The idiocy of the sell-side
By: PAUL JACKSON
November 14, 2008 6:17 PM CST
No, not that sell-side. Think real estate. Think realtors, home builders, the people who have to make a sale to justify their very existence — the same groups now pushing Congress and Treasury to consider installing teaser mortgage rates in an effort to entice borrowers back into housing.
Via the Sarasota Herald-Tribune, we’re not making this up:
Large builders like Toll Brothers and real estate companies like Realogy Inc., the owner of thousands of Coldwell Banker and Century 21 offices, and now the National Association of Realtors, want the federal government to cut mortgage rates to 4.5 percent or less — for home home sales up to $1 million.
“Our research indicates that an interest rate deduction of just one percentage point could result in as many as 840,000 additional home sales, which would further reduce the inventory of homes by as much as 20 percent,” said Lawrence Yun, the Realtor association’s top economist, at the group’s annual conference in Orlando on Thursday.
… Coldwell Banker’s parent, Realogy, approached the Treasury Department about two weeks ago, suggesting the government rate buy-downs. Toll Brothers, one of the nation’s largest builders, chimed in this week with its own pitch for government-sponsored teaser rates on new homes.
“There are millions of credit-worthy people ready to jump back into the housing market, but they need to be motivated,” said Realogy president Richard A. Smith in statement. [emphasis added]
I’m dumbfounded. Teaser rates? Isn’t that how we largely got into this mess, by enticing borrowers who couldn’t afford a market-rate mortgage to pay a teaser rate?
We’re going to spend billions of our dollars fixing this mess. Here’s hoping that we don’t listen to the groups that got us into this foxhole when trying to figure out how to get out of it. Is that too much to ask?
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November 16th, 2008 1:10 am by Geoff J
By teaser rate do you mean adjustable rate? If so I can see your concern. I get the feeling they are talking about a lower fixed rate though. If so then no, that would not be an example of “enticing borrowers who couldn’t afford”.
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November 16th, 2008 2:04 pm by PAUL JACKSON
Geoff, first off all, read the quote. Bob Toll wants TEASER RATES. Secondly, having the government subsidize even fixed mortgage rates for new homebuyers is a better idea? Are you kidding me? What’s next? Asking Uncle Sam to help you get that next water ski? Either you can afford the market rate for debt, or you cannot. Simple as that.
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November 16th, 2008 4:26 pm by Geoff J
Paul: “Bob Toll wants TEASER RATES.”
Yeah I know. That is why I specifically asked how you are defining “TEASER RATES”. You are taking it as a given that the term means an adjustable rate and I am not convinced that is a safe assumption in this case. It is certainly not clearly stated that it mean adjustable rates in the post or quotes. Teaser rate could mean a temporarily offering fixed interest rates too. The idea would be to entice (or “tease”) more credit-worthy buyers into the market to buy up more of the existing housing inventory.
Now I don’t know how the subsidy part of such a program would work. Any lender could choose to lend at 4.5% if it wanted to after all. Maybe the “subsidy” would be something like FHA backing for such loans or something… You haven’t explained any of this yet. (I assume it is because you don’t know what these people really have in mind yet.) So why should we be all outraged as you seem to be without even knowing what is really being proposed?
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November 17th, 2008 8:49 am by Tim
By definition a “teaser rate” is an adjustable rate, the teased rate and payment is enticement of the person to take the loan and then the actual rate that it adjusts to is where companies make money. The problem with this plan is three-fold. First, the reason we are in this mess is because last time we had a 1% Fed Funds rate we did have 4.5% 30 year mortgages which inflated home values because people shopped for payment affordability when buying there home rather than actual worth, the appraisers, realtors, lenders, and securitzers all were comlicit in this. Next, the market sets the rate for mortgages which is why when we are now back at a 1% Fed funds rate we don’t have 4.5% 30 year mortgages. The market sees inherent risk in these mortgages and therefore is demanding a higher rate(i.e.-6%). Lastly, it all comes back around to my first point which is if we could get 4.5% mortgages, then great I am sure I and just about everyone who reads Housingwire will make a ton of money during the time they are offered, maybe some of us will even save it in a rainy day fund. The problem would occur after the 4.5% mortgages, what happens when we go to 7% mortgages, is the $400,000 house still worth $400,000 even though that payment over 30 years is $640 MORE?!? When do we stop the madness? Now? 10 years from now? 30? Maybe we should look for FHA to put out 100 year mortgages if this 4.5% thing doesn’t work out. I’m sure we can find a bunch of people who won’t mind saddling their grandkids with their mortgages just so they can have granite countertops and a sauna tub. But maybe someone will have the foresight to end this bubble here and now by letting the market do what capitalist markets are supposed to do, let the market crash, burn, and grow again.
