David Laibson has a good start, outlawing the prepayment penalty.
The prepayment penalty allows for “loss leader” loans, because it it offers an incentive to provide “loss leader” loans, because it makes it prohibitively expensive to get out of those abusive loans.
I would add outlawing, or severely limiting, points, which provide a similar incentive.
Congress could do this tomorrow, and it would help a lot of people now and in the future, while not bailing out bad actor lenders.
Bush has proposals for mortgage crisis.
The question is who is he paying off with this? Is it poll driven or contributor driven?
Dean Baker has some good analysis.
Basically, his plan is to allow poor people to get even further over their heads by waiving the 3% FHA equity requirement, and to forgive the taxes on the forgiven debts that are foreclosure, which benefits the richest families (higher tax bracket) more than the poor ones.
There is also the inevitable jawboning about going after bad players in the market.
Bush and His Evil Minions™ have a good record on going after evil doers. Where’s Osama bin Laden again?
So, it will make things worse, and benefit the rich….Any Questions?
Well, it turns out that if you need work done on your house, your contractors will show up on time, and may finish the work on budget and ahead of schedule.
They might even ask to show up ahead of schedule.
Used to be, if the contractor finished the same year as promised, you counted yourself lucky.
These guys are seriously hurting right now.
Rich Karlgaard, who thinks that comparing a Democratic candidate with Franklin Delano Roosevelt is somehow a slur.
It isn’t, not in the general election, and particularly not in the Democratic primary.
It’s easy to see why he’s so profoundly misinformed, as he tells us with self assurance that only comes from being an economic knuckle dragger, who are in no short supply at Fortune magazine, that the investment class “went on strike” in 1937*.
I guess that would explain the soaring mattress sales at the beginning of that year, they had to put their money somewhere.
While it is clear that criminals bury their money in low return investment when the heat is on, most investors are law abiding and moral individuals, who continue to invest. Tax and regulatory policy can determine where they invest, but not how much.
*In reality based economics, what happened was that Roosevelt thought that the depression was over and he backed off the new deal, for example cutting the WPA funding by half.
One thing that you can be sure of is that any news story on real estate will be mindlessly optimistic. There is too much ad money out there for it to be otherwise.
In this case, they talk about rising new home sales, but ignore the following:
We are still very early into this.
Brad Delong quotes Lawrence Summers, who asks “Why Haven’t the Conforming Mortgage Cap Amounts Been Raised?”, and Mr. Delong further says, “These are wise questions. I don’t understand why the conforming mortgage dollar caps have not already been raised substantially.”
Let’s be clear here. They are probably both smarter than I am. They definitely both have far more training in economics.
That being said, I think that, in a world where economic policy is run by sane competent men*, that any sort of recovery should answer some questions first:
In terms of what I would suggest for initial steps:
*Yes, I know, that’s not the case right as long as Bush is in office.
The Federal Reserve is allowing CitiGroup and Bank of America to make massive transfers to their brokerage sides.
Jesus H. Christ on Toast!!! Doesn’t anyone remember what happened during the depression???? It’s why, until the mid 1990s, banks were forbidden to own brokerage houses.
This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed’s move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don’t have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed’s discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.
These rules are not for good times, they are for times like now. They are there to prevent the financial system from going down the drain as good money follows bad.
Helicopter Ben has made a very bad move.
Remember when I wrote about how imporper disclosure may invalidate many of the sleazy subprime loans because of the truth in lending act?
Well, it’s not just blogs like the Big Picture covering this now, it’s on Yahoo, via CNN Money.
We are going to see millions of the suits, literally.
(Via the Big Picture)It appears that failure to disclose loan terms according to the Truth-in-Lending laws can change the loan status.
It turns out that there is a provision in the Truth-in-Lending Act that allows debtors to rescind their loan and void their mortgages if the terms of the loan are not clearly spelled out.
You still owe the money, but they are now just another creditor, at the back of the line, and protections from homestead provisions and bankruptcy would still apply.
One wonders how *chough* Alan Greenspan ignoring the Fed’s role in mortgage lending *cough* the lenders could have screwed up so badly on something that was both cheap and easy.
There is a report from Challenger, Gray & Christmas showing job cuts in the financial industry skyrocketing this year. There have been about 88K redundancies so far this year, as versus about 50K for all of last year. Extending the numbers out, it looks like there will be 104+K job losses this year in the industry.
The question of course is, now that we don’t actually make anything here, what are we going to do when people cannot get jobs selling houses or financial instruments to outselves?
I commented on it briefly, and the stocks recovered, the Murdoch Dow ending down only 15 points, after being down more than 300 points.
Well, now I know why: the Fed cut the discount rate by 50 basis points. An surprise half a percent rate cut has a way of getting people to buy stocks.
I don’t think that it will mean much in the long term. As Nouriel Roubini says, “Given the serious insolvency – rather than just illiquidity– among many economic agents (many mortgage-burdened households, dozens of mortgage lenders, homebuilders, some hedge funds and financial institutions, some distressed corporates) a formal 25bps cut will not make much of the difference as you cannot solve an insolvency problem by throwing liquidity at it.“
Dean Baker has a good take on the general cluelessness of NPR’s financial correspondent Adam Davidson about the credit crunch. They seem to think that it’s all the “subprime meltdown”, when it’s a more systemic problem.
I would generalize further regarding the press.
At this point in time, almost all of the Financial reporters are well behind the curve. We don’t have a problem with a small segment of the home mortgage market. We have a situation where credit is drying up because people cannot determine risk in any meaningful way.
