September 20, 2007

Operation Destroy the Dollar: H.R. 1852 Objective Number One – Bailout the Lenders.


You can tell it is an election year when political operatives try to pander to every single group with no long-term thought process of the implications of instant gratification. Maybe that is why the United States on a personal level, has a negative savings rate. How can the government encourage people to save and be prudent when they do the complete opposite? Let us take a look at the winners with this newfound ease in lending:

Home Loans: Winner because they become cheaper

Auto Loans: Winner because payments will be lower

Credit Cards: Winner since your APR just dropped from 18 percent to 16 percent
Lenders: Winner since they are given a lifeline to do more loans

Savings Account: Losers since your interest rate is lower than inflation

Dollar: Loser as you can clearly see by the drop below the 80 support level

Pretty basic right? But if you think about the deeper ramifications of the decision it shines the light on an eerie part of our economy. The only way we can keep this game going is by making savings unattractive to the masses and encourage spending at all cost. Many investors realize the game is up and are diversifying out into foreign currencies, stock, and everything else that will benefit from a falling dollar. Many are doing short-term call options and figure they can make a profit on these pseudo bull runs. This does not help the massive majority of Americans. How is this good for our country in the long run? Today we will take a look at an absurd piece of legislation that passed the house, H.R. 1852. I will translate the key points for you into blunt language and what it means to you and our country. Take a look at this press release issued a few days ago from the House Committee on Financial Services:

· Lower Down Payments. Authorizes zero and lower down payment loans for borrowers that can afford mortgage payments, but lack the cash for a required down payment.

Translation? We are going to institutionalize subprime lending! Forget about the tried and tested 10 and 20 percent down payments of yesteryear. We are overhauling the system to remove down payments. After all, we have a hard enough time saving anything month-over-month so how can we expect people to save a few thousand dollars? So instead of requiring this archaic “saving” that is so passé, we are going to allow people, assuming they can make the monthly payment, to purchase homes even if the prices go beyond financially prudent ratios. Down payments exist for a reason. They show that a prospective buyer has the ability to tighten their belt and manage their finances for a few years to purchase a home; normally this is achieved by foregoing spending on other discretionary items. But you can have your cake and eat it too in the mortgage world! Debt is saving in this apparently brave new world.

· Housing Counseling. Authorizes more than double the current funding level for housing counseling, to help subprime homebuyers and borrowers late on mortgage loan payments.

Do we really need housing counseling? I can imagine one of these sessions:


Counselor: “Can you tell me about your current situation?”
Supbrime Borrower: “Ok. Someone from one of those now bankrupt lenders gave me this great 1.25% teaser loan and told me it wouldn’t reset for a long time. I didn’t read the note because hey, I trusted him since he was in a nicely ironed suit. When he said long time I thought he meant 10 years, not 2 years. Now my payment went from $1,250 a month to $2,200. What can I do? I barely was able to afford it even with the crazy teaser rate?”

Counselor: “Damn. Looks like you need to increase your income by adding an all America 2nd or 3rd job. Another option is to go into foreclosure since the market price on your home is now less then the mortgage balance. Oh hold on a second…I’m getting a fax from our blessed government. [pause to get fax] Hey! Good news. We can refinance you into another loan with another teaser rate since the government is now subsidizing these loans.”

Subprime: “Great! Because I was looking at this other home that I would like to flip…”

The folks that need “counseling” are the lenders and the policy makers for thinking this is a good long-term strategy.

· Subprime borrowers. Directs FHA to provide mortgage loans to higher risk (but qualified) borrowers, without authorizing unnecessary fee hikes on such borrowers.
Reverse Mortgages. Enhances the FHA reverse mortgage loan program to help seniors pay for health and other expenses, by removing the loan cap to avoid program shutdowns, raising loan limits, and by reducing the maximum fee lenders can charge for these loans.

Higher risk but qualified borrowers? Bwahaha! You couldn’t write more Orwellian language. Could it be that they are high risk because maybe they can’t afford the home? This is like saying that a person is perfectly suitable for working at the drug enforcement agency so long as his cocaine and heroine addiction doesn’t rear its ugly head while raiding a drug house. As we are seeing, it is unethical to give someone that doesn’t have their financial house in a row $100s of thousands of dollars in the form of a mortgage only to have them lose their house later on. That is why we have [had] lending standards. When lenders had to hold the notes they actually vetted the loans with higher scrutiny because a foreclosure would hurt their books. Now we have this moral hazard where we are encouraging irresponsible lending. This doesn’t help the homeowner. This is horrible classical conditioning on a mass scale. What we are telling people is credit doesn’t matter, saving is irrelevant, and bad financial moves will have a bailout from the government. Does this make sense?


Then the reverse mortgage portion is just classic. You can see the light bulb over these congressmen go off. “Next year is so important. Older voters are an important constituency group.” Since Social Security is peanuts and the cost of living adjustments are based on ministry of truth data, they only see marginal increases. The majority don’t have adequate savings but what do they have? Over inflated home equity! How about we slap on another virtual ATM and drain all their savings so instead of the equity going on to their children or grandchildren, it will go to the good old government. Amazing planning here. Let us keep reading.

· Multifamily Loans. Raises FHA multifamily loan limits, so these loans can fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable housing can be maintained in local communities.

