|
|
News item from the AP this morning (since updated with an L.A. Times story): "Treasury Secretary Henry Paulson sought for the second straight day to calm investors panicked about the financial state of Fannie Mae and Freddie Mac, saying the agency aims to keep the mortgage finance companies 'in their current form' without a government takeover."
His attempt to calm investors was not particularly successful: At 10:15 L.A. time, Fannie Mae shares were down $4.05, or 31%; Freddie Mac shares were off $2.01, or 25%. Those are the declines this morning. Fannie lost nearly a third of its value today. (Update: At 11:20 a.m., both stocks had recovered some of their losses; Fannie was down 22% for the day and Freddie 9%).
In a note to clients today, Goldman Sachs puts the Fannie-Freddie crisis of confidence in pretty good perspective. The issue, Goldman says, it not how the government figures out a way to keep these two companies alive. The issue is how does the government figure out a way to make them bigger, and in a hurry. That's because, Goldman writes, the U.S. economy desperately needs Fannie and Freddie out there buying mortgages; otherwise, the economy is in even deeper trouble than is now obvious.
From the Goldman note: "The key significance of Fannie Mae and Freddie Mac in the current economic climate is their ability to soften the impact of the credit crunch. Of the almost $25 trillion of lending capacity to the nonfinancial private sector, roughly half -- on-balance-sheet lending by banks and quasi-banks plus private-label securitization -- is either stagnant or shrinking at present. This means that the other half -- of which the $5.3 trillion Fannie/Freddie book of business is the biggest component -- needs to grow rapidly to generate at least some credit growth over time."
More: "In this environment, the federal government will not only need to stand behind the GSEs but will need to encourage them to continue growing their book of business. Should the market turmoil continue, the administration is therefore likely to continue escalating its signals of support, first with verbal measures -- beyond Treasury Secretary Paulson's brief statement this morning -- and proceeding to outright credit support if needed."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: U.S. Treasury Secretary Henry Paulson, left, looks on as President Bush talks to the media after a meeting with members of his economic team at the Department of Energy in Washington today.
Credit: AFP/Getty Images
Those following the progress of the Dodd-Shelby mortgage rescue plan in the Senate might want to check out two solid pieces of enterprising reporting on the bill this weekend.
First, the Examiner's Tim Carney reports that the bailout section of the Dodd-Shelby bill is, in the words a lobbyist, "exactly what Bank of America and Countrywide wanted."
Is there a connection between Bank of America and Sen. Christopher J. Dodd (D-Conn.)? There is. Carney: "Bank of America's political action committee (PAC) has donated $20,000 to Dodd since he became chairman of the banking panel 17 months ago. From January 2007 to March 2008, Bank of America employees have donated at least $50,400 to Dodd's campaigns, according to the Center for Responsive Politics."
National Review's the Corner follows up, citing an internal Bank of America document:
"National Review Online has obtained an internal Bank of America "discussion document" (PDF here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill .... This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill."
Faithful readers of the blog will remember that Bank of America has been pushing hard for a big federal intervention for months. This was from a New York Times story on BofA's lobbying efforts back in February: "Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates. 'We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,' the financial institution noted. In practice, taxpayers would almost certainly view such a move as a bailout."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Hat tips: Mr. Mortgage, The Mortgage Lender Implode-O-Meter and MN via e-mail.
 Worthwhile reading: "Why a Housing Bailout Won't Help," an interesting piece from the Wall Street Journal's Holman Jenkins Jr.
Most of you have read the anti-bailout argument in many forms and forums. What makes this piece interesting is Holman's snapshot analysis of the underlying mortgage mess as a relatively simple, regional problem: too many people made bad bets on the future of residential real estate in remote southwestern suburbs. Think Palmdale, Inland Empire, newer parts of Sacramento, San Diego, Phoenix and Vegas. Put these areas together on a map and you have what Jenkins calls "a single, nearly contiguous blob reaching from Sacramento to the environs of Las Vegas and Phoenix."
His analysis neatly summarizes a trend I've written about here: bad bets on the future of far-flung suburbs. Holman calls these "communities that now appear to have little future." Ouch.
What's wrong out there? Jenkins: "Many of these homebuyers are underwater not just because they bought
more house than their incomes could support, and not just because
prices are falling. They were also betting on commute patterns and
demographic expectations that are proving invalid.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat tip: EP, via e-mail.
Photo Credit: Associated Press
 In talks led by Democrat Chris Dodd of Connecticut (pictured), Senate leaders have reached another tentative agreement on a voluntary mortgage rescue fund that would not immediately use taxpayer money, The Wall Street Journal reports this afternoon. Reuters reported a similar deal last week.
The Wall Street Journal: "The top two members of the U.S. Senate Banking Committee said Monday they have reached an agreement on a housing aid package that includes a regulatory overhaul for Fannie Mae and Freddie Mac."
More: "The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans. One compromise proposal discussed last week would use the money from an affordable housing fund created from Fannie Mae's and Freddie Mac's earnings to help pay for the FHA guarantee program."
