A potential solution to the United States mortgage crisis

[Watchmeister]

As a side note, it is a good thing we never have to depend on debt to buy our watches here!

If you have any form of loan or debt - cash is fungible....maybe you are.

[RobbieG]

Fungible. Now there is a word I haven't heard in a while Kruz...

Anyway, I really hope the world can pull out of this one, but my heart tells me the greed went too far this time. It was fun while it lasted though. The industry made a killing but the days of the banking kings are over I'm afraid and the final consequence will be huge one day. It may take another five or ten years, maybe less who knows.

For Lord of the Rings fans, the time of Men is over and the time of the Orc has come. LOL.

But we can all be glad for good family, good friends, good watches, and good times here on the forum. In the end, these things is all there is anyway and that

is more than enough...

If you have any form of loan or debt - cash is fungible....maybe you are.

[Watchmeister]

Robbie-

Couldn't agree more. That party is over. At least until the republicans get back in.

[HauteHippie]

[RobbieG]

Now were talking. Dude, when did you get this? Awesome. Do tell...

[HauteHippie]

Hehe. See post in Rolex forum.

[fakemaster]

Threads like these are hilarious. Writedowns? Government mingling? Too many points to mention bacuse everyone wrote a novel. No one forced GM to keep introducing new SUVs after 2002 when they knew a oil problem was around the corner. And no one forced them to stop making the three most successful models they ever produced. And the people who are responsible and didn't take out loans they couldn't afford are doing just fine right now.

[gran]

Heh. I've heard this elsewhere, too... The idea Obama of inspiring confidence and optimism so that banks will start lending and people start spending again, in order to "energize" the economy. And it's just off the mark. In fact it's exactly the opposite of what we need... The crisis we're in is not a financial crisis; it's an economic crisis. And the fact is that we need more spending like we need a hole in the head. What we really need is to get rid of our artificially low interest rates in order to inspire SAVINGS and *less* spending. Borrowing to consume has got to stop, and if the new administration intends to further encourage it then they'll only be digging us deeper in to a hole out of which we'll never be able to crawl. I see there is already talk of a new stimulus plan - a sign that they'll be pursuing short term gratification. Lovely, but that would be a bubble gum patch in a leaking dam that is ready to burst and would solve nothing. The structure of the dam needs a complete re-engineering and overhaul.

MMMMmmmmmmmmmmmm......there is actually a lot of sense in what your are saying but what your advocating could be intrepreted as something far from a free marked economy....actually you ara advocating a sustainable economy? I like it . You say "Borrowing to consume has got to stop" and obviously what you mean is that spending more than one can afford has to stop (right?) and your correct in that the low interest rates have to be raised within the next 1-2 years or we will all go to up in smoke

On the stimulus package I still think that the negative spiral in the stock marked and in peoples minds have to be reversed before things can get better

Edited November 10, 2008 by Gran

[TeeJay]

That would be only a small percentage of home owners.....basically unmeasurable. Nearly all people who forclose on a house do so because they cant make the payments.....because they fell into an attractive offer....teaser rates, etc....and when the offer expired, the house payments became unmanageable overnight.

Yes, I agree, it is only a small percentage of home owners. But, it would also be a large percentage of sub prime home owners, and that is what would throw the plan. Just because someone is given sub-prime credit to get a car/home, it does not always guarantee that they will make payments, and that's all that would concern me with the plan. Other than that, I thought it's a great idea

[RobbieG]

Yeah, and the world is still crumbling, isn't that hillarious? You are right, maybe we should just not talk about it. If only you would have shown up sooner to shed this light on it for us. Then instead of posting we could all just ask you what you thought instead of writing these novels depicting thoughts of our own...

Threads like these are hilarious. Writedowns? Government mingling? Too many points to mention bacuse everyone wrote a novel. No one forced GM to keep introducing new SUVs after 2002 when they knew a oil problem was around the corner. And no one forced them to stop making the three most successful models they ever produced. And the people who are responsible and didn't take out loans they couldn't afford are doing just fine right now.

[RobbieG]

For the record, I agree with much of what Chief says in his posts. He seems to have a pretty firm grasp on the issues at hand. This is one of them and I agree that borrowing to consume is at one of the cores. If Obama getting elected spurs change that can be seen econonmically I'm all for it, but I doubt it will be lasting, and I can tell you the The Street doesn't have that confidence as they are afraid the democratic spending model is going to be the last nail in our coffin. One thing for sure, people need to stop using the equities markets as a world health gauge. It has been operating on pure fear for some time and its movements are meaningless. Actually, they are showing AMAZING resilience in the face of certain death. Given what happened to prime lending at its worst the Dow should by all accounts have gone to five thousands but it didn't. The VIX getting over 80? Come on. These are amazing times. I don't even notice 300 point Dow days anymore. Can you imagine?

