Thursday, January 7, 2010, 8:13PM ET - U.S. Markets Closed.

Jack M. Guttentag The Mortgage Professor

Bringing Down the House

Email this Page IM this Story Bookmark this Story Add to your Del.icio.us account Digg this Story Print this Story

Very Good (302 Ratings): 3.794704/5

Posted on Monday, December 17, 2007, 12:00AM

How bad is the current financial crisis? It will probably enter the record books as the second-worst in the last hundred years. The worst was in the early 1930s, when thousands of banks failed and the mortgage market shut down entirely.

It hasn't shut down this time, thanks in large part to federal institutions created during the '30s to deal with that crisis.

Lost Confidence

To appreciate why it could have been a lot worse, consider that the housing finance system is really two overlapping systems that exist side by side. One system consists of portfolio lenders, mostly depository institutions, which hold the mortgage loans they originate. The portfolio system was the larger part of housing finance prior to the savings and loan crisis of the '80s, but gradually lost ground thereafter.

The other system consists of temporary lenders who sell loans in the secondary market to firms that securitize them, or resell to still other firms that securitize them. Securitization means placing mortgages in a pool and issuing mortgage-backed securities (MBS) against the pool. This secondary market system began in the early '70s and grew at the expense of the portfolio system -- until the recent crisis.

The crisis originated in the subprime segment of the secondary market system, and quickly spread. The crux of the crisis is a loss of confidence by the investors who purchase MBS and their retreat to the sidelines. When investors stop buying, the secondary market system grinds to a halt.

It Could Be Worse

One part of the secondary market system, however, has continued to function more or less normally. This is the "conforming loan" market, which covers loans no larger than $417,000 that meet the eligibility requirements of Fannie Mae and Freddie Mac. Investors have retained their confidence in these two agencies, which they assume would be supported by the federal government if that became necessary. Hence, they continue to purchase the MBS issued and insured by the agencies.

The crisis has also reenergized the portfolio system, which has expanded into many of the market niches left vacant by temporary lenders who no longer have buyers. Portfolio lenders have been turning more often to mortgage insurance, both from the Federal Housing Administration (FHA) and from private mortgage insurers. The FHA shrank markedly from 2000 to 2006 as the subprime market expanded, while private mortgage insurance was negatively affected by lender self-insurance in the form of second mortgage "piggybacks." Both trends have been reversed.

Portfolio lenders have raised additional funds from channels unaffected by the crisis: by selling certificates of deposit, which are insured by the FDIC, and by borrowing record-breaking amounts from the Federal Home Loan Banks. The banks raise money by selling bonds, and like Fannie and Freddie, they continue to enjoy the confidence of investors.

Four of the five federal agencies now supporting the market were created during the financial crisis of the '30s. The only exception is Freddie Mac, which was formed in 1970. If not for these institutions, the current crisis would be much worse.

A Premium on Fright

But it's bad enough. Portfolio lenders have replaced only part of the shortfall left by temporary lenders deserted by investors. The portfolio lenders live in the same world as secondary market investors, see the same frightening data on foreclosures, and have tightened their underwriting requirements across the board.

Further, many are constrained by capital requirements, especially those who participated in the secondary market system as investors and have suffered capital losses.

The upshot is that, just as many loans were made during 2005 and 2006 that shouldn't have been made, today there are loans that should be made that aren't. Further, the prices of all deviations from underwriting perfection contain a "fright premium," and are therefore priced higher than they ought to be. This is true even in the conforming market, where Fannie and Freddie have raised the price increments on borrowers with less than excellent credit.

More Surprises to Come

This semi-paralyzed market will continue until investor confidence is restored. Key players are the investment banks and hedge funds who sold MBS when prices were high in expectation that they could buy them back later at lower prices. They have large short positions, and at some point they must go into the market to buy the MBS that they owe. They'll do that when they decide that MBS prices have reached a bottom.

That won't happen before we see the end of unpleasant surprises -- large value write-downs by major U.S. firms, or revelations by some previously unknown foreign institution that they too bought subprime-contaminated securities and are taking a major hit. Since most firms everywhere come clean at year-end, hopefully the surprises will stop then.