Analysis: Having Fannie and Freddie bear the cost of a new insurance program, and the risk of re-defaults on re-written loans, if that is the ultimate Senate plan, will probably satisfy some of the no-bailout crowd in Congress. But it loads those companies up with more risk, and marginally increases the chances that taxpayers will ultimately pay for Fannie and Freddie's various mistakes and generosity. Relatedly, it's not clear how Fannie Mae and Freddie Mac would use their earnings to pay for anything these days -- they reported a combined $2.65 billion in losses earlier this month.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP
 Excellent story today in the Wall Street Journal elaborating on a tidbit that was on the blog a while back: The anti-bailout website AngryRenter.com is run by Washington insiders who own million-dollar houses.
As L.A. Land reported a while back, the website is the brainchild of Freedom Works, a think tank run by Dick Armey (pictured), a conservative Republican from Texas who once served in House leadership.
The Journal: "Angry they may be, but the people behind AngryRenter.com are certainly
not renters. Though it purports to be a spontaneous uprising,
AngryRenter.com is actually a product of an inside-the-Beltway
conservative advocacy organization led by Dick Armey, the former House
majority leader, and publishing magnate Steve Forbes, a fellow
Republican. It's a fake grass-roots effort -- what politicos call an
AstroTurf campaign -- that provides a window into the sleight-of-hand
ways of Washington."
The Journal reports Armey is pulling down a comfortable $500,000 salary at Freedom Works, and that he lives on 78-acre spread in Texas valued at $1.7 million.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Hat tips: hp100, via e-mail, paynoattentiontothatmanbehindthecurtain, via comments.
Photo Credit: Associated Press
Breaking news from Reuters: "Key members of the U.S. Senate have reached a deal on a sweeping housing rescue plan that would see Fannie Mae and Freddie Mac backstop a government mortgage insurance fund, two industry sources said Thursday.
More: "Sen. Christopher Dodd, chairman of the banking committee, said that a deal had not been finalized. But the plan outlined by the sources says the two mortgage finance giants would offer the funds to cover the costs of a $300 billion mortgage rescue fund."
One member of the Senate who will probably not be voting in support is our old friend Jim Bunning of Kentucky. Highlights of his comments today in opposition to the bill: "A major part of this bill is a big bailout for irresponsible lenders and borrowers.... The whole idea of bailing out people who took a gamble and lost is an irresponsible way to spend the taxpayers' money. I do not think the people back in Kentucky sent me to Washington to bail out speculators, Wall Street executives, and people who drained the equity in their homes to buy flat-screen televisions and new cars."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
 Regular readers know I am a fan of mortgage broker/Fed watcher/pundit Lou Barnes, and his column this week is worth your time. The final years of the housing bubble were not complicated, he argues: Bad loans were made to financially suspect borrowers, by the millions. Excerpt:
"The elephant in the room, who cannot be mentioned in polite company: We gave mortgages to a few million households with deficient long-term financial behaviors, hopelessly incompatible with home ownership.
"That’s a hell of a thing to say about fellow citizens, but it is the case. 'Sub-prime' by definition meant below the minimum standards of the FHA. Roughly $1.5 trillion will default: half of sub-prime and a like amount of the worst of Alt-A.
"A year of all-out foreclosure prevention by traditional means has failed: recasting, forbearing, capitalizing interest, refinancing, canceling adjustment ... all. The new measures include writing down loans to the level of fallen market value and refinancing the remainder. Fairness aside (deeply unfair to families who tough out this cycle), two realities will defy the new efforts. First, write-down/recast will leave these households still with no equity, no up-side to defend, and new monthly payments still higher than rent on equivalent housing. That ownership-rent gap has gaped throughout the cycle; the good news for a foreclosed family: Replacement housing is cheap and plentiful.
"Those in authority demanding foreclosure rescue, Barney Frank and most of Congress, joined by compassionate Americans, cannot conceive the financials of a 575 FICO sub-prime applicant. A dozen or more late payments, several defaulted loans, and a large mass of consumer debt outstanding; poor job stability (temporary, seasonal, intermittent, commissioned sales); also no money, no savings, retirement or otherwise, often tens of thousands in consumer debt, huge negative net worth ... before purchase.
" 'But, you bailed out Wall Street -- why can’t you do the same for these people facing foreclosure?'
"Bear Stearns was not 'bailed out.' It was liquidated in an orderly manner.
"Wise, tough-love policies would encourage rapid recycling of foreclosures, enabling quick acceptance of short-sale offers by servicers terrified of value second-guessing, and above all, making financing available for strong households to buy the foreclosures. The marketplace can absorb the volume, but it needs help. Orderly liquidation.
"(Before you come after me with tar and feathers, know that my mother lost her Ada, OK., home as a teenager in the 1930s. I know what foreclosure means.)"
Your thoughts? Comments?
Photo Credit: AP
 The Barney Frank mortgage rescue bill got all the big headlines today, but the House also passed a more straightforward bailout bill: Rep. Maxine Waters' bill to give local governments $15 billion to run out and buy foreclosed houses.
Waters: "This bill provides effective and meaningful help that is targeted, timely and temporary.... First, this bill targets assistance where it is most needed. The $7.5 billion in grants and $7.5 billion in loans would be allocated to states based on the number of foreclosures and the number of subprime loans 90 days delinquent and then adjusted to account for median home price. Second, the bill put funds 'on the street' quickly enough to stimulate the economy."