You really need to put on your doublespeak reading glasses for this one. So they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more affordable housing. But this legislation assumes that current housing bubble prices are justified and are trying to institutionalize them under the guise of good public policy. What we need is less legislation and more open market competition. Think about it. If you have two companies and materials are being driven down because of competition and efficiencies, then the company that can provide lower priced goods to the market will win. That means lower priced homes and more sales. Did you notice how Hovnanian had no problem attracting buyers when it slashed prices by $100,000? But here, we have this big government mentality and you’ve seen the ridiculous budgets where toilets cost $2,000 and pens go for $30 each. Do you really think these companies compete when they know they have a locked in price? Why do you think communism failed so miserably? And the language is scary. What do they mean “fully fund construction costs” in bubble areas? They call them more expensive areas instead of overpriced bubble metro areas fueled by rancid loans but I think the PR folks removed that language. This is a blank check. Make sure you contact your representatives in both houses and contact the White House to veto this. Maybe Bush will dust off the pen and use it for once.

· Affordable Housing Fund. Authorizes up to $300 million a year from the bill’s excess profits for affordable housing, instead of returning such funds to the General Treasury.

You don’t need the affordable housing fund if you relax zoning rules, stop bailing out lenders, and make these folks accountable for their actions. They are trying to seal high prices into the system as a paradigm shift. These folks want you to believe that higher prices are just a thing of the modern day as opposed to being fueled by exotic funky lending and mass greed.

· Higher Loan Limits. Adopts the Frank/Miller/Cardoza amendment that would raise FHA single family loan limits, which now bar loans above 95% of the median home price in each local area and shut FHA out of higher cost home markets. The amendment raises the FHA loan limit in each area to the lower of (a) 125% of the local area median home price or (b) 175% of the national GSE conforming loan limit. The amendment also also retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”retains the bill’s provision for a nationwide FHA loan floor of 65% of the GSE conforming loan limit, and gives HUD authority to raise these loan limit amounts by up to $100,000 “if market conditions warrant.”

This is the one that is getting everyone worked up. How is raising loan caps going to help the family on main street USA by pushing limits over $500,000? I thought the median price was somewhere around $225,000 for most Americans? Oh! I forgot. Lenders make their most profits from overpriced bubble metro areas therefore we should ask our brothers and sisters in Wyoming, Montana, Arkansas, and every other non-bubble state to contribute to their mass greed. Make no mistake. This bill is 95 percent for the housing industry. It will not help you or your family if you are facing foreclosure. They will use the 1 or 2 examples to get media heart bleeding and lenders going into crying moments (did you see that Youtube video of the guy pleading for Brittany?); it’ll be something to that effect but everything is garbled up in this translation. Pandering at its finest. How is someone in a high priced area with a $400,000 or $500,000 mortgage with a family income of $50,000 going to get help if the main problem is a pricing and income issues? Unless they want to give everyone a 50 percent mandatory raise, I’m not sure how this helps anyone except lenders on the large part by washing their hands clean ala Pontius Pilate of unethical and corrupt mortgage products?


Doublespeak: Helping Minorities Pad our Bottom-line

Someone once told me that getting married is easy, staying married is the hard part. During a presentation, one of the nation’s mortgage lending leader reiterated their goal of helping minorities to own homes. The government always throws this PC statement out. The last few years these lenders have done the most damage to minorities. Guess who are the folks who are losing their homes because of subprime lending in the largest numbers? These greedy lenders didn’t care about folks’ long-term well being, they only cared about putting people into homes and getting their nice commission cuts. So what if 1, 2, or 3 years down the road the family drowns in their own debt service? Setting people up for failure is not the American way.

The fact that many are subprime meant they couldn’t afford homes to begin with. Simple way to avoid this mess from the start. If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down. During this time people aren’t buying, selling, refinancing, busting out home equity lines of credit and all things where the housing Ponzi Scheme gets their money from. To use this “we are helping minorities” line is arrogant and absurd. Why don’t they address the real reason that of massive inequities in pay for minority groups? Oh! We can’t talk about income because that is taboo. Yet they are okay with putting people into ticking time bombs. A good senator and representative, for example, in voting for a war should always ask themselves if they would send their own child to a conflict. In the case of lending, a good lender should be required to ask, “would I loan this person money if it came out of my own bank account?” Guess what your answer would be?



Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.

43 Comments:

info@cmseldercare.com said...

Re: Reverse Mortgages
Before applying for a reverse mortgage, everyone should consider the ramifications this may have for Medicaid eligibility. Medicaid has home-based programs and also pays for nursing home placement - reverse mortgages can wreak havoc on the eldercare process. The person might not be eligible for Medicaid due to excess income. Since it's cheaper for Medicaid to pay for placement and be reimbursed from the sale of the home when the patient dies (single patients only), a reverse mortgage can be a horrible thing. There are medicaid offices in every state; before applying for a reverse mortgage check with them or an elderlaw attorney to be sure it won't adversely affect eligibiltiy.

Megan said...

Yet another great post! The madness has got to stop. Greed is killing this country. Had a great time yesterday explaining to my boss why we keep getting 'price worsened' emails from all our lenders. All he could say, over and over, was 'But the fed cut the rate! Why are rates going up?' Sigh.

Exit said...

Doh! Mmmmmmm, rate cuts.

I recommend reading Depew on Minyanville (5 things) today, and Markman at MSN Money (Bear market).

Remember that TV show where the masked magician unveiled the secrets of other magicians? Can we get one of these now for the financial markets?