Once the surprises stop, the shorts will look for a bottom in house prices and a peak in foreclosures. When both become clear, even if not imminent, they'll make their move.

Foreclosures Yet to Peak

Neither is in sight yet. Housing markets are always slow to adjust, partly because sellers practice denial and are stubborn about reducing prices, while many buyers defer purchases because they expect prices to decline. Rising foreclosure rates strengthen this attitude by buyers, since buyers understand that foreclosure sales depress prices.

The peak in foreclosures is not yet evident because of the large overhang of interest rate resets on adjustable rate mortgages (ARMs). Since many borrowers facing rate resets will find the new payment unaffordable and won't have the equity or credit needed to refinance, the outlook is for continued increases in foreclosures.

The hope, however, is that the relief plan orchestrated by Treasury secretary Henry Paulson will change this expectation.

The Relief Plan

The federal government initiated and to some degree orchestrated the relief plan, the details of which were released on Dec. 6. No government funding is involved in it, however -- it's a private initiative developed by the American Securitization Forum, a professional organization of firms involved in the securitization process. The plan applies to one category of firms belonging to the organization: servicers of securitized ARMs.

The major goal is to reduce foreclosures of securitized ARMs facing rate resets by extending the initial rates for five years. The eligibility rules are designed to make implementation possible on a wholesale fast-track basis, as opposed to the slow case-by-case basis that's the rule, which involves the collection and evaluation of new data concerning the borrower. It's also intended to be consistent with the contractual obligation of servicers to modify loan contracts only when it's in the interest of the investor.

Who Gets What

Borrowers eligible for the fast track:

• Took out ARMs with initial rate periods of two or three years between Jan. 1, 2005, and July 31, 2007.

• Face rate resets between Jan. 1, 2008, and July 31, 2010, that will increase their payment by more than 10 percent.

• Occupy the property as their principal residence, and have been current on their payments for 12 months prior to the rate reset.

• Will be unable to meet the payment increase, as indicated by a FICO score of less than 660, and not more than 10 percent higher than it was at origination.

• Will be unable to refinance, either because their original loan was more than 97 percent of property value, or because they don't qualify for FHA financing.

Not eligible are borrowers who have already had their rates reset and are now struggling; borrowers with high-rate fixed-rate mortgages who are struggling; borrowers who made down payments larger than 3 percent who are struggling; and borrowers with good FICO scores, or who have substantially improved their scores, but are nonetheless struggling.

The inequities in this are obvious but should be kept in perspective. Those not eligible will be no worse off than they are now, and perhaps a little better off. Treating a significant category of borrowers on a wholesale basis will free up more time and resources for treating other borrowers on a case-by-case basis.

Relief Plan, Part Two

The major shortcoming isn't the unequal treatment of groups of equal merit, but the fact that the eligible group is too small to have a decisive effect on market expectations. I view it as a good first step -- about the most that can be expected from the private sector. It remains for the government to take the next step, which should be aimed at tripling or more the number of borrowers offered relief.

The government should mandate that, with the exception noted below, all ARMs originated after Jan. 1, 2005, with rate margins over 4 percent should have their margins reduced to zero. The margin is the spread added to the interest rate index in calculating the new rate after the initial rate period ends. The rule should apply whether the loan has reached its first rate reset or not.

The exception would be any mortgage for which the lender can document that the borrower was informed of the margin at least three days prior to closing.

Crisis Forestalled or Lengthened?

Having the government set aside existing private contracts is not a matter to be taken lightly, but in this case it's well justified. The margin on an ARM is a critically important number to the borrower, but since it doesn't kick in until the first rate adjustment, most borrowers don't ask about it.

Margins above 4 percent are found only on subprime loans, and these borrowers are the least likely to ask. The fact that the government is too inept to make the margin a required disclosure should not absolve lenders of the responsibility for disclosing it.

Another possible intrusion by the government into private contracts, which has been proposed by some politicians, is to declare a moratorium on foreclosures. This is a really bad idea. The objective of the relief plan and my proposed extension of it is to reduce foreclosures, which would shorten the crisis period. A moratorium only pushes foreclosures into the future, which would lengthen the crisis period.

