A lot of other investors are failing due the CW.  There is a ripple effect -- I have problems with the bailout option -- but will keep an open mind.  It seems those who created the problem and took huge profits (per what I have read in the Wall Street Journal) should be the ones using those profits to bail others out of the mess.

Now, wait a minute:  when you're right, you're right.  The more we "bail out" the folks who have acted unwisely, whether they be investors, brokers, or borrowers, the more we will encourage their risky behavior that led to this problem.  I am not saying we should punish anyone.  I am saying that we should allow the market to reward prudent behavior and not allow the government to reward risky behavior.

Joan -- That was the way I felt too but with American Home and First Mangus both failing and talking to some folks who are trying to refi out of the Pay Option Arm I have changed my position.  These folks need help.  Aloha 

Hi Jefferson -- I agree in principal BUT just like we cannot afford to have CW fail, we cannot allow all of those folks who bought on the Pay Option Arm to lose their homes.  It will tank the entire real estate market nation wide.  I just don't think it is prudent.  Aloha

Surely the best way forward is to assist those "home owners" who are in genuine hardship with some form of bail out to allow them to keep their homes and ease the dire foreclosure problems we are seeing. Couple this with tighter regulation and maybe investigation of some of the loans that may have been mis-sold by some of the more unsrupulous loan brokers. Why aren't lenders licensed and more strictly controlled?

The consequence of a bailout would be to keep housing fundamentals out of equilibrium. The natural consequence of this would be very slow sales volumes and long term lack of appreciation. For every action there is a reaction.

It is much better to get things back in balance and move forward from there. It is smarter to help those who have lost their homes to more easily buy again (special Fannie/Freddie programs for foreclosure victims, rental assistance, etc) than help those who might lose their homes because of the decisions they made. This way there is no moral hazard created, everyone lives with their decision, and the market returns to equilibrium quickly and starts helping the economy instead of hurting it.

So pick your poison, long and slow or short and quick.

Back in the late 70's we would would look for the buyer that could come to closing with suitcases of cash. ALAS, can't do that anymore. Now the suitcases are full of plastic.

Hi Graham -- I am sure that there are and were plenty of loan officers to blame BUT Wall street created this monster by allowing and encouraging lenders to do these deals.  TRhey then sold them as CMO's and CDO's.  Boy there is plenty of blame to go around. Aloha

Hi Mikey -- I am not sure I understand your position.  If we let all of the defaults to occur it will bring the market back quicker?  Why would that be so?  Aloha

David -- Out here we did a ton of VA and FHA loans.  Aloha

Bruce,

Yes, homeowners in trouble cant price at market price, they have no equity so they cant rectify their mistake. If homeowners give the house back to the lender, the lender prices according to market price and takes the loss, the homeowner gets a credit ding but the faster they deal with the issue the faster they can get back onto their feet (and I support gov't programs to get them back faster). In this scenario market equilibrium is achieved quicker, prices more quickly adjust to the level that incomes, interest rates, and lending standards dictate therefore sales volumes reach equilibrium.

Its either a long slow drag or a fast painful one.

I am with you Bruce the move by the Feds Friday may have been a bandaid but it may be enough to get CW back into action and keep the doors open.  I am not sure it will cure all the other issues we face.  I think you will see within 3 months a cut in prime as well to help fuel housing again.  I know they have their focuc on inflation but if house keeps pulling the economy down a recession is a very real issue.  Nice post Bruce even if you had to CROW or was that eat CROW?  Have a great day :-)

rethink your rethinking, a bailout is a mistake.

without being cruel. many buyers with 2/28's, stated, and other sub loans were more than happy to overstate their income, asked loan officers to help and/or show them how to get into a home regardless of what they had to do (sad but true). others who were told that they had a couple of years to correct their credit made no effort to do so (once again sad but true).

did anyone really believe you could get a 1% mortgage, no stings attached? 

my favorite, drum roll please;

those that can not afford their payments or sell their properties because the market took their equity and they are under water. Upon further review that new BMW in the driveway, that boat at the dock, and whatever else they spent the money from the equity line on took their equity.

that does not mean that there's not some people out there who have problems for legitimate reasons, but i know that you're not new at this, and that will always be the case.

unless crow is a delicacy on the island feel free to order something else.    

I'm with you on this one. Bail out the owner occupied that fit conforming criteria only. While we are at  it, audit the lenders and indict the ones who used egregious liars loans.