Or maybe, Survivor: Wall Street - tribes of financiers against tribes of pensioners who have to survive on a fixed income. Each group gets armed with an envelope of coupons. Or would Celebrity Death Match be better?

Megan said...

It was comedy. He could not at all comprehend what I was saying.

SD Scientist said...

It's not so bad. Hyperinflation is a viable strategy that solves all our problems at once.

* Inflating away the debt softens the blow from housing bubble collapse.
* Giving up fight on inflation hurts foreign investors' confidence in the dollar, foreign investors stop buying U.S. treasuries and MBS, Fed basically takes away the needle from the junkie. United States are forced to live within means.
* Existing debts (all those long-term treasury bonds in Chinese vaults) will be repaid with depreciated dollars.
* Exporters are helped because they make more money.
* Most people don't have any savings (IIRC median American family has $6,000 in liquid net worth) and they don't suffer much when dollar is devalued.
* Smart people have been moving their money out of dollars for a while now.
* If you're sitting on a pile of dollars while Fed is hyperinflating, you're not paying attention and you're no better than all those subprime ARM borrowers.

Dr Housing Bubble said...

@cmseldercare,

Great way to alleviate the burden on the Medicare/aid system. Not only that, you can increase the profits for the housing industry. Win/Win. Win for the government by lowering social welfare payments and a win for those in the housing industry since they can churn more absurd mortgage products. Are we forgetting anyone? The family on the street? Bwahaha! We can spin it as a good cause and dumb them down since they are too concerned with the Juice chasing his memorabilia.

Why do you think they pushed this legislation this week with all the noise about the interest rate cut? The majority of the public figured it was one of the same instead of two separate actions.

@megan,

This is only helping out the holders of the notes and Wall Street. That is it. They are trying to put the entire society into a crippling debt spending machine. Visualize the US on this huge hamster wheel and the Fed and big banks feeding people little pieces of cars, homes, and artifacts of wealth. Financial prosperity and sustainability is not their end goal.

@exit,

How about mortgage Fear Factor? “Who dares to sign their name to the 1.25 percent teaser Wonderland loan?” Of course you’d have to sign the loan while eating mutant Amazon flying roaches, otherwise known as option ARM and interest only mortgages.

I’m not sure we need a magician to tell us we are getting screwed. Most Americans are well aware that they are getting shafted by this slight of hand. The main question is will the public say anything about it?

I think a good show would be a Wife Swap between Alan Greenspan and his wife with one of these subprime borrowers in lower income areas. Since he stated he had a hard time having a sense of how bad it gotten, I know of many places in LA that we could put him. “Damn it Alan! The rate just went up by 50 percent. What do you suggest we do? By the way, get that stinking BLS report off the damn counter!” Hilarity would ensue.

John said...

Dr. HB,

I love your site, and I agree with you up to a point. Here's where you and I part ways. You just posted this:

"If people want to buy homes why is it so bad to ask that they save a minimal down payment? You know why? Because this slows the real estate complex down."

The politicians have a vested interest in seeing that the illusion of an American middle class is sustained at all costs.

If people had to work and save for a down payment, then they'd ask for wages which matched the rate of inflation. They'd organize into unions, which is exactly what our parents did. They'd ask real questions about Globalization and Immigration which have hurt wages.

Our political class wants to put people into homes. Let them buy whatever they want, whenever they want. All so that they don't pressure their leaders on tough economic questions like "free trade" with China and outsourcing IT jobs to India.

Claire said...

Our dollars are at par (Canadian Vs. US). You Yankees are going down ;)

Claire said...

P.S. I'm just teasing. I actually feel sorry for you. You were once such a strong country. A country I admired. I really hope you can turn things around. I guess only time will tell.

ocholdout said...

On a recent travel show the host was trying to explain all of the half finished houses in Turkey. His explanation was that people couldn't save because puting the money in a bank was useless with hyperinflation so people built houses as they got the money. They took years to complete, but at least they were building housing stock for the next generation. The US is much more advanced. We steal the money from the next generation.

mrfnuts said...

Can someone tell me how you can find which 348 of the 420 house members voted YES to this absurd piece of legislation?

I've been poking around the www.house.gov website a fair bit and can't find where it actually lists the votes on this thing.

I think it is imperative to actually post a list those congressmen who vote in such an obviously corrupt way. Perhaps one day Americans will stop having so much apathy to the election system and perhaps throw the scum out of office for a change.

carlivar said...

Is there somewhere I can move where I can be free and safe from this sort of thing? Kind of like the hidden community John Galt founded in Atlas Shrugged.

This country is screwed. But I don't want to go to Socialist Europe or Canada either. Any suggestions?

Great analysis by the way. Depressing, but good.

carlivar said...

Here are the House voting results.

Ron Paul voted No, of course.

mrfnuts said...

carlivar:

Thank you very much for the voting results.

Oh, and if Ron Paul had voted yes, I would have come to a conclusion that I had in fact entered the twilight zone, or perhaps ended up on the planet of the bizarros (to use a Superman reference).

Would be nice to see a Ron Paul Presidency in 2008...

mrfnuts said...
This comment has been removed by the author.
mrfnuts said...

As expected my Representative voted in favor of this bill. I do live in LA LA land after all.

At any rate, I decided to write him a letter, that although I know he won't ever read, or pay attention to, I still feel better for having written it:


Dear Congressman Schiff:

I would like to convey my disappointment for your support of the obviously pork laden bill H.R. 1852, which is a de facto gravy train for the Mortgage Brokers Association, the National Association of Realtors and the National Association of Homebuilders (to name but a few).

