Monday, January 5, 2009

The Great Pretender

Sorry for the lack of posting. Back to work after two weeks always is rough and I was in the process of having all the trees that fell down in the ice storm removed. More snow and ice is on the way for Wednesday, so you know I am all kinds of excited. Just a couple of items for tonight.

Hyundai Believes in You
Under normal circumstances that are part of a serious economic contraction, credit extension contracts as the ability to repay debt is impaired. Not this time. After banks lost every fractional reserve dollar they had, and more that they do not, the FED and the Treasury are trying to force cash out the door and into the the needy hands of the credit impaired. South Korea, after decades of exposure to American culture, has taken the next step in this process of loaning no matter what.

I saw this commercial at least 5 times during the NFL playoff games this weekend and I did a double take each time. Basically Hyundai would like you to come in an buy mortgage a car, and if you lose your income in the next 12 months, you can return the car! Now one may wonder why someone at risk of losing their income would finance a BRAND NEW CAR, but such thinking is useless. From Yahoo Finance:
Hyundai: Can't make car payments? Just return it
Monday January 5, 6:05 pm ET
By Dan Strumpf, AP Auto Writer
Hyundai offers to cover depreciation on returned cars in bid to woo skittish consumers
NEW YORK (AP) -- Can't make the payments on that new car you just bought? No problem -- just return it free of charge.
At least that's the deal being offered by Hyundai Motor America. In a bid to woo skittish consumers, the South Korea-based automaker will cover the depreciation on any returned leased or financed vehicle for the first 12 months to those who find themselves unable to make their car payments.
"We're seeing people who are stuck," said Joel Ewanick, vice president marketing for Hyundai Motor America, in an interview. "Really they have a mental fatigue and they're really nervous about their long-term financial situation, so we started working on that side of it."
Deadbeats need not apply, however. The "Hyundai Assurance Program" only applies to customers stricken by misfortune outside of their control, such as losing their job, becoming disabled or losing their driver's license for medical reasons.
Customers must also have made at least two payments on the car already. In addition, Hyundai will only refund the depreciation on the returned car up to $7,500.
"For the normal person, this should cover any normal depreciation in the first year," Ewanick said.
After the first 12 months, customers have the option of extending the program for a fee through their dealership. Customers who pay cash for their car don't qualify for the program, Hyundai said.
Hyundai, which launched the program on Friday, said the program is aimed at consumers too nervous to spring for a new car in the difficult economy. The slump in consumer confidence has been one of the biggest factors behind the collapse in new vehicle sales in 2008.
For this reason, traditional incentive tactics, like low-interest financing or cash bonuses, have been much less effective in boosting sales recently, Ewanick said. Economic anxiety -- rather than cost -- has been the biggest factor holding consumers back from big-ticket purchases.
"This is a recession of fear, a recession of confidence," he said. "It's much more severe than what we saw in the early '90s."

I agree that the best way to help someone that has "mental fatigue" and is "nervous about their long-term financial situation" is to commit them to a 5 year new car loan and double their car insurance premiums. If anything goes wrong, just return the car hassle free. When will they come up with a program like this for real estate?

It is curious that people paying all cash for a Hyundai are excluded. This must be some weird arbitrage thing with whomever Hyundai has insured this program with. Any thoughts as to who may have insured this deal? Probably AIG knowing those clowns.

Mission Creep
While there are many commentators that have asked just how the FED and Treasury are ever going to get extricated from the loan business, those two institutions seem oblivious. The government thinks they know when home prices are too low (but not too high), when home sales are too low (can never be too high), when car sales are too low (never any over consumption here), or when banks are not lending enough (fractional reserve banking knows no limits). To prove how they know these things the government is about to make sure those kinds of numbers jibe with what thy want.

Where will this end is any one's guess. With funding essentially endless and cheap we are going to see the government begin to set "targets" for various sectors and indices. A central planned economy has never worked out very well, but this time may be different. It seems we spent almost all of 2008 pretending that things were not that bad only to cave in and accept how bad things have been overextended. Sadly it seems that 2009 will be the year we pretend that the government can stoke demand to make things all better. Playing pretend can be fun for the lonely and for small children, but it is not responsible behavior for serious adults. I wish we had some serious adults in charge.

