Entries Tagged 'Stupid' ↓

I have a friend from college who grew up here in San Mateo.  We often discuss things like Asian parents and also the ridiculous real estate here on the Peninsula.  He is also a pretty frugal guy who makes a good income.  We often exchange articles about bailouts and real estate and discuss them.  The most hilarious comment I got from him about these articles is, “I want to punch them in the face”.  Here are some examples of folks he wanted to punch in the face.

When CNN featured this gallery of people who went through foreclosure, my friend said to me, “Are we supposed to feel sorry for these people?  I want to punch them in the face, with the exception of the guy that became disabled”.  I thought the most egregious example of a deadbeat out of the four families is the third one here.  This is  a guy that obviously knew that he was walking away as a financial decision.  He actually said that he “landed on his feet in just about every way”.

Here is another guy that my friend would like to punch from the article titled “Mortgage-modification program questioned, protested. “

“The government cannot do anything to make Rafael Aponte’s home affordable.

Aponte has been unemployed for three years since being laid off after 17 years at National Display Co. That is how long he has owned his Northern Liberties rowhouse, now in foreclosure.

Protesting near the National Constitution Center, where a congressional panel yesterday tried to gauge the progress of homeowner-rescue programs, Aponte said his lender had agreed to modify his mortgage, then had withdrawn the offer.

“They said that without a job, how could I pay even that?” Aponte said. “They’re right, but it isn’t fair.” “

I thought that this article was hilarious since the guy admitted that the bank was right that he couldn’t pay, but still complained that it’s unfair.  The article actually went on to say that the mortgage bailout money should have been given directly to the borrowers.  Seriously? I say thank God now that there are banks that are smart enough to deny loans that they know wouldn’t be repaid.  Another precious quote from the above article is the following:

“Getting a homeowner’s DTI [debt-to-income] ratio to 31 percent won’t help the unemployed, since 31 percent of their income is zero,” said Paul Willen, a senior economist and policy adviser at the Federal Reserve Bank of Boston.

This made me laugh pretty hard, too.  When did you learn that 0 multipled by  anything is 0?

If my friend were to be face to face with these folks, I am sure he wouldn’t actually punch them in the face, even though someone needs to knock some sense into them.  What we are frustrated about is that many of these foreclosees are painted as victims in the media and coddled like innocent babes by the politicians.  Yes, the economy is in the pits right now, and many people are unemployed, but that is not an excuse to throw away personal responsibility.   If the government continues to bully banks into making loans to people who they know have no intention or ability to repay those loans, then this situation will not get better.  Unfortunately, that is still what I am seeing.  The banks are still portrayed as the ultimate villains that aren’t helping enough homeowners in trouble.  The truth of the matter is that a lot of these folks intend to walk away from a vastly depreciated asset anyway, and the modification efforts will just give them a few more months of free housing.

Share This

On Friday the Federal Housing Administration Commissioner David Stevens admitted that the agency’s reserve funds has sunken below the legally mandated level of 2% of its insured loans.  However, the commissioner also said that the 75 year old agency will not need a taxpayer bailout. Is this remotely believable?   Lets look at some datapoints.

First of all, the FHA doesn’t make loans.  It simply insures lenders against losses on defaults.  This means that if a loan defaults completely, then the FHA is on the hook to make the lender whole.  The money it uses comes from mortgage insurance premiums that borrowers pay.  The current rate is 1.75% of the loan amount upfront, and some additional monthly insurance on 30 year loans.  The monthly mortgage insurance goes away when the borrower gains enough equity.  When you add it all together the premium is less than 3% of the loan.  The  borrowers will need a minimum downpayment of only 3.5%, and they can borrow up to $729k in high cost areas.  The problem with this whole scheme is that the lenders do not care if the FHA loses money because they will be compensated if things go wrong.  Since private insurers, Fannie, and Freddie tightened up their lending guidelines, the new subprime loans are practically all going to the FHA.  This has pushed the  mortgage loan  market share of FHA loans   from 2.7% in 2006 to 23% in the second quarter of 2009.

Basically, the FHA has taken on a vast expansion, and with that expansion it has taken on a lot more risk.  The 90+ late and foreclosure rate of FHA loans is now at 7.8% according to the Mortgage Bankers Association, and this is only expected to rise since those who take out FHA loans generally have very little downpayment, and their average credit scores are lower than the prime borrowers. Unemployment has not stopped rising and the economy isn’t totally recovered.    The FHA currently  insures about 5.2 million according to its website, and 7.8% means  that about 405,000 of these loans are practically lost.  Additionally, there are another 400 to 500k borrowers that have missed at least one payment.  Since the value of the FHA reserve funds are going to fall below 2% of the value of the insured loans, it is hard to imagine how the agency would cover all the losses when they come due unless all the loans that defaulted have balances much much lower than  the average loan.  It is pretty simple math when you think about it.

