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Foreclosure, for Closure
And so, since the bubble popped and home prices ceased to rise, desperate players in the market have taken a series of actions intended to delay price discovery in housing. Rather than cut prices, sellers began to throw in free cars or other inducements to buyers who paid the asking price. Brokers reduced their commissions. Builders started including all sorts of extras (fancy kitchens, pools, etc.) for no additional price. Every link in the chain sacrificed margins and profits rather than cut prices. The Wall Street Journal reported last year that homebuilders were funneling large cash payments to buyers through third-party marketers, in effect reducing the price buyers had to pay while publicly reporting that sales prices remained buoyant.
Such measures were like throwing sandbags at a rising river. And it hasn't worked. The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing them on the market quickly and accepting any reasonable offer. When foreclosed properties are dumped onto the market and sold at fire-sale prices, they establish new comparable sales on a given street or neighborhood. It might take a solvent home-seller 18 months to mark down the price of his house by 20 percent. A bank will do it in 18 days.
Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs. The potential for massive systemic problems is the reason there's been so much discussion between financial institutions and government regulators about trying to orchestrate some sort of bailout for the bond insurers.
In general, cleaning up quickly after popped bubbles is good for the economy, because it enables everybody to move on. Over the years the American economic system has proved to be quite adept at doing so. And as Japan's experience in recent years shows, refusing to deal with the overhang of bad debt can condemn an economy to a lengthy period of slow growth. But I doubt there's the political will to allow the fast price discovery allowed by foreclosures to continue. While it would certainly bring long-term economic benefits, the short-term social, financial, and political consequences of a rapid clearing of the housing mess are too much to bear. As the year goes on, expect presidential candidates and government officials to keep throwing lifelines and buckets full of hope at the housing market.
© 2008
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Member Comments
Posted By: theshark58 @ 03/05/2008 3:25:44 PM
Comment: second try,pardon if duplicated.
First, nice ad Steve... first you said you "were told" about a company and then you said "we".
These companies ONLY HELP THEMSELVES WHILE YOU GET SCREWED.
Back to my comment
Individuals were not being coerced into these loans. People knew what they were doing and were betting the property values were going to go up. They thought that they could refinance and everything would work out. Now the politicians want to bail them out...because they can buy votes.
Sorry, but i BIT THE BULLET AND DID NOT BUY. Each year I file my taxes and have to pay alot of taxes.
I could not buy a house for a tax break because it was just too risky, too much pressure. A 4300 mortgage is just plain crazy ( I live in San Jose).
where are the breaks for the millions who rent? Buyers get the best of both worlds in this scenario... tax breaks, buyouts, while their neighbors who are renting are footing the bill.
First they borrowed, then they bragged, now they beg.
Posted By: theshark58 @ 03/05/2008 3:11:53 PM
Comment: A bailout is just plain wrong.
the people who bought these homes signed papers knowing full well what THEY WERE DOING.
I made the choic not to buy in california even though I am getting killed with taxes.
These individuals gambled that their home values would go up and they would be able to refinance at a lower rate if they had to. Sorry, Vegas does not return your losses.
what government should really look at is the tax breaks homeowners get when they buy, yet renters don't receive any. where is all the outrage for the millions of people who can't buy but are getting raped by their government; where is their tax break.
I can see in 2 months one neighbor who rents, pays his 10k more in income taxes when he files while the neighbor who bought, bragged, and begged gets bailed out.
Posted By: elcaminobootery @ 02/18/2008 7:32:04 PM
Comment: Excellent response. Your readers are informed obviously. You will not bring prices into a stable environment or see true valuations until EVERY American is either removed from homes they cannot afford or brought in line with the income needed to service the debt secured by the home ithey live in. Its put up or get pushed out! However a negotiated settlement with a lender is a fast rising alternative - deed your home back to the lender and repruchase it at a reduced "affordable amount. Companies like borrowerhotline.com do this type of work. But whats important here is that the Stated income and Stated assets programs of the last two years were highly predatory for one specific reason. Look at the neighborhood you reside in. More times than not you will live in an area with people of the same economic earnings capacity as you. Yes, middle income tends to live with similar economic profiles as do upper high end income earners who are more often than not self employed. So when a borrower who lives in a predominantly middle income area reports $20,000 a month needed to qualify for a loan and who was induced to overstate income and the borrower really works as a W2 wage earner - get the message? What the "majority" of borrowers can afford is really what the homes in the area are worth! As a risk comliance specialist for the institutional secondary markets, I never have auditied so many housekeepers and blue collar wage earners living in million dollar homes! Foreclosures loom and create absolute instability to each and every neighborhood. Website www.borrowerhotline.com or go to
www.360blog@yahoo.com M Soliman, Managing Director