Mikey -- i understand what you are saying now but would we not be better off AND maintrain equalibrium by providing some sort of hybred FHA program that would allow these folks to refinance their homes.  It seems to me that foreclosure or short selling hurts all parties and will artifically hurt the whole real estate markket.  I was talking to a friend of miine this AM from San Antonio TX and he says that their are entire subdivisions of 300 to 500 homes that were sold on Pay Option Arms.  Surely letting a subdivision go is not good for any one.  Aloha

Gary -- Yes I too hope that CW makes it and now they have a fighting chance.  Aloha

Jay--I love your post and 99.9% of the time I ma slightly right of Attila the Hun.  I think that the fall of AHM and on Friday First Mangus and the potentrial fall of CW has really gotten to me.  I have a bunch of friends wtih these companies.  I am just believe that it will do no good for our industry to let these folks go belly up.  See above.  I am all for investigaging and charging and jailing and one who perpatrated a fraud, buyer, seller, realtor or loan officer. Aloha

Jim -- Amen Brother, I'm with you on this one.  Aloha

Bruce - I about fell off my chair when I read your e-mail and I hurried to read your blog post.  I took Friday and Saturday off to visit the coast and walk on the beach.  Didn't read a newspaper or watch any American news.  It was great.

Boy the feds are scared, as we all should be.  I agree with you 100% Bruce.

Jefferson:  the government rewards risky and irresponsible corporate behavior all the time at the expense of the consumer.  In fact, this dilema would not have happened except for "risky" corporate behavior.   To say that consumers should bear the weight of this corporate irresponsibility is wrong.  The consumer should have known better?  No - the educated executives who allowed these products to come to market should have known better.  Wall Street should have known better.  Government over-site should have been in place to prevent this from happening.  If these measures had been in place we would have had the normal 6-7 year real estate cycle followed by a year or two of market softness. 

Mikey:  In today's world, a "ding" of this type on your credit is a death knoll that will be nearly impossible to recover from.  There are huge anti-consumer dynamics present in the marketplace that need to be corrected.  Corporate America was allowed to take the market out of equilibrium by offering these products.  Now we say - oh consumers I'm sorry you have to pay the price for the fact that we didn't have measures in place keep things in line and protect you?  I can't agree with that point of view.  This is not the consumers fault.

I am not in favor of a complete bailout of all consumers.  I'm simply arguing that there has to be a safety net in place to soften the blow.  The net won't catch everyone, but if it's implemented quickly enough and thoughtfully enough, it will catch enough to put the market back into equilibrium quickly.

This is not just an American market issue, it's become a global market issue.  As I write this I realize that for this reason alone, the government will intervene.  Failing to take care of our own is one thing, but we don't have the right to pull down the rest of the world because of our corporate greed.  Other governments will demand that we do something.

I'll help you with that crow, because I'm pretty sure I commented on your prior post with something to the effect of,"there's no way CW will go down".   I guess this was a prime example of wishful thinking.   I think that if the lenders will offer programs to convert the 2/28s and 3/27s to fixed without the borrower having to re-qualify for the loan, it will fend off a significant amount of foreclosures.    Hopefully, CW will hang on, but I think they might end up doing away with their retail network........maybe........kinda dangerous to make predictions lately. 

Hi Kate-- Glad you took the time to go walk on the beach and thanks again for your well thought out comments.  Aloha

Hi Seth -- These are very scary times.  I too hope that CW makes it.  I think with the Fed action and their drawing on their line, they have bought themselves about 30 days to work things out.  Aloha

Hi, Bruce.  I can't get to the place where I "get it", but respect the fact that you do!

Kate: "Mikey:  In today's world, a "ding" of this type on your credit is a death knoll that will be nearly impossible to recover from.  There are huge anti-consumer dynamics present in the marketplace that need to be corrected.  Corporate America was allowed to take the market out of equilibrium by offering these products.  Now we say - oh consumers I'm sorry you have to pay the price for the fact that we didn't have measures in place keep things in line and protect you?  I can't agree with that point of view.  This is not the consumers fault.

I am not in favor of a complete bailout of all consumers.  I'm simply arguing that there has to be a safety net in place to soften the blow.  The net won't catch everyone, but if it's implemented quickly enough and thoughtfully enough, it will catch enough to put the market back into equilibrium quickly."

You will notice in my comments that the gov't program I proposed would help people a foreclosure ding on their credit and therefore wouldnt be a "death knell" (dramatic much?). A consumer made their bed now they have to lie in it, the lenders made their bed, now they have to lie in it. What the gov't can do is help keep the market liquid and that softens the blow. That doesnt mean cheap money, that just means that a person going into the marketplace with reasonable capacity to pay can get money based on that capacity.

There is no simple easy fix, this is a MANY MANY year issue. All the "quick fix" ideas I have ever heard usually help out the person whose ideas it is, but have long term consequences for everyone else. Bailing out the homeowers and Lenders (you cant bailout one without bailing out the other) will just keep the market in disequilibrium for a very very long time. It is simple economics, basic Econ 101 day 1 supply & demand stuff. Prices will stay high (above fundamentals) we will have low demand and high supply. That is not a solution.

