Coming HELOC crisis.

let's rewind a bit here .. so we all agree that what fueled the bubble was

1) economy growing
2) jobs plentiful
3) stock market at the all-time-high
4) extremely, extremely lose lending standard .. if u can breath, u got a mortgage

now fast forward to today .. do u see the same landscape ?

1) economy not growing, possibly double dipping soon
2) jobs not plentiful .. WS cutting back
3) stock market has its own lost decade .. mom and pop are taking money out of domestic equity funds every month and every quarter
4) extremely, extremely tough lending standard ... FICO, DNA and blood test required .. as well as ancestral lineage

So, how can anyone expect NYC RE prices, which is still pretty darn close to its bubble top, remain at these levels ?

Inquiring mind wants to know!!

> deal with the losses like a F*K*G MAN MATT or FINANCEGUY!!!

No kidding! The problem is not so much that those that payed more for their homes than they should have and/or HELOCed were the main source of madness and responsible for the crash and current recession that hurt many real innocent by-standers. Through job losses, having to stay on the sidelines for years till these over-optimistic people calm down and drink their own medicine, you name it. Nobody is asking these losers to pay for the whole damage they created, only for the stupid financial decision they themselves made while bragging and smilingly telling renters: "how humiliating is to be you!". Oh, really? Who is the financially illiterate one? Now that buyers are humiliated by reality, they are victims? Banks should take these losses too, like those over-bidders, like grown ups. Learn from it and more on.

Mind-blowing that these losers were/are trying to brainwash others into thinking that renting is "humiliating". Learn "not-so-financialguy", at the very least, that those that have been renting instead of buying are way more financially literate than those who bought. Hence have a lot to teach when the student is ready. But the lion share of the student body is stuck in "victim" mode still, hence cannot learn a thing.

There's no meritocracy in buying during the last bubble, no real achievement, nothing to be proud of. Anybody that thought so is a certified moron. Anybody with the ability to sign with an X could have gotten a mtg and over-bid just like the rest of the proud "victims". Debt-addiction is not fun for the debt-addict nor financially savvy, i give you that. But let's focus on the damage they create to the innocent by-standers and how to prevent it going forward. Helping the debt-addict the way you want provides a positive reinforcement on their addiction. They need rehab, not more drug.

To me, their behavior shows a huge disconnect with the reality of the low discretionary incomes of the lion share of the young, on which real estate prices are ultimately based on. I wouldn't be surprised if those that over-bid also believe that entitlements and pensions will be fully paid. Which is not financially savvy either. After all, the way they are being structured, they fully depend on transfers from labor income of the younger ones. Given the prices these guys accepted to pay (many times even engaging in bidding wars!) assumes an over-optimistic view on the young generations ability to pay.

We'll see! Interesting times ahead for sure :-)

the thing is, manhattan is at all-time high, despite all the BS

every one knows assbook is worth barely $0.2/share at most, but hey it's trading at almost $30

Ino: Professionals making decisions in their jobs -- approving loans that make sense only in a bubble -- need to be reincentivized or reeducated or replaced.

Professionals making bad decisions as homebuyers don't bother me so much. In a properly functioning system, they wouldn't have been allowed to borrow to buy at bubble prices, and there aren't enough who can pay cash to keep the thing going.

Bubbles happen when the LENDERS decide that all buyers are good risks and all collateral is good collateral because rising prices will fix all problems. They are prevented by rules that bar lenders from doing that. After 1929, we eliminated margin buying, and it worked until WS found a way around it. Now, in the RE market, we need to find a way to force banks to value collateral at the lesser of market or fundamental value. Holding them liable for the losses they caused is a first, inadequate, step.

> the thing is, manhattan is at all-time high, despite all the BS

Cause bankers had been postponing auctioning foreclosures in these area since 2009. Call it the "not in my backyard" effect if you want. They lost a bundle on the stock mkt crash and don't want to lose a bundle more on the value of their own homes. That's why when it's in Jamaica, Queens or Bronx they have no issue foreclosing fast (together with access to better lawyers), cause they don't live there, that's where "the help" live.

But at some point those losses will be recognized. Maybe by then most bankers might have jump ship already. Bankers could make a bundle in NYC if they become renters, open the REO spigot in earnest and bottom-fish a couple of years later at rock-bottom prices. So why not? CT and NJ are falling fast and unclogging their own foreclosure pipelines. What cannot go on forever, will not.

To me, this is not necessarily a bad thing for those on the sidelines. The more $ the financially illiterate waste in this period before prices drop, the less $ will be available to bid those low prices up. It'll provide more opportunity to those on the sidelines that should get their big reward. Postponing the drop in prices by manipulating the REO pipeline (went down from 72 years to 67!? is that progress?) just intensifies the cycle. Which is a blessing to smart bottom-fishers.

> Cause bankers had been postponing auctioning foreclosures in these area since 2009. Call it the "not in my backyard" effect if you want. They lost a bundle on the stock mkt crash and don't want to lose a bundle more on the value of their own homes. That's why when it's in Jamaica, Queens or Bronx they have no issue foreclosing fast (together with access to better lawyers), cause they don't live there, that's where "the help" live.

> But at some point those losses will be recognized. Maybe by then most bankers might have jump ship already. Bankers could make a bundle in NYC if they become renters, open the REO spigot in earnest and bottom-fish a couple of years later at rock-bottom prices. So why not? CT and NJ are falling fast and unclogging their own foreclosure pipelines. What cannot go on forever, will not.

> To me, this is not necessarily a bad thing for those on the sidelines. The more $ the financially illiterate waste in this period before prices drop, the less $ will be available to bid those low prices up. It'll provide more opportunity to those on the sidelines that should get their big reward. Postponing the drop in prices by manipulating the REO pipeline (went down from 72 years to 67!? is that progress?) just intensifies the cycle. Which is a blessing to smart bottom-fishers.

notadmin nailed it .... WINNING!

str33 -- Residential RE prices tend to be very sticky downward. In most prior RE bubbles, including NYC's last one, the adjustment was almost entirely by nominal prices remaining flat at low volume until inflation brought costs (building, renovating, renting) up. Current inflation is extremely low and , so perhaps this won't happen this time (and it hasn't in Nevada). But the NYC numbers still look like the usual pattern applies. NYC prices still need to drop by half, but barring a major increase in unemployment or bank foreclosures, it'll probably be by nominal prices saying roughly flat or declining very slowly until everything else catches up.