If you want to know what is going on in the world don't watch US equities anymore for a while. Watch both LIBOR and the EURO/YEN cross if you want to do what the big boys do:

Regarding LIBOR, look for stability when it is running a little more than half the prime rate and ideally should be fairly close to the fed target rate in a perfect world. Think about it in very basic terms. Banks have to be able to lend to each other cheaper than they can lend to top tier credit wothy clients. In other words if LIBOR is less than Prime, that difference is money they can make. Banks making money is a good thing these days. In fact, our future depends on it. Same goes for Fed Funds and its relationship to Libor. If there is a big spread between the two it signals instability.

Regarding the EUR/JPY cross, use this as a barometer for global growth and risk tolerance. If the euro gains agaist the yen growth is in tact and appetite for risk in US equities is higher. Look for major US indexes to stabalize or rally. Conversely if the Yen is gaining on the Euro, growth is bleak and risk aversion is high. People would rather hold the carry trade in the low yield Yen than risk losing money in equities. Watch these two things as they move month to month and you won't even have to look at the US stock market anymore to tell whether times are looking better or worse. In closing, here is a EUR/JPY chart of the last 6-months. Can you say fear? This shows investors would rather suck wind in the low yield yen carry trade than risk being in US equities for even a second. But also notice the pennant pattern forming at the far right edge. It is building up energy in consolidation now. Many times this pattern explodes into big up moves. It is going to break one way or the other and is at a critical point here. But I wouldn't want to be short the cross right now that is for sure. Certainly if it breaks above the double top resistance at 131 or so you can expect to see it rally to some degree...

Heh. I've heard this elsewhere, too... The idea Obama of inspiring confidence and optimism so that banks will start lending and people start spending again, in order to "energize" the economy. And it's just off the mark. In fact it's exactly the opposite of what we need... The crisis we're in is not a financial crisis; it's an economic crisis. And the fact is that we need more spending like we need a hole in the head. What we really need is to get rid of our artificially low interest rates in order to inspire SAVINGS and *less* spending. Borrowing to consume has got to stop, and if the new administration intends to further encourage it then they'll only be digging us deeper in to a hole out of which we'll never be able to crawl. I see there is already talk of a new stimulus plan - a sign that they'll be pursuing short term gratification. Lovely, but that would be a bubble gum patch in a leaking dam that is ready to burst and would solve nothing. The structure of the dam needs a complete re-engineering and overhaul.

[chronoluvvv]

keep it going gents, i like reading this stuff

happy to see i'm not the only eurjpy follower out here, albeit a short-term one

[Natron1]

The trouble with this plan, and with many others I've heard, is that the guy who buys what he can afford and makes his payments on time, gets screwed. Does the phrase "redistribution of wealth" ring a bell?

this is what happened to me.

Both my neighbor and I bought a similar house in a gated community just under $300k.

He put down a standard 10%, so lets say $30k,

while I put down $175k to lower my mortgage and monthly payment.

So now he owes $270k and I owe $125k. Our houses at one time were appraised at $500k,

but now only $200k.

He will get help because it looks he has a bad mortgage owing more than it is worth.

I on the other hand look financially responsible, but would still lose MY MONey if I were to sell.

Doesnt seem fair. Some people in the neighborhood borrowd more than $150k in equity and never moved

into the house at all. They took the borrowd money and paid off another house. Now they have a mortgage free home

and a foreclosure on their record. they dont seem to care at all.

Some banks are in such bad shape, they dont even know where the original paperwork for mortgages are,

Natron

[Chronus]

This is a very interesting thread... Chieftang, Kruzer and RobbieG's comments are interesting to read, (as well as others of course!). Where can I find out about the mathematics to the quantitative finance? That kind of thing interests me... mathematical things have always interested me...

The interest rate in the UK was reduced by 1.5 % last week with the government urging the banks to pass this on to customers. Some have and some have not. Too many people keep thinking it's all about mortgages. I'm not sure if that was what the government want (great for electioneering though), I thought it would be more important that small businesses have enough cash flow just to pay workers backed against future income. Most are short-term loans/overdrafts, but the lack of lending has caused some of the increase in unemployment. There have been reports of 50,000 laid off, and I personally know a few people finding it tough to find new jobs despite being highly qualified and/or experienced in the jobs they are looking for.

Another thing to remember is that there is talk that the US could slash interest rates to 0%, but this had negligible effect in Japan when they tried this

Anyway, I'm rambling now with my amateur thoughts!