Email this Page IM this Story Bookmark this Story Add to your Del.icio.us account Digg this Story Print this Story

Rate This story

Very Good (302 Ratings): 4/5

Sign-in to rate!

60 Comments

Showing comments 6-35 of 60<< Previous Next >>

Sort: first to last

MattG - Sunday, December 23, 2007, 2:21AM ET Report Abuse
- Overall: 5/5
I am unclear why the federal government will help folks with credit scores less than 660?!? These are the very people that should have never been allowed to purchase a house in the first place. Anyway, most ARM's are tied to the one-year LIBOR index. Several days ago the European Central Bank injected $500 billion USA dollars in the banking system. The one-year LIBOR rate will continue to fall, (it has already fallen 1% since August) and stands now at 4.5%. I believe that within the next 2-3 months it will be 1% lower at 3.5%. When ARM's begin to reset, 2.5% is added to the one year LIBOR index, and at therefore it would make the new rate at 6% for the ARM. Now this will only be good for one year as the ARM will reset again. However this will slow the tide of foreclosures. Also it will hopefully stop the freefall of house prices. With all this said, homeowners in 2008 will have a chance to then refinance at a 30 year fixed rate, which is now about 6%. However, with this massive injection of liquidity in the world's market, comes inflation. The powers to be are keeping fuel prices high so that extra cash floating around gets sucked by foreign oil governments. In turn Russia, Saudi Arabia, will create government investment funds, and begin to invest in global emerging markets to prop the world stock market. Lastly, millions of citizens from China and India are becoming Westernized and are offsetting this bubble by borrowing. The key thing is that as long as population grows and becomes Westernized, the global financial system will work.
Yahoo! Finance User - Saturday, December 22, 2007, 1:01AM ET Report Abuse
- Overall: 5/5
The housing crisis is over. Stop yelling "the sky is falling, I'm chicken little"... ...go out, spend money, buy a big house, enjoy life.
Yahoo! Finance User - Friday, December 21, 2007, 2:24PM ET Report Abuse
- Overall: 4/5
A well written article, one of the few good ones from among the 'experts'. But we should not encourage a bailout. Buyers made these decisions to buy homes themselves, and were not forced to do so. I'd rather see the government spend my tax dollars to feed and shelter the homeless, than bailout stupid borrowers who either chose to not educate themselves sufficiently before taking a 500K loan, or who speculated on an ever increasing equity! Let them hand over the house keys and start on a clean slate (rent and save for downpayment). The economy will not collapse if these crazy borrowers are not bailed out, as other fundamental factors are pillaring the economy. Bailout proponents use the argument of a bailout simply to spook others into helping them out for the stupid decisions they made! Let the free market sort itself out and let the government stay away from it!
A - Friday, December 21, 2007, 9:29AM ET Report Abuse
- Overall: 2/5
Misses the real issues facing the frontline consumer who is responsible for 2/3 of GDP - stagnant wages, double-digit inflation, capped-out credit, lost wages due to illness. Most "homeowners" are upside down on their mortgages - they owe more than the true market value, thus no more easy credit lines. Consumers are turning to credit cards to pay for everyday living expenses - expect another monster bubble to form in '08 as a result. An economy that depends upon spending for its lifeblood is doomed to a short lifespan. It's been a great ride, but this trip is over; and there's a helluva long walk back to fill 'er up again.
Yahoo! Finance User - Thursday, December 20, 2007, 12:37PM ET Report Abuse
- Overall: 4/5
The fed are thinking that if they stiffen the guidelines on lending This will all go away. In some sort of way yes that would be correct but if no one can borrow money even the ones who can afford that mortgage payment, than they will not be helping the situation but instead making it worst and definitely plunging us into a recession.
WildHorse - Thursday, December 20, 2007, 11:49AM ET Report Abuse
- Overall: 5/5
Too much for the average reader to comprehend but definitely worth passing along to my clients in a different format.
Mike - Thursday, December 20, 2007, 9:30AM ET Report Abuse
- Overall: 1/5