More on the bill, from the Congressional Research Service: "Limits the use of such loans to: (1) purchasing or financing the purchase of qualified foreclosed housing for resale as housing for homeownership to families having incomes of up to 140% of the median income for the area in which the housing is located; (2) rental of such housing only by families whose incomes do not exceed 100% of such median income in the area; and (3) rehabilitation of such property for the purpose of reselling it within three months at a price as close as possible to its acquisition price."
I've written before that this a bad idea. Foreclosed houses will sell at the right price. If they're not selling, the price is too high. Giving local governments money to buy houses is a sweet deal for lenders -- they get a willing buyer with cash who is also a clueless negotiator. And do you really trust your government to go shopping for bank-owned properties without playing favorites? Do you trust your government to inspect, remodel and sell or rent a bunch of broken-down houses in a timely and cost-efficient manner?
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: U.S. Rep. Maxine Waters (D-Los Angeles), by Getty Images.
 Rep. Kevin McCarthy (R-Bakersfield), pictured, tells the L.A. Times that his constituent mail on the Barney Frank mortgage rescue plan was running "50 to 1: 'Don't bail these people out.' " McCarthy voted against the bill.
Other interesting tidbits from Richard Simon's piece on latimes.com about how the House vote unfolded today on the mortgage rescue bill:
--One California Republican, Rep. Gary G. Miller of Diamond Bar, voted for the bill. Otherwise, the vote in the California delegation split along party lines, with Democrats supporting the bill and Republicans siding with the White House in opposition.
--Miller said Frank "helped win his support by adding a provision that would permanently raise the maximum mortgage the Federal Housing Administration can back to $729,750 from $362,790." (Aside: Did anyone ever believe that increase would be temporary?)
--Three Californians skipped the vote: "Reps. John Campbell (R-Irvine), Laura Richardson (D-Long Beach) and House Speaker Nancy Pelosi (D-San Francisco) did not vote. By tradition, the speaker seldom does."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: kevinmccarthy.house.gov
 News item: President Bush today promised to veto the Frank mortgage rescue bill now before the House, saying the proposal to write down, refinance and guarantee mortgages "will reward speculators and lenders” who have suffered because of their own foolishness.
More, from The New York Times: Democratic Rep. Barney Frank, anticipating a veto pledge, said on Tuesday evening that a veto would signal that the president was abandoning efforts to help homeowners and would mean that "he’s stopped trying to govern."
Analysis: The president is right, up to a point. The bill would reward speculators and lenders (It would offer lenders a better price for their distressed mortgages than the private sector is currently offering. That is a reward of sorts. It would also offer speculators new, cheaper mortgages -- by far a better deal than the private sector is currently offering them. Again, a reward of sorts.)
The larger question, though, is whether the Frank bill would work and how much it will ultimately cost taxpayers. The Congressional Budget Office has said it won't put a floor under housing prices and won't stop a recession from happening, but it will prevent some foreclosures.
My suspicion is that the ultimate cost to taxpayers of Frank rescue package will be significant, but will be dwarfed by the larger mortgage-related bills coming due soon. I'm talking about the likely cost to taxpayers of cleaning up the mess that Fannie Mae and Freddy Mac are very busy making right now. Again The New York Times: "... some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments."
Remember, folks, the mortgage market in this country was effectively nationalized over the past six months. There's Fannie and Freddie and the FHA, and that's about it. The market is groaning under the weight of bad loans, and the odds are increasing that you and I will ultimately own them, whether we want to or not.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Getty Images
 From a front-page story in today's LATimes about the impact of the slowing economy on younger workers: "Dulce Maya is worried that she won't be able to squeeze by much longer. The 27-year-old restaurant manager bought a three-bedroom, two-bath house in Fontana for $350,000 two years ago with a $5,000 down payment and an adjustable-rate mortgage.
"This year, her $2,300 monthly payment will probably rise to $3,300 and her work hours were recently cut because business is slow. Maya has asked her bank to lower her payments so she can keep her house, which is now valued at $200,000, and expects to hear back in the next few weeks. If it doesn't agree, she says, she may have no choice but to hand the bank the keys.
"'I don't know what happens next,' Maya said. 'I may try and rent an apartment for around what I'm paying, but rents are going up too.'
Random thoughts and bloviations:
1) The estimated decline in the value of the house is 42%. In two years.
2) Is this mortgage salvagable? And should it be saved? The Dodd-Frank plan, as I understand it, would offer the lender the following deal: The government will guarantee a new mortgage at 85% of current appraised value, or $170,000. That would certainly make payments more affordable: roughly $1,100 per month for a 30-year-fixed at 6%. This appears to be a pretty good deal for the homeowner.
But it raises questions: Is a lender going to take $170,000 for a $345,000 loan? (It's more complicated than that: There are probably two lenders involved.) And what are the neighbors going to think? I'm talking about the neighbors who have just dropped their cable TV service and taken part-time work so they can pay their $3,300 mortgage on a similar house. Kinda makes them feel pretty silly if the house can be had for one-third of what they're paying.
3) In a long newspaper article about economic trends, the best anecdote is often at the bottom of the story. This one was.
Your thoughts? Comments? Feel free to correct my interpretation of the Frank bill. E-mail story tips to peter.viles@latimes.com.
Photo Credit: LATimes.
The L.A. Times reports this morning that the Dodd-Frank mortgage rescue plan is in trouble in Congress: "Mortgage industry intransigence, voter anger over possible government aid for speculators and economists' fear that thousands of homeowners might just walk away from troubled loans are contributing to a potential stalemate."