In addition, despite overwhelming opposition to this bill from the population, you went against the will of the public and voted YES.

You should know better that the problem in housing is NOT a 'lack of financing' problem as evidenced by the current sub-prime mess we're in right now, it's a PRICING problem. You have thus effectively used my tax dollars to artificially inflate the prices of California (and National) Real Estate. What's worse, the next home I buy, I will in effect be bidding against my own money.

I sincerely hope that you become more principled in how you vote in the future, because as of now you should NOT count on my vote.

Sincerely,

(name removed for privacy reasons -- was in original letter)
Generous Tax Payer.

Crazed in Glendale said...

Hi Dr. HB,

Thanks again for the article.
I found this very disappointing.
However, the ones who will suffer the most would be the middle class and the future Americans.
People are worried about loss of hypothetical value of their home, when food and energy price are going up?
What’s the point in ruining the dollar. This is such a short term fix. What are they going to say about inflation?
Oh yeah, we don’t have huge inflation, because food and energy isn’t part of the basket.
Who would believe this B.S?
I wonder what will happen, when inflation run amok, and people are forced to question the Fed regarding inflation.
Maybe the wages might go up. Not sure about that one, because Fed doesn’t like that.

I don’t know this bill will help too much on housing. Because I think people aren’t buying because it’s still cheaper to rent in CA.
Housing is too expensive, and my dollar is eroding. However, I’m better off renting then buying an overpriced POS box called a home.
I don’t see how the prices of houses in CA can keep going up and up and up. I think most people are maxed out. Then again maybe this is my wishful thinking.

You know I’m beginning to think that lot of cooperation and some home owners( the ones who are in trouble because they bought more than they could afford) are liked spoiled children. If anything goes wrong, wine and cry and the Fed will come and bail you out. It’s a strange time.

Does anybody know what happen to Japan after their bust in the 80’s?
Did they have huge inflation?
All I remember is that the housing prices went down for ten years, even with low interest rate.

Do you thing the prices of houses will be maintained for next five years, or do you think it’ll go up and up?
Thanks so much
Crazed

eridani said...

I got the following by email as a legislation suggestion. Whaddaya think? Doable? Useful?

Homeowners and Bank Protection Act of 2007

The act would include the following provisions:

1. Congress must establish a Federal agency to place the Federal and state chartered banks under protection, freezing all existing home mortgages for a period of however many months or years are required to adjust the values to fair prices, and restructure existing mortgages at appropriate interest rates. Further, this action would also write off all of the speculative debt obligations of mortgage-backed securities, derivatives, and other forms of Ponzi Schemes that have brought the banking system to the point of bankruptcy.

2. During the transitional period, all foreclosures shall be frozen, allowing American families to retain their homes. Monthly payments, the equivalent of rental payments, shall be made to designated banks, which can use the funds as collateral for normal lending practices, thus recapitalizing the banking systems. These affordable monthly payments will be factored into new mortgages, reflecting the deflating of the housing bubble, and the establishment of appropriate property valuations, and reduced fixed mortgage interest rates. This shakeout will take several years to achieve. In the interim period no homeowner shall be evicted from his or her property, and the Federal and state chartered banks shall be protected, so they can resume their traditional functions, serving local communities, and facilitating credit for investment in productive industries, agriculture, infrastructure, etc.

3. State governors shall assume the administrative responsibilities for implementing the program, including the "rental" assessments to designated banks, with the Federal government providing the necessary credits and guarantees to assure the successful transition.

The Congress of the United States must act to pass legislation embodying these three principles immediately, as emergency legislation, halting a "tsunami" of foreclosures, keeping millions of American families in their homes to avert social chaos, and protecting chartered lending banks of the United States and the states. It this does not happen within the next 30 days, the country is likely to go into an economic meltdown that will trigger a 1930s style depression or even an economic dark age which would take decades to recover from.

Exit said...

@eridani

The staggering bureaucracy necessary to run the "modest proposal" you shared would be fraught with corruption. It sounds positively Orwellian in scope.

It's a governmental "solution" to a market problem. As we've seen, the government is ill-suited to prevent or contain, let alone solve, problems.

For instance - what happens if you want to move from your home? Who sets 'market value'?

What if a borrower / home owner simply refuses to pay - can he be evicted then?

The speculative debt runs in the mid $400 TRILLION dollar range, some 8 times the GDP of the entire planet (some $60 Trillion). That would take more than 'some years' to unwind - no matter what structure (or lack thereof) is proposed to solve the problem.

A bill passed by Congress and signed by the president in 30 days? To quote the good doctor - Bwahaha. Special interests begin at Goldman Sachs (Paulson) and go all the way to your neighbor or family member who owns property which no longer can be sold for a profit (in Washington or North Carolina, for instance, where values are increasing.)

Interest on any loan is a function of risk. Freezing and restructuring rates removes risk. At that point, what's the point of any bank lending? Homeowner's would be guaranteeing a certain return to the bank. But as a corollary, there could be no inflation (in fact, it would be deflationary), which in turn means no pay raises for workers.

It ignores global economic realities such as imports and exports, which would be under no governmental restraints to have their prices 'pegged' by this proposed Bureau for Bailouts. How would the bureaucracy contend with price fluctuations generated by such out-of-country forces?