> Ino: Professionals making decisions in their jobs -- approving loans that make sense only in a bubble -- need to be reincentivized or reeducated or replaced.

Look, it boils down to the regulatory framework. Nobody should be able to lend with DTIs > 30%. Make it 24% for those that are self-employed or working on a cyclical sector when the taxpayer is on the hook (GSEs, FHA, VA). End of story. The taxpayer will eventually wake up and demand origination standards that minimize those expected loses. It might take a couple more GSE bail-outs and FHA collapse for they to wake up though, but they will.

FHA with down-payments of 3.5% should end too. Maybe private lenders could be left to their own devices, as long as they don't receive deposit insurance and they don't receive any bailout whatsoever when they fail.

"Look, it boils down to the regulatory framework. Nobody should be able to lend with DTIs > 30%. Make it 24% for those that are self-employed or working on a cyclical sector when the taxpayer is on the hook (GSEs, FHA, VA). End of story. The taxpayer will eventually wake up and demand origination standards that minimize those expected loses."

Even if those tougher lending standards were in place, most people who are facing foreclosure now are the ones who actually met that criteria but LOST THEIR JOBS in the ensuing economic meltdown.

> Even if those tougher lending standards were in place, most people who are facing foreclosure now are the ones who actually met that criteria but LOST THEIR JOBS in the ensuing economic meltdown.

I call BS on the "most people" part. Yes, there are definitely folks who are facing foreclosure who could have met the tougher lending standard and if they lost their jobs for the last 3 years, it would eat through any sort of savings they have. And here, we have a picture of a very responsible buyer which also means they didn't over-stretched and over-reached for that McMansion which WAS NOT the NORM during the bubble years.

Therefore, they are in the MINORITY, NOT the "most people." Most people couldn't pass the smell test but were still given NINJA loans!!!

notadmin/str33:

I try to stick to pretty basic finance and economics. The most basic lesson in finance is that legal categories don't differ as much as people think. Buying with a secured loan (mortgage) and renting are not so different: you to use the property so long as you make the monthly payments. The difference between debt and equity is a matter of degree, not kind: in each case the investor gets paid if the underlying business does well, not if not. Renting money (borrowing) and renting property are similar. A penny saved is a penny earned (more or less).

In each case, not identical, but close enough for many purposes. And when the price between two similar things differ because people imagine them to be more different than they are, there is lots of money to be made shifting from one to the other (arbitrage), which tends to bring prices back into line. (Conversely, when they treat them as too similar, you can make money the other way: that's the basic principle behind the derivatives that made the bankers so wealthy.)

For some reason, this is all intuitive when people are trying to understand why it usually costs about the same about to buy or to lease a car, but hard to understand for residential RE.

The basic lesson of economics is that prices tend towards the point where price equals marginal cost of production, because higher prices mean that production is profitable, and eventually -- but often not quickly -- someone figures out how to produce more, which tends to bring the price down.

The second basic lesson of both is that arbitrage is often difficult and production often takes a long time.

Taken together, these mean that bubbles happen easily in capital asset markets (but not in consumer markets). In a consumer market, shortages mean that prices go up, which reduces demand and incentivizes increased production, both of which bring prices down. But consumers (renters, e.g.) usually won't pay more than something is worth to them just because they imagine that someone else might later.

But in capital asset markets, it doesn't always work like that. Sometimes increased demand leads to increased demand and increased prices cause higher demand: Whenever buyers decide that fundamentals (i.e., the cost of production or conversion from another use) don't matter because other buyers don't think that fundamentals don't matter, buyers will bid prices up above fundamentals, thus demonstrating that fundamentals don't matter and leading to more buyer demand, while the rising prices create more buyer ability to pay. Once lots of people start thinking like this, it makes complete sense to pay more than something is worth (to you, or for its use-value, or historically) because you'll make money by selling to someone else doing the same thing. Look at Mercer's or LICC's explanation of why it makes sense to pay more to own something than to rent the same thing.

That's a bubble. It is not the same as a shortage, partly because the bubble creates its own demand, which allows prices to go up faster than suppliers can increase supply.

Those basic principles are enough to generate bubbles and tell us that they are unlikely to last forever. Eventually prices get high enough or the bubble last long enough that suppliers find ways to create new supply to match the bubble-induced demand. Then the cycle reverses. With prices no longer rising, fewer people see overpaying as the quickest route to wealth. If it fully reverses and buyers decide that fundamentals don't matter in the downward direction, it's a panic. Panics are common in the stock market but highly unusual in RE markets.

No need to go into fancy theories about economic booms or riding stock markets or dumb poor people -- bubbles happen during depressions and with smart rich people (Inonada's point), too. It doesn't require evil people or even stupid people. All a bubble requires is enough people who believe that the way to make money is to sell to someone else who plans to make money by selling to someone else -- rather than by using the thing or renting/selling to someone who'll use it. Which, of course, is a perfectly reasonable thing to believe in a bubble, because it is true. Until it isn't.

> But in capital asset markets, it doesn't always work like that. Sometimes increased demand leads to increased demand and increased prices cause higher demand: Whenever buyers decide that fundamentals (i.e., the cost of production or conversion from another use) don't matter because other buyers don't think that fundamentals don't matter, buyers will bid prices up above fundamentals, thus demonstrating that fundamentals don't matter and leading to more buyer demand, while the rising prices create more buyer ability to pay. Once lots of people start thinking like this, it makes complete sense to pay more than something is worth (to you, or for its use-value, or historically) because you'll make money by selling to someone else doing the same thing. Look at Mercer's or LICC's explanation of why it makes sense to pay more to own something than to rent the same thing.

Financeguy, just say "greater fool" theory w/out all the mumble jumble! For stocks, which has the fungible characteristic, it makes perfect sense that mania feeds on itself, the greater fool. However, for RE, it isn't fungible yet there is still a mania. It boils down to the "greater fool" theory and in its essence, simple human greed. Nothing more, nothing less.

> arbitrage is often difficult

Wrong financeguy, I am sure you are an ardent believe of the EMH right ? Oh boy! Keep thinking that way while others steals right from under your nose financeguy! Bubbles, and we have too many to count throughout human history, proves EMH to be utterly inefficiency in its explanation. EMH is a nice theory IN THE CLASSROOM ...