The Frank plan would ask lenders to write down troubled mortgages by roughly 15%, and then put federal guarantees behind the newer, cheaper mortgages.
The anti-bailout sentiment so widespread on housing bubble blogs appears to be a factor in the bill's troubles: "'There is no sympathy for anything that smacks of bailout,' said Allen Sinai, chief economist of Decision Economics Inc., who recently testified in favor of the Frank bill. 'The outrage has shown up very quickly, and means that at this point the government can only go so far.'
There is also the question of how well the Dodd-Frank plan would work, and the risk that it would stick the government with a large pile of bad debt. A congressional report on the plan concluded it would not stop the sharp drop in housing prices, and raised other serious issues. For example, if the government is essentially paying 85 cents on the dollar for mortgages through new guarantees, the mortgage industry has strong incentive to game the system by selling only those mortgages that are worth less than 85 cents on the dollar. Only the weakest, least valuable mortgages would get rewritten. Relatedly, borrowers would have new incentive to manipulate their personal finances to qualify for the program -- if it means missing a few payments, some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage, the congressional report predicted.
Your thoughts? Comments? Email story tips to peter.viles@latimes.com.
Congress appears to be heading toward approval of some version of the Dodd-Frank plan to write down, refinance and then guarantee as many as 1 million mortgages. What's not to like? Plenty, according to this report from CNN Money, which highlights several arguments against the write-down rescue plan:
-- Robert Shiller, the Yale economist who has long argued there was a bubble in home prices, said the plan will do little to stop the slide in housing prices -- he argues prices have further to fall to reach historical norms.
-- If Shiller is right, and prices continue to fall, "the FHA would be left with a large portfolio of loans backed by houses worth less than the mortgage... the government (and hence taxpayers) would be on the hook for billions of dollars in bad loans."
-- It might not be in the best economic interests of homeowners struggling to meet mortgage payments. MIT professor William Wheaton "argues many of the homeowners now facing foreclosure could be better off renting the same home at current market prices, rather than trying to refinance the mortgage.... For this reason, he thinks the government would be better off giving tax assistance to companies willing to buy foreclosed properties and then rent them to the current occupants."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
A couple of quickies this morning:
--A new online poll from AOL and Zogby International finds that "45 percent of Americans feel that the government should not help homeowners at risk of foreclosure by offering special financing programs, rebates or credits." The poll was taken in mid-February and released today. Same poll finds that 47% of Americans would consider purchasing a home they had found by searching foreclosure listings.
--The L.A. Times conducts an autopsy on the congressional attempt to change bankruptcy law to allow bankruptcy judges to change home mortgages to stave off foreclosure. Cause of death: an intense and somewhat misleading lobbying campaign by the lending industry. "The Mortgage Bankers Assn., which spearheaded the Capitol Hill campaign, claimed that the bankruptcy measure would drive up the costs of all new residential mortgages by as much as 2 percentage points.... But that claim has come under fire by critics who say the MBA cherry-picked data to paint a bleak picture of sharply higher mortgage rates. The association also misquoted a study by the nonpartisan Congressional Budget Office in a way that made it seem that the CBO supported its position against the bill."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
A quickie tonight from the hometown newspaper: "Democratic voters in key primary states don't oppose the Bush administration's action to save investment firm Bear Stearns Cos. from bankruptcy, but most also think the government should bail out homeowners caught between rising mortgage payments and falling home values, a Los Angeles Times/Bloomberg poll has found."
The key states where likely Democratic primary voters were polled are Pennsylvania, North Carolina and Indiana -- I'm not sure any of them contain markets overheated by the housing bubble. Here's the housing bailout question: "Are you in support of or opposed to the federal government bailing out individual homeowners who have been caught between rising mortgage payments and falling home values?"
In Pennsylvania, the responses broke like this:
Strongly in support of: 34%
Somewhat in support of: 29%
Total in support of: 62%
Strongly opposed to: 15%
Somewhat opposed to: 13%
Total opposed to: 28%
Don't know: 10%
My two cents: I'd love to see a good California poll on housing issues.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
 The man from Chicago said small-town Americans (or is it just small-town Pennsylvanians?) are bitter, so now we are discussing elitism, populism, guns and churches.
This post is about none of those things. It's about bitterness, anger and confusion over the government response to the housing slump.
Bitter and angry: Angry Renter, who does not want to pay for a foreclosure bailout, posted this video on YouTube, which argues, "Don't Bail Out Bob -- Or His Bank!" It's only 50 seconds long, go ahead and watch it.
Truth in lobbying: Who's the Angry Man behind Angry Renter? It's former Congressman Dick Armey, who heads up Freedom Works, a conservative think tank, and who argues in this other YouTube video, "The American people are not looking for another big bailout program.")
Confused? That comes from Fed-watcher, mortgage broker and bailout supporter Lou Barnes, who argues Americans are getting fed up with the lack of a cohesive government response to the mortgage problem: "In this leadership vacuum, the American people are confused, worried, and p--ssed, which is the soul of good sense."
For the record, your blogger is neither bitter nor angry, but is often confused.
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Associated Press
 We're at a point in the housing crisis where some stories have been written again and again and again (The Coming Option ARM Reset Crisis!). Sometimes, though, a new and compelling version of an old story comes along that is worth reading -- and this particular version of the "coming Option ARM crisis" story, from Slate.com, is worth the effort.
