Bank Bailout and Stimulus News Roundup
Jillayne Schlicke on 02 11, 2009
Bloomberg is reporting that the $15,000 tax credit has been mostly dropped from the stimulus bill. Hat tip CR:
“Asked what a proposed $15,000 tax credit for homebuyers looks like in the compromise plan, Baucus laughed and said, “not much.” He said that proposal has largely been dropped, though he didn’t provide details.”
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CR (Calculated Risk) provides us with a summary of Martin Wolf’s interview on the Financial Times: The New Tarp Plan Will Fail:
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency. Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value … The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. …Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities.
…
Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalized financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. …Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalization; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing.
…
The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. …By asking the wrong question, Mr Obama is taking a huge gamble. … He needs to rethink, if it is not already too late.
Dr. Paul Krugman explains why bank nationalization is as American as Apple Pie
“And the argument that our culture won’t stand for nationalization — well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out. Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie.
Roubini, who has been eerily accurate with his predictions says, It’s Time to Nationalize the Insolvent Banking Systems:
A year ago I predicted that losses by US financial institutions would be at least $1 trillion and possibly as high as $2 trillion. At that time the consensus such estimates as being grossly exaggerated as the naïve optimists had in mind about $200 billion of expected subprime mortgage losses. But, as I pointed out then, losses would rapidly mount well beyond subprime mortgages as the US and global economy would spin into a most severe financial crisis and an ugly recession. I then argued that we would then see rising losses on subprime, near prime and prime mortgages; commercial real estate; credit cards, auto loans, student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and massive losses on all of the assets (CDOs, CLOs, ABS, and the entire alphabet of credit derivatives) that had securitized such loans. By now writedowns by US banks have already passed the $1 trillion mark (my floor estimate of losses) and now institutions such as the IMF and Goldman Sachs predict losses of over $2 trillion (close to my original expected ceiling for such losses).
But if you think that $2 trillion is already huge, our latest estimates RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be at their peak about $3.6 trillion. The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to brink back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector. So these figures suggests that the US banking system is effectively insolvent in the aggregate;
It looks like the current administration will chose to do everything but nationalize the banks, until that’s the only choice left. The unfortunate consequence is that this means it will take just that much longer to hit bottom. I’m also experiencing an interesting trend. Of course I know just one person doesn’t make a trend but it’s still interesting. I’ve recently talked with several people online, over the phone, and in person who have real estate that they would like to sell for various reasons, but they are in a negative equity position. Further, these folks actually HAVE money to make up the short fall should they choose to try and sell short. In all cases these folks are curious about a loan modification. For example, maybe they could ask their lender for a reduced payment so that they could put a renter in their home and move out and live elsewhere…sometimes even buying a bigger, nicer home. Traditionally, loan modifications were only offered to people with true financial hardships, meaning, near foreclosure and no cash and other assets. This has me wondering what loan servicing will be like when banks are nationalized and pondering how many people will decide to trash their high credit score and let the bank foreclose. I am willing to guess that when nationalized, the banks are not going to be too terribly hard on consumers with low credit scores. Maybe they won’t be able to qualify for a mortgage but perhaps the nationalized banks will give them a credit card or an auto loan.
About the Author: Jillayne Schlicke
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15 Responses to “Bank Bailout and Stimulus News Roundup”
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“For example, maybe they could ask their lender for a reduced payment so that they could put a renter in their home and move out and live elsewhere…sometimes even buying a bigger, nicer home.”
If that ever comes to pass it will be pitchfork and torch time without a doubt.
During the bubble run-up, people who wanted to move on for whatever reason could just sell.
With negative equity, the homeowner is stuck. I sense that they’re ranking their choices by what would net them the most available cash….NOW v. possible future consequences.
One of the choices available to some people (in the past) is to put a renter in their home and move forward.
No so fast this time around because rents are nowhere near covering the payment.
Of course there are always exceptions to the rent problem. Some folks purchased before the bubble run up and didn’t serial refi. For these homeowners, rents might be near breakeven.
I’d like to see another report from Christopher Cagan at Firstam Core Logic about the number of homeowners with negative equity.
principal reductions should only occur in the most extreme cases and most certainly not so people can afford to put a renter in “their” home. There are winners and losers when it comes to investments.
I think if principal reductions occur, the bank should have a recorded second mortgage similar to state bond where no payments are due but when the home is sold or refinanced (after it receives this new lower mortgage) that balance is due. The second could have no payments due for x many months with little to no interest.
