Re: OT: Thoughts on current US Economic condition


On Mon, 22 Sep 2008 17:21:15 -0700, "Paul Hovnanian P.E."
<paul@xxxxxxxxxxxxx> wrote:

Robert Latest wrote:

John Larkin wrote:

So who has the money? People who sold houses?

For days and weeks now we've been treated to long and interesting
background articles about the financial crisis, but this is the one
question I haven't found touched in any of them, and it's the one
question I'd like to have answered:

What will the US taxpayers pay $700b for?

The money will be used, as I've understood, to buy bad loans from
suffering banks. I.e. loans that someone has used to buy a house with
but is now unable to pay the interest on. IOW the $700b will buy
unsellable houses in flyover country.

Is that all there's to it?

Not really. One loan for one house really no longer exists. Mortgage
companies sell loans to investment banks. Investment banks throw them
into a blender and pour out CDOs. CDOs and bundles of loans, split up so
that the 'low risk' slices get paid first, then the next slice of risk,
etc. The effect of this is that, if any of the mortgages default, the
people holding the highest risk slices are the last to be paid with
whatever is left over.

For this privilege, they bought their CDOs at deep discounts. When times
were good and they still got paid, they made bundles of cash. But as
soon as people stopped paying, these CDOs became worthless first.

Tough luck, I say. You go to Vegas and you can put your money on black
or on a single number. Which pays more? Why should we care if you bet
the long shot in hopes of big money?

No, I think on top of that someone must have run away with a lot of
money. After all, houses are needed for people to live in. They have
real value, and the people haven't stopped existing.

The money is gone. Actually, it went to the realtors, home builders or
previous owners who managed to get out before the market collapsed.

Like always: Individualize gains, socialize losses. Or something along
those lines.

If you use public funds to buy back high risk CDOs, you reward the Wall
Street gamblers and encourage reckless mortgage writing, since Uncle Sam
will be there to absorb the risk.

If you use public funds to refinance individual mortgages, you have two
problems: 1) If you only refinance owner occupied homes (cutting off the
real estate speculators), you leave lots of bad paper in the mortgage
market. 2) If you refinance all defaults, you cash out both the low risk
slices of CDOs as well as the high risk ones. Banks hate refinancing,
because they like holding (good) mortgage paper on their books instead
of cash.

Personally, I like a version of #2. Refinance owner occupied homes
_before_ the owners are evicted. The government can take part of their
$700 billion and go into business writing their own mortgage paper. If
the current debt is higher than the market value, write a fixed rate
loan for the market value (or 80% of it) and a second, reverse mortgage
for the difference. Have the government 'sit on' the reverse mortgage
and even allow it to be assumed as the house is sold for some period of
time.

For second homes, wait until they go into foreclosure and then have the
government pick them up outright and pay off the loan. They can then
offer them as rentals, rent to own, or whatever program fits the market.

In either case, the public will (eventually) get its principal back.
Even if they take a paper loss on tying up that cash for a decade or
so.

Wall Street would hate it, because they want to unload the risky paper
while hanging on to the low risk bits. A refinancing scheme would put
cash into their pockets which they would have to reinvest*.



*I'm watching the closing price of oil jump $16.00 on the business news.
The pundits are trying to explain why a potential failure in the bailout
plan is causing this to happen. Someone assumes we all missed Econ 101.
Oil futures go up in anticipation of a large amount of cash entering the
speculation market. IOW, Wall Street expects it will have an extra $700
billion to play with soon.

Cripes! The end of the world must be eminent! I actually agree with
Hovnanian, AND his version #2 ;-)

...Jim Thompson
--
| James E.Thompson, P.E. | mens |
| Analog Innovations, Inc. | et |
| Analog/Mixed-Signal ASIC's and Discrete Systems | manus |
| Phoenix, Arizona 85048 Skype: Contacts Only | |
| Voice:(480)460-2350 Fax: Available upon request | Brass Rat |
| E-mail Icon at http://www.analog-innovations.com | 1962 |

I love to cook with wine Sometimes I even put it in the food
.

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