We all know of the massive pile of ARMs due to reset, with bad consequences. The Slate story stresses a new angle: The biggest, baddest, stinkiest pile of ARMs due to reset is in California, and home prices in California are dropping rapidly. Do the math: resetting mortgage payments plus recession plus falling home values equals... a potentially huge wave of homeowners walking away from their mortgages: "Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages."
More from Slate.com's Mark Gimein: "Over the next several months, we're going to be subjected to a chorus of hand-wringing about the moral turpitude of people who walk away from their mortgage..."
We've discussed this issue at length here, and many of you have argued that this is an economic issue, not a moral or ethical one. The lenders knew the risk when they made these loans that one day they might end up owning the house. That day is coming: "Lenders had no reservations about selling borrowers loans with rising payments that would be poisonous in a rising market. Now it seems borrowers have no reservations about leaving those lenders with the risks they begged to take."
This is the wave of jingle mail that scares Washington and Wall Street and is motivating federal policy discussion right now.
Worth reading. Your thoughts? Comments? Email story tips to peter.viles@latimes.com.
Hat tip: PS via email, others via comments.
Photo Credit: LATimes
 This blog has been teeing off on the proposed tax break for home builders, and this morning I gave the blog over to Daniel Gross' rant that the tax break is "perverse" and "absurd." I thought it only fair to invite someone from the other side of the debate to weigh in. That said, here is guest blogger Patrick Duffy, who blogs at HousingChronicles.com:
"While I can understand and sympathize with bloggers, readers and journalists such as Daniel Gross who remain adamantly opposed to any alleged special treatment of home builders at potential taxpayer expense, such emotionally wrought arguments conveniently ignore both rational discourse and historical precedent.
"Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications. No matter how many safeguards they put in place to clamp down on speculative activity –- borne out of a similar scenario in the late 1980s when flipping houses in between phases became a new sport –- speculators knew that builders weren’t really in the business to enforce such contractual provisions, so they took the risk anyway. And other than a few lonely voices in the blogosphere, the conventional wisdom at cocktail parties was that such activity was a surefire way to build long-term wealth. Lesson learned: Never trust people drunk on either alcohol or their own supposed genius.
"Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that nonspeculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement in between job opportunities.
Read more Defending the tax break for home builders »
 The main housing debate in our nation's great sausage factory is over write-downs, or cram-downs: Should lenders be encouraged (forced?) to write down bad mortgages, and if so, under what terms, and what possible benefits? And where do the new mortgages come from, and who is on the hook for them?
That said, the Senate, in its great wisdom, continues to push for a seemingly unrelated tax break for home-builders. The headline above comes from a particularly scathing Slate.com analysis in which Daniel Gross argues that the tax break -- technically a "tax-loss carryback" -- is better described as "a bubble-head tax break." Oh, yes, and it's "perverse, absurd and unwarranted."
Gross: "The proposed tax break is hard to justify for several reasons. It does nothing for slow and steady companies that keep their heads and simply rack up profits year after year — and pay their taxes accordingly. Rather, it rewards the most reckless participants in the bubble. If you borrowed a ton of money to build spec houses in Miami and reported $2 billion in profits between 2002 and 2007 but gave up all those profits by notching a $2 billion loss this year, the extended carryback has a great deal of value. If you've been building affordable housing in Wichita, Kan., and booked $300 million in profits in those years, and then, through careful management of costs, managed to eke out a $5 million profit this year, it has no value. The big public homebuilders, whose shares rallied on the news of this potential tax break, didn't pay any windfall taxes on the bubble-era earnings. Why should they get an extraordinary post-bubble windfall?"
More: "The proposal to give new tax breaks to homebuilders and banks is yet another example of the pernicious trend of privatizing profit and socializing losses, which is gnawing away at faith in the system. Dilute the shareholders, not the taxpayers."
Your thoughts? Comments? Email story tips to peter.viles@latimes.com
Hat Tip: Patrick.net
Photo Credit: Getty Images
 A programming note: Sen. Jim Bunning of Kentucky will appear on cable TV tomorrow (Thursday) to explain his opposition to the Senate's housing bill, which he has called "unusually bad." The senator's office reports he will be a guest on CNBC's "Squawk Box" at 8:15 a.m. Eastern (5:15 a.m. local) and on CNN's "Issue #1" at noon Eastern, 9 a.m. local time.
Bunning does not strike me as a reader of blogs, but he is listening to somebody: "It turns out that the American people don’t like the idea of bailing out banks and their neighbors who gambled on home prices," he said this week. "The voters understand what is going on in Washington, better than we do."
I look forward to a full report on the senator's Squawk Box appearance in the comment section from one of you early risers.
Photo Credit: File photo of Jim Bunning via AP
 The rush in Congress to agree on an emergency housing bill appears to have given way to a three-way muddle, with the House, the Senate and the White House staking out different positions. A muddle is not necessarily a bad thing, but that's where we are:
The AP today: "The Bush administration announced new steps Wednesday to help more homeowners head off foreclosure. The Senate, in the meantime, worked to complete a bipartisan housing bill the White House says would worsen the mortgage mess."
