"My question isand has been.HOW is it less costly for them to allow hundreds of thousands of homes to sit empty and deteriorate..than it is to allow those homes to remain occupied and therefore viable...and also receive payments??? "

It wouldnt be. As it is now I imagine that the banks themselves could rewrite the terms if they chose to (with their reason being to get as much as they can without being stuck with an overpriced house) without it being forced on them. I suppose they would also be worried about the terms that the judge would set - in many states judges pretty much have a book to go by now because their discretion in the past has been seen as being abused.

In any event, things like this seem to be just another reason for a bunch of old men in suits to get together in a room to hear themselves talk. This 'process' will take far to long to help anyone that is in need now(if they could pay their bills for the next few years they wouldn't need help anyway) while creating in haste questionable laws for the future.

Cheapheap,
You've got it!

Having judges (most of which have zero financial services experience) re-write financial contracts is suicidal.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner

I'll take a stab at it... the ethical banks don't feel they are as exposed to risk as the banks that pushed bad loans on shaky borrowers, thus they don't want legislation that helps keep afloat all of the banks as a group. The ethical bankers want to see the corrupt competitors go under. Its in bad form for a banker's association spokesman to be so blunt, especially about some of its own members, so they spin it into being about higher costs (which to me would also be a valid point on its own merits, if you ignore the downside of the empty homes).

I suppose now you'll question how a banker could consider himself ethical when he's advocating for more foreclosures. That will be a good question and I'm not sure I'll have any answers. Maybe their ethics only extend as far as their lending practices and not out to the community as whole.

mfbenson, your answer makes the most sense...however, I think that at this point their are few lenders indeed who do not have tremendous exposure...

Another interesting point...there are a minimum of 5 developers that I know of within a 20 mile radius who are trying to get plans approved to build housing developments.

One of them is spending quite a bit for approvals..as it is in the midst of an environementally sensitive area..and the local residents have hired an attorney to try to stop the homes (28) from being built...

I can't help but wonder what do the lenders..and the developers know..... that is eluding the rest of us...

dave donoff: "Cheapheap, You've got it!
Having judges (most of which have zero financial services experience) re-write financial contracts is suicidal."

Dave, you usually provide excellent advice and information on this board, but here you are just flat out wrong. Bankruptcy judges are involved in the rewriting/renegotiating of financial contracts in every aspect of the economy except when it comes to mortgages. That's what Chapter 11 of the bankruptcy law is all about! In fact, on rare occasions, they even do it for entire municipalities under Chapter 9! So I think that they possess the financial acumen to handle residential loans.

Now, whether they should or not is a matter open for debate. Whether they have the ability to do so is not.

The industry will resisit any kind of interference from "outside," and that includes bankruptcy judges and legislators. It wants to remain as unregulated as it is now because it gives the banks the freest hand to continue doing exactly what they want to do.

Banks sell the mortgages in the bond market. If the government starts messing with the mortgages, it will spook the bond market considerably and the people who buy the bonds will demand MUCH higher return because they are worried the government will continue to change the terms of the mortgage and thus put the bond holder at risk.

Imagine that you lend me $100 and the contract we have says I will pay it back or there will be dire consequences. That would make you fairly comfortable provided I have a solid income stream. Now imagine the government passes a law that says if you owe someone money the person can easily get out of it if they can prove it causes hardship. Whoa. You still going to lend me that $100?

"You still going to lend me that $100?"

If the interest rate goes up enough I might. But I'll be a lot pickier about to whom I would lend.

A little lending discipline could be good for the economy.

feedingfrenzy, your answer is now the most logical..IMO...

docholiday...it seems your scenario is already happening...without the above mentioned legislation being passed...see below:

"A little lending discipline could be good for the economy."

It is absolutely required. What some people don't realize is the entire real estate bubble in the past 5 years was temporary because it relied on money that was being lent with a poor risk assessment. That could not happen forever. Now that the stream of money has dried up, house prices are going to come down and mortgage rates are going to go up. Just look in the past couple of weeks, mortgage rates have gone up despite the prime rate going down. That is because the risk model is changing to more accurately reflect the real world.

The important thing to realize is that banks don't work the way we were taught in grade school. Mortgages are not made up of other peoples deposits. There just isn't enough money there. Instead they are sold off on the bond market. The people who buy the bonds in the end set the interest rate. Thus, if the rates go up, don't just blame the banks, the individuals that buy the bonds are saying they want a higher return or they won't buy the bonds.