I'm afraid the economic 70 car pile-up is going to happen no matter what kind of air-bag is stapled to the hood of the scooter.

al said...

question for financial brains:

Say I have $50,000-60,000 in a savings account (2.49% interest), that I've been saving for a house. And, say I knew I was going to wait ATLEAST 6 more mos. before I bought anything. What should I do with that money for the time being to avoid losing any more to mr. inflation and doesn't involve much risk?
thanks

SD Scientist said...

@al

the safest way to protect your money from inflation is to buy U.S. government inflation-protected bonds. There are two kinds - TIPS and I-bonds. In both cases your rate of return is recalculated twice a year based on recent inflation measurements (CPI).

Return isn't great and government is generally believed to mess with CPI techniques to result in artificially low measurements, but they shouldn't be able to mask hyperinflation if it does occur.

I-bonds are safest and easiest to use, you don't incur any taxes until you sell them, but return is lower (currently 1.3% over CPI) and you lose 3 months of interest if you sell too soon.
TIPS are harder to buy and much more complicated from tax perspective, but interest rates are generally higher.

Head to http://www.treasurydirect.gov to find out more.

There is a TIPS auction upcoming on October 11 if you're interested.

Erik said...

Dr. HB,

I thank you for your sober and realistic analysis, now and throughout the past year and a half I have been reading your blog. I wish the folks in charge of our monetary policy had the same scientific approach to economics as you do.

It has truly been disheartening watching recent events, this week as well as over the past several months, as our policy makers levy decisions and propose legislation that seem to completely defy the fundamentals of financial responsibility that one would expect from the largest economy in the world. I have often seen our federal government as the mommy/nanny that they are, telling me how to spend my money (by way of taxing the hell out of me and appropriating it as they please), but now they have posed themselves as the crack dealer pushing their product to the poor slobs who have can’t seem to get clean from the addiction of cheap money. In the meantime, hordes of responsible Americans are the sober, financially responsible families who will tragically watch our investments plummet and the value of our paycheck diminish, as the US dollar is eroded to historical lows on the global market.

Sadly, I believe that Tuesday’s Fed rate cut had more of a political motivation (see: November 4, 2008) than what was best for our country. By no means am I trying to spark a political debate, but I am truly wondering how our country will benefit by further trimming the value of our dollar (and economic solvency) and reinforcing the façade of accountability-free, hyper-consumerism that has created the mess we all find ourselves in. My money is non-partisan and I loathe anyone that would meddle with it otherwise. I don't lose a wink of sleep thinking about the folks who will be foreclosed upon because they didn't read their mortgage paperwork, and certainly don't think that greedy investors should be bailed out or given a break.

I was looking forward to a healthy and measured correction that would purge the speculators, those that bit off more than they could chew, and the absolute idiots who had perpetrated this housing bubble and credit crunch. But now I am convinced that there will be a great deal of collateral damage in the implosion of this (dynamite-filled) house of cards.

Please keep evangelizing your wisdom, as you inspire the folks to continue to save for that unicorn-like 20% down payment, while responsibly managing their family’s welfare.

pugg squaar said...

Dear Doctor,

Can you explain something to me?

Let's say I owe 30,000 on a fixed, first mortgage taken out 10 years ago at 6.25 %. Now let's imagine a dollar that has depreciared some 60% during that time and is about to depreciate more. Has my mortgage, essentially, gotten cheaper?

And, if the dollar drops by another 10%+ would it be advantageous to pay off that remaining mortgage, beofre the dollar reinflates (assuming it can)? i.e, if my dollars are worth less, does my fixed loan cost less.

I guess I'd answer my own question in terms of cash flow and income... if my income grows, than yes, my loan is cheaper, but somehow I think it's more complicated than that in the context of a deflating dollar.

Does my question even make sense?

Cheers,

nick said...

i am a credit counselor in southeastern florida and that isnt quite how the conversation goes with clients. most of the calls i get are from people who bought multiple properties and were expecting to get rich next year flipping them.

i had a jamacian immigrant in nyc who bought 2 apartment building for $800000 each and got $4500 rent and had $20k in piti and thought they were going to be a millionare in a couple years. he is an emt and clears 3k net each month.

another client 72 years old with 4 rentals and 5 mortgages including their own 1st. all rentals are in forclosure. these are in indiana

i had a teacher in fl with 4 rentals and all are empty and has no positive cash flow from the properties. they split up with their partner who had to rent because their investment property was in such a bad neighborhood they could not live their own house.

there are 17 houses for sale on the street next to my own and that was on 5 blocks.

so it might be worse than you thought

Kerri said...

I can just cry when I read this, because my husband and I have watched in disbelief the past 10 years, as the government and lenders take every advantage and savers are looked on as morons. We have plugged away at paying off our "median" So Cal house. We have some retirement savings. We must be more solvent than many, but doing our taxes makes me crazy every year, because of the write offs make only an excessive borrower feel cash flush, and then they tank because they can never pay anything off, because they would see less of their pay check. the hamster analogy is so right on! I literally loathe our government full of wimpy over paid baby boomers who wouldn't know a budget from an Expensive DC lunch menu. If you're not a business the tax code will suck you dry. I even laugh at the new idea of joe average riding around in the expensive SUV, Mercedes or BMW with a magnetic business sign so he can only pay 60% of the price of the car he can't afford. Thanks government, what a thrifty piece of tax laws. This new legislation better not pass, or have I missed it, and it did. Fuming in San Diego

The North Coast said...

