Is Obama about to forgive billions in mortgage principal?

posted at 8:48 am on August 5, 2010 by Ed Morrissey

James Pethokoukis hears rumors of an August surprise coming from the White House, one that will attempt to win backs the hearts and minds of voters dismayed at the failing economic policies of the Obama administration.  With the government fully in control of Fannie Mae and Freddie Mac, Barack Obama may issue an order to forgive portions of underwater mortgages processed through the GSEs, where negative equity approaches $800 billion overall.  Some financial houses have begun quietly preparing for the possibility:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. …

Why?  As Pethokoukis notes, it would be a naked ploy to buy votes … with our money:

Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

The government controls the two GSEs thanks to the bailout demanded by Bush administration, and then made unlimited by the Obama administration.   They are being floated on taxpayer money, but the idea had been that an orderly wind-down of bad loans and securities would eventually rescue the principal in most of the mortgages.  Taxpayers would take a bath, but eventually we’d see something approaching a wash in the long run.  Government seizure was supposed to allow for renegotiation of terms with borrowers to rescue the loans.

A massive write-down of principal in underwater mortgages would cost us additional tens of billions of dollars, if not $100 billion or more, in order to get these mortgages to market level.  That money won’t come out of thin air, either.  Either it will take taxpayer dollars to make up the difference, or the sudden and arbitrary writedown will make Fannie/Freddie investors a whole lot more poor than they were before.  The Obama administration can’t afford to send Wall Street reeling with that kind of shock, especially this close to an election and with the economy already sinking, so it would almost certainly require massive taxpayer subsidies to accomplish, on top of what’s already been spent on TARP bailouts.

In other words, it’s exactly the same kind of Obamanomics that we have seen for the last eighteen months — spend what we don’t have now, run up debt like crazy, and hope that a momentary spike will translate into political success.  Unfortunately, that has also been the formula for long-term economic failure.


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Just like mortgage modifications (which failed miserably), this is just another program to keep banks from realizing real losses, keeping us debt slaves to overpriced property instead. This will in no way be a bailout of Main Street, rather a plan that will keep us barely holding on to property that would otherwide be foreclosed on by the bank and sold at a substantial loss. The banks are insolvent when assets are marked to market, and nothing says market price like an actual sale, which must be avoided lest we see the empreror has no clothes.

shuzilla on August 5, 2010 at 2:07 PM

Obama/Geithner/Bernanke wanted the banks to spend the billions they gave them and pump those printed dollars into the economy, but the banks left that money in the vaults at the fed and never used it, thus not creating the massive inflation the axis of evil wanted to devalue our debt. They are desperate to double or triple the amount of dollars floating around the economy…”

PastorJon on August 5, 2010 at 1:59 PM

Good point. However, paying down principal, if that is what is in the cards, will still not solve the problem of the unemployed and their mortgages. And those who hold on to employment can enjoy a reduction in mortgage payments, but if only reduced down to an affordable amount then there’s still no additional money left to go elsewhere in the economy. In fact, reduced payments would backfire because many of those who get their payments worked down are currently spending their mortgage money on i-Pods, TV’s and vacations in anticipation of having no discresionary budget when shelter starts to cost something again, either from a re-worked mortgage or from rent.

shuzilla on August 5, 2010 at 2:17 PM

I’m still #!$$ed about this thread. I went to Walmart with the kids, and spent the entire trip explaining, “no we can’t afford it, it is too expensive, or maybe another day”.

I should have said, “put it all in the cart, don’t look at the price, we’ll let our neighbors pick up the tab”.

Stoopit me.

Laura in Maryland on August 5, 2010 at 2:20 PM

You know…

After Obowma finally leaves office, there is going to be one big pile of cr%p to clean up.

Seven Percent Solution on August 5, 2010 at 2:21 PM

It won’t work. America isn’t for sale. De Tocqueville is wrong. Americans can turn back the tide.

Obama doesn’t know any real Americans. Neither does his staff. Neither does the elegantly vacationing Michelle. It’s their greatest weakness.

Pablo Snooze on August 5, 2010 at 2:22 PM

I live in Georgia and where I live most of the empty homes were due to illegals leaving when the drought hit two years ago. My next door neighbor was here from Guatamala and when his lawn business dried up he held yard sales and just left. They didn’t even try to sell the house.

If this goes through, I think I’ll just quit paying my mortgage and credit cards.

moonsbreath on August 5, 2010 at 1:51 PM

I hear ya. Georgia was one of the centers of the illegal-fed housing and construction boom. My brother lives in Suwanee, and every time I went to visit him there wa s astunning aoumnt of new housing going up everywhere. Georgia also had a massive amount of mortgage fruad, which is still being uncovered by the FBI. I think it’s possible that most of the housing built there since 2000 was built by illegal labor, financed with shady loans based on faked appraisals and faked borrower income verificatons, some of which were originated by mortgage brokers that were not even licensed.

And guess who bought most of these loans? Fannie and Freddie.

rockmom on August 5, 2010 at 2:32 PM

If realtors were selling houses at FAIR MARKET VALUE.. then why are we in a housing bubble burst? Hmmmmmmmmmmmmmm

Why are appraisers putting houses ABOVE and BEYOND what is concidered FAIR MARKET VALUE? hmmmmmmmmmmm

Jimbo, admit it. You don’t own a house. Because if you did, you would KNOW THIS!