> All a bubble requires is enough people who believe that the way to make money is to sell to someone else who plans to make money by selling to someone else -- rather than by using the thing or renting/selling to someone who'll use it. Which, of course, is a perfectly reasonable thing to believe in a bubble, because it is true. Until it isn't.

Saved us a lot of time, financeguy, if you had just used "greater fool" ... please use that going forward so we don't need to read through your entire drivel when two words is suffice! thank you!

maybe the heloc crisis won't be as bad as people anticipated. interestingly, i got an offer to take out a home equity installment loan whereby the bank would take a 1st lien position replacing the traditional mortgage provider. any thoughts on this? i sort of like having the bank take care of taxes and insurance payments.

> Even if those tougher lending standards were in place, most people who are facing foreclosure now are the ones who actually met that criteria but LOST THEIR JOBS in the ensuing economic meltdown.

a ton of them worked in cyclical sectors, even related with housing. that's why if your income comes from those less stable sectors, max DTI allowed should be much lower to allow the income earner to save much more during high UE periods.

in an ideal world, those that participated in inflating prices will compensate those that faced and are facing UE. not so. but let's not go to the extreme of helping out those that are to blame for inflating home prices either. it's a transfer in the wrong direction.

BTW i don't get tired of saying this, the "I" in DTI should be calculated using the lower of the last 2 federal tax reports for those self-employed. if they ever complain that they deserve a higher loan amount cause they under-report, loan officers should report them to the IRS by law for an audit.

> Saved us a lot of time, financeguy, if you had just used "greater fool" ... please use that going forward so we don't need to read through your entire drivel when two words is suffice! thank you!

yep. the music stops when the most stupid guy in the county implements the "greater fool" theory. that's why i'm shocked not-so-financeguy still thinks that renters are losers when it's the other way around.

not-so-financeguy, did you buy in 2005-2008?

> EMH is a nice theory IN THE CLASSROOM ...

+100

bravo.. bravo

> not-so-financeguy: I try to stick to pretty basic finance and economics

it's tricky enough that if you over-simplify it, you lose all meaning. don't get me wrong, finance/econ is not rocket science, but it's not like gardening or cooking either, where gut feeling tend to work and damages are usually not a big deal.

> The most basic lesson in finance is that legal categories don't differ as much as people think. Buying with a secured loan (mortgage) and renting are not so different: you to use the property so long as you make the monthly payments. The difference between debt and equity is a matter of degree, not kind: in each case the investor gets paid if the underlying business does well, not if not. Renting money (borrowing) and renting property are similar. A penny saved is a penny earned (more or less).

oh boy! never ever heard of seniority? even if you had only read about a bankruptcy of a public company once in your life you would had acquired a much more accurate understanding of the difference between creditors and equity-holders. i advice you to either quit econ/finance as a hobby, or dedicate yourself a more seriously to it. fudging in this way with a straight face is painful for everybody.

????
> The basic lesson of economics is that prices tend towards the point where price equals marginal cost of production,????

is Real Estate a perfectly competitive market? does it have no transaction costs, no barriers to entry/exit (hence, you can be a developer tomorrow if you wish and there are no land restrictions), perfect information (hello! realtors make a living from the lack of perfect info), are all participants price takers (hello not-so-finance guy: participants are ALL price setters).

i forgive you for the last mistake, cause i do understand that at the root of your clamor for help to those that inflated home prices is the belief that buyers are price takers, when in fact they are price setters. you are being consistent and that's valuable. but the previous ones come from not thinking.

> The second basic lesson of both is that arbitrage is often difficult and production often takes a long time.???

where did you learn econ/finance? are you studying it now?

> the bubble creates its own demand

+10. that's why the bottom is nowhere in sight! cause for the most part it brought demand forward. hence the lack of real buyers from now on.

> Then the cycle reverses. With prices no longer rising, fewer people see overpaying as the quickest route to wealth.

boy! you are on a roll. credit cycles come easier to you than conditions attached to price-setting mechanisms from profit maximization of firms. congrats for that! and i mean it. to navigate this times, understanding credit cycle is the key, not when price= Marginal Cost.

now let's face it, "fewer people see overpaying as the quickest route to wealth" you are there finally admitting that those that need to be rescued were speculating.

> It doesn't require evil people or even stupid people. All a bubble requires is enough people who believe that the way to make money is to sell to someone else who plans to make money by selling to someone else -- rather than by using the thing or renting/selling to someone who'll use it. Which, of course, is a perfectly reasonable thing to believe in a bubble, because it is true. Until it isn't.

ok, let's not call those that bought during the bubble "stupid". let's just call them "gullible", unable to think on their own, prone to wishful thinking. ie: not that smart in my book.

> All a bubble requires is enough people who believe that the way to make money is to sell to someone else who plans to make money by selling to someone else -- rather than by using the thing or renting/selling to someone who'll use it.

That set of people is made up by the union between "stupid" and "speculator, strong version" (the intersection of both sets is very crowded). The stupid doesn't realize that prices are too high nor that he is a speculator too, albeight a softer version (he thinks he "deserves" to at least break even when selling, which is speculating too). But doesn't know that he could rent instead, doesn't know that he's signing up for debt-slavery, believes there's such thing as "good debt". in short, feel for every trap out there. The speculator stronger-version believes he will sell the house for a higher price.

> Which, of course, is a perfectly reasonable thing to believe in a bubble, because it is true. Until it isn't.

You need to realize that not only is not reasonable to base a 30-year mtg on that belief, it's also moronic. Till we are not 100% understanding this part, the bubble and debt-addiction is still with us. Guess you are confusing "reasonable" with "common". Sure, without enough "morons U speculators" you don't have a bubble, so by definition is a common belief.

The reasonable thing to do is to realize that prices mean-revert and stick to fundamentals (disposable incomes of the young, rents...).

