Friday, December 7, 2007

No Country For Grown Men

Posting may be short tonight and light for the next couple of days. Plenty of holiday type stuff to do as well as the Patriots taking on the Steelers in the late game Sunday. After the wild week this week, a break may be needed! Instead of the usual headline type stuff, I just wanted to post a thought I had today while checking over all the news.

No Country For Grown Men
The coverage today was all about the Rate Freeze Plan. It was almost palpable when the realization came that the plan is a window dressing only. I had hoped that the heated discussion of the merits of the plan would ignite a large scale "timeout" where even average folks would mull over things for a moment. Judging by the feedback on various media sources, an overwhelming majority are basically sick to their stomach about the rate freeze idea. Most have concluded that all things real estate were overdone, and that things must correct over time. I was pleasantly surprised by this.

The problem is that government officials and the banks/lenders were out in force slamming the plan as, get this, NOT DOING ENOUGH! They want more help in propping up a failed financial scheme that has run out of time. FED rate cuts, expansion of Fannie and Freddie, and various freezer plans are not hinted at, but outright demanded by the industry. The players would have you believe that the entire financial system will collapse without a home price prop put into place. The craven demands for aid coming from the very people that brought this all about is both sad and a perfect commentary on our society today. If you read the article on Herb Greenberg's blog I linked to yesterday you understand that this was indeed round one. Round two will be so disastrous for the banks that it is hard to imagine the wails of pain they will cry when things really turn south. And this brings me to my main point.

Enough is enough. Not one of the entities involved in the scam that was mortgage lending has any desire to help you. The FED could care less about your job, your finances, your life. The entire machine right now is running full speed to keep you spending and keep you in debt that is just barely serviceable. Not one thing should be done for the banks and the lenders until a full and clear accounting has been done on what the hell was going on for the past 4 years. Answers that must be found:
  • The models you were using relied heavily on ever increasing home prices. Now that home prices are in decline, what do the models say?
  • How much money will be lost if home prices fall 5%? 10%? 20%?
  • How much of a pay cut across the industry will you take to help offset the costs of the losses?
  • Why were people given loans without any documentation, income verification, and no money down? How exactly did you think they were going to pay for the loans?

I am sure you can think of a bunch more. The point is that there are serious questions that need to be answered. Instead of acting like this will all go away with a few rate cuts, all involved need to come clean about what is going to happen as home prices keep falling. To steal and change the title of a new film, the USA right now is "No Country for Grown Men" in that we are led by people that think they can handle everything and keep the public in the dark. It has worked great so far. When the next calamity in the housing bubble happens, and it will, they may find that the little children they are in charge of want some answers.

Friday means Rock Blogging!

The immortal Jimi Hendrix with "All Along the Watchtower":

My personal favorite Led Zeppelin song, and one amazingly no one seems to ever have heard, "No Quarter". Amazing song:

Black Sabbath with the bluesy but all metal "NIB" another favorite:

Have a good night.


Anonymous said...

"The players would have you believe that the entire financial system will collapse without a home price prop put into place."

Unfortunately they are going to have to find some kind of prop or at least away to slow the deflating bubble if possible or that is exactly what will happen. The financial system it seems to me would collapse. I don't think Paulson, Bernankie or anyone else involved thinks this will keep housing prices from falling or the borrowers from eventually defaulting anyway as they are just trying to slow the decent with a longer time frame and trying to replace it with another expanding sector of the economy which unfortunately will probably lead to another unintended bubble. The consumer was used by Greenspan to give corporations time to clean up their balance sheets after the dot boom crash, now it will be their turn to give the consumers time to clean up theirs with pehaps subsides, and tax incentives to get coporations to borrow, spend money and invest even in the face of falling demand. The alternative to that is government spending, or massive tax cuts, but as a county we are basically broke so I don't know how that will work out.
Every river in Japan has a cement bottom as a result of their r/e and stock market collapses they also lend money for less the 1/2 percent intrest - it could happen here and would be somwhat foolish to eliminate it as a possability IMHOP.
That doen't mean I like it though.

Rob said...

Hasn't the Fed already signaled its willingness to take our country down the path of the Japanese? Hyper-inflation through artificially-inflated reserves seems to be their medicine, and you can't blame them; a natural (albeit magnificent) correction would leave Americans questioning how we got here in the first place, and that would lead them to the doors of none other than the great Federal Reserve System. The bargain-basement lending rates of the Y2K era (which merely compounded the near-permanent Greenspan-put) should have been the Fed's last attempt at using multiplicative credit to maintain our bubble economy, but here they are again. Eventually, we will feel the TRUE effects of hyper-inflation and a debased currency, especially now that consumption prices can't be nominally undermined by further technological advances or a slave-labor super economy (China.) When that day comes, our markets will surely suffer, assuming that they don't undergo the pains of capital flight once all of our foreign investor friends realize that their real rates of return have been negative over the last 5 years when converted back to their home currencies. Ah well, I look forward to the debt-slave society of modern day Japan, replete with
100-year mortgages and nice 10 (heck, lets make it 20) year recession. If there is an actual second bubble, it will have to be either an environmental one (fueled by bogus international treaties that further tax the have-nots of the world) or a government-assisted one; if it is the latter, look out full-blown socialism, here we come!