Just shut up and go to a corner.

upinak on August 5, 2010 at 12:38 PM

Realtors don’t sell houses for a “fair” value. They sell houses for what buyers and sellers agree on. The reason we had a balloon is because cheap credit and bad planning (with some visions of easy $$ when houses were flipped dancing in some buyers’ heads because, to many people, real estate could only go up) convinced people to buy houses that they could barely afford. We now have difficult credit (including people who are out of work and can’t afford to buy any houses) and many people who have lost money on real estate. So the demand is down significantly. At the same time, there are more houses on the market and for a longer time than five years ago, meaning that the supply has gone up. When demand drops and supply increases, prices drop all else being equal.

Realtors and appraisers always have had a bit of an incentive to inflate the value of apprisals, so people can buy (and get a mortgage on) the absolute largest home they possibly can buy. Realtors generally split about a 6 or 7% commission, and 7% of X+20,0000 is better than &% of just X.

Jimbo3 on August 5, 2010 at 2:53 PM

shuzilla on August 5, 2010 at 2:17 PM

You’re assuming they want to solve it . . . This “write down” will involve paying billions to favored investors, like Goldman Sachs and George Soros, in the form of cold hard cash.

I believe that this administration wants enough pain to cause enough civil unrest to invoke the law allowing suspension of the constitution. They THINK they’ll be able to retain control in that situation.

Nothing they have done has actually helped anybody. Most of the mortgage rewrites have turned around and defaulted anyways. It’s all about having the IMAGE of doing something to help people, while knowingly making things worse.

Research George Soros. He has done this to Hungary, Thailand and many other economies. The difference is he’s forgetting this is the first country he’s attacked this way that has a right to own guns, and Americans can react a lot differently to a constitutional suspension and communist take over.

PastorJon on August 5, 2010 at 2:55 PM

The government controls the two GSEs thanks to the bailout demanded by Bush administration, and then made unlimited by the Obama administration.

Actually Ed, the United States Congress created the GSEs. I know that blaming Bush for just about everything is fun for people on both sides of the aisle, but I remember the last couple of decades and that means I recall Bush trying to pull the reigns in on Fannie Mae and Freddie Mac..time and again. I also recall Clinton and almost everyone in the US Senate happily signing onto legislation that would greatly expand government’s role in the finance service.

No, this is not Bush…this is all Obama and if he does this, it will simply be another bailout…and a lot people might well think it is a good idea because they will see it as help to homeowners rather than banks. Of course it will add more instability to the markets and might well blow up in their faces in the long run, but these guys are not thinking about the long run, they are thinking about November.

Terrye on August 5, 2010 at 3:01 PM

If they have, they have already exceeded their mandate. Please read the legislation and discussion prior to the creation of Fann and Fred. Any guarantee was explicitly denied.

Vashta.Nerada on August 5, 2010 at 1:06 PM

My understanding is that the Treasury has now (as of last December 24) agreed to make unlimited funds available to Fann and Fred to assure their solvency. If that’s the case, then that is the same as a guarantee of any newly issued debt by Fann and Fred.

Jimbo3 on August 5, 2010 at 3:02 PM

So, since I bought my house wisely, didn’t overextend myself, kept up my mortgage payments and now actually have a nice bit of equity, I’m going to have to chip in to bail out the irresponsible buyers who goth themselves in over their heads.

I’m bending over and I feel someone spreading my cheeks.

JerseyJeff on August 5, 2010 at 3:03 PM

No, this is not Bush…this is all Obama and if he does this, it will simply be another bailout…and a lot people might well think it is a good idea because they will see it as help to homeowners rather than banks. Of course it will add more instability to the markets and might well blow up in their faces in the long run, but these guys are not thinking about the long run, they are thinking about November.

Terrye on August 5, 2010 at 3:01 PM

The initial TARP and appointment of conservators for Fannie and Freddie happened under Bush II.

Jimbo3 on August 5, 2010 at 3:03 PM

Excuse me, but is there any way I can get off of “As$clown Express” Airways created by the Grand As$clown himself, BHO?

So, I have been current on all my bills for 35 years, never been late on a payment, and made safe investments, and now I have to help pick up the tab for a group of fools and morons that could not either anticipate a future downturn and prepare themselves for it by not over extending themselves, or read the fine print of a mortgage application?

WTF!! And the Queen As$clown is spending how much for her Secret Service entourage at a Spanish 5 star resort? Bull….loney!

yobobbyb on August 5, 2010 at 3:04 PM

Obama/Geithner/Bernanke wanted the banks to spend the billions they gave them and pump those printed dollars into the economy, but the banks left that money in the vaults at the fed and never used it, thus not creating the massive inflation the axis of evil wanted to devalue our debt. They are desperate to double or triple the amount of dollars floating around the economy…”

PastorJon on August 5, 2010 at 1:59 PM
Good point. However, paying down principal, if that is what is in the cards, will still not solve the problem of the unemployed and their mortgages. And those who hold on to employment can enjoy a reduction in mortgage payments, but if only reduced down to an affordable amount then there’s still no additional money left to go elsewhere in the economy. In fact, reduced payments would backfire because many of those who get their payments worked down are currently spending their mortgage money on i-Pods, TV’s and vacations in anticipation of having no discresionary budget when shelter starts to cost something again, either from a re-worked mortgage or from rent.

shuzilla on August 5, 2010 at 2:17 PM

But having consumers start spending again will help money start moving again. One of the major problems this time around has been the contraction of the money supply. Even though there has been tons of money made available, the banks have generally not lent it out. We need to increase significantly the amount of money in the economy.