It is actually a good system except the rating agencies screwed everyone because they over-rated the bonds quality because they assumed house prices would go up forever (terrible assumption, just look at Japan), and the gave the monoline insurers ratings they never deserved. People got suckered into buying these crappy mortgage bonds because they had AAA rating they never deserved.

Here is a funny cartoon that shows at a high level how it worked:
http://docs.google.com/TeamPresent?revision=latest&fs=true&docID=ddv7hj3403774hsc7&skipauth=true&pli=1

Warning: it contains adult language, but sure does hit the mark.

docholiday..thanks for the link....someone had already sent that to me as a PP..it does indeed simplify a very complex issue......and is spot on.

But you should also mention that the rating agencies were pressured by the mortgage bond issuers to overrate the bonds at the cost of losing their business. It's analogous to the appraisers who were pressured into overvaluing houses because they would otherwise lose the mortgage lenders' business.

What all this shows is that the whole industry from bottom to top was easily corrupted by greed. There were NO built in checks and balances to keep everyone honest.

An industry that failures to regulate itself and with such dire consequences to the entire economy has left itself wide open to forced regulation by the government. The question remains whether the mortgage industry can or will reform itself.

"because they assumed house prices would go up forever "

Close, but not Precisely Right... they assumed that the "national average" house price couldn't significantly drop.

Foolish, and simple, in hindsight. But really, everyone who expects to someday sell their house for more than they paid for it (and that's just about all of us) is at least to some small degree guilty of this same sort of thinking.

mfbenson: "But really, everyone who expects to someday sell their house for more than they paid for it (and that's just about all of us) is at least to some small degree guilty of this same sort of thinking."

Operative phrse being "to someday sell their house for more than they paid"....which is VERY different from experts expecting the houses to continue to rise in such astronomical values that the "someday" time frame would somehow magically coincide with the same day that the ARM's exploded for every buyer who was duped into an absurdly structured sub-prime....especially knowing that a good percentage of those buyers could not hope to afford the astronomical payments that would result whne "someday" did not occur a mere year to a few years later...

"Close, but not Precisely Right... they assumed that the "national average" house price couldn't significantly drop."

Well, I disagree. Giving someone a mortgage with 0% down only makes sense if the price of the house is assumed to go up quickly such that the new owner immediately has equity and hence some attachment to making staying in the house and making payments.

Of course they used an average, they certainly didn't bet EVERY house would go up in value. However, they DID assume the prices would go up (not just stay the same): "home price appreciation [HPA] of low single digit (LSD) or mid single digit [MSD], as HPA has been for the past 50 years".

Link for Fitch ratings: http://seekingalpha.com/article/58305-fitch-discloses-its-fatally-flawed-rating-model

In that link they say that even an extended 1 to 2% drop would break their model! All one has to do is look at the housing curve before the bubble and realize at some point we will be back on that and that will most likely happen by prices coming down. Furthermore, real estate bubbles are hardly new, just look at Japan.

The problem was that so many people were making money, nobody wanted to speak up.

The real problem in the financial system today is low interest rates. Why? Because every half-a$$ed hedge fund can borrow huge amounts of money cheap--practically free, if they borrow it in Japan where the prime rate has been ~0 for years now--and then use it to buy stuff. All that buying sends the prices up and the yields down. So Treasury bonds, junk bonds, CDs, etc are yielding like 2%. (Has anyone gotten a decent rate on a bank deposit product this decade?) And more-conservative fundslike pension funds, which aren't allowed to go playing with esoteric long-short strategies and stuffsee their yields drop to below inflation levels. So they, and increasingly others toohedge funds, banks, rich folks, and E-Trade account holdersgo looking farther and farther afield for somewhere to put their money that will have a prayer of keeping ahead of inflation. (Utilities are no help, as deregulation has turned them into regular old stocks that are no more suitable for the proverbial widows and orphans than anything else. And their yields have dropped down to average. Might as well buy Microsoft.)

This use of borrowed money also creates volatility, as margin calls force asset sales when prices drop past certain levels, which of course casues the prices to drop even more, triggering more margin calls.This is what happened in the crash of '29. I used to think that they'd learned their lesson from that event and the securities laws would prevent a repeat, but I'm no longer so sure about that.