Feds Passes Deadbeat Protection Act of 07 Yes Jack lets forgive all the finacial inept, its not there fault its the governments. What kind of message does this send to the responsible borrower with good credit that they worked hard for, to the few of us that live with in our means? I have no sympathy for those that have treated there homes like an endless ATM sucking out every dime to finance a life style that they could not afford. I have no sympathy for Wall Street hounds and there insatiable appetite for mortgage backed securities and above all I have no sympathy for the mortgage bankers and there voodoo products. When did it even begin to make sense? My cat could walk in to a bank and claim a $2M income on his signature and walk out with a liars loan. What do you mean I cant have my $1M home for $300/month any more, its not my fault I didnât understand the terms Uncle Sam save me. These are the same misfits (with there negative 2% saving rate) that we will be bailing out over and over again (think long term health care, food and shelter and diapers in there old age). How can I teach my kids to pay your self first (15%), live with in your means, save 30% for a down stroke on a house, make sure the college funds are fully financed before there 15th b-day, have 6 months worth of living expenses in the bank at all times, and have retirement 80% funded before age 50 when every fool and his brother is spending like thereâs no tomorrow? Not to worry irresponsibility and unaccountability are a live and well. The only guy I feel for is the Joe average guy with his 20% down and a 30yr. fixed driving his Joe average car and taking the kids on a Joe average vacation. With 3 or 4 foreclosures on his block and the people that had no business buying the house next to him turning in the keys and tanking his property valves for him, well let just hope Joe doesnât need to move for a while. And yes owning a home is the American dream but it is not and American entitlement ( no yet anyway
Yahoo! Finance User - Wednesday, December 19, 2007, 11:06PM ET Report Abuse
- Overall: 5/5
To the $120k earner with the $600k home and various other payments, the simple fact is you are living beyond your means. The solution is to make more, spend less, or do both. Signed, $180k earner with $300k mortgage, driving a 12 yr old car, $5/mth cellphone, basic cable, etc., and no other loans.
Yahoo! Finance User - Wednesday, December 19, 2007, 8:31PM ET Report Abuse
- Overall: 4/5
Greed abounds everywhere. Particularly frustrating to me, are agencies such as Moody's and Dun&Bradstreet and others that vastly overrated MBS's and probably other securities. When shakey is rated "investment" grade, then the system is corrupt. The frugal will have to pay for the profligate, as usual.
Christine K - Wednesday, December 19, 2007, 5:45PM ET Report Abuse
- Overall: 1/5
Jack, you are wrong about the backstop. By guaranteeing the funds banks loaned to customers, banks and investors were taking on riskier loans. Why would I fret about a 400,000 loan to an individual, when I was guaranteed to recoup most of my losses(through PMI)? Wouldn't we all like to have a 5 or 7 or 10% guarantee return on our investment? And who provided the lion's share of PMI? Its a cold cruel world out there, however, 50,000 a year incomes should not be in 500,000 homes. Had the government not guaranteed these ridiculous loans, prudent bankers and investors would not have made these loans. Let the market correct the government mistakes.
Yahoo! Finance User - Wednesday, December 19, 2007, 5:24PM ET Report Abuse
- Overall: 4/5
Housing prices must come down for people to reasonably be able to afford their mortgage payment without sacrificing all other aspects of their life. I make over $120k, which puts me in the top 5% in the US, yet I still cannot afford a $600k median home in So Cal without abandoning retirement savings and other "luxuries" (like cell phone, cable, etc.) that are now basic in life, not to mention making student loan and auto loan payments. A $600k loan amounts to a payment of $3,900/mo at today's "low" interest rates. Add to that property taxes of $500/mo, PMI of $300/mo, insurance (car and home) of $200/mo and utilities (gas, water, electricity, cable, internet, phone) of $400/mo, my after tax pay of $5,600 (after 401k contribution) is close to getting wiped out. That would leave $300/mo, which is not enough to cover my student loan payment, let alone my car payment, food, groceries, clothing, gas, etc. And this a MEDIAN house for somebody making over $100k!!! Yet, I hear stories all the time about people who are making $50k a year who are approved for huge loans on houses I couldn't even dream of owning. And people wonder why there will be a recession next year and housing is facing a collapse that our generation could never have imagined.
Yahoo! Finance User - Wednesday, December 19, 2007, 5:05PM ET Report Abuse
- Overall: 1/5
