same "top professionals"?

From my view of various people working in finance, RE development, RE brokering, mortgage origination, credit agency analyst, etc., I see very little difference in the buy vs. rent decisions of those individuals vs. others at the same level of wealth in other professions. If anything, they seem more likely to buy. I say this across a wide specteum of level / wealth in these professions.

So I see a disconnect with your premise that top professional knew better and what they were doing with their own money.

flat stock market for a decade, sub-zero interest rates, might just as well take out a mortgage and roll the dice with RE - everyone agrees that cheap mortgage money helped fuel the RE bubble, but they focus on borrowing costs and availability of credit - look at the other side of the coin - and now what is the fix? more of the same, more of the same, more of the same, more of the same, more of the same

So more if the same then