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November 17th, 2008 11:11 am by Illinois Sees Q3 Home Sales Fall 21.2 Percent : HousingWire || financial news for the mortgage market
[...] National Association of Realtors, along with some large realty groups, have been lobbying Congress to lower mortgage rates to 4.5 percent — perhaps on a teaser basis — in an effort to stimulate sagging demand. And weak [...]
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November 17th, 2008 5:43 pm by 220mph
PAUL … please try reading the actual story … the tell us where Toll said “teaser” in any way?
It is one more example of ignorant media types making up crap, and then folks like you reporting on it - giving it validity.
The WRITER of the story offered that embellishment - NOT Toll. It is quite clear that what is being proposed is permanent buydown of the rates to 4.5% or less. Which directly addresses exactly the problem you note - eliminates teaser rates and increases home affordability.
This is a much smarter route than the ridiculous, pandering stimulus handouts that do little to actually help the economy.
Here the benefit targets an industry that has direct impact and effect on the economy … and where there is significant multiplier effect as well.
And it actually costs the gov’t nothing - their cost of money is far less than 4.5%
If you use the 840,000 homes number and a median price of $210,000 we are talking $176 BILLION in sales …
Even if 10% are foreclosed - 5 times the current fixed rate foreclosure rate - and they see a loss severity of 50% on each - the total loss to the givernment is appx $8.8 billion …
$9 billion to generate $176 billion in home sales … which also have a large multiplier effect across the economy … a tiny fraction of the proposed $150 to $300 billion “stimulus” proposed (or $600 billion some are saying is necessary).
A far, far more intelligent use of funds than the silly stimulus checks which will largely go to debt and/or paying regular expenses not new spending
Add to the 4.5% fixed financing a 10% credit towards purchase of a NEW const home … make the credit a direct reduction at closing, paid by the government (and not the unwieldy and unattractive tax credit currently offered).
But don’t make it a handout … make it a 2nd mortgage on the property, with 4.5% interest, but no payments req’d … and make due on sale of property.
Increase affordability yet again, gives people a real incentive to buy new homes, and yet gets the money back with interest - so no free handout.
If we give the credit to 1 million new home buyers (2+ years of sales at current pace) at 10% of purchase price on median $210,000 sale the total needed is $21 billion … again a fraction of the proposed stimulus checks …
And most of this would come back, with interest … even if 30% defaulted, and there was NO recovery of any of it - the total loss to government would be appx $6.3 billion
For $6 billion net (less appx $700 million annually in accrued interest) we could see 1 million new home sales worth $210 billion … a gigantically better return on investment than the “stimulus” checks
Net costs less than $15 billion - less interest received back … and for that we finance $176 billion in new sales and sell 1 million, $210 billion, in new homes
Take it even a step further … a BETTER use of the $150 - $300 billion in stimulus is to simply have govt BUY a large share of existing new home inventory ….
Current inventory is appx 9.8 months sales - 5.5 montsh is considered “balanced” - which means we have appx 44% too much new home inventory currently …
There are appx 450,000 new homes in inventory … 44% = appx 200,000 homes … median price is appx $210,000 so total value of that 44% is appx $41.5 billion
The builders should participate so charge a 2% fee and require a 5% discount off current appraised value to sell to govt. So govt buys $41.5 billion worth of homes for appx $38.5 billion - which means they have nearly $3 billion ion equity up front.
Govt can use these homes for various housing programs where appropriate (military for example) and offer others for affordable “partnered” sales - where govt keeps say 50% of equity. Put income limits etc so these equity share buyers are not cannibalizing regular sales.
Instead of stimulus checks with minimal real benefit to economy - here we see $41.5 billion in dretc benefit to new home industry … which has direct effect of eliminating overhang inventory, largely eliminating discount price pressures, and freeing up new home sales.
Cost is $41 billion but still a fraction of stimulus check totals … and unlike the stimulus which is simply throwing money out window and getting no value for govt - here they own real assets - and brand new ones at that.
My ideas above cost the govt next to nothing in the end … maybe 10% of the low end of the proposed stimulus … total investment appx $54 billion, but we would won appx $41.5 billion in new homes in exchange … and would generated appx $176 billion in sales from enhanced finance and another $210 billion in sales from buyer credits …
100% of which investment targets industry that directly and significantly benefits the economy … and has large multiplier effect … compared to the stimulus checks which are little more than window dressing with little real benefit to economy …
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November 17th, 2008 5:54 pm by PAUL JACKSON
With all due respect, 220mph, I did read the story. I wouldn’t have focused on teaser unless that’s precisely what was being proposed — and it is. I’d suggest you read what’s actually there.
I’ve seen the Realogy proposal — have you? I’ve also read comments from large homebuilders (see: http://moneynews.newsmax.com/streettalk/hovnanian_mortgage_rate_/2008/11/17/152097.html) — or the story above, and all make it clear that this is a temporary buydown of mortgage rates. So rather than blindly discrediting the writer, you might want to consider that the words used were used for a reason. The proposals on the table are for temporary rate buydowns (read: teasers).