Many thanks to the first commentor for the crucial information on reverse mortgages and their impact on a person's Medicaid eligibility.

This, I had no idea of.

Many elders of my acquaintance, who are short on income and long on accumulated equity on homes they have owned for 50 years, are being pressured into these destructive arrangements.

I will show them your comment and refer them to the appropriate legal assistance.

Thank you very much for your timely and crucially important info. You have probably saved thousands of seniors from making a suicidal financial decision out of desperation and fear.

Liberal said...

Al...Say I have $50,000-60,000 in a savings account (2.49% interest)
Why would you do such a thing?? I get 4.50% at my credit union insured Money market account!!! Stop feeding these ripoff banks and just give your money away...
Just my 2 cents

Saver said...

@Al,
you can either get a CD, for which the principal is FDIC insured, probably around 4% these days, or a Treasury Bill, I guess about the same, that is totally safe. Your money is locked for 3-6 mo depending what you buy but certainly better than 2.49%

Exit said...

http://www.marketoracle.co.uk/Article2203.html

This is a very cogent analysis.

DeeDub said...

One of your best posts IMHO.

Dr Housing Bubble said...

Thank you carlivar for providing the link to the House voting results. If you really want to contact some people that are making noise, here is the list of the House Committee on Financial Services:

House Committee on Financial Services Members

It seems like many people are concerned in regards to preserving their wealth in the face of a declining dollar. SD Scientist does bring up good points that the Fed is possibly hoping to inflate out of this bubble. I wouldn’t agree that I-Bonds or TIPS are the best way of preserving your wealth since they are derived via a composite of BLS statistics that incredibly underreport the real inflation rate. Take a look at the BLS data here: BLS data. As you can see, according to this information, for the last 6 months consumer inflation is hovering around an annual rate of 3.8 percent. So anyone can beat the government rate of inflation but what is the REAL rate of inflation? If you look at hedges against a declining dollar, gold is up 25 percent year-over-year. The energy sector is also doing well with double-digit jumps year-over-year. Many online institutions are offering 5 to 6 percent yields; keep in mind the tax implications between these accounts vs. government saving bonds or TIPS. I would even look at solid international funds since they will appreciate in the face of a declining dollar.

Another issue is yes, we are having inflation in practically every area except one crucial area, income. I’m not sure the Fed has much of a say in inflating incomes especially when even places such as Countrywide, are outsourcing jobs to India. Not Indiana, but the other side of the globe. And housing prices are so disconnected from reality that incomes will have a long way to go to catch up to any sensible ratios. Thankfully the New York Times is talking about this:

Will the Fed Reverse the Housing Slump?

The fact of the matter is you can’t fight the Fed in the short-term. Many shorts got hammered this week and I expect many options to expire worthless today. When you short stocks you are doing educated betting. If you look at all the data with foreclosures at all time highs, subprime debacles, hedge funds going down, and other market issue you’d think the stock market would be getting hammered. But the Dow Jones Industrial Average is actually up 10+ percent for the year. There are many places to invest in these upcoming years but buy and hold may not be the best policy, in my humble opinion.

If you doubt this take a look at what is being said today:


"Nothing being contemplated rises to the level," said Frank, Democratic chairman of the House Financial Services Committee.

"I don't see a moral hazard," said Paulson, Republican secretary of the Treasury.

"I see no problem," said Bernanke, independent chairman of the Federal Reserve Board.

Lawmakers: Subprime plan is no 'moral hazard'

Everything is “OK” as the Fonz would say. So expect to see much of the same pattern. Underreported inflation, dollar declining, and higher commodity prices. The US dollar index started the year at approximately 90. Today it stands at 78.55, a decline of 13+ percent. If the real inflation rate is 10 percent, the dollar declined 13 percent, and you had all your money in American stocks that are up 10 percent, how much are you up for the year?

Manuel said...

HI DR. HOUSING BUBBLE,

GREAT POST! I HAVE READ ALLMOST ALL OF YOUR BLOGS SINCE FEB OF 2007 I HAVE FOUND THEM VERY INFORMATIVE. I AGREE WITH YOUR IDEAS FOR THE MOST PART. YOUR POST HAVE GIVIN ME A GREAT DEAL OF KNOWLEDGE CONSIDERING REAL ESTATE HAS NEVER BEEN MY EXPERTESE. I HAVE A COUPLE OF QUESTIONS.

1. I HAVE RECENTLY READ ARTICLES WRITEN BY NEWSPAPER COLUMEST STATING THAT NEW YORK CITY REAL ESTATE NEVER GOES DOWN. "NEW YORK CITY IS IMMUNE TO HOUSING SLOWDOWNS" I FOR ONE KNOW THAT NOTHING IN THE FINANCIAL WORLD IS IMMUNE TO ANYTHING. BUT IF YOU CAN PLEASE SHED SOME LIGHT ON YOUR THOUGHTS OF NEW YORK REAL ESTATE NOT GOING DOWN.

2. MANY COUNTRIES THAT ARE DEPENDANT ON THE UNITED STATES HAVE AND STILL ARE EXPIRIENCING HOUSING BUBBLES BUT STILL MANY HAVE FAILED TO COME DOWN. WHAT DOES IT TAKE FOR THESE COUNTRIES DEPENDEND ON THE UNITED STATES TO FACE REALITY?

THANKS

Son of Brock Landers said...