The new White House proposal could be called Dodd-Frank Lite -- a limited and voluntary version of the widespread mortgage write-downs and new guarantees favored by Sen. Chris Dodd and Rep. Barney Frank: "It is a more modest version of a concept Democrats have recently been pushing to respond to the housing crisis, which would have the FHA back from $300 billion to $400 billion in restructured loans for distressed borrowers if lenders were willing to take a substantial loss on the mortgages. The administration's idea, however, would reach far fewer borrowers than the Democrats' proposal -- roughly 100,000 rather than between 1 million and 2 million -- without requiring lenders to take large losses."
The administration laid out its most explicit criticism of Dodd-Frank, saying it would "'essentially put taxpayers on the hook for a large number of non-performing loans." The administration also criticized the Senate's proposal for grants to allow local governments to buy foreclosed homes, calling it "a costly bailout for lenders and speculators.''
Your thoughts? Ideas? E-mail story tips to peter.viles@latimes.com
Photo Credit: AFP/Getty Images
 Sen. Jim Bunning, formerly of the Philadelphia Phillies and now of Kentucky, receives special attention around here because he was the first U.S. senator to find fault with the housing bill that is dominated by tax breaks for home-builders. Today Bunning explained his objections to the bill in detail. Excerpts:
"This is an unusually bad bill, and I have opposed it from the start. The course it has followed almost guarantees that it will be filled with the worst kind of gimmickry. And it is. The Senate may be the world’s greatest deliberative body, but this bill is anything but the product of deliberation. It is a jumble of disjointed ideas, unlikely to solve the crisis at hand, and it’s unpopular.
"It turns out that the American people don’t like the idea of bailing out banks and their neighbors who gambled on home prices. The voters understand what is going on in Washington, better than we do. ...
"Another provision that deserves far more scrutiny is the $4 billion in community development block grants that will be allocated to state and local governments to buy foreclosed properties. To begin with, this program is very poorly managed. The Wall Street Journal called it among the worst-run programs in Washington, and there is a lot of competition for that title."
Read more Sen. Bunning on the housing bill: 'Unpopular,' 'unusually bad' »
 All kinds of news is breaking out on the real estate beat today. A quick catch-up:
--The White House voiced strong opposition to the Senate housing bill, saying it "will likely do more harm than good by bailing out lenders and speculators, and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations."
--Washington Mutual found some new friends with money: "The Seattle-based thrift scored a $7 billion capital infusion Tuesday from a group led by private equity shop TPG." WaMu said "mortgage problems will lead to a $1.1 billion quarterly loss and the elimination of 3,000 jobs.... It also plans to close its 186 stand-alone home loan offices and stop offering loans through mortgage brokers."
--The National Assn. of Realtors reported that "pending sales of previously owned homes fell a bigger-than-expected 1.9% in February to the lowest level on record."
-- Last, never least, the L.A. Land blog launched several photo galleries in the popular, user-generated LATimes.com photo gallery Your Scene. The above photo, taken in Mar Vista this morning, is from the Foreclosure gallery. Post your photos, it's easy and free. Other L.A. Land galleries include Weird L.A. Houses, Under Construction and Tree of the Week.
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
The L.A. Times this morning explores the issue of whether the government should offer mortgage aid -- a bailout, for lack of a better word -- to the "undeserving." Peter Gosselin's front-page article observes that, in previous crises, the government has erred on the side of helping the overall economy rather than trying to determine who deserves special aid and who doesn't.
"And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore."
A couple of thoughts: You would think it goes without saying that many oppose these mortgage aid packages for very specific reasons, but it doesn't -- so I'll say it: Many Americans oppose mortgage aid right now because they believe lenders and borrowers participated in an unsustainable housing bubble that drove up prices, enriched millions, gave the economy a false appearance of prosperity, and made housing unaffordable to those who refused to take foolish mortgage risks. This argument is particularly potent in Los Angeles, where soaring housing prices long ago lost touch with income levels, and home ownership levels lag well behind national rates.
Many of these bailout critics also argue -- they argue it here daily -- that government attempts to prop up housing prices will ultimately prolong the housing crisis rather than shorten it. In other words, there are two arguments here: the first is fairness, the second is whether a broad bailout provides "a benefit to society as a whole" -- whether it will work.
Will a widespread bailout help the reckless and the undeserving? Probably. Here's PIMCO economist Paul McCulley: ".. The inequities smell to high heaven, and that is one of the huge problems in dealing with it. It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Catching up on weekend reading: The Fortune magazine interview from last month with economist and columnist Paul Krugman is worth reading for its matter-of-fact pessimism. Highlights:
--Krugman sees housing prices falling by 25% "overall" and worse here: "In places like Miami or Los Angeles, you could be looking at 40% or 50% declines."
--Krugman sees economic recovery, as defined by job growth, coming in summer 2010 -- at the soonest: "But I wouldn't be surprised if it goes longer than that -- maybe into 2011."
--He sees a good chance the Fed will reduce interest rates to zero. (Not a typo.)
--Lastly, he favors public investments to revive the economy. This is not surprising given Krugman's general political leanings, but his reasoning is worth noting. "... Since this thing is going to go on for a long time, effectiveness is more crucial than speed. I'm actually for public investment now -- repairing bridges, building infrastructure. Normally people say if you try to do any public investment to stimulate the economy, the recession will be over before it can come online. But I don't think that's a problem this time."