To forgive balances to me, would encourage many Americans to say “screw this! We want a reduced mortgage too!” Especially those who are upside down but still can make the mortgage payments w/out trouble.
Current bill extends $7500 tax credit, first time HBers only.
The Bloomberg article in the link says it was changed from $15,000 to $8,000.
“A proposed $15,000 tax credit for homebuyers was reduced to $8,000, Baucus said. ”
I’m going to wait until something is signed at this point. I’m hugely disappointed…I can’t even begin to describe how hugely disappointed I am in this change. But let’s see what it is actually changed to, before we talk about the effect it will have. That means, let’s wait until something is signed.
And the WSJ reports:
“Home buyers who hoped for a $15,000 tax credit to buy a new home, as promised by the Senate, will be disappointed. A $35 billion tax credit to support home sales was jettisoned in favor of a more modest $2 billion to $3 billion proposal, which would eliminate the repayment requirement in an existing $7,500 tax credit for first-time home buyers.”
http://wsj.com/article/SB123436825805373367.html
(subscription not required)
I guess (most) people will have to save more, and buy a place they can actually afford without government assistance.
WSJ says $7500-
http://online.wsj.com/article/SB123438908135874509.html
In case you don’t have WSJ access, here’s the section:
“Democratic negotiators have also jettisoned a proposal from Georgia Republican Sen. Johnny Isakson that would have provided a $15,000 tax credit to consumers who purchase a principal residence before the end of 2009. The plan was strongly supported by the National Association of Home Builders and many Republicans.
But after Mr. Isakson and most Senate Republicans voted against the overall stimulus package Tuesday, Democrats stripped it from the final legislation. Instead, they extended an existing $7,500 tax credit for first-time homebuyers though the end of the year. The change cuts the cost of the home-buyer proposal to less than $3 billion over 10 years from more than 10 times that amount.”
Since the Senate first proposed the $15,000 credit, I have urged realtors and buyers alike to wait and see what develops. Other folks were already acting like the $15,000 credit was a done deal and went so far to suggest that buyers delay escrow until the credit came through. I told these folks that the House and Senate had to agree on the final form of the bill. And that nothing was certain and everything was subject to change. I also tried to point out potential difficulties with extending close – the sellers needed to agree, buyer rate lock committments could expire but my concerns were dismissed. I know many realtors want the $15,000 credit to help spur the real estate market but honestly, I am not sure the $15,000 credit if passed would be the best thing for our nation. I get the sense the folks in Washington DC are running around like chickens with their heads cut off – they have NO IDEA of what needs to be done – other than spend money and mortgage our children’s future. I think they need to slow down and take a breath. I also think the Realtor community needs to step back and wait for regulations to be passed before acting like it is a done deal and raising expectations among consumers for something that may not happen.
gene said: “I guess (most) people will have to save more,”
The credit issue has nothing to do with saving more. The credit could not/can not, be used at time of purchase. People would still need the same amount of money to buy with or without the credit.
Arn, well said all around.
Ardell, the credit was still a subsidy to the purchase and could be used to help with say renovating a fixer. But you make a good point – it could not be used at the time of purchase, “people would still need the same amount of money,” — which begs the question of how much real value the credit would provide to anyone in the housing industry aside from as a marketing item for realtors…
From Prof Krugman: The “Talk Like a Pirate” Bill
“Am I wrong in believing that the final name of the stimulus bill will be the American Recovery and Reinvestment Reconciliation Act, or ARRRA? Arrr!”
[...] Jillayne Schlicke wrote a interesting article about the latest developments with the stimulus packag… She quoted Nouriel Roubini, an economics professor from NYU who happened to predict the economic decline pretty accurately. Last year at Inman News’ Real Estate Connect, Dr Roubini spoke very clearly about what has come to pass. At the time, most of the audience was shocked by his thoughts. There’s no doubt he was ahead of the pack with his predictions. My money is on what he has to say. [...]
Jillayne,
Arrra! That’s hilarious – thank you for posting that URL – I needed a laugh! (And good post overall.)
Gene
Thanks, Gene.
Dr. Krugman had another good one yesterday. Let me go find it. Here it is:
“I was going to dub the new financial plan TANF 2 — temporary assistance to needy financial institutions, without, you know, any of the means-testing or work requirements involved when poor people get help.
But Jamie Galbraith (private communication) has trumped me; he says it’s the Bad Assets Relief Fund.”
BARF
http://krugman.blogs.nytimes.com/2009/02/10/acronyms/