Jimbo3 on August 5, 2010 at 3:07 PM

If realtors were selling houses at FAIR MARKET VALUE.. then why are we in a housing bubble burst? Hmmmmmmmmmmmmmm

Why are appraisers putting houses ABOVE and BEYOND what is concidered FAIR MARKET VALUE? hmmmmmmmmmmm

Jimbo, admit it. You don’t own a house. Because if you did, you would KNOW THIS!

Just shut up and go to a corner.

upinak on August 5, 2010 at 12:38 PM

upinak:

I was a realtor for awhile. And the way it works is that you sell the house for the best price you can get, that is the market value. The market in one state might be very different from the market in another. A three bedroom 2 bath ranch in Oklahoma might be appraised at less than half of what that 3 bedroom 2 bath ranch in California would bring. When we did price analysis, it was based largely on what houses in the region would bring. Fair market value was whatever the market would bear. And that is true whatever the price is. Up or down.

Terrye on August 5, 2010 at 3:10 PM

The suggestion here is that this is going to be done as a ploy to buy votes, and I don’t think it’s going to be terribly successful.
Really.
Now, I don’t have any numbers at my fingertips to demonstrate this, but I think my instincts are pretty on-target.
Most of the “millions” who are underwater on their mortgages and would be the recipients of this generosity are probably not the stand-up, hard-working, nose-to-the-grindstone folks who are keen on showing up to vote this November.
Just from my personal life, the ones I know of float in and out of jobs, and got in over their heads because they were simply irresponsible in the first place.
What am I saying? I’m saying the people you’re giving this gift to probably aren’t going to be voting in great enough numbers to make this ploy successful. Sure, you’re tossing money out, but you’re tossing it to the “Obama’s gonna pay for my gas” crowd and they’re not going to tilt the election one way or another.
More debt? Yup. Lost money out of your wallet? Yup.
Anything that will change the election? Nope.

12thMonkey on August 5, 2010 at 3:11 PM

The initial TARP and appointment of conservators for Fannie and Freddie happened under Bush II.

Jimbo3 on August 5, 2010 at 3:03 PM

Actually Jimbo Bush tried on something like 17 occasions to get certain reforms through for Fannie Mae and Freddie Mac, and the Democrats blocked him every time. The ethically challenged Ms Waters said, if it ain’t broke, don’t fix it. But in 2008 Fannie Mae and Freddie Mac collapsed, went belly up, insolvent, etc and the Feds were forced to step in. And then of course the Congress instituted some of the reforms Bush wanted, but that was like shutting the barn door after the horse is out and trotting down the road.

And yes, TARP was instituted under Bush, but Congress was not going to stand by in that situation and neither was the Treasury. But the majority of the money lent out then has already been paid back for some time now. The money should go back to the Treasury.

I know some people think that if Bush had not allowed TARP to come about that the market would have magically righted itself. I don’t think so, the market did not create the situation. I think that it could have been worse and the Democrats would have exploited the situation even more than they already did.

My point is that Bush should not be blamed for the policies of the Obama administration.

Terrye on August 5, 2010 at 3:17 PM

My point is that Bush should not be blamed for the policies of the Obama administration.

Terrye on August 5, 2010 at 3:17 PM

And my point is this is not “all Obama”. The problems started under Bush and Bush’s TARP.

Jimbo3 on August 5, 2010 at 3:23 PM

Fannie and Freddie were taken over under provisions of pre-existing law, not under TARP. Their takeover actually preceded TARP by two months. Bush did sign that law, and thank God he did, but if he hadn’t there would have been no alternative to bankruptcy for the GSEs when they became insolvent, which would have instantly made almost every bank in the U.S. insolvent because they held so much of the GSEs’ debt.

You wanna see a meltdown – now THAT would have been a meltdown.

And the only reason Bush even got that law was because he threated to veto the Democrats’ loan-modification/housing counseling bill unless they attached the GSE reform bill to it. Chris Dodd didn’t want that GSE bill at all because it actually provided some semblance of regulation for Fannie and Freddie for the first time.

Just trying to end the confusion here about Fan and Fred vs. TARP.

rockmom on August 5, 2010 at 3:37 PM

Oh, and by the way, the new agency created in that legislation to oversee Fannie and Freddie? It’s called the Federal Housing Finance Agency, and Obama STILL hasn’t appointed a Director for it; it still has an acting director who has never been nominated for the job permanently.

So let’s review: Obama wants to order Fannie and Freddie to give away a potential trillion dollars of assets owned by the taxpayers, with no approval of Congress and no oversight by anyone who has been approved by Congress.

rockmom on August 5, 2010 at 3:40 PM

Jimbo3 on August 5, 2010 at 3:23 PM

Do you get paid for this pablum? Or are you a superhero in your own mind? Or do you just labor tirelessly like some sort of Sisyphean smoke-screener out of self-important partisan hackery?

