CBO Projects Housing Bailout Program Will Send 140,000 Families Into Second Foreclosure
The Congressional Budget Office (CBO) is not terribly optimistic about the success of the housing bailout bill going through Congress. They project that 35 percent of the homeowners "helped" under the plan, or 140,000 families, will find themselves again facing foreclosure. The reason for the pessimism is that the lenders get to decide which loans enter the program. Naturally, they will pick homeowners who they think will be the least likely to make it.
I wonder what the folks who support this bill will tell those 140,000 families? Many of these families will struggle to make their mortgage payments for 2 or 3 years, sacrificing health care, child care and other necessary expenses in a hopeless effort to hang onto their home. At their end of their struggling, they will end up out on the street, foreclosed a second time.
That is what Washington policy wonks call "asset building."
It was painful to have a housing policy designed by economists and analysts who were too out to lunch to recognize the largest housing bubble (in absolute size) in the history of the world. It is even more painful to see that the same folks are still calling the shots.
As a result, we see Congress rushing to push through a bill that CBO projects will hand $680 million to lenders. Yes lenders -- you know, the folks who issued predatory mortgages on an enormous scale to low and moderate income families in the last few years. Given the structure of the program (it does nothing to prevent loans from being issued at prices that are still inflated by the bubble), it is questionable how much any homeowners will actually be helped.
And, CBO's numbers are likely to prove optimistic. Remember, these are the folks who over-estimated capital gains tax revenue in their 2001 budget projections by $600 billion because they assumed that the stock bubble would persist indefinitely.
I don't understand. If they will not be approved by 'the lenders [who] get to decide which loans enter the program', how will they be in a second foreclosure? Seems to me they will still be in the first foreclosure?
July 6, 2008 3:40 PM | Reply | Permalink
D-UK,
Sorry for the earlier unnecessary rudeness.
Fred
July 6, 2008 8:42 PM | Reply | Permalink
Re: Naturally, they will pick homeowners who they think will be the least likely to make it.
That makes non sense. Lenders do NOT want to end up owning real estate. They take a huge loss on every REO. In today's market they may be stuck with vacant properties (and the bills for taxes and maintenance) for months and when they do sell them they generally do so for far less than was owed on them.
July 6, 2008 5:59 PM | Reply | Permalink
JonF311,
The point is that the government will be guaranteeing the new loans, so they will not take a huge loss, the government will.
July 6, 2008 7:18 PM | Reply | Permalink
DB,
Please explain to me what will happen if the borrower defaults on the second loan.
Are you saying the USG will continue making payments to the private lender?
Who will own the property after foreclosure?
Does the USG guarantee a certain sale price at or after foreclosure? Is that price equal to the amount of the loan?
If the loan itself is "guaranteed" by the USG, why would the bak foreclose in the first place?
July 6, 2008 8:47 PM | Reply | Permalink
The deal is that the government will guarantee a new loan that is issued at roughly 90 percent of the current appraised price of the home. This gets the first lender off the hook -- they take a haircut, but obviously they wouldn't agree to this deal unless they thought it is better than carrying through with the foreclosure and throwing the people on the street.
If the homeowners again fall behind, then the holder of the new loan can go through with a foreclosure. Insofar as they recover less than the guaranteed amount, they run to the government and get the difference.
So, you get 35 percent of the homeowners in the program facing a second foreclosure and the government out some money in the process.
July 6, 2008 9:01 PM | Reply | Permalink
DB,
Thanks for your reply.
I am in the real estate business in San Diego.
What we are experiencing here with bank-owned foreclosures (REO) is the following.
The banks are putting these properties on the market at 10% below their current appraisals, thereby producing immediate interest from buyers. It is not unusual for these properties to attract multiple offers, some ABOVE the listing price and frequently ALL CASH offers.
Today, I personally showed a sophisticated client
of mine two 4-plex REOs. We both were astonished at the real economic value inherent in these properties at their offering price. These are income properties, so decisions are made by crunching numbers, no emotion, like that found in the purchase of owner-occupied single family residences.
We have no idea when the REOs will cease. But 40-50% of the transactions taking place here are in REO properties, an unheard of statistic.
My client is going to write an offer on one of these 4-plexes tomorrow...Wish me luck. =)
Your posts are the kind of stuff that TPM needs more of: real information about the real world.
Thanks,
FB
July 6, 2008 9:37 PM | Reply | Permalink
Nah.
You don't get gold stars for sniping and carping at easy targets, here, the rhetorical hypocrisy of Congressional enablers of our current financial system.
When Baker brings out the howitzers and levels them at the FRB's DSGE models (dynamic stochastic general equilibrium), then, he'll be worthy of praise. Till then, he remains a dogsbody running errands for tired old, dead, and soon-to-be dead economists.
Note: The question is what economic policy should be adopted, now. Whether in the past one successfully identified a "bubble" has no bearing upon his or her qualifications to design a post-bubble response.
July 7, 2008 9:03 PM | Reply | Permalink
I wonder what the folks who support this bill will tell those 140,000 families? Dean Baker
We couldn't have done it (repairing the balance sheets of our financial institutions) without you. Thanks for taking one for the team.
July 7, 2008 9:00 AM | Reply | Permalink
We should be telling these people what we should be telling the entire country: stop listening to the lies and myths about "home equity."
July 7, 2008 2:55 PM | Reply | Permalink
It occurs to me that the government is mostly in the business of handing out money (the IRS side is responsible for collecting it).
So, the worst loans get palmed off on the government. I see the government NOT foreclosing at all, instead allowing people to live in their homes for a nominal fee, based on a sliding scale.