It seems the author suggests that problems and pains of poor financial planning should be excused by the government. This only discourages a free market system and encourages the populous to make bad future decisions. I understand the need to curb a financial meltdown, but a recession and some significant pain seems necessary for lessons to be learned. I would most like to see the loan origination process to be cleaned up to further prevent liar loans.
BullRider - Wednesday, December 19, 2007, 4:52PM ET Report Abuse
- Overall: 4/5
Well written article - sums up the mortgage crisis nicely. To those leaving a comment.....I'm sick and tired of people blaming the government for our problems and pointing fingers elsewhere. For once, let's be accountable for our own mistakes. I recognize that mortgage brokers and lenders may have duped the ignorant into loan products they did not truly understand. But you still cannot spend more than you make - that is just common sense. All these morons thought the equity in their homes would continue to rise and fund their newfound expensive lifestyles. If these folks had exercised some reasonable judgment and lived within their means, it would not matter that their 3 or 5 year arm resets this January. They could either swallow the increased mortgage payment or refinance into a decent fixed rate mortgage without significant strain to their budgets. Unfortunately, our nation is a consumption driven engine and some people will just never learn their lesson.
Yahoo! Finance User - Wednesday, December 19, 2007, 4:30PM ET Report Abuse
- Overall: 3/5
It's going to take a lot of articles like this to figure out a good path to take. The solution offered so far looks to be worthless as far as addressing the big picture. One thing that does need to be illegal right now is allowing lenders to collect prepayment penalties!!! Removing this unneeded expense does not hurt anyone. If a loan is going to increase, why should it be held a 0% increase? These borrowers knew they would face some increase so why not an increase of 1% - 2%? I also agree with some of the comments that it's time we (american tax-payer) quit rewarding people who make stupid mistakes. Let's start rewarding responsible people. While we are at it, lets stop providing medical services to people who will never repay, this is also a huge drain on the econmy. I better stop now or I'll use up the entire 4000 characters allowed here for comment. Realtor for 30 years
Yahoo! Finance User - Wednesday, December 19, 2007, 3:57PM ET Report Abuse
- Overall: 1/5
My wife and I worked hard saved and omitted vacations paid all our mortgage off early and got out of debt. Now I see we should have refi'd the equity gains took lavish vacations bought big expensive cars and let the goverment worry about it. What was I thinking? Or maybe we should get a reward from the government for being responsible.
leo - Wednesday, December 19, 2007, 3:56PM ET Report Abuse
- Overall: 5/5
WELL WRITTEN WITH A THOUGHTFUL ANALYSIS.
Bruce - Wednesday, December 19, 2007, 3:48PM ET Report Abuse
- Overall: 3/5
Reducing the margins to zero on any loan originated after Jan, 1, 2005 that currently has a margin of over 4 is the single most delusional bit of advice I've heard so far in the ongoing attempts to play Monday morning mortgage quarterback!! First of all, I have been in the mortgage industry for 25 years and I have not seen that many margins over 4%. Secondly, IT'S NOT JUST SUBPRIME BORROWER'S WHO ARE IN TROUBLE!! Many of the average "Joe Blows" are having difficulty keeping up. Yes, some of that is directly attributable to greed (Stated Income, No Income, No Ratio, No Doc, etc.. loans and every one and their monther looking the other way in the hope values would bail them out of a bad underwriting decision) but some of it is just a reflection of a lousy economy. Gas prices are also to blame for this current economic situation but I haven't seen headlines screaming out the outrageousness of gas prices in quite some time. The mortgage ship must right itself. But I fear it will not be soon. I am hopeful that maybe another "refi boom" will occur in '08 but I doubt if there is sufficient equity in many of the homes of the people who could use a refinance to support my hope. The mortgage industry needs to regain confidence again. Confidence that the secondary market will not kick back every loan because the "I" is not dotted or the "T" is not crossed. When is the last time Mr. Guttentag either originated, processed, or underwrote a mortgage file?
Yahoo! Finance User - Wednesday, December 19, 2007, 3:27PM ET Report Abuse
- Overall: 4/5
