Was Last Week’s Housing-Market Crash Worse Than You Think? — New York Magazine — This is a long article worth reading if you like to track financial change. Could things be as bad as this article says?
This spring, as many homeowners stopped paying, the mortgage bonds—for the first time—starting losing value. Hundreds of billions in bonds that were thought to be worth more or less the price they were sold at, it turns out, are worthless. That’s triggered a chain reaction: Brokers like JPMorgan, Goldman Sachs, and Merrill Lynch that lent money to the firms that bought the bogus loans—most famously, Bear Stearns—basically foreclosed on those firms to get their cash back. But the firms, which are always running full tilt, didn’t have the money to pay up. Bear, at the direction of the now-fired former co-president Warren Spector, let one fund just go down the drain. But Spector thought the other was still worth a great deal, so he put up $1.3 billion to pay back what the fund owed to the lenders and take direct control of the mortgage bonds. Spector, maybe one of the best minds in the bond business, genuinely believed that these mortgage-backed bonds still had substantial value. If someone as savvy as Spector thought these bonds were still good when they were actually worthless, that tells you that thousands of other managers are simply dreaming if they think their portfolios are worth anything near what they claim they’re worth. In other words, we’re looking at the start, not the end, of the lending meltdown.
found by John Ligums
I can tell you this much. This guy sure thinks so. If you have not seen the Jim Cramer meltdown, have a peek.
Fed Honcho and Hank Kingsley lookalike Ben Bernanke was formerly GW Bush’s top economic advisor.
Hey Now!
#32 “Just imagine how bad it would be if we didn’t have the first MBA for president.”
That’s a positive thought but maybe that is the problem – all sermon but no substance.
A new spin…
Those who can do, those who can’t…go to graduate school and get a MBA! 😉
Bush never had a successful business in his life. But don’t worry he take care of everything because he believes “The fuck starts here”
Cheers
#33, Scott
Thus why I have a 15 year fixed that I can actually afford. Amazing concept.
Great idea. Now what happens if tomorrow you have a stroke. First, you rack up $50,000 in medical bills. You have good insurance, they pay 80%. Do you have $10,000 you can use to pay off your portion? So you’re out of work for six months, how much will your disability pay, 75%? For how long, a year? When you return to work you can’t do the same as you did before so either they get rid of you or put you in a lower paying job.
So, can you actually afford that mortgage now?
What happens when your company gets bought up and your position becomes redundant? Or you get a new manager that replaces you with a college kid? Or your industry / business makes a sudden downturn in the economy (typewriter repairmen)?
What if your spouse battles until she succumbs to cancer? You have three kids too. Your wife’s income accounted for 40% of household income.
My point is the vast majority of people having financial difficulties paying their bills got in over their head because of some unforeseen tragedy. I pray to the Flying Spaghetti Monster (Ramen) that tragedy never strikes you or your family, but it could.
This whole thing about the sub prime mortgages is just a smokescreen piece of bullshit. Sub prime failures are a very small part of the trouble. The greater problem is those who want the government to bail out the industry while doing nothing to help those with crippling debt loads from unforeseen tragedy.
35 So you’re out of work for six months, how much will your disability pay, 75%? For how long, a year?
Undercuts your credibility to use 75% as a “fear factor”.
That 75% isn’t taxable, so your actual “take home” pay is about the same as if you were getting 100% of your normal pay – because there is no income tax, or payroll taxes, deducted from it.
35 My point is the vast majority of people having financial difficulties paying their bills got in over their head because of some unforeseen tragedy.
Possibly, but how many of the “vast majority” were chin-deep in debt before the tragedy struck?
And this line from the article gives me the creeps:
You are getting poorer by the second because many of these mortgage bonds were priced way too high because nobody thought that large numbers of borrowers would ever walk away from their homes rather than pay the interest that backed the bonds.
They were confident the borrowers would be “trapped” or “locked in” and do whatever it took to keep paying the interest.
The safety net [for investors] was for the borrower to re-fi, or sell… except, of course, they can’t do either in this market. 🙁
Mr. Fusion #35
You’re 100% correct the US has an insanely expensive medical system that can destroy almost anyone. But that’s been a problem for several years at least.
So far, the Fed is not bailing out big banks, but rather avoiding a credit crunch by providing liquidity to creditworthy borrowers. A credit crunch is a real disaster, because people become too frightened to take risks for reasonable returns. A credit crunch can cause the economy to seize up and the innocent go down with the guilty.
The sub-prime problem is real to the extent that investors expected the investment grade paper to actually be that. The margins in that business are very thin for failure. As one of my commercial real estate banker friends said, he has to make 64 good loans for each one that goes bad on him (1.6%). You don’t need a big hiccup in defaults before you have a real problem.
