Good questions on foreclosure prevention, just two years too late

Just a quick note - according to the Boston Globe's revised style guide, I believe the correct labeling for Dodd is now supposed to be: Senator Christopher Dodd (D-Countrywide).

Thanks.

as I have said countless times before, there is no way in the world to make a trillion dollars of bad loans into good ones. Someone has to take the hit, either the "homeoweners" or the banks. The bottom line though is the taxpayers and bank shareholders are being punished as a consequence of horrendous decisions by government and the banking industry to put every idiot you can find into a house...

The $50 billion “rescue” is more empty talk from Washington about a supposed problem that can not be fixed by government. Just like all the other pathetic attempts to prop up house prices, this measure will fail miserably.

Why do I say this? Let's look at some rough numbers... The value of the US Housing stock at peak was around $50 trillion. The decrease in value so far has been roughly 30% of this amount or $15 trillion. The proposed rescue is $50 billion, which expressed differently is $.05 trillion. Compare the two numbers: $.05 and $15 trillion. The rescue equals a whopping 0.3% of the total value that has been lost date. A mere drop in the bucket.

Or let's look at it another way... Home prices are still falling at 10-20% a year by most estimates. Let's pick a number in the middle: 15%. At this rate, approximately $430 billion (.15 * 35 trillion value of current housing stock) is being lost every month, which works out to around $14 billion per day. In other words, the entire $50 billion rescue will be wiped out by 3-4 days worth of declines in the current market. Seriously, does anybody really think this program will make any difference?

Falling prices are the solution, not the problem. I sincerely hope our politicians realize this.

Its been a while since I mentioned King Canute. But perhaps there's nothing that can be done about the foreclosure rate? The govt can't afford to buy all the houses - govt money doesn't come from magic, it comes from us.

Govt can't legislate a soft landing if you jump off a cliff. Gravity, and many other things, are not subject to the legislature, politician hubris aside.

Lance,
The only thing missing from your analysis is that 25-40% of the total costs of the rescue plan will go towards General and Administrative Costs (as is typical of US Govt programs). So, we're really looking at $30-38 billion used to fund the actual rescue.

Lance,
One factor you didn't take into account is that it's a small percentage of homes that are in foreclosure. The $50 billion is negligible in the context of the total US real estate market, but (in theory) it's not supposed to buoy the market, it's supposed to help "homeowners" stay in their homes. In the context of the total amount of underwater/near foreclosure properties, $50 billion might help a little. (I'm not sure whether keeping underwater, foreclosed "homeowners" in their homes is a sensible policy goal, but that's not what matters at this point.)

Scott,
Lots of juicy numbers in this post, thanks! Any chance you could link to sources (so we can go pick numbers apart ourselves)? Also, I think a post with a bunch of reference-point numbers would be really useful for understanding the current market. Like, population of MA, number of homes in MA, number of homes sold in MA in each of the last few years, number of underwater mortgages, number of foreclosures, number of foreclosure sales, number of mortgages renegotiated/helped out by various programs, which banks are foreclosing/sitting on properties, etc. 40 mortgages sounds like a tiny number, but if that means 40 would-be foreclosures didn't reach the market, is that a big number or a small number?

Scott - Seems that you are not tuned into what is really happening .
"At this point, many of those homeowners have already lost everything." Most of these "homeowners" had nothing to lose in the first place. 0% downpayments. 110% mortages . You can't lose what you don't have. Even if these loans were modified they would probably default in the future.
They should take the 50 billion dollars and prosecute the loan originators and appraisers that caused this problem.

"July 20 (Bloomberg) -- U.S. taxpayers may be on the hook for as much as $23.7 trillion to bail out financial companies, according to Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

Barofsky made the estimate in testimony prepared for a congressional hearing tomorrow."

That kind of money could sure pay alot of mortgages. Of course, there is no free lunch, so it will just create a whole other set of problems, problems which will dwarf the current crisis.

James, you are correct. Much of the losses generated by the market collapse will be absorbed by homeowners and will not result in foreclosure. My numbers were obviously very rough figures intended only to show the scale of the "problem" in relation to the "solution". You can (and probably should) whittle the numbers down a lot. For example, the banking industry has forecast bad loans will result in around $1-3 trillion of losses so let's use these (much smaller) numbers instead... A $50 billion rescue will offset approximately 2-5% of these losses. The conclusion is the same: this bailout is like throwing a cup of cold water on a burning house... It's not going to put out the fire. Not even close.

i think that one factor has been left out of the discussion -- the banks simply make out better financially if they let a house go to foreclosure NOW, rather than modify a loan to a lower interest rate, and let it go to foreclosure a year from now, when it may be worth even less.

in trying to decide whether to sell our house to downsize (so we can save for college -- our house is no longer an equity solution), i sat with my husband and explained our amortization over the next year or so (he wants to "ride out the market"). we will only have paid $5000 towards principal over the next year, and over $20K in interest -- why would a bank want to modify my loan? to "help me"? get real -- the idea that we could help out homeowners, even ones who are not in danger of foreclosure but who have lost equity is nice, but there needs to be some financial nicentive for the banks.... after all, are they not about the MONEY????

I'm simply amazed there are still people who want to "ride out the market". Frighteningly, they are probably still the majority.

Repeat after me - a bubble is not normal. A bubble is not normal. A return to normal means much lower prices. Permanently.

charles, tell me about it. i have been wanting to move for over a decade out of this town, and there is always one reason or another. i need his signature on the papers, right?

"riding out the market" rates up there with the worst of the worst as a reason. but then again, he does not read and does not appreciate the magnitude of the problem. i wonder how many couples/families are out there who are riding it out based on, not a shared decision, but a divided one.

interesting point