What benefit will government intervention provide? Who in this country is for delaying foreclosures and lengthening the crisis period? Do these people who've made these bad choices and facing foreclosure think that the government is going to bail them out by cutting their mortgages in half or by making their monthly mortgage payments for them? If this should happen, it will be at the expense of the American people. As a tax paying American, I don't want to pay for someone else's mortgage. Rather I'm waiting for the market to correct itself as soon as possible so that I can buy my own home for my family at an affordable price with affordable monthly mortgage payments. I can bet most Americans feel will share my view with the exception of those who are trying to profit someway or another by this mess. No one can say that you can't see this coming. It was inevitable. The average legal income cannot pay for a $500K mortgage unless you've got rich parents. Once prices fall to the point where it's affordable for an average working American, economic stability will come and consumer confidence will come when the market readjusts on it's own. We need to see what kind mortgages have been made and when the interest rates on them are expected to increase and then we'll know if this crisis has hit bottom. Government is not to be blamed nor trusted entirely. People need to make themselves more knowledgeble so that they can make better decisions instead of blaming others for bad choices.
The Beast - Wednesday, December 19, 2007, 3:00PM ET Report Abuse
- Overall: 3/5
Guttentag doesn't understand that every lender on an owner occupied refi can prove the margin was disclosed 3 days prior to close because of the disclosures in their signed loan documents which generally require a three day right of recission. What I don't understand is why this blowhard spends so much of his time bashing lenders and placing no blame on borrowers who willingly commit loan fraud by signing inaccurate applications. Funny how borrowers get a case of selective amnesia when they are faced with problems. I find Guttentag to be very biased in his writings and usually quite unrealistic about what borrowers face in the mortgage market. Most of the ideas he presents will effectively cripple the mortgage banking system in the long run. Nobody will qualify.
Yahoo! Finance User - Wednesday, December 19, 2007, 2:22PM ET Report Abuse
- Overall: 5/5
best ever writing on this topic. Hope everyone notices the impact of the short position of GS
Yahoo! Finance User - Wednesday, December 19, 2007, 1:40PM ET Report Abuse
- Overall: 5/5
Great Article - Bad idea. Government interference will make the problem worse, and will only protect the banking institutions. Better to let the market take its course, respect the existing contracts, and let housing become affordable for the young people of this country again.
Lemon Drop Kid - Wednesday, December 19, 2007, 1:38PM ET Report Abuse
- Overall: 4/5
This is a great article, well thought and precise. Government intrusion is not going to help much in dealing with this home foreclosure problem, and prices that are way out of control. People dont realize that there are no buyers. When I sold my house in 2003 there were buyers, which allowed me to sell and build a new house. The main question here is how do we get people to buy again? As painful as is it, prices have to come down to be more competitive with rents, more affordable to the average American family.
Sam - Wednesday, December 19, 2007, 1:29PM ET Report Abuse
- Overall: 5/5
Overall well stated. I disagree with the author's 'everything will be alright' bias, and his acquiesence to the bailout plan, but overall he wrote a good article. So much better than anything out of the 'mouth' of Penelope Trunk, that I just HAD to give this 5 Stars.......
JamesS - Wednesday, December 19, 2007, 1:21PM ET Report Abuse
- Overall: 5/5
This article brings up some good points. I expect things to get worse before they get better. Right now I have a lot of my 401k money sidelines, waiting for a point to jump in. I bought my house 6 months ago. Perfect credit, 20% down, 5.79 fixed. I think if I sold the house today I would lose 10 grand, but I bought it for shelter rather than a great investment and my payments are fairly low. I don't see any quick fix for this. If a lot of folks are foreclosed on it drives the price of everyone's house down. I think the best thing is for the markets to correct on their own and then to look for the bottom. This reminds me of the dot com bubble where you would make money on just about any tech stock. Normal real estate goes up 5.5 to 4 percent a year. Some places had years of 20 percent growth! Normally a boring S and P index funds would make you more money than a real estate investment. I look for things to "normalize".
William - Wednesday, December 19, 2007, 1:19PM ET Report Abuse
- Overall: 1/5