> Even if those tougher lending standards were in place, most people who are facing foreclosure now are the ones who actually met that criteria but LOST THEIR JOBS in the ensuing economic meltdown.

check out the default rates of different loan vintages. the younger ones reflect a going back to more traditional lending standards and have much lower defaults than the vintages from crazy lending. also watch out for FHA defaults, 3.5% down is asking for trouble. saying that origination standards and HELOC activity have less impact on default rates than UE means you are not on topic cause UE impacts all vintages at the same level.

we shouldn't try to reinvent the wheel here, we all know what good under-writing looks like. 20% down-payments were required not so long ago for a reason. proof of income using tax returns was required, higher FICOs were always the norm, not a horrible thing to do to borrowers. given that we are all taxpayers guaranteeing most of these loans let's wise up and demand serious under-writing.

Efficient market theory has been thoroughly disproven.
Information is asymetric, future price movements are not random and guided by previous price movements and normal distributions don't hold.

> Efficient market theory has been thoroughly disproven. Information is asymetric, future price movements are not random and guided by previous price movements and normal distributions don't hold.

Ding ding ding!!! agree to the T!

> not-so-financeguy, did you buy in 2005-2008?

I called him UNfinanceguy .. we're both coming to the same conclusion .. either he is a speculator because he riles at the banks (maybe b/c they gave him a loan that he shouldn't have taken ?) yet give speculators a free pass ? when in reality, both parties are to blame, not just one.

regardless, UNfinanceguy, you need to stop with these long posts that can be condense into maybe 1 or 2 and at most 3 sentences. we don't have all day reading your drivels. the long posts don't make you sound any smarter, quite a opposite ..

http://www.youtube.com/watch?v=vxbxXBrOPS8

> i advice you to either quit econ/finance as a hobby, or dedicate yourself a more seriously to it. fudging in this way with a straight face is painful for everybody.

ROFLMAO .. classic!!!

> Efficient market theory has been thoroughly disproven. Information is asymetric, future price movements are not random and guided by previous price movements and normal distributions don't hold.

that was known all along in my experience, even to those using it on their crappy-papers. it just makes things tidy, allows for math formulas with close solutions that are easy to use. a convenient tool, although it provides results that differ from reality. econ/finance suffer from science envy, so they through in a formula whether it fits or not.

what did crappy-paper writers do about those discrepancies? well, they made them into topics for further papers, kid you not! check out those that include the word "puzzle" on them. most come from assuming that those EMH based papers are not crappy ones.

> realtors make a living from the lack of perfect info

Man, do they want to keep info from you like their life-force will vanish or dissipate the moment they share it ... LOL.

> understanding credit cycle is the key,

bingo!!! most folks still think it's a matter of price .. hahahahaha ...

"Bubbles happen when the LENDERS decide that all buyers are good risks and all collateral is good collateral because rising prices will fix all problems."

Define "LENDER". Is that the mortgage broker who just sources the mortgages and sells them to willing banks? Or is it the bank who buys & bundles the loans to sell them to willing buyers? Or is it Freddie/Fannie buying the paper for a willing US government and/or the funds/pensions/municipalities/etc. buying securities for willing investors? Or is it the investors in the funds, or taxpayers of the country guaranteeing Freddie/Fannie & FDIC-insured banks?

My point is that bubble mentality probably infects every stage of the chain. It is just a bunch of these same bubble-prone individuals that make up the diverse and diffuse chain that is "LENDER". To ignore this aspect, IMO, is to ignore the very nature of a bubble. The mentality permeates across all relevant institutions.

The bubble on the lending side occurred because it never occurred to those originating that losses would occur at all at once instead of spaced out over time, borrowers would always pay their loans because they did in the past, they thought the interest rate was sufficient to cover defaults, that they could dump the crap onto Fannie & Freddie. Now today the banks are capital impaired and have now decided those that ask for money don't have any.

you have very different phases of the bubble from the lending point of view. the bubble is the 2nd super-high profile failure of the quants. the 1st was LTCM. these geeks are unable to understand risk unless somebody gives it to them in a formula. we all heard how most of those modeling MBS didn't even understand how mortgages work. there was hubris all over the place, that's when traditional origination guidelines were sent packing on behalf of these geeks theory that real estate collapses don't happen at the national level hence securitization would diversify away credit risk.

this last stupid idea is based on the fact that the credit source for real estate before S&L used to be local, hence real estate prices would reflect through credit cost and availability local econ conditions more closely.

it takes a geeky guy not to understand than when the credit source is not local, real estate prices will not have that strong local component that in theory was the cornerstone of the diversification of risk according to the sausage makers. it takes a bunch of very dumb guys that think of themselves as geniuses to make this mistake.

i'm surprised that the quants are kind of left alone in this mess even though they have played such a big role in it.

once securitization took off, the sausage making needed the input as there was plenty of demand for them. hence mtgs were originated no matter what. and the "stupid U speculators" willing to keep on bidding up prices were plentiful. but this was the last phase, 2004-2006/7?

i'd say that what stopped this madness was not only the "stupid U speculators" buying pool drying out, but the start of the inevitable defaults at the national level. that killed the status of MBSs as investment vehicles (until Uncle Sam decided to put the taxpayer as the explicit guarantor for MBSs of GSEs, private ones are dead still).

it never occured to the quants that the HPA(A= appreciation) formerly known as HPI(index)could go down. THis was probably true because yours truely, Alan Greenspan, said housing prices have never gone down on a nationaly level.. execept during the great depression... since no one believed we could have great depression again... a negative HPI was left out of the quants model.. so quess what -- lever up--- result-- Great Recession --

an over simplification but generally true -- When you get the herd running its hard to turn...

it really was a generational credit expansion that fueled this bubble coupled with the generational low yield that drove investors hungry for yield into ABS, MBS, securitization of any"backed" security, etc.

therefore, low yield coupled with yield hungry investors made for a perfect storm to securitized the heck out of any collaterals with a cash flow. since the demand was so great, doesn't matter if the cash flow is suspect and the collateral was overpriced as long as you can cut it, dice it, minced it into a AAA rating with 10 million tranches and subordination. Alas, reality sets in and we're where we are today.

i'd say hungry demand for floating rate securities overseas too.

Ino -- I meant all of those. I don't think we disagree that the bubble mentality was pervasive.

But it wasn't all delusion and little of it was "foolish." Even when the individual decisionmakers understand exactly what is going on, they may have institutional incentives to assume the bubble will continue: IBGYBG. The very slogan makes it clear that plenty of people understood something had gone wrong.