Inanemergencydial on August 5, 2010 at 3:41 PM

But having consumers start spending again will help money start moving again. One of the major problems this time around has been the contraction of the money supply. Even though there has been tons of money made available, the banks have generally not lent it out. We need to increase significantly the amount of money in the economy.

Jimbo3 on August 5, 2010 at 3:07 PM

Actually, it’s the contraction of available credit and creditworthy consumers that’s the problem. Money can’t be borrowed into circulation because consumers (and increasingly governments) can’t keep up with servicing the debt they already have.

This crash was generated from an assest bubble. Money was lent out against the total value of all the housing purchased, minus down payments. The only recoverable money is the total current value of those assets once liquidated.

There is NO reviving the consumer because there is no ability to increase lending. And there’s a crapload of losses yet to be taken, so understandably banks are holding cash against inevitable losses instead of lending it out against depreciating assets, extending their losses. Putting cash in the consumer’s pocket most likely will result in debt service instead of further leveraging.

shuzilla on August 5, 2010 at 3:56 PM

My god what has become of this country? This has already been going on. I know of someone who was upside down on her house. She had bought it with a first and a second. Then the second started to go up because it was a variable, then she tried to renegotiate the terms, then all of sudden the whole second was forgiven! This sounds like that on a much wider scale. I believe the second was with GMAC. I like her but I resented that I being conservative did not over buy or over extend and no one is going to forgive my mortgage nor do I want them to. I despise the Liberal Democrats I really do…

CCRWM on August 5, 2010 at 3:57 PM

H/T to all the commenters who get it.

Small problem: forgiving debt is not the same as money in hand. Always with the unintended effects, Bambi.

Caststeel on August 5, 2010 at 4:04 PM

Well, of course – this would be a MASSIVE re-distribution of wealth since the only loans that would receive principle reductions would be those that went through the GSE’s. Those would mostly be loans to lower income families.

Which is why it won’t work and why it would be INCREDIBLY stupid on the part of the Obama administration to try this. I don’t think they’ll attempt it – but I try not to underestimate the levels of stupidity present in this administration.

Here’s the deal – this thing comes unraveled and blows up in the face of Democrats in SOOOO many ways.

1. Like I said – it’s not going to impact anyone but lower income families who are probably in homes they shouldn’t have bought in the first place. This whole fiasco will be paid by MILLIONS of middle and higher income families who are also underwater – but won’t receive any benefit. This will not only produce anger in those voters … but sheer, unadulterated OUTRAGE.

2. News Flash – NOT all lower income home owners got a loan through the GSE. Some were smart enough to get good loans at good rates – but they’re still underwater on the mortgage (just like one hell of a lot of us are who are still paying on our loans). This will produce OUTRAGE in these voters.

3. I can play hell with this all day – because I know military families who are underwater but got their loans through their military credit unions – like Navy Federal. So a lot of military HERO’s – people who have fought in war on terror – even some injured and disabled – who won’t be beneficiaries of this and – this is going to OUTRAGE everyone!

I almost hope that Obama attempts to do this. It will not win him votes. He’s already got the votes of those this will help.

HondaV65 on August 5, 2010 at 4:15 PM

We need to increase significantly the amount of money in the economy.

Jimbo3 on August 5, 2010 at 3:07 PM

And you do that by getting Government’s fingers OFF the economy!

HondaV65 on August 5, 2010 at 4:18 PM

We need to increase significantly the amount of money in the economy.

Jimbo3 on August 5, 2010 at 3:07 PM
And you do that by getting Government’s fingers OFF the economy!

HondaV65 on August 5, 2010 at 4:18 PM

You do it by getting banks to lend and businesses and consumers to purchase, which would have a multiplier effect.

Jimbo3 on August 5, 2010 at 4:23 PM

Consistent with income redistribution, land redistribution, Che, and Fidel. Why are so many posters shocked, shocked, at this proposal.

FalseProfit on August 5, 2010 at 4:24 PM

Realtors don’t sell houses for a “fair” value. They sell houses for what buyers and sellers agree on.

Hey, wizbang, what do you think FMV is? It’s the price that buyers are willing to pay for a piece of property in a given market. Hence why half a million dollars will buy you a mansion in the South but still only a 1200 square foot condo shack in many parts of California.

But having consumers start spending again will help money start moving again. One of the major problems this time around has been the contraction of the money supply. Even though there has been tons of money made available, the banks have generally not lent it out.

Why do you suppose that is? Possibly because these banks don’t know what steamroller is coming down the pike next? And who are they supposed to loan money to? People who are out of work and can’t pay it back?

The money supply is not the problem. There are already too many dollars printed and waiting to be spent. The problem is that when people don’t have a job, they ain’t gonna spend money no matter how much of it they have stuffed under a mattress.

NoLeftTurn on August 5, 2010 at 4:39 PM

We need to increase significantly the amount of money in the economy.