Also, formerly un-correlated assets have been moving in tandem more and more in recent years (know that whole conventional-wisdom thing where retirees are supposed to keep more money in bonds than stocks, because they're less volatile? Have bonds seemed un-volatile lately?) Every asset you can imaginegold, oil, stocks, bonds, real estate, foreign, emerging-markethave been moving up and down together. Which is great when they're all going up, but the point of investing in different things is so that when item A zigs, item B zags and you don't lose everything all at once.
In the 90s, the asset bubble was dot-coms. Then that crashed, and the next bubble was real estate and mortgage-backed securities. Asian stocks were in there too. Wall St chopped mortgages into so many pieces and made so many 'prime' products out of subprime loans, everyone ought to have known it was a shell game. But the alternative was that 0.55% money market yield, so they looked the other way and hoped they'd see the crash coming in time to get out and leave someone else holding the bag. Of course, statistically, only a very few can actually do that, so....

Now, oh joy, it looks like the next bubble will be in commodities. Wheat is up 75%. How does that make sense?? Unfortunately, while the money boys chase yield, the rest of us are going to be paying $6 for a loaf of bread. Great. Good thing there's no inflation.

Meanwhile, banks, like all big businesses, hate the idea that they might be forced to follow someone else's rules. Or any rules, really. They'd be just as happy if the SEC were dismantled, judges were forbidden from ruling on anything, and 'little' people were forced to get their wages in company scrip (like in the good old days). They'll spend billions bribing legislators to prevent having to take responsibility for their mistakes. But they'll also expect the taxpayers to bail them out--like the airlines--instead of letting them go bankrupt. Funny how that works. They'll foreclose on homes and let them fall down from neglact rather than accept a lower interest payment. Then they'll write off those losses and get a tax refund. I honestly think their refusal to work w/ people to prevent foreclosure, even when they'll get nothing out of those houses, is just pure pig-headed stubbornness. Refusal to admit that they screwed up, and that trying to fix it would be more profitable than doing business as usual and taking the houses.

I hope for change after the election, but don't expect it. This will keep going, IMO, until it results in a full-blown depression. Deja vu all over again.

"Well, I disagree. Giving someone a mortgage with 0% down only makes sense if the price of the house is assumed to go up quickly such that the new owner immediately has equity and hence some attachment to making staying in the house and making payments."

Then we have to agree to disagree - my premise hinges on the fact that the lenders resell the loans to bundlers who combine loans from all over the country and try to make the risk equal to a "national average" which they thought couldn't significantly go down, whereas you're looking only at a single transaction.

Well said housenewbie....for more on commodities futures fun, read the linked article...

For those of you who are old enough to remember buying gas and heating fuel prior to the year 2000, you may recall the prices did not fluctuate at the pump or on any other fuel on a daily basis...

This explains why...and...as far as things changing or not changing after the election, for a bit of insight, pay close attention to who signed the bill into law...

They'll foreclose on homes and let them fall down from neglact rather than accept a lower interest payment. Then they'll write off those losses and get a tax refund.

If this is true, I'd love to see some adverse-possession and tax-assumption going on--people move into an abandoned home, and eventually own it.

They look for properties where the owner (the bank) hasn't been paying the property taxes, and they pay off the bill and assume ownership.

if I was a city council member in one of those locales w/ the multiple foreclosures, I'l be investigating how I could force that to happen at the earliest opportunity the banks leave me. I would want those homes OCCUPIED, and I would want to be collecting SOME sort of property tax.

Hi housenewbie,

Meanwhile, banks, like all big businesses, hate the idea that they might be forced to follow someone else's rules. Or any rules, really.

This is silly... banks (as with all big and small businesses) are forced, ruthlessly, to follow the aggregate consumer's rules as enforced (often brutally) by the economics of their favor.

But they'll also expect the taxpayers to bail them out--like the airlines--instead of letting them go bankrupt.

Last time I checked http://ml-implode.com/ there were over 230 CEOs dissapointed that you're not correct ;~)

Funny how that works. They'll foreclose on homes and let them fall down from neglact rather than accept a lower interest payment.

Funny how that NEVER occurs... *ever.* Whenever banks foreclose on a home they try to clean & turn it on the open market IMMEDIATELY... usually at whatever price the realistic PUBLIC free market will actuall pay for that home, in order for the bank to regain some of its investor's funds (that would be YOUR money from your retirement accounts.)

Then they'll write off those losses and get a tax refund.

If they bleed when they profit, they get some healing when they lose... BUT WAIT... those are just "the rules" ;~)

I honestly think their refusal to work w/ people to prevent foreclosure, even when they'll get nothing out of those houses, is just pure pig-headed stubbornness. Refusal to admit that they screwed up, and that trying to fix it would be more profitable than doing business as usual and taking the houses.

You need to make up your mind. Bankers are EITHER money-grubbing profit driven capitalist whores... *OR they are carefree money-tossing spendthrift "pig-headed" ne'er-do-wells that can't be bothered to do something that will actually conserve & retain their investor's funds.