This guy calls himself a mortgage professor? Besides the fact that Jack doesn't seem to know Jack about history or economic principles, he's hiding and spinning the truth about what's really going on in the market. FIRST, this is not simply a problem of confidence, it is a problem of economics. When houses sell for over 10 times household income like the do in my neighborhood, then there's a real problem. Housing historically costs between 3 and 3.3 times household income (5 in California). Today's "crisis" will not happen until home prices fall back in line with their historical averages of the last 150 years. Besides this obviously glaring omission, the nutty professor clouds reality with things like: -Making it sound like all sorts of loans are being denied when in reality underwriting standards are just finally being enforced. -Calls a risk premium a "fright premium" when, in reality its just a return to a normal risk premium from a period where risk was ignored due to AAA ratings on junk MBS. -Barely scratches the major problem which is the resets of Option Arms in 2008 in a huge wave that will flood the market with foreclosures. Rising foreclosures doesn't strengthen the attitude of buys but floods the market with lower prices and forces sellers to meet market realities as their house sits idle on the market for months and years. -Masks the reality that banks are suffering huge loses and may yet fail as the problem spreads from sub-prime to prime. The banks are being forced to sell ownerships in the banks at very low prices and via preferred stocks to foreign investors in order to keep their minimum capital requirements. Preferred stocks also pay interest to the holder and are paid first if a bank goes into bankruptcy. These types of securities would only be sold when a bank is desperate and must attract buyers. I could go on and on but this has to be about one of the worst housing articles I've read because it hides the facts of what is going on. I read housing blogs daily and if you want the real scope on what's happening you'll find it there. Housing Panic is an excellent site and has alot of resources and links. This crisis will end through rapid price drops of 10%-15% (@40% in California) in the next 1-3 years or through a stagnant housing market for the next 6-9 years. The more government interference, the slower it will happen and the more individuals who will end up upside down on their house as more people buy overpriced houses. Isn't it better to let a small percentage of people file bankruptcy and start over instead of making them overpay their mortgage for the next 8 years just to get back to 0? That's why bankruptcy was created. To allow people a second chance who otherwise would spend a huge chuck of their life in debt. Reality check. The government plans have little to do about saving consumers and alot to do with making sure banks stay solvent. IN JAPAN, they call the 80's to early 90's the LOST DECADE because prices dropped for more than 10 years as the government tried to alleviate the problem just like how we are doing. The more we try to do to fight the economic underpinnings of this market the longer this correction is going to take and the more people it will infect. Do you want the US to have it's own LOST DECADE? No thanks. Not to mention I don't like rewarding those who lie on loan applications and have raised prices so far out of reality that those who are prudent with their financies are forced to wait and rent while the market comes back to where it should be.
Yahoo! Finance User - Wednesday, December 19, 2007, 1:17PM ET Report Abuse
- Overall: 5/5
This article was well written, and has helped me identify signals for when to purchase my next home. Thank you Mr. Guttentag! On another note - Why would anyone feel that the government is our parent, and that they should protect us of all evil salesmen that lurk behind every corner? One of the earliest things I remember my FATHER teaching me was caveat emptor - let the BUYER beware. The government is not our nanny! Salesmen (this includes mortgage brokers) are not to be trusted, and not taken at face value.
NJ_Contractor - Wednesday, December 19, 2007, 1:01PM ET Report Abuse
- Overall: 3/5
I agree wit the few writers below this comment. I am against any form of a bail out. This cost burdon ultimatly will rest middle class tax payer. As mentioned the rich just got richer during this housing bubble. People who in noway could afford the mortgages they applied for got approved. Like the others here I feel the marget place should be allowed to correct. When the dust settles housing prices will be affordable to the average American and lending rules will again apply. Yes, Americans want instant gratification at the expense of those who will have to foot the bail out bill. Those who use good common sense budgeting their finances will get punished by higher tax bills. It's a lose lose for everyone.