By the end, WS was the heavy. The credit explosion went well beyond bubble blindness. AAA rated repackaged certain-to-default mortgages were a money machine for every other agent in the business -- mispriced risk is the easiest way to make money. Especially when it is combined with regulatory arbitrage so that you have plenty of customers happy to play along. So the demand for loans, of any quality, was nearly infinite. That kind of demand will find a supply.

The homebuyers were mainly marks. Willing ones, to be sure, but isn't every mark willing? The early ones made out like bandits, as early investors in pyramid schemes do, but without the CMO markets this could not have grown as large as it did; the buyers would have run out of funds before suppliers finally caught up.

Where we may disagree is this: I think it's pretty clear that FNMA and FHA were followers, not leaders -- they were playing catchup most of the way along, desperately trying to lower their standards fast enough to stay competitive. Of course if they had been genuinely governmental, maybe they'd have kept their standards, and if they'd been fully private, maybe the buyers would have been less willing to accept the guarantee (although the purely private CMOs suggest that the latter is wishful thinking, and the Fed/Treasury capture makes the former seem optimistic too).

The math errors in finance are best captured by Mandelbrot, the phases of a bubble and why the participants follow the same path is classic Minsky.

"Ino -- I meant all of those."

Well as soon as you say "all of those", then that includes all individuals who were in mortgage funds rather than treasuries. After all, home prices never go down. That's why I think I cannot lose by buying an over-priced home. That's why I think I cannot lose by buying into a mortgage fund. It's the same set of people.

Then you have the other set of ultimate people backstopping the lending: taxpayers behind the GSEs. They vote for politicians to "protect homeownership" through "affordable financing" and tax write-offs for taking out mortgages. Guess what, those are code-words for speculation: keep my home price a-rising, and don't ever let it drop, and reward me for taking on more debt to keep it all going.

The LENDER at the end of the chain are the masses that ultimately decide what is done with taxpayer funds through their votes. And guess what, they vote for people who promote their speculative agenda. Please let me know a politician who has successfully run on a campaign of unraveling the GSEs and reinstating taxes on mortgage interest, with the goal of reducing home prices. The tried-and-true voter-sponsored path to "affordable homeownership" has never been through reducing or flat-lining of prices, but has always been through taxpayer-backed expansions of credit as desired by voters.

Now who are these voters that like the expansion of taxpayer-backed credit? Well I'll be, the very ones that want to see their home prices go up. It's our good old friends, greed and speculation, promulgated by the LENDER at the end of the chain.

It's sad that the above pervasive issue gets dropped in our national discussion of the crisis and the bubble. Everybody is too busy blaming solely the banks without looking at themselves. Which just means it'll get repeated because a large fraction of culprits don't want to acknowledge their responsibility in it.

In June, the number of long-term unemployed (those jobless for 27 weeks and over) was essentially unchanged at 5.4 million. To the extent that these people are mortgage holders and no doubt starting to face a struggle with paying that mortgage due to unemployment, can we consider that their problem stems from job loss and not necessarily greed driven speculation?

Real Estate brokers , builders and bank lobbyists push Americans into believing they are entitled to buy a home without a down payment. The American public believe the broken system is in their interest, while the real estate interests pay off the politicians. It's not surprising.

That's right on ion. Voters vote to keep the ponzi going and you know what, it's going to come crashing town because the next generation can't afford to keep it going,

Down

Str33, notadmin, Brooks: I don't think the following words mean what you think they mean: "similar" "tend" "hard" "communist" "socialist" "market" "fundamental" "bubble". Unfortunately, I don't have time to repeat the 628 Streeteasy essays I've written on bubbles and renting.

Maybe this will help a little:

ECMH is the theory that arbitrage is so easy that prices always reflect fundamentals, i.e., price equals marginal cost of production and, for capital assets, also is an unbiased estimate of risk-adjusted future returns.

In a bubble, prices do not reflect fundamentals by definition. Therefore, the general view is that ECMH is not compatible with bubbles. If you can demonstrate how prices can simultaneously reflect and not reflect fundamentals, you should publish it immediately.

But if you believe someone else is arguing that we are in a bubble because of ECMH, you should at least consider the possibility that you are not paying attention to what they are saying. One or the other of you is not making sense. As a hint, when someone says that arbitrage is difficult, that is a good sign that they are not using the ECMH assumption that arbitrage is easy. Also, it doesn't make much sense to accuse an ECMH follower of speculating on incorrect prices, since they don't believe there are any.

Similarly, the overlap between ECMH enthusiasts and Communists is small. If you believe someone is both, you probably should check the basis of your belief. This is even more true if you see them saying things that directly contradict central elements of both those ideologies. Try these tests: Perfect market enthusiasts rarely talk about how markets can lead people to do things that are not socially useful and never talk about mispricing. Communists usually do not base their analyses on Adam Smith or Ronald Coase, usually oppose private ownership of the means of production and generally do not advocate market solutions to economic problems. Using simple models to illuminate real markets, in contrast, has been a central marker of mainstream bourgeois economists since the 1890s. Similarly, mainstream finance depends quite heavily on ECMH, but mainly as a counterfactual: since it is based on false assumptions, when you use more accurate assumptions different predictions emerge -- arbitrage is profitable, similar things don't necessarily sell at the same prices, risk (and seniority) aren't necessarily correctly priced, and so on.

Finally, there is a long standing debate, dating back to the Greeks, about whether it is better to test your reasoning by argument, as Plato did, or to find an authoritative teacher with valuable experience and follow him unquestioningly as a matter of faith. In my view, an anonymous internet board is an odd place to do the latter. Accordingly, I'd find it more interesting and useful -- and certainly more polite -- if you tried to address or ignore my arguments or errors rather than making up implausible backstories for how I might have an economic incentive to arrive at your misunderstandings of what you think I wrote.

In any event, the kind of vulgar Marxism that insists that everyone talks his book all the time has been out of fashion for decades (except perhaps in that last bastion of class-struggle, the editorial page of the WSJ). It's boring.

efficient market theory causes bubbles? That comes close to building a straw man. It's more accurate to say that following an EMT approach causes one to mis-value assets and risk.

CC: "In June, the number of long-term unemployed (those jobless for 27 weeks and over) was essentially unchanged at 5.4 million. To the extent that these people are mortgage holders and no doubt starting to face a struggle with paying that mortgage due to unemployment, can we consider that their problem stems from job loss and not necessarily greed driven speculation?"