Jimbo3 on August 5, 2010 at 3:07 PM

So this is how a liberal thinks…
You take money out of private sector (with taxes and fees), you bring it to Washington and you hire and pay hundreds or thousands of employees to distribute the money back to the private sector…and you think that is increasing the money supply.
Yeah, you are F’in brilliant…
I can see why Obama was elected, with thinking like that, he was a shoe in…

right2bright on August 5, 2010 at 4:40 PM

consumers to purchase,
Jimbo3 on August 5, 2010 at 4:23 PM

The government can’t make consumers purchase, it is against the constitution…….oh, sh*t, I forgot about Obamacare.
Well the government can’t make consumers purchase voluntarily…

right2bright on August 5, 2010 at 4:42 PM

You do it by getting banks to lend and businesses and consumers to purchase, which would have a multiplier effect.

Jimbo3 on August 5, 2010 at 4:23 PM

Newsflash talking points boy, Banks have an incentive to lend when they can see that there is a profit in lending. That is how they make money. Businesses and consumers purchase when they can afford to purchase.

txmomof6 on August 5, 2010 at 4:45 PM

You do it by getting banks to lend and businesses and consumers to purchase, which would have a multiplier effect.

Jimbo3 on August 5, 2010 at 4:23 PM

What if that multiplier is less than 1?

Which it is.

shuzilla on August 5, 2010 at 4:47 PM

Newsflash talking points boy, Banks have an incentive to lend when they can see that there is a profit in lending. That is how they make money. Businesses and consumers purchase when they can afford to purchase.

txmomof6 on August 5, 2010 at 4:45 PM

Newsflash: Banks can now borrow at almost zero percent. How isn’t there a profit in lending?

Jimbo3 on August 5, 2010 at 4:50 PM

But having consumers start spending again will help money start moving again. One of the major problems this time around has been the contraction of the money supply. Even though there has been tons of money made available, the banks have generally not lent it out.
Why do you suppose that is? Possibly because these banks don’t know what steamroller is coming down the pike next? And who are they supposed to loan money to? People who are out of work and can’t pay it back?

The money supply is not the problem. There are already too many dollars printed and waiting to be spent. The problem is that when people don’t have a job, they ain’t gonna spend money no matter how much of it they have stuffed under a mattress.

NoLeftTurn on August 5, 2010 at 4:39 PM

Banks can loan to businesses, not just consumers. Some businesses are doing quite well. Many of the companies who recently announced earnings exceeded expectations.

Jimbo3 on August 5, 2010 at 4:52 PM

Newsflash: Banks can now borrow at almost zero percent. How isn’t there a profit in lending?

Jimbo3 on August 5, 2010 at 4:50 PM

What is the profit in lending if the person can’t pay it back because they don’t have a job?

txmomof6 on August 5, 2010 at 4:59 PM

Banks can loan to businesses, not just consumers. Some businesses are doing quite well. Many of the companies who recently announced earnings exceeded expectations.

Jimbo3 on August 5, 2010 at 4:52 PM

Perhaps these businesses want to stay in existence for more than the next quarter or two. Think they might need to look over the horizen to see what is coming their way?

txmomof6 on August 5, 2010 at 5:03 PM

This will backfire on Democrats; expect OUTRAGE from all the people who pay their mortgage on time. Why should I go to work and pay my bills on time?

TN Mom on August 5, 2010 at 5:05 PM

every loan mod and conventional refi in process across america just came to a grinding halt. expect these folks who otherwise would have accepeted the mods or refi’s in hand to wait for the ‘free government money’ in the bush.

DrW on August 5, 2010 at 5:09 PM

Sellers already have to meet those price points if they’re reflective of market value. The amount you have on your mortgage isn’t connected to market value.

Jimbo3 $hit4brains on August 5, 2010 at 11:24 AM

Are you a talking circle who has been personified? FUTURE sellers will be forced to compete on the new price point. It’s the exact opposite of what you don’t understand: The NEW market value will be based on the NEWly reduced principal – due to the fact that the underwater homeowner has a new, lower exit price.

Here, let’s try this: Prices will not be sticky on the way down, they will simply collapse to the new floor that was mandated by the write down.

NumberTwo on August 5, 2010 at 5:10 PM

And they’re the business with cash reserves that aren’t looking for capital and don’t want to try expanding because of the current government.

blink on August 5, 2010 at 5:06 PM

with a little Who is John Galt? possibly thrown in as well.

txmomof6 on August 5, 2010 at 5:10 PM

Hear ye! Hear ye! It’s 5:17 and I’m still #!$$ed

Laura in Maryland on August 5, 2010 at 5:17 PM

Are you a talking circle who has been personified? FUTURE sellers will be forced to compete on the new price point. It’s the exact opposite of what you don’t understand: The NEW market value will be based on the NEWly reduced principal – due to the fact that the underwater homeowner has a new, lower exit price.

Here, let’s try this: Prices will not be sticky on the way down, they will simply collapse to the new floor that was mandated by the write down.

NumberTwo on August 5, 2010 at 5:10 PM

The amount you owe on a mortgage has no impact on what others are willing to pay for a property. It may have alot to do with what you’re willing to sell your house for, but buyers don’t care how much your mortgage is. All buyers care about is how your property compares to other properties on the market or other investments.