As for permanent buydowns — were that to be the topic of discussion — that’s every bit as bad, IMHO. How could anyone justify a market where the government steps in and permanently buys down mortgage rates? There is no way such a program would be a short-term intervention on behalf of the U.S. taxpayer. The minute the government subsidizes mortgage rates directly there is no longer such a thing as the private lending market anymore; you explain to me how anyone would be willing to pay “above market” rates for a mortgage ever again, when the government sets the market price. It’s like placing a rent control ceiling on the entire mortgage market.
I’m not a socialist, sorry. I believe the free market sets rates — and if those rates are higher than a commission earning-realtor or home builder would like relative to their needed quotas or profit agendas, then the commission-earning types can adjust their business models, just like any other free market participant. Expecting the government to do it for you, and masking that desire in the now-discredited idea that selling more homes is somehow serving the public need, is an absolute canard.
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November 17th, 2008 11:14 pm by 220mph
The Newsmax link quotes HOVNIAN as suggesting a 4% 30 year fixed rate loan with a 3% rate year one:
“We’re proposing a temporary, 30 year, fixed-rate mortgage at 3 percent. That would be for next year. The rate would go up to 4 percent in 2010.”
The story you liked said:
“Large builders like Toll Brothers and real estate companies like Realogy Inc., the owner of thousands of Coldwell Banker and Century 21 offices, and now the National Association of Realtors, want the federal government to cut mortgage rates to 4.5 percent or less — for home home sales up to $1 million.”
There is no actual quote from Toll in your story link, but here is the recent direct quote from him on the subject:
“However, we believe that, if home prices are not stabilized, these efforts will be for naught, more mortgages will go under, and the taxpayers’ money will have been wasted. We urge Congress to stimulate demand by reducing mortgage rates and fees and by providing incentives such as a buyer tax credit for the purchase of all types of homes. We believe these initiatives would offer the greatest benefit for the taxpayer’s dollar.”
And yes I have seen Realogy’s proposal - their press release says:
“Realogy’s proposal calls for a short-term government buy-down of mortgage rates to at least 4.5%, or lower, for a 30-year fixed rate mortgage”
I think you would agree that the industry vernacular is “temporary buydown” for a tiered temporary rate reduction … Realogy’s proposal does not say that … it says that rates on 30 year fixed rate loans would be bought down, on a short term basis, to 4,5% as an incentive to spur sales.
You premised your post on the term “teaser” rates which is not what, these proposals refer to. And Toll to my knowledge has said nothing of the sort in any published release I’ve seen.
Hovnanian did suggest a year 1 buydown in addition to the 4.5% fixed 30 year loans, but he also used specifically the term temporary.
The bottom line is there is legitimate credible information that shows a 4.5% or similar interest rate would enhance sales.
And while I am not a socialist either, and generally abhor handouts, the fact remains that
(a) the housing market and in particular the new home market, is very important to our economy,
(b) experts far and wide, of all types have determined “stimulus” is necessary and needed,
(c) past stimulus efforts have shown that they are largely ineffective at achieving goal of benefiting economy
(d) the housing industry is one where stimulus IS spent in enhancing economy, and DOES has a significant multiplier effect
If we ARE going to throw money at the problem … which is a given, then we should insure it is directed where it will generate real benefit … and directing this money to the housing industry does that
Like it or not if money is going to be spent it should be spent wisely …
And as my comments above showed - we could spend a fraction of the low end of the amounts proposed in incentives to home buyers, get most or all of them back over time, and spur a real meaningful benefit to the economy
Or we could let politicians send out handouts again, which do an excellent job of pandering to huge numbers of voters but do little to generate meaningful stimulus …
The money is going to be spent … I say simply lets spend it where it does some good …
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November 17th, 2008 11:23 pm by 220mph
BTW … here is the Realogy Press Release
http://www.realogy.com/media/pr/show_release.cfm?id=632
And the results of the Broker study they did across 1500 brokers in 2300 residential brokerage companies across all their brands … admittedly biased to some extent, but common sense tells us lower rates combined with the currently low prices, would motivate buyers:
“… the key findings from the Realogy broker survey:
95% of brokers said they would expect an increase in home sales if 30-year conforming fixed-rate mortgages were available at 4.5% rates today.
Most notably, 54% of all responding brokers said the impact of a 4.5% mortgage rate would significantly increase home sales in their markets.
Of the brokers who answered that sales would increase, nearly half (46%) indicated that they would anticipate unit sales levels to increase between 10% to 25% if 4.5% mortgage rates were available today.
The majority of brokers also agreed that substantially lower mortgage rates would have a strong stabilizing impact on average home sales prices.51% of brokers felt home prices would increase somewhat and 38% felt home prices would stay the same.
Of the brokers who felt prices would increase or significantly increase due to 4.5% mortgage rates, 22% felt the home price increases would be in the 3% to 5% range and 13% felt it would be in the 5% to 7.5% range.