Economist Stephen Roach made a similar argument a few weeks ago, and I tend to agree with it. Instead of focusing on "putting a floor" under housing prices, government should focus on public works projects. I know a large city of 10 million people or so that could use a decent public transportation system.
Here's a prediction: By election day, the economic argument will no longer be focused on how best to help homeowners avoid foreclosure but instead on what kind of major stimulus efforts are needed. Expect the Democratic nominee to embrace Krugman's logic.
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
 A couple of you noticed that one United States senator -- baseball Hall of Famer Jim Bunning, a Kentucky Republican -- voted "no" on the housing bill that includes big tax breaks for home builders.
This prompted praise in the comment section for the hard-throwing conservative from Kentucky.
Firesale wrote:
"94 to 1 Senate vote for a Bailout.
I guess that solves it.
BUNNING FOR PRESIDENT!"
Later, "J" wrote:
"Firesale, I agree with you. I sent Bunning an email yesterday telling him how impressed I was with him standing up and doing the right thing. I also told him how I am a lifelong democrat who is fed up and willing to change teams over this."
Bunning (pictured) didn't go looking for publicity on this. He did not make a speech on the Senate floor opposing the housing bill and did not put out a press release. Earlier this year he cast doubts on the idea of government purchases of mortgages, saying, "I am concerned that further government action will expose taxpayers to excess risk or be a bailout."
His comments yesterday on the Bear Stearns bailout are also worth noting. The preferred narrative in Washington at the moment is that the collapse of Bear Stearns was a freak, unforeseen, rumor- and panic-driven "run on the bank" that forced the Fed's hand in the middle of the night. Bunning, at yesterday's Senate hearing, wasn't buying it: He accused the Fed of "ignoring repeated red flags in the run-up to Bear's failure."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Office of Sen. Jim Bunning
 From today's L.A. Times, on the Senate's housing bill: "The bill also includes $4 billion in block grants to allow communities hard-hit by foreclosures to buy and rehabilitate vacant or abandoned homes."
Think about this one for a second. Do you really think this is the best way to sell off foreclosed houses? Do you really want the city of Los Angeles running around town with a pile of your money buying foreclosed houses from the banks and lenders? And then using your money to renovate those houses? We're talking about the Los Angeles Housing Department -- the same people who paid $18,000 to a Zen Buddhist priest from Hawaii for management training. Do you really think that crowd will spend money wisely fixing up foreclosed properties? How much do you suppose the city will pay for a $109 toilet? Do you think for a second the city's buying criteria and process will be transparent?
Sorry, I got a little worked up there.
This is all a wind-up to pitch yet another worthwhile op-ed piece today on latimes.com, in which Paul Thornton argues that government should not be in the business of propping up housing prices: "Congress ought to get out of the way of market forces and let home prices drop -- and yes, that does mean more foreclosures. For those of us who don't qualify for government assistance, it's our only shot at affordable housing."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: Los Angeles Mayor Antonio Villaraigosa, by Getty Images
 After yesterday's debate here about tax breaks for home builders, two wire stories caught my eye this morning.
This from the AP: "A measure billed as boosting the slumping housing market showers money-losing businesses with $25 billion in tax relief in the next few years but offers just $3 billion to homeowners. The estimates released Thursday by congressional scorekeepers lend credence to accusations that the measure helps businesses like home builders while doing little to help millions of families threatened with foreclosure."
Here's the other one, from Bloomberg: "KB Home shareholders rejected a labor union proposal to tie executive pay to the Los Angeles-based home builders' performance. ... KB Home said last month it paid Chief Executive Officer Jeffrey Mezger $16.4 million in the 2007 fiscal year, his first full year as CEO."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP
 No joke: Wall Street Journal columnist Holman Jenkins suggests that bulldozing vacant homes would be a better government policy than the currently brewing stew of bailouts and tax breaks.
"Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars," he writes. "It can proceed experimentally. It can be turned off quickly when the need evaporates. It would not be a lesson to Americans that housing debt is not real debt and need not be repaid. It wouldn't benefit the most irresponsible lenders and borrowers at the expense of responsible ones. The housing market would still have to hit bottom, but the bottom would be higher (and sooner)."
Even if you think the bulldozer option is too far out there, the column is worth reading for its well-reasoned takedown of the thinking behind a bailout. As Jenkins points out, the only way to structure an effective housing bailout -- if that's really what you want to do -- is to construct a bailout that saves speculators from bad bets: "Behind the fig leaves that will be frantically waving, a lending bailout would be effective in stemming foreclosures and propping up home prices only if taxpayer money were used to put speculators' housing bets back 'in the money.' "
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: AP
A number of you have questioned whether a tax break for home builders is accurately described as a bailout. Let me make a few points as we continue the discussion.
--The New York Times calls the proposal "a break for struggling home builders, allowing them to claim current losses against taxes paid in earlier, more profitable years. This provision, intended to aid home builders, would cost about $15 billion in the first year."
--Senators Baucus and Grassley, in their housing proposal, estimate the cost of these "refunds" -- their word, not mine -- at $6.1 billion. You can find a link to the Baucus/Grassley proposal on Market Beat columnist Tom Petruno's new L.A. Times blog, Money & Company.
--Let's remember that most big home builders are also lenders. What's being discussed here are multi-billion dollar tax refunds for builders and lenders, refunds they are not entitled to under existing tax law.