Mr. Fusion #35
Here’s another for you, taxes as a percentage of income since the 1970s has gone up 140% by 2000, while income only increased only by 75%. It was in today’s WSJ based on a Harvard Law School Professor’s study.
Seems to me that CNBC wanted to make sure they called the shot on a down market and really didn’t do any reporting. Media outlets always get in a rush to report bad news in almost a perverse way because they think ratings first not accuracy. Kind of like bloggers in a way. I think it contributes to panic thinking and people react willy nilly and then we have a fake crisis for a few days then back to business as usual. This smells like that scenario to me…Though I do which the Fed would drop rates a wee bit.
Oh forgot to include NYT in that as well…must sell newspapers….
My personal theory: the final straw was energy prices.
I suspect that a large percentage of those who used ARMs to purchase their home live paycheck-to-paycheck. (Why gamble on an ARM unless you were trying to qualify for that bigger home?) If that is the case, then what happens when your monthly heating, electric, and fuel bills jump from $400 to $800? That extra $100/week has to come from somewhere, so you either cut back on your lifestyle — if you can –or you pull out the credit cards.
At $400/month, how long does it take to max out a credit card? Who cares, just transfer the balance to another card. Now you have two cards to keep you afloat. Repeat as needed.
But sooner or later reality bites and the house of cards comes crumbling down.
Now granted, there are a lot of other expenses, such as medical, that can cause a foreclosure. But those factors are part of the statistical background that financial institutions deal with every day. But they don’t factor in the impact to a borrower if energy prices double in three years.
Energy is not an optional expense for most homeowners. That cost must be absorbed into the family budget, and if there is no fat to trim . . .
#38, Rob,
A disingenuous number. Although it would have been nice to have a cite, the numbers you list don’t work.
Since when do Harvard Law Professors do Economic studies?
Now, if you were referring to this article,
http://tinyurl.com/272xrg
Your numbers are all out of context. Second, the author is a professor at George Mason University.
#36, Mike,
Undercuts your credibility to use 75% as a “fear factor”.
The amount is taxable. Whether it is taxed at source or later doesn’t matter because some tax agent will knock on your door sooner or later. It is looked at as income.
This isn’t a “fear factor”. It is a point that most people do not have the cushion to deal with a medical emergency. You might think you are in fine shape, but how big of an emergency can you handle?
#43 The amount is taxable
I guess I should have Googled it -first- 🙂
Seems the answer from the IRS is: “It depends”…
http://www.irs.gov/faqs/faq4-9.html
It appears the only way it is non-taxable is if you pay the premiums yourself.
“If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return.”
But otherwise, you have to start figuring-out how much your employer contributed.
“If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employer’s payments is reported as income.”
What a bunch of crap.
Remind me to vote for simplifying the tax rules.
Attempting to find documentation to support an arguement about the increase in real house prices over the last 60 years I’ve run into some stubling blocks.
Hilarious ones IMHO
Statistics available from US census bureau are hilarious as the top income bracket for the 2002 census is “over $100,000”
The best information I can find on housing prices circa 1955 is a harvard study that claims the average metropolitan house cost $59,575 LOL as if.
I give up the interweb has gone to shit since it became available to the masses. I long for the good old days when it was Gov’t use only.
I’m off to the University to use the fiche.
#44, Mike,
What a bunch of crap.
That is worth repeating.
What a bunch of crap.
To be honest, I thought all of it would be taxable. I’m glad you checked it out.
#45, nightstar,
The problem with this kind of research is things have changed so much in the past 60 years. Houses were usually 1,000 ft or smaller. There was one bathroom and a bedroom for the parents. The kids shared bedrooms. Yards were usually smaller. There would have been less insulation and the pipes often used lead solder.
Today, houses are larger with most over 2,000 ft. There will be 2 ½ baths and often four or five bedrooms. A separate dining room is standard too. A basement will be furnished. Yards are larger and fenced. There will not always be a sidewalk and schools, shopping, and downtown are further away.
So comparing the two is very difficult.
42 Mr. Fusion,
I said clearly that I pulled it from today’s WSJ and the author’s source was from that Law Professor:
“The argument is developed in the book, “The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke,” by Harvard Law School Professor Elizabeth Warren and her daughter Amelia Tyagi. In fact, using their own numbers, it is evident that they have overlooked the most important contributor to the purported household budget crunch — taxes.
My statements were correct: A WSJ article based on the research from that Law Professor. Please read what I post carefully.
I wasn’t passing judgment on either the research or the WSJ’s author’s interpretation. The key point here is that beyond risk, taxes are an important factor in overall disposable income declines, the money that could be used by people to purchase additional hedges against the risks (such as health insurance) you discuss .