“Our franchisees are small- to mid-sized business owners who have a strong understanding of what actions would help home sales and prices in their communities, and it’s clear to them that dropping mortgage rates to 4.5%, or lower, would have an immediate impact in helping to stabilize the housing markets throughout this country,” said Smith.”They also did a consumer survey which found:
“Americans still place a high value on homeownership; But the state of the U.S. economy has potential home buyers on the sidelines:
During the week of Oct. 24, Realogy used Ipsos Public Affairs, a global survey-based market research company, to conduct a national homeownership survey resulting in responses from more than 1,000 current homeowners 2. The key findings from this consumer survey are as follows:Even in today’s challenging economic environment, nine out of 10 survey respondents (91%) believe that owning a home is still the best long-term investment they can make with their money.
At the same time, 27% of U.S. homeowners surveyed said the current U.S. economic environment was causing them to put their plans on hold for the purchase of a new or existing home. This response level was consistent across the four U.S. geographic regions.”Americasn still highly value homeownership … even with all the turmoil … and the very high current unit sales rates in places like Orange County, Vegas, Florida etc show that at the right price and terms the Buyers will look past the immediate lack of confidence and buy ….
Housing has the ability to turn the economy … and giving housing a little assistance sure seems a good investment to me …
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November 18th, 2008 8:59 am by Tim
220, you are obviously in the New Construction business which is why your proposal is so geared towards reducing new home inventories that are currently out there.
The proposal you proffer has several flaws. First, the 10% government “loan” for the down-payment is really just a way around current market conditions. You can’t get people into 97-100% LTV loans anymore either becuase MI companies won’t insure it, or people just don’t qualify for it anymore so you want to “Put lipstick on a Pig” by putting them at a fake 90% LTV. I say fake because as soon as the government starts giving out 10% for home purchases then it’s really the same as not putting any money down at all, see DPA’s with FHA.
The next issue I have with your idea is that again you can’t artificially keep rates down forever unless we are going to a socialist lending system, I know we are basically there already but hopefully not for long. You can’t say “Let’s lower 30 year rates to 4% for the next 18 months until we are out the recession”, liken this to the argument made about Al Qeada in Iraq. If we set a timetable it will just wait until we leave and pop out and screw everything up again. If we take away the markets ability to set rates and lower them for certain industry benefits the recession will go away…until we take off the governor on the mortgage rates. The recession would be averted in the near term but the long term will still see the recession come and drop home prices so we will have gone through this year plus of craziness in the market just to see it go away for 1.5-2 years then come back with a vengence.
The point here is that while your short term gains would be made by lowering rates giving 10% free money, it has a bubble effect and would keep home prices artificially high when market forces clearly are against them being at such levels. Now IMHO we should’nt be doing any stimulus at this point regardless, law makers seem to forget that 10 year treasuries are somewhat the benchmark for what sets mortgage rates and if they issue another $300bb in money that isn’t there they will raise treasury prices,therefore raising interest rates,and reversing any gain the lower gas prices have had at staving off a complete collapse of home prices in suburban and exurban areas.
Like I said before, if one of these proposals for reduced interest rates goes through everyone in our business will make money because of it, but at what cost? At whose expense? Look at the big picture and you will see that this proposal is not going to make long term sense out of short term dollars.
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November 18th, 2008 1:55 pm by 220mph
Sorry … you miss my point … We ARE GOING TO SPEND MORE MONEY ON STIMULUS … $150 to $300 billion (or maybe more if people listen to guys like Roubani) ..