Their problem stems from both.

I think the question you pose convolves the two items to garner sympathy. Long-term unemployment sucks, no doubt. But this does not absolve people of their speculative / investment activities.

Let me pose a different question. Suppose I have a steady job, a nice place I rent, and a bunch of money -- enough to last me years of expenses. I go out and put it all into options on some renewable energy company. It's a great investment, it's for my kid's future, it will change the world and make it all better, people say it's a great idea, whatever other warm-and-fuzzy you want to use to mask my speculation. Then the economy takes a turn and oil/gas drop, wiping out my options in the process, and I lose my job too. Now I can't pay my rent.

Now do my problems stem from my job loss or from my speculation?

Ino -- To me, it's more interesting to think about how to prevent the next one than who to blame for the last one. I think the politicians were more driven by contributors than voters.

I agree that the tax subsidy for mortgage interest is both popular and foolish, far more likely to be a subsidy to lenders and existing homeowners than to buyers and in any event encouraging overinvestment in an unproductive part of the economy.

But the tax subsidy was around for generations (even longer than the GSEs) before the bubble. It didn't cause the bubble and getting rid of it won't prevent the next one.

Neither will complaining about greed.

To fix the problem requires some basic rules -- such as limiting loans to a reasonable percentage of appraisals based on the lower of comps, replacement cost, or rental value -- and an uncaptured regulator willing and able to close down credit when the party is just getting going.

That used to be the job description for the Fed. But much of the credit is now outside the banking sector and the Fed has relatively limited ability to reach it. In any event, the Greenspan/Bernanke Fed has been unwilling to use the powers it does have -- it needs to be less responsive to the big banks and more to credit worryworts, if there are any left.

Probably, today, it requires closing down the derivative CMBO markets entirely and seriously limiting the primary ones.

And finding a way to make banking/financial trading sufficiently unprofitable that it goes back to being the sinecure for dumb rich kids instead of the place where the smartest, smarmiest guys on the block figure out how to evade the rules and tear the faces off anyone who isn't as smart as they are. Some tightened up version of Glass Steagal, a transactions tax, and more, I suppose.

Educators explaining why renting makes more sense when prices are high and how to tell when prices are high would also help. That's what you are doing here, with some success I think. Someone with a bigger bullhorn needed to do it long ago -- Greenspan, perhaps? But it isn't enough. Far more people are going to buy or rent houses than are ever going to read Kindleberger or learn how to calculate present value of an expected income stream.

"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"?"

"Educators explaining why renting makes more sense when prices are high and how to tell when prices are high would also help. "

huh? are you f$$cking kidding me? there are plenty of educated people out there that bought homes they could not afford.

you cannot prevent GREED.

you can only try to deter it.

that's were you lost me FG!

An individual as well as a bank has to be held accountable and cannot expect BIG GOVERNMENT to bail him out because she/he made a mistake. This will be the only way to prevent it.

"Ino -- To me, it's more interesting to think about how to prevent the next one than who to blame for the last one."

One view of the democracy put together by our Founding Fathers in America is based on a fundamental notion. That fundamental notion is that no one can be trusted, so you need a system of checks-and-balances to keep everyone else in line. Tyranny lies in the belly of every man & woman, so you need to system that directs this nature of mankind toward a collective good.

If you want to fix the problem of bubbles, I think you have to understand that speculation lies in the belly of every man and woman. Solutions that don't acknowledge this have the same point of failure as the benevolent monarch. You think we can have a system where the speculative urges of one set of people can be controlled by another set of untaintable people. I am suggesting that until you acknowledge that other set of people have the same exact speculative urges, you have failed to understand the nature of the problem you seek to solve.

>I agree that the tax subsidy for mortgage interest is both popular and foolish, far more likely to be a subsidy to lenders and existing homeowners than to buyers and in any event encouraging overinvestment in an unproductive part of the economy.

You've previously said that the interest deduction for mortgages is ok for corporations. Why are you agianst individuals and pro-corporate when it comes to tax deductions?

>you have failed to understand the nature of the problem you seek to solve.

financeguy lives in an Ivory Tower. Everything can be solved with a pencil and slide rule.

no mention of ECMH here, just the "anti-American" congressmen.. where was Adam Smiths analysis or Ronald Coase's?

"So if the government (meaning the Republicans, mainly) chose, we could create sustainable real demand by filling some of the vast need for government services and production, thereby eliminating the recession entirely. It's not like we have all the quality education, effective regulation, sound pensions, affordable healthcare, high speed transportation, environmentally-friendly energy sources, pharmaceutical R&D, high density housing, celebrity drug rehab programs, and other government services that people want.

And perhaps he can't, or perhaps Obama will win but not by enough to overcome the forces of anti-Americanism in the Congress. In that case we are in for a hard time. It is very hard to create demand by firing people, cutting back government and importing. Tax cuts for the rich aren't going to convince businesses to invest when their customers aren't going to spend, or customers to spend when they are worried about their jobs or their medical insurance or further cuts to their pensions."

After this drivel, you wonder why people on this board don't engage in "polite" debate.. come on--
hmmm what would Plato think..

talk about pompous

nada, i agree with much of what you write. however, we went from a period of extreme bubble to bust to a relatively long period of banking stability, albeit admittedly with a S&L crisis to remind us of the errors of excess along the way (and LTCM, if you must, but that was along the way to our current debacle). it IS possible to minimize, although certainly not eliminate (you wouldn't want to, because it is stimulative) speculation.

you seem to be arguing two things that are both true, but should, i think, lead to a different conclusion. you are arguing that personal culpability ought to be the norm, we should all grow up and grow a pair, and that people are incapable of thinking rationally in the face of group think behavior. i also think that both of these premises are true. which is why the experts (in this case banks) are expected to behave responsibly (and should be required to do so because of their responsibilities as entities insured by us all and their responsibilities to their shareholders). until recently it was presumed that banks were conservative, they wouldn't LET someone borrow way beyond their means. i'm not absolving the masses, but there has been a pervasive media/government/real estate industry/bank push to encourage people to own, and to own as much as possible. additionally, most people, sadly, are not that financially savvy. personal finance should be a high school course requirement, honestly.

econ isn't a science, but underwriting is a fairly simple process. i'm not for excessive regulation, but certain industries have managed to do very well burdened with consumer protection. for the record, we've bought five properties over the last 20 something years, and only once have we put down more than 10%. underwriting is far more complicated than one number, but it is nonetheless not so hard.