I thought the same thing as others mentioned when the interest rates were slashed - we don't need MORE lending! And definitely not the 2007 levels as the government is encouraging. Cheap credit is the last thing needed now, and penalises those who have saved, or have pensions. And we don't need the inflated house prices propped up. It needs to get back to the more realistic 3x earnings (or less hopefully). When you need to have a wage of GBP 60k+ to borrow 5 times your earnings and still only be able to get an average apartment in an average area, there are clearly problems with the house prices. The last thing we need are more numbers on non-existent paper fuelling more and more spending...

Personally, I can't understand people who will re-mortgage their homes to fund buying cars, TVs, holidays etc.

A friend at work was told (last year) he was being stupid and too cautious by not re-mortgaging his home to fund buying 3 or 4 houses on a by-to-let business. His caution has been vindicated now though... the other guy is still saving to own his first home.

Anyway, I look forward to more informative comments from everyone!

Edited November 10, 2008 by Chronus

[RobbieG]

We may not need more frivolous consumer lending, but we do need solid lending interbank and to business or the whole world is screwed. Virtually every business operates on a debt model. Always have and always will. Lending and banks need to be solid if for no other reason than to make sure businesses can buy someone else's widgets so then can use them to make their own widgets. As they sell their widgets they use the cash generated to pay off the guy they got the widgets from and then buy more widgets. And so it goes. The cost of credit is pretty relative at the big picture level and less important than having the lending machine itself functioning properly...

I thought the same thing as others mentioned when the interest rates were slashed - we don't need MORE lending! And definitely not the 2007 levels as the government is encouraging. Cheap credit is the last thing needed now, and penalises those who have saved, or have pensions.

[Chronus]

We may not need more frivolous consumer lending, but we do need solid lending interbank and to business or the whole world is screwed. Virtually every business operates on a debt model. Always have and always will. Lending and banks need to be solid if for no other reason than to make sure businesses can buy someone else's widgets so then can use them to make their own widgets. As they sell their widgets they use the cash generated to pay off the guy they got the widgets from and then buy more widgets. And so it goes. The cost of credit is pretty relative at the big picture level and less important than having the lending machine itself functioning properly...

Exactly.... you've written what I wanted to say in a way that is readable! Sensible consumer lending coupled with interbank and business lending is what is needed at the moment.

At least there are no more 125% mortgages around....

[RobbieG]

Precisely. Those have gone and I doubt they will ever return. Thank God...

Exactly.... you've written what I wanted to say in a way that is readable! Sensible consumer lending coupled with interbank and business lending is what is needed at the moment.

At least there are no more 125% mortgages around....

[HauteHippie]

I thought the same thing as others mentioned when the interest rates were slashed - we don't need MORE lending! And definitely not the 2007 levels as the government is encouraging. Cheap credit is the last thing needed now, and penalises those who have saved, or have pensions. And we don't need the inflated house prices propped up. It needs to get back to the more realistic 3x earnings (or less hopefully). When you need to have a wage of GBP 60k+ to borrow 5 times your earnings and still only be able to get an average apartment in an average area, there are clearly problems with the house prices. The last thing we need are more numbers on non-existent paper fuelling more and more spending...

Exactly it. You can not grow an economy with a printing press and government spending, and the people running the government and the people who are going to be running it soon are completely and hopelessly clueless about this. Sayings like "The road to hell is paved with good intentions" became sayings for a reason: because they're true. And we're witnessing it firsthand. Unfortunately the reality is we've conned the world into accepting our currency for their reserve and then we flooded the world with it, and then squandered the world's wealth with our consumption and have no hope of ever paying them back. I hope we can find some way to climb out of the deep hole we've dug and rebuild our economy but if not, then in the long run, the world will simply say "Buh Bye" to our phony economy because they'll be able to absorb these financial losses and move on. All the productive capacity around the world that created the wealth that was loaned to us and that we blew is still intact. The world will get along fine without propping us up, but all we have to replace legitimate savings with is Bernanke's printing press and it is not going to work. You can not replace real savings with a printing press. You can not grow an economy with inflation. If you could, then Zimbabwe would be in the midst of an economic boom right now.... But look where they're at instead: http://edition.cnn.com/2008/BUSINESS/08/19...tion/index.html

[Nightstroker]

Just curious:

what would be the downside to offering 0 capital gains ona future sale for anyone willing to buy a house in the next 6 months.

Assuming banks are still lending you would get a ton of renters looking to buy and tons of investors pouring money into houses that might otherwise foreclose? Could solve the housing crisis overnight at least for 6 months.

What is the negative, future lose of money?

Sounds like at least a bandaid solution better than one I have heard yet.