The money IS going to be spent … and the purpose is to stimulate spending to help the economy …
My suggestion is rather than spend that money on largely worthless small individual handouts, which recent history has shown are largely spent on reducing debt and/or paying normal living expenses … that the stimulus money should be spent whee it creates real stimulus …
And secondarily where it is not simply thrown away … where it is lent rather than given
I also don’t advocate, nor do the industry proposals, that this should be a long term policy … yes the loans originated during this “short” period would have the low rate for their life - but the low rate loans would only be offered for a short period of time … as a short term incentive
This is also not a “fake” anything … it is NOT a DPA either … by requiring repayment at sale but no payments during life of the loan it increases afford ability and in doing so reduces likelihood of default
And sorry, but you most certainly can put people in 97% mortgages today … thru FHA and VA … I will suggest as well that you review the foreclosure rates for fixed rate FHA/VA loans … they will show a low downpayment is NOT an automatic indication of a higher foreclosure rate … even today after the worst of the crisis FHA/VA foreclosure rates on fixed rate product are minuscule
Likewise as an aside I encourage you to look IN DETAIL at the DAP default details …. if you do you will find, as did I, that while there is an increased likelihood of default - it is in a limited segment of those loans … eliminate the DAP on credit scores less than 620 and you eliminate a large share of the defaults …
That is the problem today - people are making knee jerk, broad brush changes without looking at the details - the DAP program DID do considerable good for many people who paid back their loans … just like the Subprime loans were n the vast majority of cases a net positive
Instead of throwing out entire programs becasue of problems with a minority of loans the industry needs to look at the details … figure out what parts worked and where the risks were too high … and then continue lending to those who used these programs responsibly
THAT is a HUGE part of why we are where we are today IMO … we pulled the entire rug out, when what we needed was simple action targeted at the limited areas where we had real problems
Subprime loans and even ALT-A for example would largely work fine if they were limited to fixed rate product OR to rational, limited fixed rates w/temp buydowns …
Temp Buydowns have been used effectively for decades … a 3.5%, 4.5%, 5.5% fixed rate 30 year loan is a good product that has been used for years very successfully
Last my proposal is geared to new construction for ONE reason, and one only … because that is where a stimulus investment will have the biggest direct AND indirect effect … where the country gets the best return on the stimulus dollars investment
New home construction provides significant benefit to the economy … AND it has a huge multiplier effect, every home sold supports a large number of people and businesses … money INVESTED (not thrown out the window for little benefit)in supporting new construction is money that provides real and significant economic benefit, along with large numbers of jobs … AND increases affordability and home ownership
If we are going to spend stimulus money anyway - it is stupid to throw it away
And to be clear I would encourage the same basic plan to support the auto industry … use incentives … credits and low interest financing to encourage sales
There is no doubt that lower rates will stimulate new home purchases…
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November 18th, 2008 6:15 pm by PAUL JACKSON
220:
You say the following: “I also don’t advocate, nor do the industry proposals, that this should be a long term policy … yes the loans originated during this “short” period would have the low rate for their life - but the low rate loans would only be offered for a short period of time … as a short term incentive.”
There is no way — NONE — that a program like this could be implemented in the current political climate that would make it a temporary program. It’d be about as temporary as the boost in conforming limits proved to be. This isn’t 1970.
(DAP is a separate discussion, as far as I’m concerned, so I’m steering clear of that here.)
You are clearly in the home building industry, as well, pushing the dope that says home building is more significant than resales for the economy….only a builder believes that sort of shit.
Let me ask you this: if homes are fundamentally overpriced relative to incomes (which they still are, in most markets), lowering interest rates temporarily brings down the cost of the mortgage, but does nothing to resolve the income/price disparity. Meaning prices must still fall into line with incomes, long term — and those with the interest-rate buydown are left with a below-market-rate mortgage and a home they can’t refinance or resell. What did it get them, besides earning some cash for a realtor, and lining the pockets of a home builder with poor inventory management skills? The nice warm fuzzy feeling of the “American Dream”?
The only way out of that sort of hot fuss is to make the assumption that by enticing borrowers on the margin to take below-market-rate mortgages, housing prices quickly rebound and begins an upward trend quickly. No different than any other idea put out there by the sell-side of this industry; everything comes back to an attempt to return to the glory days.
Housing is going through a much-needed correction. Let it correct.
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November 18th, 2008 11:24 pm by 220mph
“pushing the dope that says home building is more significant than resales for the economy….only a builder believes that sort of shit.”
C’mon … I know you are smarter than that … how many jobs are involved in the sale of an existing home? How much materials goes into an existing home?
I heard a 3 million jobs lost number the other day related to new construction … don’t know if its accurate but teh number is huge regardless …
Targeted stimulus to new construction not only creates the same benefits as an existing home sale - mortgage, title work etc … but it also supports jobs - constrution jobs, and jobs at all the suppliers up the line
And before you say that a new home sale out of existing inventory isn’t “new construction” and doesn’t create jobs - you would be right - however every new home sale out of inventory reduces inventory and getting us closer to another new home to be built
As far as home prices “fundamentally overpriced” compared to income … where did this idea ever come from … that a median income should qualify for a median home?
Home ownership has always been a goal that required extra effort, extra commitment.
That said - the facts seem to show the claim is false. The latest NAR Housing Affordability Index shows affordability at a recent high - 135.2 - up nearly 32% in a little more than a year … a family with median income can qualify for 135% of the median home price
Even in the high priced “West” markets the HAI is 104% … and the Natl City/Global Insight Housing Value Analysis shows the same … that almost the entire country is now considered “fairly valued” including all of California.
So again, I don’t really know where this “fundamentally overvalued” idea comes from?
As for the short term incentives … incentive programs are set with expiration dates every day - either with limited funding or other expirations … I think that is a specious argument
Last - you still fail to acknowledge that what I advocate is NOT creating a new pool of money for this - rather I say take money that WILL be spent - a 2nd round of stimulus - between $150 to $300 billion (or more) - and rather than throw it away on meaningless handouts that will do little to actually stimulate the economy … to target that money where it does real good - where it creates real stimulus, jobs, enhanced affordability, sales etc … AND where we have an excellent chance of getting it back …
You said you aren’t a socialist … and I am not either … IF we ARE going to spend money for stimulus I want it to be used for real benefit, and not to pander to millions with little benefit to economy … AND I want it lent if possible, to be repaid, not simply given away …
Sound fiscal policy AND sound economic policy both …
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November 18th, 2008 11:42 pm by 220mph
And Paul - where do you get that they will end up with an overpriced home they cannot refi or sell from?
