Panic misses Main Street

Submitted by Steve Hicks on October 3, 2008 - 12:37pm.

The Bailout does not address the real issue that created the mess. FORCLOSURES! We need to tackle this problem head on to bring on real market stability. One thing that could be done to create interest in the market place is to bring back the SIMPLE ASSUMPTION. This will bring millions of buyers to the negociating tables everywhere. If they can assume without qualifying, I believe many forclosures would be avoided by assumption of loan sales. I have been in the real estate business since 1967 . During the 60s 70s and early 80s 50% of our transactions were simple assumptions. The buyer offered an agreed equity down pmt. and took over existing financing. This saves the buyer and seller 4% to 6% closing cost. The fed would have to set aside due on sale clauses on all federal backed mortgages for a period of time until the market rights itself. This is a WIN-WIN for everyone. The seller gits rid of the property, the buyer gets a bargain and does not have to qualify. The mortgagee has their loan brought current and may have an assumptor who will pay on time until the mortgage is paid in full. What has anyone involved with the mess got to loose?

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Submitted by Peter Comitini on October 3, 2008 - 1:26pm.

You're right, there was no panic on Main Street, and no bailout on the first pass. But it wasn't because main Street doesn't get it, or "in part because of these damned elections". That was democracy working properly-- showing real disdain for having a trillion dollar bailout shoved down our throats, by an administration that has squandered its credibility. Main Street had every right to take moment, and it quite properly questioned the veracity of the claims. Main Street had the wisdom of holding out for a slightly better deal. So Wall Street had a 777 point hissy fit? It caused harm? Who cares! Don't underestimate the wisdom of the people or the marketplace. It was a global wake-up call to start correcting the system and evidence that Wall Street would be under close scrutiny moving forward.

Peter Comitini, New York City

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Submitted by RK Ruthman on October 3, 2008 - 1:27pm.

"...get bankers back to making loans."

This was no bailout for US citizens it was a golden life-perserver for financial institutions.

The US economy is in bad shape.

If economy remains status quo after the bailout, the government can say, "this bailout saved a from a far worse fate"

Nonetheless, the economy will stay be in bad shape, and we will never know what might have been if we had road out the financial disaster.

"...get bankers back to making loans."

I believe we have been given an opportunity to have the ability to spend more of what we don't have. We won't be able to pay it back because there will be lost jobs...

Oh, yippee!

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Submitted by Jon Astaris on October 3, 2008 - 2:02pm.

“The global element: The United States is the only domestic-driven economy on the planet; the rest of the world earns its rice and strudel by selling stuff to us.”

That is GLOBALISM for those who were wondering. The obvious problem is that the U.S. economy is not domestic driven any more. It used to be. What drives it these days is the black hole at its center. The strudel and rice eaters are lending us the money that we use to buy stuff from them. We backed those loans with our homes. For years now we simply inflate the value of the homes, suck up the bogus equity and buy, buy, buy, until the moneyed fools said No more, I want something else.

At this point, instead of stopping and taking a cold shower, instead of becoming again a true “domestic-driven economy” and closing up the black hole of consumerism-gone-mad that is sucking us dry, we have just thrown our children in it.

I don’t care how you slice it, Barnes. We haven’t just lost our freedom at this very juncture. We have sold our children into slavery as well.

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Submitted by John Owen on October 3, 2008 - 2:12pm.

John Owen

Steve's suggestion of allowing assumption of loans has some merit, but it won't help much if the amount owed is well above current market. We went through that in Oregon in the 80's with a 25-30% drop in values from the peak. That did not reverse itself until 1987-88. The more fruitful answer, but the one the lenders seem to resist, is loan workouts - whether it be modification of interest rate or even reduction in principal balance. The awful reality is: if we don't stop the next round of foreclosures prices will fall further, triggering a new round of foreclosures and so on... That will make that $700 B look like chump change.

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Submitted by Jon Astaris on October 3, 2008 - 2:25pm.

Steve Hicks has found the solution - sort of. If there had been NO bailout, the old-timers would have remembered those assumptions, AITDs, "subject to"s,leases with option to buy, memoranda, three-year escrows, bartering, to say nothing of Land Contracts - all these and other as yet unknown mechanisms would have come into play IF KONGRESS HAD DONE ABSOLUTELY NOTHING.

Moreover - as the dinosaurs fall, new and nimble financing creatures are beginning to spring from the shadows. Small local banks, bonds directly linked to mortgages, etc. There is plenty of cash looking for a safe place to go. The problem, the VALUE of these assets, instead of falling to its natural, MARKET level, is AGAIN artificially PROPPED UP by these insane devices. The "solution" actually makes the problem - INFLATED FALSE FAKE BOGUS house values - much, much worse.

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Submitted by Marc Rasmussen - Sarasota FL Real Estate on October 4, 2008 - 4:42am.