@ Al - Check out www.everbank.com - foreign currency CDs. these are FDIC insured. it's a currency play.

@ the board- Doesn't the housing scam bailout seem like it would be a great issue for one of the prez candidates? what self respecting saver-homeowner wouldnt back a person who says "no, we're not bailing out flippers, gamblers and fat cat bankers that twirl their mustaches as they play with other people's money". I know it might be a tad harsh, but I think this would be a winner. The Ron Paul comment to Bernanke about selling out the dollar for a few banks was priceless in Bernanke's question & answer period.

AnnS said...

(1) Kerri said...
I literally loathe our government full of wimpy over paid baby boomers who wouldn't know a budget from an Expensive DC lunch menu.

Don’t blame my generation (anyone from 35 –61) for this mess.

Blame the preceding generations which started with Ronald Reagan ( pre-WWII generation) and all the nonsense about “the one who dies with the most toys wins” – an expression I have never understood. It continued with GHW Bush – WWII generation. GW Bush is just following his daddy.

Blame the right-wing Republicans who believe greed is good and concern for the community as a whole is bad. Curious how over the past 27 years it is the supposedly-financially- responsible Republicans that have spend money like water and run the country into more and more debt. Put a war on a credit card??????? Never did that before.

Blame the 30-somethings who ‘just had to have” that house or that SUV or all the other toys. Wait and save? That is so passé……after all, they are entitled and ‘deserve it now.’ (Profile of such a couple in the WP who are doctor and journalist and in their late 20s-early 30s.)

An hour ago, my neighbor and I (both in our 50s) were talking about his son and daughter-in-law (teacher and computer type) who just ‘had-to-have” that house and walked into an 0 down ARM because ‘they didn’t want to wait’. They wouldn’t listen to my neighbor (retired lawyer after a becoming disabled) who counseled them not to do that, to wait and save and put down 10-20% for a fixed. Now it has reset. Now they are upside down on the mortgage because prices have fallen so dramatically here that their $260,000 purchase won’t appraise for over $180,000 on a good day. Now they are in trouble. Now they need the combined expertise of their father and me (another lawyer and micro-economist who does volunteer financial counseling.)

(2) Drhousingbubble:
Do you understand the term “affordable housing” as used as a term of art wherein it refers to low cost or subsidized housing for low-income earners. It does NOT refer to housing for Johnny and Suzy Citizen who can not afford the median house in LA even making $90,000 a year. I ask because of the following 2 statements:

a) “Multifamily Loans. Raises FHA multifamily loan limits, so these loans fully fund construction costs in high cost areas, and enhances sale of foreclosed FHA rental housing loans to localities, so that affordable he be maintained in local communities.
You really need to put on your doublespeak reading glasses for this 0 they want to raise FHA multifamily loan limits to encourage affordable housing? They are basically forcing prices to go up. If the market played itself out, construction companies that are able to acquire cheaper resources and labor would be forced to pass on the savings to consumers via more housing.”

That is the most ridiculous proposition I have ever heard uttered in the area of ‘affordable housing.’ Developers are NOT going to build multi-family with the rents subsidized by the FHA and state housing authorities without a LOT of incentives.

These are the places that have rents capped by the FHA at 40% of the median rent in an area and tenants must be BELOW a certain income. Tenants who still can not pay the full cost of even the FHA rents then get subsidies from the FHA/state authorities to make up the difference between what they can pay based upon family size and income and what the rent is.
These are not high return rental properties. It is only the below-market loans for construction and tax breaks that get developers to build such properties.

Left to their own devices, developers would take all the cost savings, build luxury apartments and make more profit per unit. They certainly would not build units that are affordable by those making $7 or $10 an hour, or existing on Social Security Supplemental Income of $600 a month or the average Social Security Disability of $800 a month – and those are the people who usually live in the subsidized affordable multi-family units.

(b) “Affordable Housing Fund. Authorizes up to $300 million a year fr bill's excess profits for affordable housing, instead of returning such f the General Treasury.
You don't need the affordable housing fund if you relax zoning rules, bailing out lenders, and make these folks accountable for their action are trying to seal high prices into the system as a paradigm shift.”

RELAXING ZONING RULES GETS DEVELOPERS TO BUILD HOUSING THAT THE CLERK AT THE GROCERY STORE OR THE TELLER AT THE BANK OR THE MECHANIC WHO FIES YOUR CAR CAN AFFORD????

This makes as much sense as believing in Harvey the White Rabbit! (actually believing in Harvey makes more sense than that statement.)

That money will go to things like the affordable housing organization in my county. What they do is acquire the land and build modest houses (or buy and rehab a house) through a combination of Federal and state funds, and charitable contributions. The land is held in a land trust. The house is available to those who have incomes below a certain level but high enough to pay a reduced mortgage (subsidized by the organization.) It means that a house appraised at $226,000 can be obtained by a buyer who can qualify for a $117,000 mortgage but whose income does not exceed $50,000 for 4 people. The buyer owns the house with certain restrictions upon the sale and transfer.

Programs like this allow people who work in a community to live there. It is useful to have the bank tellers, retail store employees and others who do those essential but not overly well-paid jobs in the community. Tough for businesses to have employees if the employees can’t afford to live there. Tough to staff a fire department, EMT squad or police department if they can’t afford to live there.

Without such programs as this, the land would go to a developer who would slap up yet another vulgar tacky 4000 sq ft or more McMansion which will be inhabited by 2 people.