Anonymous said...


"If there is an actual second bubble, it will have to be either an environmental one (fueled by bogus international treaties that further tax the have-nots of the world) or a government-assisted one; if it is the latter, look out full-blown socialism, here we come!"

There is always going to be another bubble somewhere at some point human nature doesn't change.
As for socialism that is always a possibility but so is fascism although what is happening now in the US is socializing the cost of the bubble, everyone is effected by this in some way even if they were not involved directly and to some extent the financial system is working as designed: spreed the risk. It works by inflating away the debt and socialize the losses. As for hyper-inflation that may be several years off, what we may actualy see over the next year is the dollar rising and commodity prices falling due to a global slowdown and capital flight into the US rather then away from it.


getyourselfconnected said...

Outstanding insight on the situation. Would you mind if I include your comment in a future post? Same for your Japan comment Rob?
Thanks for the great comments, this is why I love the web for exchanging ideas!

Debbie said...

Another great post. Thanks for your insight.

Anonymous said...

I wouldn't mind help yourself.

I see Market watch has an article on people gaming "The Plan" and the possibility of them not paying some bills to lower their FICO scores so when other loan types are eventually included in "The Plan" they will qualify. With all the fraud on the way up their is no doubt in my mind that their will be fraud on the way down also. I also have to wonder if our leaders are in fact not counting on it.


Anonymous said...

First footage I've seen of Hendrix playing guitar right handed - hmmmmm . . . . maybe I'm missing something. Watchtower's still a great song though.

Anonymous said...

The answers to these questions on the rate freeze should make good copy

Did the President, Treasury Secretary Paulson and HUD Secretary Jackson know the rate freeze allows servicers to modify loans without written authorization?

If mortgage servicers don’t have to make contact with borrowers to freeze loans, how do the servicers know the properties are owner occupied, and not investment properties?

Does the industry group that wrote the rate freeze represent investors in Mortgage Backed Securities, or companies that profit from the issuance of the securities?

Did the top mortgage service providers, ratings agencies and bond issuers, who are all members of the industry group which wrote the rate freeze, influence the decision to charge bond holders for counseling and modification expenses?

How much have the servicers agreed to charge for modification and counseling?

If borrowers won’t have to document current income for the rate freeze, how can servicers avoid modifying initially fraudulent loans?

If the rate freeze temporarily props up housing markets and mortgage bonds that some lenders, borrowers credit rating agencies and appraisers fraudulently helped inflate, will would-be buyers face artificially overpriced housing markets?

How much did Treasury Secretary Paulson and Goldman Sachs profit from involvement in the mortgage securitization process from 2004 to 2006?

Should those who created and profited from the subprime problems be trusted to author and facilitate the remedy?

In creating the framework for the rate freeze, did those who created and profited from the subprime problems prioritize their financial interests and avoidance of criminal liability?

Does the rate freeze encourage borrowers to keep paying for assets that continue to fall in value?

Will the freeze prevent owners of mortgage-backed securities from suing U.S. banks to force them to buy back worthless mortgage securities at face value?

Who would benefit if fewer foreclosures occur as homeowners continue to pay on mortgage larger than current values?

If investors believe contracts can be altered, could the rate freeze reduce confidence in mortgage bonds, leading to higher rates for those trying to refinance or buy?

Could higher foreclosure rates encourage further political interference with contracts?

Will some borrowers miss payments on other debt that they otherwise wouldn’t have been late on to bring down credit scores to qualify for the freeze?

How many credit card payments would it take for a 700 FICO score to fall under 660, to qualify for the loan freeze?

Should Americans help borrowers, lenders and investment banks who didn’t understand the consequences of their actions?

If fraud is found in the origination process, can mortgage bond investors require banks to buy back loans at face value?

By putting off foreclosures for several years, could the freeze delay bond investors from suing?

If homeowner knows they’re going to lose the house when the rate freeze ends, why would they pay homeowners insurance, property taxes, water bills or fix anything that’s broken at the end of the term?

If rate frozen homes go into foreclosure, will back taxes and other fees on dilapidated properties inflict even greater losses, compared to properties foreclosed upon earlier?

If properties are foreclosed upon sooner, would the new owners have a higher financial incentive to maintain property value than the prior subprime owner?

If homes temporarily saved from foreclosure continue to depreciate as new buyers fail to qualify for loans, could the rate freeze cause more losses than if the foreclosures had taken place sooner?
If frozen loan values stay the same for homeowners who owe more on properties than they are worth while housing prices continue to fall, do risks rise for homeowners with frozen rates who will want to sell, refinance or buy another property in the future?
Could uncertainty in investing in mortgage backed securities inadvertently cause mortgage lending standards to tighten?