Bruce:"Mikey -- i understand what you are saying now but would we not be better off AND maintrain equalibrium by providing some sort of hybred FHA program that would allow these folks to refinance their homes.  It seems to me that foreclosure or short selling hurts all parties and will artifically hurt the whole real estate markket.  I was talking to a friend of miine this AM from San Antonio TX and he says that their are entire subdivisions of 300 to 500 homes that were sold on Pay Option Arms.  Surely letting a subdivision go is not good for any one.  Aloha"

But bailing out the subdivision would solve nothing, it sounds great, but if those people cannot fundamentally afford the homes without making a neg-am payment there isnt a gov't program in the world you could come up with to save them. It is an issue between the lender and the borrower, either the lender takes less on the loan or takes the house back. If you regulate the lender and tell them they have to change the terms of the loan, you think they will ever put money in the market again? The only solution is to keep the economy as strong as possible, the faster we get prices back to fundamental levels the quicker this whole thing resolves, there is simply no other answer.

Hi Laurie and Mikey-- I have to admit that Mikey makes a persuavie argument. I need to rethink this issue.  Damn this is really a fun intellectrual challenge.  Thanks all for the thought provoking comments.  Aloha

Mikey:  Your point is well taken.  Normally I would completely agree with you.  In this situation, I believe that the free market has spun so far out of control that there is no way for it to reach equilibrium on it's own.  Assuming that there are entire subdivisions of 500 homes that were financed with Option Arms, (I sure hope that is an exaggeration) how do you propose that communities absorb 500 homes on the market in less than a year?   Those 500 homes would have been sold over the course of several years at planned absorption rates, but certainly not all at one time.  Now in a slow economy those homes are to be absorbed quickly - it's not going to happen.

1 in 10 people in the United States are employed by the housing industry.  1 in 10.  Not all of those people are putting sticks in the air, but their income is derived by the building industry in some fashion.  The ripple effect of putting that many homes on the market at one time is astronomical.  What is happening in this market goes beyond the homeowner and their lender.  We are talking huge unemployment levels and probable economic depression if we continue on the current path.  Add to that lower tax revenues due to adjustments in the basis of property taxes causing county and state services are decreased, while demand for services increase.  The ripples just keep on coming.

I'm not saying that the lenders should be regulated.  I'm saying tax incent them to offer creative solutions to the homeowners.  Create that 3rd option through government backed programs & tax incentives or through HUD/FHA programs that will allow the homeowner to refinance their way into a better loan.  Maybe create a 1, 3, 5, 7, 10 year product that adjusts slightly at those benchmarks.   I don't know what the product would look like, but I do know that some outside the box thinking is necessary. 

We cannot continue to put companies like CW and other large lending institutions at risk.  Is foreign money going to come in and buy these companies?  Do we really want that risk?

Again - I argue that we need to develop a safety net to catch some of the consumers.  I don't know how many, I don't know what percentage, but a safety net is definitely needed.

As for the credit comments, spend some time educating yourself on the what's happening in the world of FICO scoring.  Computer generated software periodically checks your credit profile, if you have lates or if your score has dropped it triggers many of the larger credit card companies to lower your credit limits on your credit cards.  Now your score goes even lower because your amount of available credit has been lowered.  If you happen to have lost your job, you can't get a new one because your employer pulls your credit report prior to employment....oops your credit score is too low, we can't hire you because you don't meet our criteria.  Death Knell was the right term to use.

Hi Kate -  This discussion is fantastic.  The arguments pro and con are great.  I wish we could all sit in a confrence room some where and work out a solution that would benefit all.  Aloha

Yes Bruce you are right.  This is a great discussion with good points on both sides.  Clearly this is not an easy issue.  Thanks for encouraging the thought process!!

wow I love how all of you are thinking. I come from the sub-prime world and have very recently made that switch to the "other side." I feel that I probably should have done that just slightly earlier but it doesn't seem to matter what you do these days because it all feels the same out there, INSANE!

I read through the many posts above and have many comments to add myself!

One being, I cannot stand it when people try to blame the consumer for something like this. As a mortgage professional of 3 1/2 years, even on the sub-prime side, there were many types of mortgage products out there that I steered my customers AWAY from. Let's go down that list: Option ARMS, Interest Only, and NO DOC. For the right customer these CAN be the right product, but NOT for the sub-prime customer.

The consumer plainly doesn't know! There are many educated individuals out there that know what a mortgage is and means, inside and out, but the majority of everyday people do NOT know. They don't do this for their job. Heck, I even did a refinance for a builder that had no idea there was even a recission period!

My point is this, it's hard to point the finger at what "one person" is at fault. There isn't ONE person. That's just stupid to even suggest. I'd just like to point out the consumer could not possibly be the #1 person at fault, because the mortgage lender should INFORM them of what the heck they're getting themselves into.

If I had a customer with a 500 score getting a No Doc loan for 100% of the value (obviously that product doesn't exist now, but I wouldn't be surprised if it did at one point) they would most likely be in trouble today. Happily I never did any loans like that.

I'll stop rambling now...I could go on all day. Thanks for letting me get that out! Cheers!

Hi Kristin -- Welcome to the Rain and to A paper lending.  This is such an awe some spot to share ideas and thoughts like this.  Aloha