So, not only do we have more risk in our lives (the point you make), but that the government appears to be taking a larger portion of our income (to fight stupid wars and pay debt service) that could be used to offset that risk.
I know people who gambled on the “dream home” with the ARM and lost.
I’ve had many people ask me why we bought a small home, made comments how we should have gotten a bigger one. Now, the problem with that is the bigger homes have bigger payments.
I’m proud to have a mortgage lower than $1000 per month! Oh, and at a fixed rate!
No, I don’t have the McMansion, but I do have a home that I can afford, even on one salary.
Renting is just paying someone elses mortgage. Been there, done that, don’t have any intentions of going back.
46 Mr. Fusion & 44 Mike Voice. You guys need to understand how taxes work.
The employer pays for the LTD premium, but you don’t count it as income or pay any tax on it, then when as a result of the claim you get income, that is taxable. It’s not crap. If you don’t pay tax on the premium nor on the income, when was tax paid on the $$$ you got? It’s just like the difference between IRA and a Roth IRA. You either use after tax dollars for the premium or you pay taxes on the benefit. Otherwise, it’s just a big tax dodge.
# 48, Rob,
Please read what I post carefully.
You didn’t give a cite. You used numbers someone got from a book. It is impossible for us to challenge the original numbers simply because we have no idea, unless we own a copy of the book, the context or origin of those numbers.
We also do not know if the book is humorous, tongue in cheek, well researched, peer reviewed, a scholarly tomb, consumer orientated, or what. Just tossing out names is disingenuous and self serving. No where in the WSJ did the article suggest the book was a “study”.
Then you yourself were wrong using the numbers as presented. You didn’t point out that the numbers have been adjusted for inflation or that the family has gone from a single to two income family. It is a well known fact that income tax increases to higher percentages the more you earn. You presented your “facts” as solely income tax has risen 140% while wages have increased only 75% since the 1970s.
#50, Rob,
It is insurance. The same as when I am hospitalized. The same as when my house burns. The same as when I crash my car. If, for whatever reason, I am incapacitated and can not work, someone steps up to pay the bills for me. How is that any different then someone paying the surgeon for my hemorrhoid operation.
Just because they do consider it income does not make it right.
Before you suggest we need to know how taxes work, I suggest you have your head examined. There are maybe a dozen people in this country that understand the entire Federal Tax Code. That means over 300 million who do not.
Last, premiums aren’t a tax deduction the last time I checked. Maybe you could tell me the line item this appears under.
Mr. Fusion
“There are maybe a dozen people in this country that understand the entire Federal Tax Code. That means over 300 million who do not.”
Then perhaps there is a lot to be said for flat tax – a bottom line that is final and cannot be reduced. For those in higher brackets who manage to not pay tax (but are able to) by clever manipulation of the tax laws now pays and those who are not so financial but have pick up the slack from those who didn’t pay have their tax reduced.
I know Australia toyed with this idea for quite a while – and then with sales tax – which they did do. The problem is can the government be trusted? No it seems. Australia abandoned sales tax in favour of GST at first this seemed to work BUT in the end everyone paid more.
It all boils down to the fact that governments are no different than big business mentality. Screw those who have money.
Cheers
#51
My points from the WSJ article are clear, the reasons for the growth of taxes relative to income are unimportant to my point. Whether the data are good or not, the data are what they are. I doubt the information was a joke. Government takings are increasing for families faster than incomes is the point of the article. Do you believe that they’re less? Is your view that the government is spending less than 30 years ago and, if not, how do you think they got the extra dough, they didn’t borrow all of it.
You paid property insurance with money you earned and paid tax on already. It also is different because it usually replacing something you already bought with after-tax income.
If you paid your own LTD insurance, it would be treated the same as property insurance, but probably is more similar to IRAs and Roth IRAs than property insurance, perhaps, which is why I made the comparison. Anything of benefit, like insurance, paid on your behalf by an employer who doesn’t treat that payment as income to you, is simply deferring the tax bill, no matter how simple or difficult the system is. The government gets its money. If the government didn’t handle it this way, it would be a huge tax loophole.
.
Yes, the US tax code is terrible. What else is new? So, your point is because I make some effort to understand a small bit of it, I have a problem? Or that anyone who wants to try to understand it should have his head examined?
#52 I lived for 14 years in a flat tax country. It is much easier. A big difference is that the US uses its tax system for social engineering, social justice, economic development, corp subsidies, etc. Nothing was deductible under a flat tax, not even mortgage interest. So, I’m not sure we can ever get to a flat tax, because so many major economic decisions in the US have been taxed-based, it would be very hard to unwind that without a lot of unintended consequences.