They will buy these homes at todays current market prices … period … AND they will buy them at a LOWER cost - greatly enhanced affordability under my plan … they only pay a monthly payment on 90% of the value and they pay it on a lowered interest rate
And why would they have to or want to refi? I and the industry propose a permanent 4.5% 30 year fixed rate loan … again the plan is to offer this below market rate on 30 year loan originations for a short time - not to offer the rate for a short period on each loan …
Buyers with this program can (a) take advantage of the current good buying environment - the low prices, and (b) they can get a lower more affordable fixed rate loan, and (c) they can get an additionally lowered payment thru the purchase credit system which does not require monthly payments
How is being able to buy a home in todays favorable price environment, get a low rate on your 30 year loan for it, and not have to pay monthly payments on 10% of the purchase a bad deal?
It also does not have appreciable bearing overall on prices … buyers buy at current market …
These people get a whole lot of great benefits .. and we sell some homes …
And no Paul no one expects we will get back to the unhealthy heights seen at the peak … anyone even halfway intelligent knew we were long overdue for a correction .. . we DO need to get back to a realistic sustainable market - and the way to do that is to clear inventory so the markets can function again …that is what a temporary incentive program does
I want to also reiterate that even zero down loans or minimum down ones thru FHA are NOT necessarily an issue … once again … look at the performance metrics of the FHA/VA loan portfolio … especially the fixed rate products … they have a small foreclosure rate even today …
There is nothing inherently wrong with minimum downpayment loans … in many ways these are better borrowers, as are many of the subprime ones, because they appreciate being able to get a loan …
Same with DAP’s … yes they DO have higher default rates … but a review of details as I noted shows a small part of the overall loans with DAP create a majority of the increased defaults … if you eliminate DAP for FICO less<620 you eliminate a majority of defaults …
In other words LIMIT these incentives - be it subprime qualifying, DAP’s or whatever to the segment that statistically makes sense from risk standpoint …
Protect the benefits - and the folks who act responsibly and restrict the irresponsible ones …
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November 19th, 2008 8:27 am by PAUL JACKSON
220:
You have too narrow a view of resales and the economy, matched with your overly grand view of new home sales — which is why I know you are a builder. Resales drive remodeling activity, which also drives the same sort of contractor activity you’re so quick to laud for new home sales. Like I said before, only a builder would believe their work is inherently more valuable to the economy.
In re: where do I get that borrowers will end up with an overpriced home they can’t refi or sell …. not too hard to figure out, if you re-read my earlier comment. The cost of a mortgage is one thing, the cost of a home is another. The biggest problem we’ve had in recent years is everyone focused on the payment and not on the cost, the real price of the home. And your “solution” perpetuates this distortion.
Your plan merely uses artificial mechanisms to reduce the cost of the mortgage. It does nothing to establish a floor on housing prices.
Home prices in most metros are more affordable, but most economists agree the hardest hit areas remain out of balance with long-term price/income trends. Meaning there is likely further price correction needed.
So by putting a borrower today in a 4.5 percent, 80 percent LTV government-subsidized mortgage on a $200,000 property, that borrower is effectively bought out of the refi pool, since they’ll not be able to get a better rate in the “free” market — free in quotes because its debatable that there would be any other market other than government buy-downs in your plan.
Selling will be problematic as well, given that prices still need to correct. Given 6 percent transaction costs on sale — the pound of flesh that every realtor wants — the home’s value must rise to $212,000 in order for the homeowner to sell at a break-even, not counting the time value of a dollar or the effect of inflation/deflation. Putting 20 percent down may prevent the lender from being upside down, as prices aren’t likely to drop another 20 percent, but it means the borrower loses their own money on the resale of the home at any price level below $212,000.
So by enticing a borrower to buy an overpriced home in a declining market with a below-market-rate, government-subsidized mortgage, you’ve put the borrower in the position of not being able to refinance, and not being able to sell except at a loss at any time in the foreseeable future. Unless, as I noted before, you take the Pollyannish stance that encouraging such behavior will immediately force a pricing floor and rebound in housing — which would mean housing recovers from the worst slump in a generation faster than any (lesser) downturn before it.
Feel free to continue to try to explain to me how that’s a sustainable strategy to solving the nation’s housing problem. You won’t be able to do it. All your plan, and the plan being pushed by builders and realtors, represents is a poorly-reasoned attempt to artificially drive demand and keep builders on life support, generate realtor commissions, while locking homeowners in their own personal version of the American Nightmare. No “Dream” there. And the best part is, under your plan, the government — by the people, for the people — helped make it happen.