I think Steve's solution has merit. Allowing assumptions would help solve the problem. Loan modifications are needed as well. You have a lot of people that want to stay in their home but simply find it easier to give it back to the bank if they are $50,000+ upside down. Modify these loans to current market prices and more people will decide to not send their keys back to the bank.

This is a vicious snowball. The addition of foreclosures causes home prices to fall. Falling home prices creates more foreclosures as people become more and more upside down. This in turn will cause home prices to fall even more. You have to stop the foreclosures.

Sarasota Real Estate

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Submitted by Emily in Austin on October 4, 2008 - 9:25am.

I completely agree with RK here -- while the politicians said this bailout was for the American history, it seems so obvious that this is just for the financial institutions. It's the taxpayers who are funding this bailout and I don't know how this money will be paid back. The government has no problem spending money we don't have, though that's the exact issue that caused the American citizens to get in trouble.

Austin real estate | Lake Travis real estateLake Travis real estate | Lake Austin real estate

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Submitted by Peter Vekselman on October 4, 2008 - 9:31am.

The bailout was unfortunately a necessary evil.
Loans, credit of any kind would have come to a screeching halt, not to mention a huge loss in the stock market.

As for reducing the bank loan principal down to the current market value, great thought, but highly unlikely that will happen. One reason... who or what will decide the real and current value of the homes, Appraisers who have a black eye in this mess deserved or not, the current tax assessments? We all know those can be way off one way or the other and then what about the huge loss reducing the principal would means to the banks that carry the loans? We are bailing out banks, Freddie and Fannie like it or not and if we further reduce the value of these loan packages...that is a real problem.

What a mess we are in and all the "pork" that was included with the bail out package... why does it not surprise me that law makers would try to squeeze in crazy tax breaks for companies we have never heard of because they knew this package would pass due to the pressure on them to vote yes! I cannot wait to hear what other juicy tidbits of fat are in this 450 page bill.

Foreclosures have no doubt hurt values, but I agree with Lou, we are still many months away before all of this bail out money shakes loose and the banks start putting it to good use.

There is still alot of fear out there in lending and that fear will not be turned off overnight.

Thanks for great article Lou.

Peter Vekselman
Real Estate Investment Coach

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Submitted by Shannon Ziccardi on October 4, 2008 - 12:31pm.

I am amazed at how well your post hits the target and am equally befuddled by the "doomies" who manage to make SPAM out of perfectly good food. Continuing with the food analogy, it's time for us to eat our least favorite veggies for awhile. It's the price we have to pay for eating our favorite desserts first.
I continue to hold the opinion that once these "damned elections" are behind us, things will magically return to greatness. Your positive message in the face of so much doom and gloom is greatly appreciated. Lipstick on a pig? Perhaps. But this pig is not yet bacon!

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Submitted by Steve Simon on October 5, 2008 - 6:06am.

In my opinion, read the Bio, I think the bailout is right up there with "blood letting" and "drilling holes in the skull to relieve pressure and of course demons"...
Quite a few have commented about the real solution:
"let the system work it out". Assumptions and subject to transfers would have come into play. There would have been plenty of private money looking to buy at 20 to 25 percent of face value...
This was sold using scare tactics and does nothing to remove the real roots of the problem. Lou Barnes wrote an informative post on the real culprit, poor underwriting, political rewrites of rules (Rubin cerca 1995), and a whole host of poorly designed pressure to create the "everyone owns a home country"...
The assumption that the above is a good thing is wrong; the market gave us $700,000,000,000 of proof that everyone shouldn't own a home!
Just my thoughts:)
If the answer to a complex problem is very simple, it is usually incomplete...
Steve Simon is the lead instructor at the Steve Simon School of Real Estate www.stevesimon.us

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Submitted by Michael LittleBig on October 5, 2008 - 9:56am.

On behalf of the 4 million victims of foreclosure, and the 7.5 million facing foreclosure ( as reported by CNN 10-4-08) and the 5 million that are under water( value to mtg balance) want to sincerely thank the Congress of the United States for preserving the monetary treasures of the wealthy and powerful.

The Congress has so far this year agreed more than $900 billion in rescues and special loans (reported by USA Today 9-18-08) plus the $850 billion bailout bill.

I should acknowledge that the Congress could not have done this without the Banks, WallStreet,
Investment and Brokerage firms who used their lust for money as the driving force to financially devastate millions and millions of Americans.

Michael LittleBig
10-5-08

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Submitted by Jack Kloskowski on October 5, 2008 - 11:32am.