Depends on the area I guess in my area the housing situation is not that bad, in Las Vegas it is.

Cheers,

M

After letting this thread sit around for a few weeks, I finally have something to add to it.

My father liked mreynolds idea so much that he decided to send an email to Nevada Senator Henry Reed and present it along with my fathers original idea posted in the beginning of this thread.

Unfortunately, it looks like Harry Doesnt actually read his emails. He obviously read the subject line and returned this email to me today.

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Thank you for contacting me about the state of our national economy. I appreciate hearing from you.

The domestic auto industry employs directly or supports indirectly millions of jobs across the country, and its business activities generate hundreds of billions of dollars in financial instruments held around the globe. As you know, the recent economic downturn and crisis in our financial markets has destabilized the industry and its workforce. The credit crisis abruptly choked off financing for consumers and businesses and sapped consumer confidence, both of which led to dramatically lower sales figures for the domestic auto companies. The dramatic drop in sales created a dangerous shortage of cash, which these firms need to continue production and honor their financial commitments.

A failure of one company could potentially bring down the other automakers as well since the entire industry depends on the same network of suppliers. This event could lead to the loss of potentially millions of jobs, including hardworking Americans employed at manufacturing plants and independent dealerships. At a time when the unemployment rate is rising each quarter, this level of job loss would only exacerbate the strain on our economy.

That is why I urged Treasury Secretary Henry Paulson to use the authority extended in the recently passed the Emergency Economic Stabilization Act (EESA, P.L. 110-343) to provide emergency funds to the auto companies while imposing strong conditions on such assistance in order to protect taxpayers and maximize the potential for the industry's recovery. Although Secretary Paulson has expressed the need to avoid the failure of any of the major domestic car companies, so far he has publicly said he is unwilling to utilize the Troubled Asset Relief Program created by EESA to extend relief to nonfinancial institutions.

In response, I recently introduced S.3688, which would amend the EESA to require the Treasury Secretary to extend up to $25 billion of the allotted funds as loans to automakers and suppliers that have struggled in the face of a nationwide credit crunch. I understand the view that mismanagement of the auto companies has brought them to this point, and that they should be restructured to ensure long-term viability. That is why this legislation would require participating companies to submit a plan demonstrating how use of the funds will ensure the long-term financial posture of the company while aggressively pursuing the production of energy-efficient vehicles.

I have noted the concerns that you and many others have expressed. I assure you that as I continue to work towards improving our nation's economy, I will keep your thoughts and best interests in mind. I look forward to hearing from you in the near future.

Again, thank you for taking the time to share your thoughts with me. For more information about my work for Nevada, my role in the United States Senate Leadership, or to subscribe to regular e-mail updates on the issues that interest you, please visit my Web site at http://reid.senate.gov. I look forward to hearing from you in the near future.

My best wishes to you.

Sincerely,

A

HARRY REID

United States Senator

Nevada

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Can you say GENERIC?

I hate [censored] like this. Whats the point in contacting these people? You try to make a difference and they could care less about what you are really trying to say. I know that the auto industry is in need of bailout and that our economy cant afford to let them fail....but please....atleast address the purpose of the letter to some degree.

[Pugwash]

My father liked mreynolds idea so much that he decided to send an email to Nevada Senator Henry Reed and present it along with my fathers original idea posted in the beginning of this thread.

You do realise that there is already zero capital gains tax on selling your primary property, right?

[Nightstroker]

You do realise that there is already zero capital gains tax on selling your primary property, right?

Yes, but it does not persuade investors to buy property.

In order to qualify for the current 0% capital gains tax you must be in the 10% -15% tax bracket. Most investors are WAY outside of those brackets.

10% on income between $0 and $8,025

15% on the income between $8,025 and $32,550; plus $802.50

25% on the income between $32,550 and $78,850; plus $4,481.25

28% on the income between $78,850 and $164,550; plus $16,056.25

33% on the income between $164,550 and $357,700; plus $40,052.25

35% on the income over $357,700; plus $103,791.75

The idea is to persuade investors to swoop up forclosed properties knowing that they will keep all the equity no matter how long they own the house and whether or not they live in it.

[HauteHippie]

But a "swooping" up of foreclosed properties at their current market values would bankrupt the banks. This is why they pushed for (and got) a suspension of mark to market, so that the government would grossly overpay for all these worthless assets when they bailed them out. And, besides, these sorts of "investors" are bankrupt too, because they were extremely leveraged.

Of course, however, I'm all for a renegotiation of the capital gains structure. And anyone, incidentally, who has the audacity to make money on their investments under 0bama's watch is going to feel the pinch when he allows the cut to lapse.