Jimbo3 on August 5, 2010 at 5:18 PM

Actually Jimbo Bush tried on something like 17 occasions to get certain reforms through for Fannie Mae and Freddie Mac, and the Democrats blocked him every time. The ethically challenged Ms Waters said, if it ain’t broke, don’t fix it. But in 2008 Fannie Mae and Freddie Mac collapsed, went belly up, insolvent, etc and the Feds were forced to step in. And then of course the Congress instituted some of the reforms Bush wanted, but that was like shutting the barn door after the horse is out and trotting down the road.

And yes, TARP was instituted under Bush, but Congress was not going to stand by in that situation and neither was the Treasury. But the majority of the money lent out then has already been paid back for some time now. The money should go back to the Treasury.

I know some people think that if Bush had not allowed TARP to come about that the market would have magically righted itself. I don’t think so, the market did not create the situation. I think that it could have been worse and the Democrats would have exploited the situation even more than they already did.

My point is that Bush should not be blamed for the policies of the Obama administration.

Terrye on August 5, 2010 at 3:17 PM

I remember that well. During the administration of President George W. Bush, any time reform of Fannie and Freddie came up the lefties would fly into a rage. Barney would be blubbering about eeeeevil Republicans, and they would hit the air with all those sad-sack tv spots. Remember the one with the little girl clutching her teddy bear, in the empty house with her mother saying “come now dear, we have to leave our home”? Someone needs to dig up some of those ads.

Let’s also not forget the many millions that Fannie and Freddie spent on lobbying their friends in Congress, and the millions lost through incompetence and greed by liberal hacks like Raines and Gorelick.

Funny, when our thug president demanded cuts in these lavish salaries, and paybacks of huge bonuses at companies we had to bail out, he never got around to Fannie and Freddie, did he?

President Bush tried many times for reform, but was blocked by democratics every time. Democratics have always had the ability to easily filibuster in the Senate the few years that Republicans held it.

slickwillie2001 on August 5, 2010 at 5:19 PM

Just heard Hannity all over this one. It’s going to explode in the next 24 hours. We’ll see if Obama really has the balls to do it.

I want to reiterate to everyone how serious an idea this is, and how seriously bad it is. This move would require NO approval by Congress, and its implementation would be overseen by no official that has ever even been questioned by Congress.

If that doesn’t piss you off, then nothing will.

This President is really, really dangerous.

rockmom on August 5, 2010 at 5:25 PM

President Bush tried many times for reform, but was blocked by democratics every time. Democratics have always had the ability to easily filibuster in the Senate the few years that Republicans held it.

slickwillie2001 on August 5, 2010 at 5:19 PM

You are exactly right. Everyone knew that a GSE reform bill would never get through the Senate Banking Committee as long as Paul Sarbanes was the chairman. The House Financial Services Committe actually had some rip-roaring hearings on Fan and Fred (this is where all that great footage came from of Barney and Maxine telling us there was nothing wrong with the GSEs), but there was never any interest in passing a bill that would just die in the Senate and get the Realtors and Homebuilders mad at the Republicans.

Fannie and Freddie played this extremely well while Bush was president, to avoid any semblance of regulation. It drove those of us in the industry nuts.

rockmom on August 5, 2010 at 5:32 PM

Jimbo3 on August 5, 2010 at 2:53 PM

Wow how long did you have to reaearch that Jimbo. over 2 hours. You sure are special.

Terrye on August 5, 2010 at 3:10 PM

Oh yes I know. but what do they base it off of. Appraisers who keep putting the house up and up for the town or city.. for TAXES!

I am going with a builder who is not having a great summer right now. His wife is the “realtor”. You know what I told them both…. Yeah I know you both are hurting for money, but since I looked up everything on both of you, what you paid for the land, the taxes on the land BEFORE construction, got the construction costs the labor costs and so on… i am only going to give you 10% more then the cost of the land, labor and construction on the house.

The both looked at me like I didn’t know what I was talking about until I handed over my estimate, where I got my information, etc. They wanted to build for 209K my estimate with cost all costs was 129K, with their 10%. Oh yes, some people are not playing the realestate game anymore. I am one.

upinak on August 5, 2010 at 5:34 PM

It boils down to this: Obama and his Democrats run around acting like Santa, giving away all sorts of happy stuff supplied by the blood and sweat of their elf-slaves, the taxpayers.

Logic on August 5, 2010 at 5:42 PM

I guess that woman who said Obama would give her a house and car was right.

William Amos on August 5, 2010 at 5:47 PM

Banks can loan to businesses, not just consumers. Some businesses are doing quite well. Many of the companies who recently announced earnings exceeded expectations.

Jimbo3 on August 5, 2010 at 4:52 PM

The kinds of companies that announce their quarterly earnings in a press release read by some CNBC flunkie are not the kinds of businesses in great need of borrowing capital. They’ve got their own cash reserves. The companies that need to borrow are the small businesses all across this country who employ up to 70% of the population when they’re actually hiring. Some of them would dearly love to borrow some money to expand and banks won’t lend to them b/c the climate is too uncertain with a socialist in the White House.

You can’t really be this obtuse, can you?

NoLeftTurn on August 5, 2010 at 5:48 PM

Another vote buying, wealth redistribution scheme. Since the government now owns Fannie and Freddie, they do not need the approval of Congress to add a new taxpayer financed stimulus package.