Yahoo! Finance User - Wednesday, December 19, 2007, 12:58PM ET Report Abuse
- Overall: 5/5
Government actions are part of the problem not necessarily its solution. What interest rate premiums will future mortgage investors require to balance the risks of retroactive changes in bond terms, or vague half-baked regulations? As for Fannie & Freddie, suffice it to consider their shares performance to see what the market thinks about their value. At the final end, economic fundamentals are more trustworthy in creating solutions to economic problems than political fixes. Indeed, what do you expect when government prints a massive spike of easy-mortgage-money and offers preferential capital gains tax on housing investment? Can you be surprised at a spike of demand and increasing housing prices? Can you be surprised that a consumer ends up buying the same house for twice the price and is sunk into unreasonable debt? Can you be surprised that debt capital flows to finance current consumption, rather than into growing future production and economic health? Can you be surprised that the end of the road is a potential stagflation? Should government increase its role in adding more politically-motivated economic aberrations, or should it perhaps learn from its mistakes to free the market to find efficient, robust long term economic solutions?
Chay-nun - Wednesday, December 19, 2007, 12:51PM ET Report Abuse
- Overall: 3/5
Started well, but ended lame. The gov't cannot undo contracts; that was what almost sank America in the 1780s. We depended on foreign money then as much as we do now. If the gov't freezes payments to offshoreniks holding SIV paper, the offshoreniks will presume it's one step from the gov't freezing Treasury paper payments. America is the world's biggest borrower and will be forever. If we monkey with the SIVs sold offshore, no one will ever lend us anything. The Japanese banks are right; anyone holding this overrated garbage should sue. The Wall Street sharpies have made no provision for the legal liabilities to those whom they plundered. The foreclosed-upon homeowners should sue the lenders. Where are the activist judges now that we need them?
Wildhair2U - Wednesday, December 19, 2007, 12:47PM ET Report Abuse
- Overall: 4/5
Lets see...add one part sheep (the folks getting the loans) three parts shark (the folks making the loans and the secondary market who all profit from the operation plus your representatives and the lobbyists...throw in the fog (have you ever read the paperwork in a typical mortgage) along with the hype about the size of home you can "afford" and well...that just about sums it up! My question is not how to bail anyone out...its, what happens to the economy as those expenses go up, disposable income goes down, the value of that asset goes down, bankruptcies go up??....well??? Humm, recession anyone?? In any case, no one can say that THEY didn't see it coming....remember the revision in the bankruptcy laws??!!! IMO it is not the government who is responsible except that they were responding not to the needs of the typical homeowner, but to the lobby from those who stood to profit...realtors, lenders, builders....you follow the money and you will find the cause...which should be those held responsible...How bout for the past five years there is a retroactive windfall profits tax on the sharks involved followed by a lock in the rates. Those sharks will still make money (just a bit less than expected) and folks will get to keep their domicile. Win Win all around, eh?....oh, and ask your representative for a refund based on all the money they accepted from the vested lobbies. Facism is alive and well in this country....

Showing comments 6-35 of 60<< Previous Next >>

Meet the Experts

Charles Wheelan, Ph.D.The Naked Economist
Jeremy Siegel, Ph.D.The Future for Investors
Laura RowleyMoney & Happiness

Robert KiyosakiWhy the Rich Get Richer
Ben SteinHow Not to Ruin Your Life
Jack M. GuttentagThe Mortgage Professor

Anya KamenetzGeneration Debt
Mick WeinsteinThe Week's Best Stock Blogs

» View all experts

More from Jack M. Guttentag

The Mortgage Encyclopedia

An authoritative yet concise guide to the mysteries of mortgage finance, arranged alphabetically from "A-Credit" to "Zero Balance." Includes information that will help you decide whether to use a mortgage broker, learn if you can avoid mortgage insurance, and much more. Reach for this indispensable guide and get the fast, accurate information you need!

Order your copy now!

Find out more about The Mortgage Professor.