I'm sorry aboutready, you know I don't like to pick on you. But, "underwriting is a fairly simple process", "underwriting ... is nonetheless not so hard".

Can you come up with a more compelling argument?

very funny. but you must be joking. underwriting is as simple as it gets. although they often get it wrong.

this quote is not totally apples to apples, but it resonates nonetheless.

"actuary. a job for those who can't tolerate the fast-paced life of the accountant."

and your libertarian soul just didn't like the rest of the message. but i respect your diversionary tactics.

Simple but they often get it wrong.

Interesting. But also not interesting... at the same time.

yes HB, "underwriting is a fairly simple process",.. "underwriting is far more complicated that one number".

What a refreshingly (largely) thought provoking thread - I may have to visit Streeteasy more often if this keeps up... :)

I see a lot of merit on both sides of this discussion - so much blame to assign.

Thanks for laying out the arguments, Streeteasiers.

brooksie, how stupid are you? one number is not enough to underwriting make, but you really can plug all the numbers into a program and spit out a number. and if you are old school, you can simply have a good look at a file and weigh the risks, which bankers did for years.

hb, respectfully, i don't give a shit if you don't find it interesting. at the same time or otherwise.

interesting. how you don't have anything substantive in response.

So it's easy as one number or far more complicated?

What the hell? underwriting is easy. really. ask northwestern mutual.

brooksie, you have no idea what you're talking about. nor does RS or notadmin. it you look at success rates for mortgages prior to this last six-year period you'd be stunned at the success rates for mortgages you would have, with your biased perspectives, assumed would have failed. and i'm really f'ng tired of posting those sources so tough.

the bottom line is that the vast majority of home buyers are not, according to common definition, speculators. most really just want a place to live. and so many overspent, often convinced by those in authority that they could. and many of them have lost their homes, just not so many in NYC.

Was LTCM a bank?
Did the government bail them out?

whatever. so, what numbers matter in underwriting? can you tell me? because you seem to have a lot of opinions about loans, but not a hell of a lot of real info.

did the government bail them out? you've got to be fucking kidding me.

funny Ar, Go back to Apartment comping bcs my dear you have no F^%ling idea idea what you are talking about.

"and so many overspent, often convinced by those in authority that they could." huh? what authority figure convinced them to overspend? a RE broker is an authority figure now?

really.. come on. do you actually believe what you write?

excuse me, dear? you are out of your mind.

a government "assisted" situation organized by the fed? really?

brooksie, you write horribly. i suspect you're not so clever, but really, your writing may hide many of your problems because who can or is willing to follow it?

are you like, 22, or something? because back in the day we older people were told that banks wouldn't give us loans that we couldn't afford (at the time we applied, obviously we could be stupid and take out more debt after, but even that was tough).

it used to be hard to get a loan. it is again, but for the wrong reasons.

$300 million: Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P.Morgan, Morgan Stanley, Salomon Smith Barney, UBS
$125 million: Société Générale
$100 million: Lehman Brothers, Paribas
Bear Stearns declined to participate.

what's your point? really.

god, you're a mess. do you even know what you stand for? or hate?

This makes sense to you, "underwriting is a fairly simple process",.. "underwriting is far more complicated that one number"?

are you drunk?

I heard you drink a lot

I am 12? how p;d are you 80?

i know exactly what I stand for. And, I don't hate anyone. People that think they are soo smart make me laugh.. like you... hahahah

you heard? and you believe? really?

welcome to modern america. and the sheep.

i suppose you don't think you're soo smart.

underwriting is simple, but it involves more than just a down payment number. got it? it's not so hard.

how p;d are you? i'm sorry, that's none of your business.

"i also think that both of these premises are true. which is why the experts (in this case banks) are expected to behave responsibly (and should be required to do so because of their responsibilities as entities insured by us all and their responsibilities to their shareholders). until recently it was presumed that banks were conservative, they wouldn't LET someone borrow way beyond their means. i'm not absolving the masses, but there has been a pervasive media/government/real estate industry/bank push to encourage people to own, and to own as much as possible."

I think it is a mistake to expect experts to behave responsibly. Everyone has speculation in their bellies. I think it is a mistake to think that the media won't encourage a speculative frenzy, or govt, or relevant industries. Everyone has speculation in their bellies. And I think it's a mistake to think people won't go silly on something because they think it is a sure thing with no risk despite fundamentals. Everyone has speculation in their bellies.

If we as a nation want to go on pretending that people did not / do not buy homes as an investment, hoping prices would go up, then we miss the point. If you want to have banks, or people, or any other part of the system behave responsibly, good luck with that. It won't work. People will speculate, it's in their nature.

Now you can mandate restrictions on the system to dampen speculation. Minimum downpayments, verified income, etc. But it is a mistake to think that the placement there is to deal with irresponsible lending. You put it there as a convenient place to deal with everyone's speculation. To think the former leads one down the path of "Oh but look, we've been responsible all this time, we are experts, we know what we are doing, remove the unnecessary restrictions." No one knows what they're doing. Everyone will speculate.

Of course it's human nature to speculate. Which is why occasionally we seem to muster up the wherewithal to conceive of and implement some methods to protect certain basic public needs, such as ensuring a functioning, boring, commercial banking industry.

Your argument is ENTIRELY consistent with my view. Which is that you SHOULD assume such tendencies, and public policy should take steps to minimize the harmful tendencies. Not eliminate them, because as is true with many negative tendencies, the propensity to speculate leads to much good as well as bad.

Inonada:

So let's assume everyone has speculation in their belly. I don't think it's true, but it's close enough for a first approximation. (Most of the middle class, in my opinion, would far rather have security, but lottery tickets are attractive when slow and steady no longer gets you anywhere; until recently, government officials and opinion makers often saw speculation as akin to larceny, another thing people often assume everyone is prone to but better off without.)

What's your policy recommendation? For about half a century, the New Deal system damped down the speculation; since it died, the system has become increasing unstable, growth has slowed, and far more of it has gone to the very top. What now?

