Paulson’s comments: 3 years late and a few hundred billion dollars short (Not bad for guvment)
I have been out of town for a rather large portion of the past 6 weeks. I have traveled all over the country and to our neighbors in Canada. I will say that it sucks to go to Canada and see “.90″ taped to cash registers so ‘we’ would know that the US Dollar was only worth 90 cents to them.
I don’t have time for a long post, and honestly I don’t know what else I can say that I haven’t already. I will reiterate that this ‘thing’ is going to be way worse than the Fed, Wall Street, and most analysts predict. I have said it many times before…the ‘data’ these people are analyzing is trash. They are analyzing numbers but have no idea what is really behind those numbers. Remember a few months ago where many ‘experts’ said this was quickly working it’s way through the system? Were they right?
Since it has been a while, let’s look a few things quickly:
Now have the Treasury Secretary Henry Paulson chiming in on the ‘mortgage mess’. I don’t know if these people really are clueless, or if they have a ‘financial’ interest in always being late to the party with their comments. I know they don’t want to start a panic, but would it have been so bad for them to tell people to only buy what they can afford when the real estate bull market was off and running? Come on people, this is NOT rocket science…it is basic high school math. I don’t have a lot of time, but let’s look at a few comments from Secretay Paulson.
Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.
Just how should government do this? Government gets money from 1 source…the taxpayers. So any type of guvment assistance is coming from taxpayer dollars. I reread the US Constitution again, and no mention anywhere about taking money from people that can afford their house and taxes, and giving it to people that cannot afford the mortgages that they legally signed onto. I don’t care what fancy terms the government ends up using, there should be ZERO bailout of banks or borrowers. I know there will be repercussions…just like doing 21 shots of vodka on your 21st birthday. It sucks when the party is over and you are are wrecked mess…but learn from it, and don’t do it again if you don’t like feeling like crap.
What I really want to get into is how the financial industry can help things. What are they supposed to do? The financial industry keeps getting pressured to ‘refinance’ borrowers no matter what. But tell me how the heck you are supposed to do that??? Let’s do something that is obviously old fashioned…let’s crunch some numbers!!!
Let’s look at a homeowner that is going to foreclose on their $450k ’starter home’. Let’s say they did a 3 year 100% interest only ARM at 5.5%. That puts their mortgage payment at $2,062.50 (not including taxes, insurance, or anything like that). Now let’s assume their mortgage adjusted and they have to start paying principal and the rate jumped to 6.5% (which could still be low…but for the sake of numbers it will be fair). Do not forget that because they made an ‘interest only’ payment for 3 years, they have to pay off the loan in 27 years. Let’s look at the new principal and interest payment at the higher rate for the $450k loan. The new payment for the next 27 years paying principal and interest is now: $2,949.99. Outch!!! I don’t know too many people that can afford another $800+ a month when their mortgage payment adjusts.
To make matters worse, not only are property values dropping, but so is the value of the dollar. Buying a $500k house that loses 20-40% in value is like getting punched in your stomach…combine that with the fact that the value of the dollar has conservatively dropped 10% is like getting kicked in the balls afterwards.
BUT, getting kicked in the balls isn’t so bad if you get a 160 million dollar ‘parachute’ afterwards. Yes, you know what I am talking about.
I actually saw an article where they used the word ‘trillion’ to describe the amount of potential damages caused by this ’subprime’ mess. Sadly, I am not surprised one bit. Every level of government in this country from the city, state, and federal level is in debt. They spend on emotion and not on logic. And somehow we are surprised when businesses and individuals do the same. The only difference is that individuals cannot just ‘print money’ or use the power of the ‘gun’ to generate higher tax revenues.
Anyway, I am going to continue posting here as I have time. Don’t worry, if and when something major happens, I will be here to discuss it. Don’t worry, I am following what is going on. This thing is going to take YEARS to pan out, so don’t lose sight of that. I am focusing on my other business, and things are going well.
Stay tuned…
SoCalMtgGuy
November 8th, 2007 08:16
SoCalMtGuy, you wrote:
> I don’t know what else I can say that I haven’t already. I will reiterate that this ‘thing’ is going to be way worse than the Fed, Wall Street, and most analysts predict.
I think at least the market is catching up to your view. Look over at the Calculated Risk blog where they show the graphs of how much different tranches of mortgages are worth today. Even AAA tranches (implying treasuries’ security) is down to 72.5 cents a dollar, under
http://calculatedrisk.blogspot.com/2007/11/abx-cliff-diving.html
What could you say more? It would be good to remind people that the mortgage crises is not some Act of God coming over us like a Tsunami but came from a deliberate act of financial engineering to rake in fat comissions as long as it was possible while shifting risk to others, see e.g. under
http://calculatedrisk.blogspot.com/2007/11/wamu-and-rep-war.html
November 8th, 2007 15:55
I agree…. I also saw him promote giving tax dollars to companies who HELP homeowners stay in their homes. He essentially wants to keep all of their profits inflated at the expense of the dollar. The best thing gov’t and the FED can do is leave it alone, let the correction happen and be done with it. Let’s make it quick and painless. Sure, the rich will lose a crapload but we won’t have such a wealth disparity and this country and economy can get back to being great again.
November 8th, 2007 21:47
Just as bad as the guvment is the media. You see all these talking heads saying that Bernanke needs another rate cut to help fix this mess. Can’t they see that the Fed is “painted into a corner” as far as rates go. We have gotten to the point of diminishing returns on rate cuts, a cut of 2 whole percentage points isn’t going to help this mess. In fact I think an upward increase in interest rates is what we need, to inspire more saving and low and behold, maybe actually increase the value of the dollar.