Can't be both simultaneously now...

I hope for change after the election, but don't expect it. This will keep going, IMO, until it results in a full-blown depression.

Can't disagree here... neither of the two major parties seem to have any intention of stopping the bleeding in government spending. We're going to dig our way to the bottom with govie issued shovels.

Cheers,
Dave

banks (as with all big and small businesses) are forced, ruthlessly, to follow the aggregate consumer's rules as enforced (often brutally) by the economics of their favor.

Well, actually, the "aggregate consumer's rules" isn't really rules, it's "market forces." Different thing. Rules are the laws that are passed saying you can't trick Grandma into putting her rent money into a penny stock you own so you can dump your shares at a profit, leaving her to be evicted. There should have been regulatory oversight all along by the government to keep this debt Ponzi scheme from getting out of hand. The Fed dropped the ball.

But they'll also expect the taxpayers to bail them out--like the airlines--instead of letting them go bankrupt.

Last time I checked http://ml-implode.com/ there were over 230 CEOs dissapointed that you're not correct ;~)

They tried. Paulson's attempted bailout of SIVs. He expected too much monetary contribution from the banks, so that scheme died. That check we're all supposed to get later this year--that's a taxpayer bailout, maybe not of the banks directly, but of the economy. Not that it will work. I expect more bailout schemes to crop up thruout this year.

They'll foreclose on homes and let them fall down from neglact rather than accept a lower interest payment.

Funny how that NEVER occurs... *ever.* Whenever banks foreclose on a home they try to clean & turn it on the open market IMMEDIATELY... usually at whatever price the realistic PUBLIC free market will actuall pay for that home, in order for the bank to regain some of its investor's funds

Tell that to Buffalo and Cleveland. Perhaps you didn't read those threads. The short version--the banks aren't bothering to pay property taxes or maintain houses, and the cities are suing to force them.

(that would be YOUR money from your retirement accounts.)

The fact that retirement money has gotten mixed up in all this incredibly speculative derivative debt mess is exactly the problem that the govt should have been paying attention to and not allowed. See the link below for more depressing news about pensions.

You need to make up your mind. Bankers are EITHER money-grubbing profit driven capitalist whores... *OR they are carefree money-tossing spendthrift "pig-headed" ne'er-do-wells that can't be bothered to do something that will actually conserve & retain their investor's funds.

Can't be both simultaneously now...

Well, actually, it's quite common for people to be both greedy and stupid. In fact, that seems to be the qualificaiton for getting on a company's board nowadays. Letting--what is it currently, $100 billion?--evaporate from the financial markets in a matter of 3-4 months IMO qualifies as careless, money-tossing, and stupid. Negligent even. And since all these banks and insurance companies are supposed to be so financially sophisticated, one has to wonder how they ever thought that building a skyscraper of debt on top of a sandbar of assets (some estimates run as high as $30 'value' per $1 of actual assets) could ever possibly NOT collapse in a collosal mess of disaster. If they'd asked me, I would have told them in my mother's immortal words, 'that doesn't sound like a very good idea.'

And yes, all of us are going to feel the pain from this collapse for a long time. But the ones who came up with these slice-and-dice debt derivatives are going to get their million-dollar bonuses (on top of the ones they've already gotten), their golden parachutes, and their lucrative lobbying jobs. As will the politicians who let them get away with it.

Look, there's nothing inherently evil about capitalism. However, it needs to be controlled by laws. As Gordon Gecko said in his famous speech, capitalism is nothing more than self-interest. But self-interest unfettered by laws governing behavior results in the strong robbing, killing, and raping the weak. (See the Dark Ages, the Vikings, and certain areas of the modern world, ahem Rwanda)

We live in a society. One might even optimistically call it a civilization. Such behavior is not acceptable. It's irrelevant if the exploitation/victimization is physical or financial. Since today survival is based on money, not one's ability to hunt game or herd cattle, people's money needs to be protected from predation by others. That's where the government must step in and impose regulation.

None of this stuff happened before all the deregulation that took place in the 80s (i'm obviously not including the pre-Depression era, which inspired the imposition of securities laws to begin with). Most of those years that make up the "history" people refer to when they say "the historical return of the stock market" took place when the market was much more highly regulated than it is today. Over the last couple decades, we've been moving more toward Roaring 20s-style markets. Not a good thing. Yes there are some new laws, like Sarb-Ox, but they're pointless. They impose costs without protecting anything.

housenewbie: "..building a skyscraper of debt on top of a sandbar of assets.."

Soundbite that nails it exactly...