There is no political benefit for the government to foreclose on the homes, only political damage.
People whose loans get palmed off on the goverment could get their houses for close to free.
July 7, 2008 10:33 PM | Reply | Permalink
I would love to believe this fantasy that you write about? Banks want to desperately repair their image. They do not want to continue to be seen as a villain not continue to torture themselves or the people they choose to finance. They do not like, need or want to foreclose anyone. They don't want to pick and choose, they just want to make a deal that makes good dollars and sense. They just want to go back to just making loans and making money. Not continue to lose money. They are in the loan business not foreclosure or property mgmnt. This is a win win scenario for both the Lender and the owner. Everyone wants closure not a temporary fix.
July 8, 2008 1:06 AM | Reply | Permalink
To FB in San Diego,
SAN DIEGO PRICES ARE STILL WAY OVERPRICED.
We have all heard about "sophisticated" buyers for a long time now. The "sophisticated" were your clients back in the hey day of the housing boom. Many of whom have gone upside down on their morgage and now want responsible people to bail them out for their "sophisticated stupidity". Please spare us the continual lies you and other real estate clowns have been selling the public. You are not Donald Trump and your clients are not sophisticated. San Diego real estate is and will continue to drop like a rock. The client you mention who will be paying in cash is less "sophisticated" than the McDonalds manager who bought a $750,000.00 home back at the peak in 2005 with no money down. At least he can walk away and hand in the keys. He has no skin in the game. The poor "sophisticated fool" who may buy from you with cash will end up catching a falling dager and losing his "sophisticated shirt".
July 8, 2008 3:07 AM | Reply | Permalink
joe9876,
Why are you so angry at me personally?
And where were the lies I was telling?
Nowhere did I suggest you or anyone else run out and buy a single family residence today with the thought of it going up dramatically in value during the short to medium term.
I specifically was discussing income-producing investment properties, and indicated those buy/sell decisions are not made based on emotional wishful thinking, but rather on crunching numbers. How much rent does the building generate, what is the cost of the building, and so on.
I can tell from the emotional rant you call a "reply" that your life is ruled by knowledge-less emotion. Good for you.
The best I can say about your piece is that you are master at using trite phrases and a real tough guy when hiding behind the anonymity of TPM.
Best of luck to you.
July 8, 2008 10:15 PM | Reply | Permalink
Can we just stop with the spin in comments like:
"At their end of their struggling, they will end up out on the street... "
These people are not going to end up on the street, under bridges or anywhere else so bleak as the picture you paint.
Rather, they will reduce their monthly outgo for housing to a third of what it was, by renting one of the many available homes, probably on the same street. They may even end up renting the house they were buying, skipping the cost of a move. In many cases, they will enjoy free housing for the three to six months it will take for defualt and forclosure proceedings.
Whatever the case, these intellectually dishonest depictions of "families being forced into the street" are getting old.
July 8, 2008 12:02 PM | Reply | Permalink
Well Mr. Bernanke,
First of all your name suits you perfect.
Second of all. I'm angry not just at you but rather your entire industry which has so much dishonesty it's incomprehensible. That is a fact not just a trite phrase. Real estate agents, lenders, appraisers and yes the lying borrowers. In addition, the wall street guys selling the CDO's and the rating agencies with their false ratings. The stench is so bad it's reaching the heavens. Your industry has been so dishonest it's bringing down the entire US economy with it. However I will admit the US government and your predecessor Alan Greenspan are more to blame because they did nothing to regulate the SLEAZE. It was their job to stop it but they did absolutely nothing and one could argue they encouraged all this to save us from the previous stock bubble that popped. How pathetic.
The facts are on my side. You are the one who is emotional because it's too difficult for you to accept your own industry helped to destroy itself due to GREED. It's very hard for a man to admit he's wrong when his livelihood depends on it.
By the way, I am as tough as the next guy but not foolish enough to give out my personal information over the internet. I don't see you you listing all your personal information. If it's too hot in the kitchen maybe you should leave.
Good luck with your real estate career Ben.
July 9, 2008 2:52 AM | Reply | Permalink
joe9876,
My last name is my last name, not much I had to do with that....and again insulting me peronally for it is kind of hitting below the belt, I think.
Ok, now we can talk.
I have no quarrel with your 3rd paragraph at all. And I didn't think my little personal narrative of my next day at work was some sort of overall defense of the real estate industry in toto; it was merely a little "homey" touch in my usually quite impassionate, cold, comments on various issues.
I was in no way putting myself forth as the defender of the real estate, banking, mortgage or Wall Street industries. I don't think there were any words in my post that would indicate that.
Here's something that may set your blood boiling: In my youth I was, of all things, the Head of a Corporate Bond Trading Dept. at a Wall St. firm in NY.
I think if you would take the time to read my blog here at TPM or, better yet, browse my own blog at http://ProteanPerspectives.blogspot.com you would have a much different opinion of me.
Although you will not believe the following statements, I am not emotional about the real bubble popping at all, I think the industry and all its off-shoots contributed to the bubble, and NEVER EVER encouraged a client to do anything I would have not done myself. That behavior, by the way, did not make me the biggest-producer in my office, to say the least.
No, I don't publish my home address, nor my cell phone number, but at least I put my real name where my mouth is...you don't.
I also stand behind my analysis of the two investment properties I cited in my earlier reply.
As impossible as this may seem to you, there are a few honest people with personal integrity in real estate, banking, mortgages, and even Wall St.
Do they pay a price for that sometimes? Yes.
FB
July 9, 2008 8:41 PM | Reply | Permalink