Have a good night.


Anonymous said...

Looks like were headed right down the Japanese rabbit hole to me. Government spending IS the economy.


getyourselfconnected said...

Good to see you again! Thanks for dropping a comment.

GawainsGhost said...

We don't get much snow down here. In fact, I took my mother to midnight mass on Christmas Eve a couple of years ago, and when we walked out of the church, it was snowing! For the first time in over 200 years.

One night of light snow, all of which melted by noon the next day, and that's about it. Probably won't see that again for another 200 years. Not that I'll be around then, but it was nice that I got to experience snow once in my lifetime.

Anyway, more to the point, I don't get this Hyundai buy-and-return thing. It smacks of desperation to move inventory off the lots by way of "creative" financing. And it begs the question: If no one wants to buy a new Hyundai, even a returnable one, why would anyone want to buy a used, returned Hyundai?

The answer to that question takes the recycling fallacy to its logical extreme. Buy new, so we can move inventory off our lots, then return, so we can have used inventory that we can't move off our lots. It doesn't make any sense. But, frankly, I'm surprised the geniuses at GM didn't think of it first.

You ask when a program like this will be applied to real estate. It already has been. I spent the day yesterday studying Fannie Mae's new financing, called HomePath.

Fannie now offers two types of financing for repossessed homes. The first is similar to their previous financing, called ExpressPath: 3% down, no PMI, no appraisal required, sales price used as property value. The second is a rennovation mortgage: 3% down, no PMI, loan amount based on "as completed" value, rennovation funds included in loan amount up to $30,000 or 20% of as-completed value.

The latter is actually a good thing. Some of these repossessed homes have been gutted and are unliveable in as-is condition. (We have one on the market that is missing not only lights, vanities and commodes, but an entire kitchen.) Only an investor with cash can buy these homes, since a lender will only loan for the purchase price, not the purchase+rennovation amount. You could take out a loan to buy the house, but you would have to have the cash on hand to pay for the rennovations, and hope you can then sell it for a profit.

This new program allows buyers to purchase and rennovate a home, with only 3% down. But it also begs the question: If no one who had the cash would buy and rennovate the home, why would anyone take out a loan to buy and rennovate it?

The answer to that question takes the flipping fallacy to its logical extreme. Take out a loan to buy and rennovate, so we can move inventory, then if you can't make the payments, we'll foreclose so we can have a rennovated house we can't sell without losing money.

The whole world has gone collectively insane.

Anonymous said...

Just had to drop a note today to my CONgress critter:

Hello Senator,

Now that we seem to be following the Japanese model of propping up insolvent banks, throwing money at companies that will never make a profit and haven't for years which will rob capital from productive ones, propping up any company such as AIG or GMAC that would cause a counterparty accident which would naturally effect the same insolvent banks, concurrent with the huge taxpayer dollars that will be spent lining river bottoms and the resulting 20 year stagnation that will follow burying the population and future generations under a mountain of debt when too much debt is the problem in the first place which more then likely will end in a currency collapse at some point in the future.
I would just like your thoughts on whether this is just a function of human nature and the evolution of the political system in that.
Pretty fascinating stuff really.
Have a good day.


Bet he liked that.

watchtower said...

I paid my house off a few months ago and am totally debt free (not really, if I stop paying the insanely high property taxes on it they will take it away), I want a new 4X4 truck so bad that I can taste it but have went ahead and took "Ole Red" to a local mechanic that I trust to get it back in perfect working order (one of my goals to do before 2010) instead of turning $24,000 into $5,000 again with the new truck.
I'm still on the look out for a good used woodstove that could be moved from the garage to the house in a worst case scenario.
In otherwords I'm keeping the faith out here in the heartland.
If I turn out not to be a nutcase and TSHF I will give you city dwellers some advice: People from where I live are decent hard working folks with a strong moral background, it would be mighty hard for these people to deny you substance, just please try not to make your way out here all at the same time.

Good luck everyone.