Everything from the cost of a new home to a head of lettuce at the grocery store is so out of whack with wages. Our economy needed a down cycle to get things realligned with reality. Those who have shown discipline during this time of “free money” will be rewarded when the bottom does get here.
November 12th, 2007 09:10
Brownie said, “Those who have shown discipline during this time of “free money” will be rewarded when the bottom does get here.”
I wish you were right, but I think the Fed will set policy and inflation so those who speculated or lent money where they shouldn’t have will instead be bailed out and those who were responsible will pay the bill.
November 21st, 2007 13:15
California governor Schwarzenegger announced a “deal” with four lenders: ARMs in their portfolio will require borrowers only to pay the teaser rates for some additional years, until “the housing market retuns”. It is not clear yet how many years are added, if the outstanding payment is added to the principal and who initiated the deal - the lenders have a large interest not to be stuck with too many foreclosures. SoCalMtGuy, do you know more about that?
November 21st, 2007 22:31
Peter,
I have not heard that yet. I don’t see how a govenor can make a deal with lenders…unless the lenders are physically the ones holding the paper, and even then, I think it would be a tough deal to put together. Most lenders were selling the ‘ARMs’ and only keeping the lower risk loans if they were keeping loans at all.
That said, what does ‘until the housing market returns’ have to do with anything?? So what…the madness can start again and these people can sell for big profits??? The PROBLEM is people DON’T MAKE ENOUGH MONEY TO AFFORD THEIR LOANS!!!! There is NOTHING short of MAKING A LOT MORE MONEY that can be done to ’solve’ this crisis.
Propping up the value of assets is a ‘feel good’ proposition, but will only make things worse in the long run.
Happy Thanksgiving!
SoCalMtgGuy
November 22nd, 2007 12:03
I hope you enjoyed all your travels both in the US and Canada!
I just have to comment on the “0.90″ signs you saw on the register. You sound offended by them. Those are there no matter what the US dollar is doing. Years back it would say “1.40″ exchange. When was the last time a Canadian could ever travel to the States and get our money even ACCEPTED anywhere? The stores only do that because Americans don’t bother getting Canadian money. There was no insult intended by any “0.90” signs. Again, Americans have been treating Canadian money like dirt for as long as I’ve been going down there. You can’t use any Canadian for anything.
November 22nd, 2007 13:43
Debbie,
Canada is a great country. I guess.
November 22nd, 2007 20:15
Debbie…
I was not offended by the signs. I just had not seen them the last time I was in Canada about 6-7 years ago. I thought they were there to let people know that the dollar is no longer on parity with the canadian dollar.
That said…I am back in Canada for another week of work, and some ‘non-socal’ weather!
SoCalMtgGuy
November 26th, 2007 17:48
Finally someone’s brought up the weakness of the dollars as a contributing factor to the ‘real’, inflation and currency-adjusted value of a home.
Nicely done.
November 26th, 2007 23:08
As always, a very intriguing read. Crazy times indeed. We are in dire need of change and a long way from it.
November 30th, 2007 16:38
Well, today was full of renewed babble about a subprime bailout….”freezing” interest rates of those borrowers who can’t afford their reset payment. Okay, what about Alt A borrowers, we all know they are the next tsunami. What about prime borrowers who squeaked into a home they really couldn’t afford over the long haul either.
I know we’re it’s election time next year, and the politicians are all about happy talk for the sheeple, but it is just maddening to hear this bailout talk again. Not everyone owns a home. Not everyone bought irresponsibly.
December 2nd, 2007 15:25
SoCalMtgGuy:
the wall street journal says:
Clinton to Call for Foreclosure Freeze
Hillary Clinton is expected to call for a 90-day moratorium on home foreclosures and a five-year freeze on adjustable-mortgage rates, in a sign that the housing crunch is resonating on the campaign trail.
it’s not just the liberals — Paulson is calling for similar measures.
Can measures like these really be enacted? How will they affect the market? Will they just prolong the inevitable, or not prolong it at all?
The most frustrating part is that I didn’t buy because I thought it was a speculative bubble, so i saved my money and waited, and now the people who made idiotic decisions are going to get bailed out?
How can this be?
December 3rd, 2007 15:46
No matter what kind of fix they choose or impose the results will be the same. Life happens. Meaning when someone who needs to get out of a house because of a job transfer/change, divorce, medical issues, etc.. will still be in a world of hurt. The borrower/buyer pool is severely limited, due to stricter underwriting, and days on market are starting to climb. I am in TX and have had friends that have had 2 contracts fall through because of financing and the house down the street from me has been in option pending twice. This same house has been on the market for over 6 months. Also, 2 people I work with in a small company are trying to get out of their 0 down no equity situation as we speak. It is closer to home than most of us on this site conceive. There is no band-aid big enough for this fiasco.
December 4th, 2007 20:19
I think most would agree there is more turmoil to come in the housing/mortgage/financial markets. It’s kind of frightening to think how much worse the whole situation could become. Falling dollar (falling even more if the fed cuts rates like everyone is clamouring for), rising oil, 2 million ARM’s resetting in 08, and this is all with a strong job market.
Went to a property auction in Denver last weekend. They auctioned off 120 bank/lender owned properties around the metro area, and another one with another 100+ properties is scheduled in 2 more weeks. Most seemed like good deals compared to prices 1-2 yrs. ago. I think we are still a year or 2 away from the bottom of this mess.
December 5th, 2007 15:02
A must see video for the folks that still visit here:
http://www.vcconfidential.com/2007/12/blodgett-helps.html
December 5th, 2007 20:29
Dogma,
That video was downright hilarious!!
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