From what I read about stock market crash of 1929 and ensuing Great Depression era, there are many similarities (but also differences) worth pointing out. Both now and then, panic did not hit Main Street until much later - about mid- to fall of 1930. Most people just went about their business as usual. The economy was still good, and it did not slid into recession immediately. Between December 1929 and March 1930 stock markets even temporarily recovered 3/4 of losses sustained in the initial crash. No wonder Main Street does not feel the pinch (yet). What really caused the depression was as string of bank failures (700+) causing widespread distrust of the banking system and subsequent bank runs with no "lender of last resort" - as Fed decided to stay on the sidelines focusing on combating inflation and defending dollar/gold parity while leting the banks fail. Before the crash of ‘29 banks were heavily invested in stock markets, either directly or indirectly by financing stock purchases on credit margins to unqualified public. This eerily resembles loose real estate lending practices, cheap credit and over-production of “investment instruments” like MBS, CDO’s, CDS etc. marketed and promoted by the banks. It is debatable if the 700 Billion dollar plan is good or bad, but having no plan at all could be worse. I do not believe that World can turn the clock of times and replace money and credit simply with bartending, at least not overnight. The devil, as usual, is in the details. Any good plan can falter if not executed properly; a bad plan can exacerbate the problems, a so-so plan if properly implemented can stabilize the situation, like the one implemented after Long Term Capital Management collapse. So let’s hope this one is at least executed and managed properly. Transparency of "Bailout Fund" is a must, but only when enforced through periodic reporting and congressional hearings. As constituents, we need to press congress to ensure that there is no direct influence, lobbying or any other direct pressure exerted on fund management personnel. What’s left is to hope that both this and next administration hires competent and independent (from lobbying) professional asset managers. And exactly this is what makes me feel most uneasy…

Jack Kloskowski
Mortgage Helpline

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Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on October 5, 2008 - 12:16pm.

I would take issue with the rescue plan being called “absurdly complex”. The core of the plan is, on the contrary, absurdly simple. The treasury buys mortgage debt from banks, they hold them or sell them as they see fit; simple as falling off a log.

The process of determining the current market value of these things is a bit complicated but can be accomplished through some sort of reverse auction platform administered by Barclay’s or one of the other big fixed income players.

No, the plan is not complex at all.

MasterPlan Capital LLC - Simple, 1 Page Commercial Mortgage Application; Online at: www.masterplancapital.com

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Submitted by Commercial Mortgage Loans - Privately Funded - MasterPlan Capital LLC on October 5, 2008 - 12:35pm.

I’m a big free market guy; I oppose government intervention at every turn. And although I was not a cheerleader for this plan neither was I screaming for the Government to stay out and give the free markets time to heal themselves. Fist of all, there was no time to give, the commercial paper markets were virtually shut down and very, very quickly nobody was going to be able to fund operations, and second of all the free markets were and are ailing and did not have the means nor the inclination nor the liquidity to fix this thing.

In other words, only the Government had $700B that they were willing and able to apply to the problem. You can not force a free market solution when the free market made it clear they wanted no part of this paper.

MasterPlan Capital LLC - Simple, 1 Page Commercial Mortgage Application; Online at: www.masterplancapital.com

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Submitted by Steve Simon on October 6, 2008 - 3:22am.

The calling card for private money in situations like this is pain. It is an election year and those that sit in the highbacked leather chairs were not willing to allow the situation to work out. The private money would have certainly shown up to pick at the rubbish pile at 25 cents on the dollar if the banks and secondary players were not telling the private money "I'm not taking that offer, I'm waiting for my Uncle Sam"
You can't even work in the short sale arena because of the arrogance of the banker still, "telling people that are months into negotiation that if they don't come up with another $5,000 they will let thedeal collapse and take the property to foreclosure"... The above coming from people that have the nerve to call themselves "loss mitigation reps!".
No, the attitudes and results would have been a lot different if the Government didn't ram through the largest bailout in world history (using scare tactics at an unprecedented level)inside of a few weeks from start to finish!
Just my thoughts:)
If the answer to a complex problem is very simple, it is usually incomplete...
Steve Simon is the lead instructor at the Steve Simon School of Real Estate www.stevesimon.us

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Submitted by Keith Labrecque on October 6, 2008 - 8:15am.

I heard an extremely interesting and scary piece yesterday evening on National Public Radio, on THIS AMERICAN LIFE. The host interviewed a number of rocket scientist-types who understand the financial markets. Their interpretation is that although the mortgage crisis triggered the credit-market lockup and is serious enough on its own, it is only the canary in the coal mine and the tip of the iceburg.

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Before your eyes glaze over, read at least the last paragraph or two of this writeup ! ! !
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A MUCH larger issue now is CDSs, or Credit Default Swaps. I never quite understood this, as apparently the regulators and central bankers also did not, but they are not just hedging tools but also naked speculation tools. Since they are totally unregulated, there are no capital-adequacy requirements on the issuer of these "insurance" products. And no open market. And no disclosure requirements. So now way too many financial institutions have them buried in their books, with no one else able to determine what they have, who they have them with, and who those counterparties have them with.