I think maybe a lot of posters here are looking at the Arizona/Florida model of the foreclosure crisis - where people who, for the most part, already owned first homes bought secondary homes as a means of generating wealth, and then when the value of those homes dropped, walked away.

That was certainly a speculative bubble.

But what about the rust belt (Ohio/Michigan) model of the foreclosure crisis? That seems to be, by and large, middle-class homeowners who re-mortgaged their primary homes to extract the equity to pay for silly luxuries like healthcare. Ten years or more of stagnant income plus rising costs = you start eating your seed corn.

How in the richest country in the world do we prevent that?

ali r.
DG Neary Realty

"That seems to be, by and large, middle-class homeowners who re-mortgaged their primary homes to extract the equity to pay for silly luxuries"

Mortgaging their home to buy silly luxuries.

This is not greed?

We're not the richest country in the world anymore, but Roy Johnson is Public Enemy Number One: http://www.nytimes.com/2012/07/19/us/foreclosure-rates-surge-for-older-americans-aarp-says.html

But at least we still have heroes to look up to: http://dealbook.nytimes.com/2012/07/18/bank-of-america-2nd-quarter-profit-of-2-5-billion-beats-estimates/

Brooks2 -- So you are offended by my calling Congressmen who advocate actions that will cause unnecessary misery to Americans "anti-American." Ok, delete the adjective.

The rest of the post is absolutely mainstream macro-economics as taught in every undergraduate economics course since 1945 and practiced by every President and Congress, until the current Congressional Republican caucus decided that defeating Obama was more important than reducing unemployment, preserving the American bond rating, or even helping the states continue to provide essential services.

That's "anti-Americans" in my view, but you can call it "peanut butter" if you like. Or explain why bad is good, if you can.

that's funny.. But I don't think you paid much attention in your undergradute macro-economics course if that is all you got at of it.

out

> If you can demonstrate how prices can simultaneously reflect and not reflect fundamentals, you should publish it immediately.

Unfinanceguy, ARE YOU SERIOUS ? let me give you one current example,

SPX trading around 1380'ish. 10-year Treasury yielding 1.5%. Which one reflects FUNDAMENTALS ?

Give me a break UFG-- "So you are offended by my calling Congressmen who advocate actions that will cause unnecessary misery to Americans "anti-American." "

you are a joke

> But what about the rust belt (Ohio/Michigan) model of the foreclosure crisis? That seems to be, by and large, middle-class homeowners who re-mortgaged their primary homes to extract the equity to pay for silly luxuries like healthcare. Ten years or more of stagnant income plus rising costs = you start eating your seed corn.

Still boils down to greed! Put another way, wanting something for nothing. It takes two to tangle no matter how you slice and dice it. Everyone involved must bear the consequences. What's so hard to understand about that ?

no wonder why everyone on the board disagrees with the BS you spout..

start over in Econmics 101. get a real education

I'm up $300k on $700k sprint position in 4 months.

I'm not speculating, I'm providing capital to enhance society's need for iPhones.

If I am upside down on sprint, I'd like all the bankers, politicians, re borkers and anyone else 'in sprint' to manipulate the 'mkt' so I can still keep my 'investment'. Cause I DESERVE it!

Look at me I'm on a re board! NOT making $300k in 4months.... Plenty of time for sprint to hit $6 /share. Oh i loves beings self serving prick.

> But what about the rust belt (Ohio/Michigan) model of the foreclosure crisis? That seems to be, by and large, middle-class homeowners who re-mortgaged their primary homes to extract the equity to pay for silly luxuries like healthcare. Ten years or more of stagnant income plus rising costs = you start eating your seed corn.

isn't it obvious that it's through improving the health care sector and avoiding obesity/diabetes? not through manipulating real estate prices? it's like saying "hey, that people had to fill for Ch11 cause of credit card payments covering medical costs. it's time to fix the credit cards!"

till voters are not willing to support what needs to get done to fix health care (allow insurance to compete interstate, break up monopolistic hospital networks, provide super cheap catastrophic insurance for the young, and why not give incentives for medical turism & cutting obesity/diabetes) then Ch11 will happen, whether they paid with the house, with credit cards, you name it!

I heart notadmin.

Not bc you told a Harvard flunkie Borker what a self serving / caviar eating bleeding heart shill she iz, but bc you got you got your 'priority' hat on straight.

"I heart notadmin."

Ditto.

W64, is there a valuation thought involved behind $6/sh that you want to share w/ us? Or Sprint ticker is just easy to remember?

"I'm not speculating, I'm providing capital to enhance society's need for iPhones."

You are a selfless American, providing for your country. If you can come up with a story on how you intend to use the profits for a worthy cause -- like caring for your aging granny or buying computers for your children's educations -- then the rest of us will feel your pain and cover your losses should you ever head underwater. We'll do that even if you don't bother to take the few percent of your gains so far and buy options to guarantee that you'll stay above-water no matter what.

"What's your policy recommendation?"

Here are some ideas:

1) Smack down the banks w/ regulation.
2) Get rid of Freddie/Fannie since they encourage systemic risk.
3) Get rid of the mortgage tax subsidy.
4) Have underwriting standards determined by either the Fed or Congress, so as to make them difficult to weaken over time.
5) Force the Fed to include home prices in CPI.

The top ones are pretty boiler-plate ideas, the later ones I haven't heard of so much.

I kinda like the last one. People want to make an argument that homes aren't for speculation, people got suckered into paying up in a bubble for a basic need, it's unfair that I'm calling it speculation, etc. OK, fine. Then let's stop treating homes as a speculative asset and start treating them as a consumer goods. The beauty of stuffing it in CPI (like it used to be) is that the Fed is forced to respond. It doesn't matter who/why/what/where the speculation gets going.

Just a thought, maybe there are bad things to it. Probably. But the point is that if we think everyone will speculate given the opportunity, and we don't want speculation on homes, then let's stop treating it as a speculative asset.

again i say, tumbleweeds gone. rejoice. how the eff did they grey out fg? too many words?

> > If you can demonstrate how prices can simultaneously reflect and not reflect fundamentals, you should publish it immediately.

Unfinanceguy, not responding to the example cited ?

SPX trading around 1370'ish. 10-year Treasury yielding 1.45%. Which one reflects FUNDAMENTALS ?

he doesn't have a clue what he's talking about. That's why,