Unfortunately, if this happens, it will have a devastating impact on the real estate market in general. It will manipulate market values downward, perhaps in a sprial that won’t play itself out anytime soon.

A lot of these values were artifically driven upward by speculators, flippers, and a host of ther schemes that created artificially high values in some areas. The market is in the process of readjusting itself, and has actually probably fallen below the norm at this point.

If you house is not yet underwater, it almost certainly will be when this move resets the market downward. Not just in those areas where prices were artificially driven up – across the board. Which will create a new batch of underwater debt that was not underwater before. And will hit the incentive to repay loans, prompting borrowers to turn over the keys rather than continue to pay on homes where the debt exceeds the value. And that increased delinquency activity and new glut of bank owned properties will further drive values down as banks try to unload inventory at fire sale prices. Which will lead to an increase in unemployemt when the real estate segment and peripheral businesses try to offset a decline in revenues.

All at a time when the market is starting to stabilize.

Disasterous.

Jim M. on August 5, 2010 at 5:53 PM

Holy shhhh….t! You know what this will trigger? A massive devaluation of the dollar. The government can’t pay for this and it’s rather uncertain how much it has to pay. The message is unambiguous: the Obama administration doesn’t care jack about the stability of the dollar. Hate to sound unpatriotic, but I’m pulling the rest of my savings out of the country, starting…ummmm, now!

year_of_the_dingo on August 5, 2010 at 5:55 PM

If there is any truth to this no one who is an incumbent will return next year.

enginemike on August 5, 2010 at 6:08 PM

This is going to be a nightmare for investors and servicers who do loan modifications but do not reduce principle.

cadams on August 5, 2010 at 6:57 PM

But it has much to do with what price a seller will take which greatly influences the sales price.

Especially if the seller is the bank and the bank doesn’t want to take a hit on its books for the property because it would force them to take a hit on similar properties as well.

blink on August 5, 2010 at 5:30 PM

Banks really should have been required to recognize the unrealized losses immediately. My recollection is that they were able to get the government and the Financial Standards Board to change the rules so they didn’t have to recognize the losses.

Jimbo3 on August 5, 2010 at 7:14 PM

And you people who have scrimped saved and lived your life to make sure you don’t get in trouble with your mortgage- screw you! You get to pay for this!

CWforFreedom on August 5, 2010 at 7:24 PM

Hmmmm.

@ JerseyJeff on August 5, 2010 at 3:03 PM

“I’m bending over and I feel someone spreading my cheeks.”

Oh sorry my bad! A bit too much to drink dontchaknow.

memomachine on August 5, 2010 at 7:50 PM

Hmmmm.

Frankly the next step is to nationalize the private retirement plans such as IRA, 401(k) and the others. Union pensions will be fine with a $165 billion bailout courtesy of the Democrats.

But everyone else with a retirement plan: you’re screwed.

This is what Argentina did and there is no doubt in my mind at all that this is going to happen. Obama and the Democrats have been screwing with investors, investments and investor rights for the last 18 months. Time and time again they have shown complete indifference to investor confidence that a law based system actually exists.

Instead investors have seen utter caprice in how the government treats them. When investors say “Thanks but no thanks” to t-bills then retirement funds will be fair game to the Dems.

memomachine on August 5, 2010 at 7:55 PM

King Barack Hussein’s Banana Republic.

AshleyTKing on August 5, 2010 at 9:12 PM

Where do I send my mortgage to? I figure I have about 60 days before the onslaught and the butchering of the democrats, might as well get a little while they are handing it out…better me then a liberal…

right2bright on August 5, 2010 at 9:39 PM

http://www.bloomberg.com/news/2010-08-05/fannie-mae-seeks-1-5-billion-from-u-s-treasury-after-12th-straight-loss.html

From drudge Report Fannie seeks 1.5 BILLION from fed and he is thinking of forgiving loans that are under water. We are being spent into slavery!

dhunter on August 5, 2010 at 10:03 PM

memomachine on August 5, 2010 at 7:55 PM

I don’t see how that can happen. I know they talk about it at times but that blatant a confiscation of hard earned and often times taxed dollars, money that families and business persons sacrificed to put away for their retirement years, would usher in an all out war on the political class!

dhunter on August 5, 2010 at 10:08 PM

FANNIE reported this afternoon, HUGE SURGE! in REO inventory (houses we all now own thanks to GSEs). this is all slowly being converted to Section 8 while we bat away shiny rumours.

I think the MS plan of a 1 pg refi for all CURRENT mortgages would free up consumer spending and it would not cost us more than we are already paying, face it folks we OWN all these homes now, one way or another, we can refi the paying folks and simply reduce future ‘projected’ cashflow on those loans and get a boost to GDP from it with consumer spending which creates jobs, OR we can not do that and wait and watch as FAN FRED FHA turn all those strategic defaults, and future defaults, into SUBSIDIZED housing, so we will pay TWICE, once for the rent, once for the loss to the books.

We will IMO be getting QE2 one way or another, this sounds better to me the MS plan, not the principal writedowns although if they had done HOLC out of the gate IMO we wouldve been SOOOO much better off, but too late now…anyway, this FED does NOT have the ‘girding’ of a Volcker and Gentle Ben is NOT going to watch us go into the double dip without throwing all he has at it, and he has nothing else left that I see.