I really do not see how the FHA could build up its reserve fund in two to three years when the foreclosure rate of the loans it is insuring is not exactly decreasing.  The FHA is insuring many more loans than before, but those new loans are also defaulting and draining the reserve funds.  You have to remember that the insurance premium is very small, so in many instances the FHA is using the premiums from 20 to 30 homes to repay the lender for one default.  That is only sustainable if the default rate is very small, but a 30 day late rate of 17% is not exactly encouraging.

Anyway, the FHA does not expect to increase its insurance premium rates or downpayment limits, but it is requiring audits of the lenders that send loans to the FHA to prevent fraud.  I would have thought that those audits were already happening, but I guess not.  If the FHA really wants to decrease the amount of its defaults it would need to increase its downpayment limits so that people have more equity in their homes, but I don’t really see that happening.  Eventually this agency is going to need a bailout.  They may not call it a bailout, but I think it is pretty much inevitable unless the FHA changes course drastically.

Share This

If you haven’t heard by now, President Obama heeded the complaints of the United Steelworkers’ union and slapped a punitive 35% tariff on Chinese produced tires.  This has sparked anger in Beijing and China vowed to investigate poultry and automotive parts imports from the United States.  China is also filing a formal complaint with the WTO.  So who does this really benefit?

First of all, I don’t think this  benefits the Obama administration because they really need to sustain a good relationship with Beijing.  Even though the tire industry is a small part of the trade between the two countries, the Chinese government definitely sees this as a grave insult.  The Chinese commerce minister Chen Deming said that this act is “an abuse of special safeguard provisions and sends the wrong signal to the world”.  Frankly I don’t think it is worthwhile to anger China over a tiny percentage of trade between the two countries just to yield to  some political supporters.

Next, this will probably hurt Americans more than the Chinese. The poultry industry is now on edge because they export tons of chicken feet and wings to China at a premium price.  If China imposes a tariff on them they will lose quite a bit of profit.  The USA Poultry & Egg Export Council expressed that they are “upset with the way this has been handled by the administration“.   The New York Times published a particularly amusing article on this matter which said that the Chinese will still continue to buy the large juicy American chicken feet even if there are tariffs, but Chinese people are also very price conscious so any increase in price will bring consumption down.  The poultry industry is right to be concerned, because those chicken feet are fairly worthless here in America.  Suppose that this tariff protects $1 billion in domestic tires, but loses $2 billion in chicken exports, then American workers still lose as a whole.

Another way this hurts Americans is that the tariffs will increase tire prices.  Most of the Chinese tires are cheap low end products.  American manufacturers such as Goodyear and Cooper manufacture their low end products in China and import them to the United States.    The tariffs on Chinese tires will inevitably increase prices for American consumers who buy the lower end tires.   Additionally, if manufacturers had to increase the price of their low end products they would probably increase the price of their premium products to make their products seem more “premium”, and that means more expensive tires for everyone.Americans are also very price conscious right now, and the higher prices might mean lower sales, and ultimately that might hurt the American tire industry and decrease jobs in that sector anyway.  In that case this protectionist measure would have accomplished the exact opposite of its purpose.

So who really benefits from this?  I think the trade lawyers should be happy because Obama pretty much open the doors for more similar complaints from every other industry.  In Bush 43’s administration four similar industry complaints were rejected because Bush wanted to keep trade free.  Now Obama is sending a signal out there that he is willing to approve protectionist measures for small groups that he favors so more groups may be hiring up lawyers to file complaints because now they have a bigger chance of getting their petitions approved.  Although the complaints are not “expensive” according to this article, whoever files them will be getting a fee. So in the end, I think  the lawyers win.

Ultimately, I highly doubt that this tariff on 0.4% of China’s exports to the United States is going to turn into an all out trade war, but it is certainly making Obama less popular to everyone except the specific unions that he is agreeing to.  Decisions like this affect a lot more than just the people making the complaints, and it is probably wiser to reject them all like Bush did.  That way at least it looks like there are no favorites.

Share This

CNN recently ran a slideshow featuring seven families who utilized the $8,000 first time homebuyer’s tax credit to purchase a home.  I found the slideshow to be pretty interesting because it featured a good diversity of people, but quite a few of the examples were from California.  Here is a breakdown of the slideshow and my comments.

First,  there is a family of four from Adelanto, CA that is buying a home for $72,000.  Obviously for this family the tax credit is  a great deal.  They can only claim $7,200 because that is 10% of the price of the home, but hey, it is free money.  They are still waiting for approval on their purchase, and I hope they get it because it seems like an awesome deal for a 4 bedroom house.  However, the story indicates that they would have bought the house with the credit or not because they needed a new home and the price was right.

Next, there is a single woman from Michigan  who bought a $115,000 home for herself.  From the description she gave it seems that she has a good head on her shoulders and she has been saving for a downpayment.  This person also said that she would have bought the home anyway, and the $8,000 is really a bonus to her.  I think that is great for her, but this means that the stimulus did not really spur an additional sale here.