It’s clear that even with the massive infusion of cash last week, people are finding it VERY difficult to borrow money.
Lenders in general are pulling back, and highly leveraged operators are holding paper that no one wants to buy.
If the Fed cuts interest rates, it’s likely to boost the Yen, which cause losses and resulting liquidations of people playing the Yen carry trade.
Over the past 35 years we have moved from a production and investment economy to a consumption and leverage economy, and at some point the music will stop, and it will get very ugly, possibly Argentina crash ugly.
Home sales tumble in response to credit crunch. Just so you know, that’s what the National Association of Realtors is saying, so that’s the sunniest possible outlook.
Stocks tanked yesterday because a French Bank said that it had to freeze funds for lack of liquidity. Basically the meltdown is going global, and the securities that they hold are illiquid. They are not normally bought and sold, so there is no market for them.
When Bear Stearns funds went out for sale, they were getting less than 10 cents on the dollar as offers.
The European Currency Board (ECB) and the Federal Reserve have injected billions in liquidity to prevent a collapse. While this is not an extraordinary action for the Fed, this resembles things like the LTCM bailout, it is for the ECB.
The ECB’s scope is far narrower than that of the Fed. They are not charged with anything but controlling inflation, at German insistence (there are still a few Germans alive remember needing a wheelbarrow of money to buy a loaf of bread).
It appears that American Home Mortgage will shut down Today. It’s lenders have made margin calls, and it has no money left.
This is not a subprime lender. This is an Alt-A lender.
American Home specializes in Alt-A mortgages, an alternative for A-rated borrowers who can’t satisfy all the terms for a regular “prime” mortgage. Founded in 1988 by Chairman and Chief Executive Officer Michael Strauss, the company became the 20th- largest Alt-A lender by 2006, according to trade publication Inside Mortgage Finance. IndyMac Bancorp Inc. ranked first.
This is not the first lender to go under, you can see the accellerating rate of mortgage lender failures at the Mortgage Lender Implode-O-Meter.
It’s clear to me that Bear Stearns is complete toast.
They have just halted redemptions on a third hedge fund. This fund had less than “0.5 percent of its assets in securities linked to loans to subprime borrowers”.
People are losing confidence in the market, and in Bear Stearns in particular.
My prediction: in one year, Bear Stearns will cease to exist. It will either be forced to liquidate, or it will be bought out in a fire sale. I’ve already written a post dated blog post for August 1, 2008 (it’s a year short, but 2008 is a leap year, so it’s 365 days, and August 1 is a nice round date).
My heart bleeds borscht for this muthaf#$@&^!
Subprime hedge fund manager forced to put yacht up for sale – Jul. 30, 2007
…..
John Devaney, the CEO of United Capital Markets, a fund that specializes in buying and selling bonds that are backed by the mortgage payments, particularly adjustable rate subprime mortgages, has put his 142-foot yacht “Positive Carry” up for sale, according to a yacht broker’s Web site.
Devaney’s fund has run into trouble lately. A spokesman for the firm told Reuters on July 3 that it had stopped honoring request from some of its investors for redemptions, or withdrawal, of investments.
…..Devaney told Money magazine this spring that despite problems that the loans cause for borrowers, the assets backed by them provided a good return for his fund.
“The consumer has to be an idiot to take on those loans,” he said. “But it has been one of our best-performing investments.”
I hope he gets cancer.
According to the yacht broker’s listing, the yacht has accommodations for 10 passengers in its five staterooms, along with space for a crew of seven. Its amenities include his and her baths in the master suite, and four guest bathrooms with Jacuzzi tubs and showers and cherry wood interior throughout.
It has two 2,250-horsepower engines and a range of 3,500 nautical miles.
The New York Post reported Monday that Devaney is also seeking to sell a home in Aspen for $16.5 million.
The Aspen Times reported in November that he bought that house, for $16.25 million, and that property includes a 16,000-square-foot main house and carriage house which include 16 bedrooms, 18 full bathrooms, two fireplaces, three kitchens and two caretaker bedrooms with bathrooms.
Unfortunately, this #$@&ing vulture is still rich.
Well, it looks like the housing bubble is bursting in Anchorage Alaska.
That’s right Anchorage, which is pretty remote, unless you live in Ketchikan.
Time on market has more than doubled.
Same thing with Hawaii, which geographically is one of the most remote locations on earth.
This is not a real estate crash. This is an easy credit, blood the economy with liquidity crash. That’s why this is not local.
People don’t buy houses on price, they buy it on monthly payments, and mortgages are still about 3% lower than historical norms.
The difference from 2 years ago is that the low rates created a frenzy, where people were afraid that they would never own if they did not buy right now.
Now there are people who believe (correctly) that if they wait, they will get a better deal.
That’s why you are seeing this in places like Anchorage, Honolulu, Wichita, and Indiannapolis. It’s a nation wide phenomenon.
It appears that we are starting to see An epidemic of abandoned houses.
This story is set in Chandler, AZ, just outside of Phoenix, but this is not the only place where this is happening.
A significant portion of the recent Chandler complaints are from newer neighborhoods in southeastern parts of the city where homes once sold for $400,000 or more and values have dropped, Carr said. Buyers who divorce, lose a job or can’t afford rising adjustable-rate interest are finding they can’t sell their houses for what they owe on them, he said.
This dovetails nicely into the return of Hoovervilles (Favelas) that I wrote about earlier.
The new economy that was supposed to be unleashed by deregulation is an old economy, a very old one. One that ended on Black Tuesday in 1929.
Even worse, it will be years before we can make what we need, because our economy has been hollowed out.