Here is voting FED member Bullard on QE2, sounds like he is on board for some helicopter Ben Round XXX to me:

I emphasize two main conclusions: (1) The FOMC’s extended period language may be increasing the probabil-ity of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program o¤ers the best tool to avoid such an outcome.

ginaswo on August 5, 2010 at 10:36 PM

If there are any tax experts reading this…would it be possible that the forgiven amount of the mortgage principal could be considered ordinary income by the government, and thus taxable?

MADgirl91 on August 5, 2010 at 10:37 PM

year_of_the_dingo on August 5, 2010 at 5:55 PM

Gold came back from it’s dip, I agree with your USD assessment! And that would fit into O’s export plan, they WANT a low dollar, to devalue the debt and push exports.

ginaswo on August 5, 2010 at 10:39 PM

MADgirl91 on August 5, 2010 at 10:37 PM

Congress passed the Mortgage Debt Relief Act in 2007 and made ‘forgiven’ principal nontaxable.

ginaswo on August 5, 2010 at 10:43 PM

here is the breakdown on the Fannie inventory surge-CalculatedRisk

Fannie Mae reported that their REO inventory more than doubled since Q2 2009, from 62,615 to 129,310 in Q2 2010.

REO: Real Estate Owned.

See page 11 of the 2010 Second Quarter Credit Supplement (ht jb)

This graph shows the rapid increase in REO.

From Fannie Mae 10-Q (page 9):

During the second quarter of 2010, we acquired approximately 69,000 foreclosed single-family properties, up from approximately 62,000 during the first quarter of 2010, and we disposed of approximately 50,000 single-family properties. The carrying value of the single-family REO we held as of June 30, 2010 was $13.0 billion, and we expect our REO inventory to continue to increase significantly throughout 2010.

Barney Frank is already on record supporting turning the GSEs into ‘utilities’. The government isnt just backstopping anymore now we are the LARGEST LANDLORD in America.

ginaswo on August 5, 2010 at 10:48 PM

There is a BIG PUSH now b/c FAN FRED FHA are apparently preparing to try and SHOVE all the bad loans back onto the lenders. Since O, Geithner et al work for the unabankers they are scrambling to find a way to avoid the losses. I firmly believe we will get the bill one way or another. IMO better to reward those who pay on time and goose consumer spending now.

ginaswo on August 5, 2010 at 10:50 PM

How’s this for an unexpected consequence…

When Fannie and Freddie write down the value of all these mortgages, what happens to the tax base upon which all the local governments are funded?

Will there be yet another bailout for them too?

DaveK on August 6, 2010 at 3:02 AM

This is so frustrating. We pay our mortgage on time, every time, and have no other debts. All we want is to get a refi for a better rate. We’re not sure if we will be able to get one as our home has lost so much equity.

Yet, there will be another bail out and I’m sure it will leave us in a position to just continue going to work every day and paying off other people’s forgiven mortgages.

gatorfanatic on August 6, 2010 at 7:26 AM

So now it’s “cash for flunkers”?

garry on August 6, 2010 at 8:31 AM

A large steel company bought out the smaller steel company I worked for a few years ago. The bond holders came first and we employees (union) came last when the deal was finished. Comes Obama and the auto makers employees (union) came FIRST and bond holders last. Now after my wife and I busted our butt for 30 years to pay off our mortgage Zero gives these home owners a free ride. Maybe it will buy him some votes but the man is setting the country on fire with anger. I may be weak, I may be old, I may be insignificant but dammit I ain’t gonna forget and will work my a$$ off to get these Democrats defeated.

Herb on August 6, 2010 at 9:36 AM

Unfortunately, that has also been the formula for long-term economic failure.

Feature. Not a bug.

bitsy on August 6, 2010 at 9:38 AM

We are being spent into slavery!

dhunter on August 5, 2010 at 10:03 PM

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.”
Vladimir Lenin quotes

bitsy on August 6, 2010 at 9:44 AM

If there are any tax experts reading this…would it be possible that the forgiven amount of the mortgage principal could be considered ordinary income by the government, and thus taxable?

MADgirl91 on August 5, 2010 at 10:37 PM

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

http://www.irs.gov/individuals/article/0,,id=179414,00.html

Jimbo3 on August 6, 2010 at 10:57 AM

ginaswo on August 5, 2010 at 10:36 PM

I really appreciate the analysis, links and depth of information you’re providing, but I’m having a hard time understanding some of the abbreviations (MS, QE2). Can you dumb this down a bit for those of us not in the industry?

Jimbo3 on August 6, 2010 at 11:02 AM

If a bank sells a property that was used as collateral, then they are forced to remark the value of the loan and similar loans.

blink on August 5, 2010 at 7:42 PM

For the ones that they sell. But usually you’d be expected to mark down the value of the ones that you’re still holding, so their carrying value approximates the new market value. My understanding is that the banks were able to change the rules so they didn’t take a hit on their inventory of houses.

Jimbo3 on August 6, 2010 at 11:04 AM

Oh joy, more farking redistribution of my wealth.

{+_+}

herself on August 6, 2010 at 3:49 PM

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