You say: “we DO need to get back to a realistic sustainable market - and the way to do that is to clear inventory so the markets can function again …that is what a temporary incentive program does.”
You misunderstand something important: the markets are functioning. Prices are too high, and must come down; witness the boost in demand in California for deeply-discounted foreclosed properties. Clearing inventory will occur when prices fall sufficiently so as to stimulate demand.
Artifically boosting demand in an attempt to generate a false equilibrium, as you propose, is just that — a false equilibrium. The result is that the market remains out of balance longer than it otherwise would, and we then have to listen to whatever builders — like you, I’d expect — think the next big short term crutch is that can deliver buyers.
There’s a reason I said in my original post that started this discussion that we should simply outlaw the groups that got us into this mess from being able to suggest their own self-interested strategies for getting out of the foxhole they put us in.
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November 19th, 2008 8:39 am by Tim
220, the thing I thing that I think has not gotten through my conversation with you here, is that I believe your program will keep home prices at an artificially high value. I do NOT believe we are at the bottom, doing calculations based on affordability for a median income household we still have 10-20% down in real price terms before we can see sustainable inflation based price increases over the long term in most markets. Because of the negative stigma at this point we will probably have to feel a bottom out 5-10% below that IMHO to get people buying again and clear the inventories. This is NOT a bad thing.
Your idea has merit in the sense that it would move new construction as well as the homebuilders pipeline. However, I do not feel your plan is something that has a long term benefit to our economy and could in fact hurt it. You do not need/want 4.5% loans to make unaffordable houses affordable, we should want affordable and sustainable home prices with market rates. We shall have to agree to disagree on this as I can tell you do not see this point of view as valid.
The best way to clear the inventory of homebuilders and auto makers is not in fact bailouts or loans or crazy programs, we actually do not even need any new congressional action for it to be effective. It is called…Bankruptcy. I am all for the government providing DIP financing for companies who have a long term sustainable 21st century business model at market rates since that type of financing has dryed up recently if it is not available. But a bankruptcy court would clear the inventory of new homes much quicker and actually help us find the bottom sooner rather than later. Obviously, everyone will scream that people will lose jobs in this, which they will, and the PBGC will take on a ridiculous amount of the automakers retiree benefits which will add cost to the federal budget, which is true, but it truly is the best idea for all these companies/industries. Airlines did it and they are still flying, car makers can do it and cars will still be made, homebuilders can do it and homes will still be built. Although, I am certain you will disagree our bankruptcy laws were written to specifically handle these types of situations, and it would be best to let them do their job as intended.
Let’s look at the actual delinquency rates for FHA/VA. They are nothing to be in awe of. 12% for FHA, almost 7% for VA. If we had these numbers nationally throughout all types of mortgages our market would be in even more peril than it is today. LTV has been, directly correlated to rate of default, especially the no out of pocket homeowners that got 100% financing or 97% FHA with DPA. They had no skin in the game, they got out when the going got tough, the same as what would happen if we gave people 10% down as a subsidy/grant/lien.
You say “And why would they have to or want to refi? I and the industry propose a permanent 4.5% 30 year fixed rate loan”??? Are you in this business? I do not mean to be facitious, but really?
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November 19th, 2008 4:45 pm by 220mph
First, I am not a builder but have been involved in RE market for 25 years … so I’ve been thru a few of these
Both Paul and Tim continue to ignore the fact that I propose using STIMULUS DOLLARS THAT ARE ALREADY GOING TO BE SPENT for this purpose .. that is the most important part of my position … that we TARGET THIS MONEY to where it actually does, or has chance, to do some good - instead of throwing it away as will be done with more handouts …
AND my proposal has very good chance of majority of money invested to be repaid …
Second … you both also continue to harp on home affordability … yet every measure shows across the country - including the high priced West - that affordability is at recent highs … nationally 135%, and in the West 104%
There may well be isolated areas where affordability is still an issue but they are the strong exception.