And that is what ‘relaxing the zoning restrictions’ would get in spades. In fact, my village is considering two measures:

(i) a mansion tax whereby an property which is sold at a price that exceeds the amount that the median household can afford will be taxed heavily on the amount in excess of the price the median income in the village can afford. The money will go into a fund to be used to ‘buy down’ property for those who are live here year round and work here. (2nd homeowners are useless parasites who drive up prices. – and we are infested by them so they can pay through the nose.)

(ii) mandating that 25-50% of any development be made affordable for those with incomes as low as 70% of the median; and the houses must be on the same size lot as all the others in the development.

In contrast left to their own devices, developers think that houses priced so high that less than 5% of the permanent residents can afford them are ‘affordable.’ Say the ‘A’ word to a developer and they roll their eyes.

Kerri said...

I am a baby boomer, on the tail end, at 46.

SD Scientist said...

"I wouldn’t agree that I-Bonds or TIPS are the best way of preserving your wealth since they are derived via a composite of BLS statistics that incredibly underreport the real inflation rate. Take a look at the BLS data here: BLS data. As you can see, according to this information, for the last 6 months consumer inflation is hovering around an annual rate of 3.8 percent. So anyone can beat the government rate of inflation but what is the REAL rate of inflation? If you look at hedges against a declining dollar, gold is up 25 percent year-over-year."

I-Bonds and TIPS aren't the best way of preserving wealth, but they are the safest way. Their yield is guaranteed not to go below zero, no matter what's going on. Foreign currencies and gold and energy might keep showing double digit gains year over year, or not. Future is notoriously hard to predict. Fed might do an about face and decide that it's time to start fighting inflation. Expensive Euro might force European Central Bank to lower rates and start inflating. American recession might hurt the demand for oil in Asia and send oil prices tumbling. Gold bubble might start deflating (if you think about it, there's nothing to keep gold from dropping to zero!)

I'm not saying that any of it will happen, just that there is risk of losing money with any one of these kinds of investments.

BLS statistics isn't great but it is based on actual things you need to buy in your everyday life, like food (15%), shelter (33%), cars (7%), etc. When gold goes up 25% year over year and food, rent, and new cars barely move in the same period of time, it probably means that we have an asset bubble in gold, not that we have 25% inflation which is somehow hidden by government.

SD Scientist said...

P.S. If you don't like TIPS - there are two currencies that are unlikely to depreciate against dollar in the next year or so, no matter what: yen and yuan. Both banks have been going to great pains to keep their currencies from appreciating too much. Neither bank can afford to lower rates (China can't lower their rate because they are having serious problems with inflation, Japan can't lower their rate because it's almost zero to begin with).

Unfortunately, Everbank is paying 0% interest on yen and yuan denominated accounts.

Crazed in Glendale said...

I missed out being a baby boomer, because it ends at 1964. So if you're born after that,then your not a boomer. I'm a Generation X (also known as the lost generation)
What a name!! People who made Slackers and clerks are the gen X people.

Crazed

joanne said...

What's happening economically in this country is damaging me and those I love!

I still have some money in dollars, but I've been moving it out. But what worries me more than any hit my personal finances might take (I'm young enough to recover from any hit), is what this is doing to my parents.

They are retired and receive social security and defined benefit pensions. In addition they have savings in dollars and I can't convince them it's a bad investment. Enough inflation and they'll be eating cat food despite working and saving all these years.

Mr.Mortgage said...

Greenspan nailed in interview with John Stewart.
http://thegreatloanblog.blogspot.com

cmseldercare.com said...

re: reverse mortgages - when I said that people won't qualify for Medicaid to pay for home-based programs or nursing home placement, that doesn't mean that the system will save money. It will SPEND more money via Medicare for multiple admissions to the hosptial, higher acuity of patients & longer length of stay in hosp. The patient will prob set aside income and qualify for medicaid via Income Cap Trust - only less money will be paid back back after pt dies because of the reverse mortgage. I'm just throwing this out there, because someone who applies for reverse mortgages need financial counseling that considers medicaid and long term care issues.
cmseldercare.com

nevvy said...

To protect ones savings from the great inflation that will occur from the rate drop,and the fall in value of the US dollar as against other currencies & gold & silver buy gold with any cash you have preferably gold 1 oz eagles,mapleleafs or krugerands. Store them in safe places,safety deposit boxes or the simple hole in the ground.Your purchasing power will be preserved for the years to come.The US dollar is buggered.

Lisa said...

The government does have mortage programs for the very low income called a 502 direct housing loan and it's to buy a house outside the city. Why doesn't the government increase funding for programs like that instead of the bail out program?
With a 502 direct loan USDA office determines the loan amount and it's around 30% of income. They also subtract any debt payments from how much of a mortage payment a person can qualify for.
I read an article in the paper how the US was helping working Americans with the bail out program. I kept thinking there already is a program for that why not give more grants to that so there is less of a wait list and more very low income people can qualify. There are many very low income people who are frugal and have excellent credit and have just lived without home owndership. With the exception of poor credit due to medical bills why is the government helping those with poor credit and/or bought something they could not afford instead of helping those with good credit and have just been frugal first. In my area he 502 loans are on hold now for at least 6 months.

Both 502 and Habitat (private) give no interest mortages and make sure the person can meet the payments by showing verification of employment, bank statements, etc. It's not a free mortage but it's no interest.