--Lastly, let's remember that the builders made a ton of money in the bubble. Executives were paid very well. Then they overbuilt, and now they're stuck sitting on inventory of unsold houses. My vision is not great, but I can't see why it would be a bad thing to let the builders reduce prices until they sell off the inventory, without any special help, encouragement, or refunds from the federal government.
Enlighten me. Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
 It appears Treasury Secretary Henry Paulson's brief tenure as the administration's chief critic of foreclosure bailouts is coming to a quiet end.
You will remember it was Paulson (pictured) who called bailout plans a "nonstarter," saying "absolutely not" to talk of direct government aid to homeowners. Well, that was then.
This is now, from Bloomberg News today: "Treasury Secretary Henry Paulson indicated the Bush administration is willing to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages. 'I think you will continue to see flexibility as we learn and go forward,' Paulson said in an interview with Bloomberg Television in Beijing."
More: "Paulson's housing comments are a shift from last month, when he said proposals to use government funds were a 'nonstarter'' and played down concern about homeowners whose houses are worth less than what they owe on their mortgages."
Diversion: I knew this little dance reminded me of something, and then it hit me: The very end of one of the greatest scenes in Hollywood history, the Joe Pesci "Funny how?" scene in "Goodfellas." The part of the scene everybody remembers is when Tommy DeVito (Pesci) browbeats Henry Hill (Ray Liotta), demanding: "Funny how??? I'm a clown??? I amuse you??? Funny how???"
DeVito ends the scene by saying: "I wonder about you sometimes, Henry. You may fold under pressure!"
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: AFP /Getty Images
 First developing news: The Republicans in the Senate, evidently fearing voter backlash, have agreed to work with Democrats on a big housing bailout. From The New York Times: "With both parties in Congress voicing a new urgency to help millions of homeowners at risk of foreclosure, the Senate voted overwhelmingly on Tuesday to move forward with a package of housing legislation."
The L.A. Times: "The breakthrough came after lawmakers returned from a two-week spring
recess during which the federal government stepped in to rescue
investment bank Bear Stearns Cos. and the country's economic troubles
dominated the presidential campaign."
Now part of the bailout you haven't heard much about: tax breaks for homebuilders. "Corporate homebuilders -- including those responsible for the mortgage and housing crisis -- would receive billions of dollars in tax breaks under a provision of the Foreclosure Prevention Act currently pending in Congress," the Laborers' International Union of North America argued in a news release today.
More from the union: "Under the bill's little publicized 'carry-back' provisions, builders would get billions in tax breaks. The carry-back provision would allow homebuilders to apply losses from 2006 and 2007 as far back as five years against taxes paid on profits."
Bloviation: When Congress is through with the omnibus foreclosure prevention legislation, it says here it will resemble the world's largest Christmas tree, with boxes of bailouts, goodies and giveaways for every Who down in Whoville and every interest group and corporate lobby remotely connected to the business of building, buying or financing houses. Don't be surprised if the homebuilders find two piles of goodies under the tree: carry-back provisions to reduce taxes, and new tax incentives to encourage buyers to purchase new homes.
The tipping point in this debate was when the Fed backed the bad assets of Bear Stearns. Whether that event is most accurately described as a bailout, a liquidation or a burial is irrelevant. It opened the floodgates. "If we can bail out Bear Stearns, we can certainly provide aid to... (fill in the blank)."
Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo: Los Angeles Times
 I hope those of you who like to make a punching bag out of my employer (no, not Sam Zell, the Los Angeles Times) have noticed that the newspaper continues to publish full-throated, anti-bailout opinion pieces.
Last week it was economist Christopher Thornberg's politically incorrect, but historically obvious argument that the housing bubble was caused by "greed on steroids."
Today it's Peter Schiff, who writes on the opinion page that bailouts won't work, and housing prices must be allowed to fall to a "sustainable bottom" -- levels supported by the market, not by government intervention.
Highlights:
"At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. The only mechanism to restore balance and get the credit flowing is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed."
"The government is trying in vain to get funds flowing again and put a floor under prices. But it's too late. U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, 'teaser' interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities. Knock out even half of these pillars and the house comes crashing down. We've knocked out all of them. Yet everyone hopes that this allegorical house can defy gravity and that bubble-era prices can be sustained in a post-bubble world."
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo: Getty Images
If you're up for some pragmatic, pro-bailout, big-picture thinking, check out this interview with PIMCO economist Paul McCulley. I'll summarize and highlight, but encourage you to read it for yourself.
McCulley's take on real estate right now is that no-money-down, underwater homeowners are making a rational business decision by walking away from their mortgages (where have we heard that before? From readers of this blog). "When you have no skin in the game ... it’s eminently rational to go into early payment default." This, McCulley argues, is creating a deflationary spiral in home prices.
One problem with a deflationary spiral like this, he argues, is that smart buyers (of homes) refuse to buy into it. Who wants to catch a falling knife? So prices continue to fall. But won't investors buy the homes as rental properties at some point? McCulley says prices are so far above that point that the decline would be hellish: "That would conceptually be your
floor, but that is so far away from here that the economy would have to
go through absolute hell to reach that point."
The solution? Like many others, McCulley looks favorably on the Barney Frank proposal, in which banks would write down problem loans rather than foreclose, and then the government would guarantee new loans at lower amounts, in hopes of keeping underwa | |