I also strongly disagree that there should be absolute parity between median income and median home price … home ownership while something we should strive for is not a right … I think its a POSITIVE when buyers have to stretch a bit … forces them to make commitment
We also have lost sight of fact that housing is NOT an investment … first and foremost it is a home - shelter … and as such THAT is the majority of the value … and cost …
For years NO ONE expected to make money, and knew they would likely lose money, if they sold in 3 or 4 years from purchase … housing is a long term investment ….this whole expectation that someone would never be underwater if they sold quickly is simply ridiculous
Housing IS affordable today … and even more so because of the historically low interest rates … and because of those low rates housing SHOULD be worth more …
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November 19th, 2008 5:10 pm by 220mph
As far as the comments on “delinquency rates” … sorry but they are meaningless … the media loves them as do those with vested interests like RealtyTrac (whose biz is selling foreclosures)but they tell nothing …
Delinquencies are not foreclsoures …
REO’s - actual foreclosures, along with loss severity ratios are the only meaningful data when it comes to actual performance and losses… and FHA/VA loans have some of the lowest foreclosure rates of all loans, especially when looking at fixed rate product …
The simple fact is FHA and VA loans have a current foreclosure rate in the 2% range - and a lifetime rate commensurately low … the VAST majority of these FHA loans are minimum downpayment loans …
I’ve done a detailed review of the real stats - including for loans with DAP, and as I noted downpayment in itself is not a reliable indicator of foreclosure … by simply restricting DAP to FICO 620 and above appx 60% of the deflaults would be eliminated
FHA and VA have been less than 3% down for decades … and through even the worst downturns they have performed well … there is essentially no difference between an FHA downpayment and a zero downpayment
The vast majority - 97%+ even at worst of times - of all FHA VA borrowers are NOT foreclosed …
FHA/VA borrowers have overwhelmingly proven they are good - excellent - risks overall … regardless of downpayments …
And my 10% credit suggestion does not necessarily mean NO downpayment either … the primary intent is affordability - to reduce the monthly costs of buying a home … I would still require normal FHA downpayments on majority of loans
I would advocate a pool of money avail for “subprime” type borrowers as well though … like with FHA/VA the vast majority of subprime buyers are not foreclosed … and again if you look at fixed rate buyers that number is better yet
Subprime loans have served an important purpose - helping large segment buy homes that otherwise could not … and the majority have performed … like the DAP program which also has real value … we should fund a subprime pool … price for higher risk, but also increase underwriting to eliminate the areas of worst performance … keep the good parts, price accordingly, and get rid of bad … ie: only offer as a fixed product
Again, same with DAP … downpayment assistance programs provide very real benefit … and the vast majority of users did not walk away … restrict the program to credit score of 620 and up and the biggest part of problem goes away and we can still give the benefits to those who used responsibly
Same thing here as well … you can ALWAYS price for risk …
It is telling that my high level contacts in markets tell me there are plenty of buyers for the worst tranches of CDO’s etc but few if any for the AAA parts … this is because the returns on AAA even though very low risk, are minimal … while the returns on the worst tranches are very high - even after a high default rate
Last - as to your refi comment … if a buyer gets a 4.5% 30 year fixed rate loan why the heck would they ever have to refi? There is little chance rates will be lower - and even if they are 4.5% is a great rate. The only reason they would have to or want to refi is lower rates or to take out cash …
Again - if someone has a 4.5% fixed 30 year loan I will find no sympathy for them not being able to refi to take money out in the first few years ….
You say “And why would they have to or want to refi? I and the industry propose a permanent 4.5% 30 year fixed rate loan”??? Are you in this business? I do not mean to be facitious, but really?
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November 19th, 2008 9:59 pm by Poor & Unemployed
I am a home buyer waiting in the wings in Miami. I have 100% cash which I have trouble keeping safe. I have perfect credit, which I do not need to use! I have a well paying steady job.
But I can not find a house in Miami, which I can afford. Most of the REO houses in Miami are not for sale. You can verify that by checking county records. One which are available are dumps, which were part of fraud or are at asking prices of 2006 which were 300 - 400 % higher than 2000 - 2001.
This is all so strange and no one wants to address the issue.
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November 20th, 2008 1:32 pm by linda
Let Toll Brothers lend their own money at 4.5%.
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November 22nd, 2008 2:21 pm by Godsgas Ltd
At least 220mph put his suggestion in the box, is a concerned taxpayer, with a positive contribution towards all evolved humanity. Amd whose mind isn’t lodged into the Collective crevices of consciousness feeding on fatalism and McCarthyism. The only material thing of my boomer youth I have preserved is a mapsize themed Crossword Puzzle of the 70’s encompassing Ecology. Without looking I can only parrot -
“Make it up, Use it up, Wear it out, Or do without.
Here in my little sleeper city of roughly 50,000 the city operates under the Unified Development Code, yet operates under the “Arrested Development” code*-0. It’s rigid, not for the people, and leaves too much discretion to the public servants (the few) and not the constituents (the many). Without public input it’s not even superficially “Unified”. It’s discretionary state n local loopholes, so that the private citizen is gagged & bound without the right of express concern and opinion-period. Anyway, I have never stood in line for unemployment, soup or bread & water, and community involvement means something other than a handout to me as well. But I am swayed by so much information. Poor & Unemployed in FL, did you enlist the services of a real estate agent in your homequest? Our market in TX is & has been more stable in the 15 years I’ve been licensed to sell property; with average appreciation between 2 to 5% in my effective service area.Some reo’s are offerred by the asset mgmnt team of the bank or lender. Perhaps I could refer you to a good buyer’s agent to look into the market(s) you’re talking about. Have you checked online for HUD homes? In my own house a large new subdivision was developed and it put a cap on our appreciation, but it’s still holding pretty steady. I just want to see what other’s think about the alternatives from stamp scrip and more at:
http://www.theoildrum.com/node/4633I would like to see some feedback if anyone has an opinion.
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