The next couple is actually from San Mateo County.  They bought a $750,000 home in San Carlos with an FHA loan.  This means that they put down 3.5% and their loan is somewhere around $723,000.  At 5.5% this is a mortgage of around $4100.  Throw in property taxes and that’s another $600 a month.  They will be paying pretty much all interest to begin with and  it definitely does not cost $5000 a month to rent a three bedroom in San Carlos.   This story makes me worry a bit because this couple is planning a wedding and they said that the $8000 tax credit is saving them.  If you do the math, $8000 is  1.06% of their purchase price.  Honestly $8000 would not even cover their closing costs on this purchase so it would seem that perhaps they are buying too much.  The story did indicate that they felt rushed into the decision because of the tax credit, and I don’t know if that is a good thing.

The next couple is from Baltimore and they purchased a $119,000 home that they fixed up with the tax credit and other grants for historic homes.  Again, I think in this case the $8000 is significant enough that it makes a lot of sense.

Another local couple from San Francisco is up next.  They got a $550,000, 2200 square foot home in San Francisco.  This is actually a pretty good deal if it is in a good area of San Francisco.  They used the $8,000 to partially pay for a $12,000 roof.  They indicated that they waited to buy their home because they heard that a refundable credit was coming out, but once again, $8000 is just a drop in the bucket for their purchase.  It’s great that they were pay for 2/3rd of their roof, though.

The next couple took advantage of the fact that the $8,000 could be used as a downpayment .    Essentially they got a 0% down loan from the government.  The home is $257,000 and they could not save up $9,000. It also seems that they got an adjustable loan?  In this case their only equity is the $8,000 tax credit,  so it was definitely crucial in their purchase decision.

The next guy also used the tax credit as a downpayment, but he bought a triplex and is renting out two units to pay for most of his mortgage.  So basically he became a little landlord on the dime of the US government.  That is a awesome deal for him and I hope he does well.

In conclusion, I would say that most of these folks would not have purchased a home this year if the tax credit weren’t there.  The two groups that used the tax credit as a downpayment could not have afforded what they bought.   In the two Bay Area  cases where the purchase prices were $550,000 and $750,000 the $8000 really was just a drop in the bucket so I feel like they shouldn’t have based their purchase decision solely on the credit.  Anyway,  it is nice to see that some people are able to take advantage of this in a smart manner even though I find it ironic that the government is giving out 0% down loans on one hand and wagging a finger at the “greedy bankers” with the other hand.  Honestly  I cannot wait for this credit to expire so that the housing market returns to normal.

Share This

If you do not know by now, the Cash for Clunkers program is looking for another $2 billion in funding since it burned through $1 billion in less than a week.  Legislators are touting this program as the most successful program of the stimulus package and that is rather scary because how much waste it actually produces.

This program essentially scraps working cars and gives consumers a voucher to buy a brand new car.  A good illustration of what happens to the “clunkers” is here on YouTube.   The sad thing about it is that the cars being traded in have to be in working condition, and none of their parts can be reused or resold.  So the result is that hundreds of thousands of perfectly good used cars are taken off the market completely to be turned into garbage.  The gas mileage requirement for the new cars are also quite low.  In some cases consumers only have to find a car that gets 1 or 2 miles per gallon to get the voucher so I am not quite sure how big of an environment benefit this would be considering that it costs quite a bit of  energy to scrap the old cars and produce new cars.  It may be much less wasteful if the old cars that got just 1 mile less per gallon were allowed to survive a bit longer.

If this is indeed the most successful part of the stimulus package then perhaps the legislators should apply the same principles of Cash for Clunkers to the housing problem.  In order to promote new home sales, perhaps home buyers should be given a credit for “trading in” their existing homes with home builders.  The old home will have to be owned for at least a year, and in habitable condition and cannot be more than 15 years old.   The new homes have to be green and use appliances that cut down on energy use by 5%.  The government will then give a voucher for  $100,000 for the old home, and then the old home has to be burned down to the ground and none of its parts can be reused.  Lets just throw $75 billion (this is the price of the ill conceived mortgage modification plan) at this hypothetical program and sell 750,000 new homes and decrease the supply of used houses by 750,000!  Sure, some neighborhoods will get uglier due to the piles of ashes, but I am sure that will stimulate new construction and create jobs!

I know that burning down homes to stimulate new home sales sounds ridiculous, but the fictional housing program I outlined above directly parallels Cash for Clunkers. If it is implemented it would probably be deemed a “success” as hundreds of thousands of people with homes worth less than $100,000 start razing their properties and buy new homes.  The government is essentially encouraging people to destroy something perfectly usable to buy something new.  Also I am sure many of these new car purchases came with new loans so once again we have government policy that encourages people to spend and get into debt.  Cash for Clunkers  certainly is stimulative for the auto industry, but it is definitely not stimulative for the environment or prudent tax payers.

Share This