And the way these were used, a process called "netting", makes them dangerous in crumbly credit markets. To use Warren Buffet's term, they are "Weapons of Financial Mass Destruction".

Instead of only using CDSs to insure a portfolio of debt instruments (a perfectly useful and sound hedging strategy) numerous institutions were "netting" which can best be explained by example:

Hypothetical Company-B (Co.B) would buy a CDS for say $1B ($1 Billion) face value against say, Lehman Bros. default. When Lehman looked sound, the counterparty (say AIG) would agree to sell protection against Lehman going bust for maybe $20M ($20Million) per year for say five years. A couple years later, when things did not look quite so promising for Lehman, Co.B would SELL an offsetting CDS against Lehman default, say to Citi, for $60M, for say three years. Co.B is now "netted out" to supposedly "zero" risk, for if Lehman busts, while Co.B owes $1B to Citi, it is due $1B from AIG. All so good, until AIG cannot pay. Then Co.B is stuck for $1B , which they do not have adequate capital reserves for. Now please note that Co.B is not the only one doing these "netting" transactions, virtually anyone could and was. So Citi and AIG were doing these with various other counterparties, who were doing them with yey more counterparties, and so on into the night... all throughout the financial world. So now down comes Lehman, taking with it (perhaps) AIG, Co.B, and Citi. The dominoes fall to their counterparties who own CDSs on perhaps Lehman, AIG, Citi, Co.B, or others. As these topple, they take down Morgan Stanley, Wachovia, and God knows who else. This is just an example, but you get the point. And maybe it is not Lehman, but some bank in Cracosia. Nobody can predict.

The fundamental issue and risk TODAY is that nobody trusts anybody any more. And credit markets are based on trust of a kind, that being able to determine counterparty risk.

Well, these things have not been around long enough for most profit-seeking managements to clearly understand how deeply the markets had become riddled (or not- though the rocket scientists believe it is deep and pervasive) with CDSs. And with no open exchanges or disclosure, there is no real way to get a handle on it. And no real way to price them openly. So Nobody trusts ANYBODY, NOT! And the wiser financial cos. are trying like mad to scrape together and hoard capital (as did GE last week from Warren Buffet, borrowing at outrageous rates and issuing juicy preferred stock warrants to WB to boot!).

And so Nobody in their right mind is lending money. Main Street is now becoming seriously affected as companies cannot borrow the funds for ongoing operations and payroll like they used to... against the collateral of their completed work and outstanding accounts receivable, to pay for the goods and labor used to complete the contracts. YIKES! Worse than YIKES! Worldwide Financial Armageddon! [Panic is coming to Main Street, just wait.]

Even after passage of the "bailout" legislation Friday, the world is nervous. As I write this, the DOW is falling and it can't get up. It is well below 10,000. The FTES is down 6.9%. Can you say "Volatility"? Can you say "Nervous Markets"?

Not to spread panic, but this is serious folks! We DO need a financial intervention, and it needs to be FAST! And we need it to be a stock-injection type of intervention, not this STUPID buying of toxic, virtually unpriceable securities at prices influenced by the Banks (via lobbying, or worse). The taxpayer WILL get stuck under that scenario; anyone who believes otherwide has blind faith in our politicians. AIG was supported by a stock injection, as were I believe FNMA and Freddie. Their management was ousted in the process. The remaining financials (or at least their leaders) don't want this so they are spending untlold (I actually heard billions) lobbying against such an outcome for themselves. [Self-preservation is a powerful instinct!] But I also heard that buried in the just-passed bailout bill is rather vague language that would allow the Secretary of the Treasury, at his discretion" to use stock injection. HOORAY! Please follow this part of the issue, and help raise the pressure to do right by the taxpayer even at the expense of the CEOs!

Keith Labrecque
Labrecque & Associates
Louisville KY
We Buy Houses FAST

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Submitted by Keith Labrecque on October 6, 2008 - 8:21am.

So Lou, I'm with you all the way! How do we best get the Sec. of Treasurey to "use his discretion" and utilize stock injection as opposed to the crappy (for taxpayers) toxic security purchases? (se my previous post)

Keith Labrecque
Labrecque & Associates
Louisville KY
We Buy Houses FAST

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Submitted by RK Ruthman on October 6, 2008 - 1:01pm.

3 days after original post. 10/6/2008

http://money.cnn.com/2008/10/06/markets/markets_newyork/index.htm?postve...

Tough day for stocks
But losses are pared in half after Dow drop reaches 800 points on credit crisis.

Tough day for stocks
Stocks plunged today, with the Dow down as much as 800 points during the session, as the $700 billion bank bailout plan and European government attempts to prop up faltering banks failed to comfort panicky investors. But the Dow Jones industrial average cut losses and ended down more than 300 points, CNNMoney.com reports. developing story

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