Bonds Go Begging

The state of Virginia is proud of its AAA bond rating. Local governments, like Henrico, are fond of such ratings, too. But what happens when the larger bond market suddenly decides it won’t buy any bonds at all — AAA rated or not?

We’re seeing some of what can happen right now. Today’s Wall Street Journal has a piece on how one wealthy family told its bankers to stash their cash in the safest investment vehicles available. The results weren’t pretty:

The Mahers rank among the earliest victims of “auction rate” securities, a once-obscure type of bond now sending shock waves through broad swaths of the U.S. economy. Auction-rate securities — an unusual type of long-term bond that behaves like a short-term bond — have become a keystone of modern finance. They are routinely used to fund everything from college student-loan programs to municipal road-and-bridge projects.

These bonds became popular with investors looking for cashlike investments, because they offered better returns than traditional money-market investments but were just as easy to buy and sell.

Recently, however, that advantage has disappeared. The market for auction-rate securities has dried up amid fears about fallout from the subprime-mortgage crisis. This week, New York’s Port Authority saw the interest rate on some of its debt jump to 20% from 4.2% amid disruptions in this market.

We may not weep for the huge losses billionaires endure (the Mahers are still worth several hundred million dollars each), but the spreading trouble in auction-rate securities means even bigger problems for municipalities and local authorities issuing debt. The Port Authority’s example is truly eye-opening:

The Port Authority of New York and New Jersey’s interest rate jumped Tuesday to 20% from about 4.2% when bidders didn’t show up at an auction of its securities by Goldman Sachs Group Inc. For the next week at least — until the rate is reset again in the next auction — the Port Authority, which oversees New York-area transportation facilities such as bridges and tunnels, will have to pay close to $390,000 in interest payments to holders of the securities. That is up from $83,611 the week before, said a Port Authority spokesman.

Yes, the pain may be temporary. But the underlying affliction may take a long time to heal:

In less tumultuous times, the banks might be expected to step in and buy some of these securities themselves to help smooth the process. But their balance sheets are already stuffed with other holdings — loans to corporate borrowers, lines of credit to customers, mortgage debt and more — so they have decided not to intervene in this market.

As a result, well over $10 billion worth of auction-rate securities have been frozen. These included borrowings for Massachusetts prep school Deerfield Academy, Carnegie Hall and California’s De Young Museum, among many others.

Issuers have said that they were originally drawn to the auction-rate market because it offered them low short-term interest rates on long-term debt. It also gives them an easy way to pay down debt if they become cash rich: simply participate in the auction and take it back.

Investors have liked them because they have offered slightly higher interest rates than other plain-vanilla liquid holdings, such as Treasury bills. Corporate treasurers often hold them as alternatives to cash.

Now, they are having second thoughts. Several government and pension funds, some of which sustained steep losses during last year’s credit crisis, are rewriting their investment rules and are adopting more conservative strategies.

I do not know if any of Virginia’s bond debt, or that of its local governments and other debt-issuing authorities, is caught up in this latest crunch. But until the market works through its current problems, the debt window is a lot less friendly, and a lot more expensive, place than it was even a few weeks ago.

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  1. Jim Bacon Avatar

    Let’s hope that Gov. Kaine and the General Assembly factor this discombulation of the bond markets into their calculations of how much it will cost to service the debt of those billion-dollar bond offerings they want to approve for higher ed and other purposes.

  2. The overall economic environment in the United States is deterioriating even more quickly than I expected. I have been saying that we are facing a recession for months on this blog. If I could figure out a way to seach this blog’s comments (rather than the articles) I’d link back to comments I posted to prove I am not just jumping on the economic slowdon bandwagon now.

    The slowdown / recession is affecting Virginia overall and Northern Virginia in particular. The Feb. 6, 2008 headline on the Fairfax County Times – Reston Edition says, “Dulles office market faces glut of space”. Vacancy rates at year end 2007 were 15.5% in Herndon and 19.1% on the Rt. 28 corridor – south of the Dulles Toll Rd. This is the commercial property that some in Virginia hope to tax at higher rates than residential property in order to stave off tax rate increases on residential property.

    In the same edition of the Fairfax County Times is an article entitled, “Schools around region face cuts”. It describes the plummeting real estate values and their effect on real estate taxes and tax revenues for schools.

    The Commonwealth of Virginia and the localities therein are facing a severe financial crunch. While there is little that Virginia or its local governments can do to fix the US economy, there is plenty they can do to reduce the pain to Virginians. First and foremost is to stop spending like drunken sailors. The pre-school initiatve, higher education bonds and the like may all have to be deferred until the overall economy picks up. The second step is to stop pretending that tax rates can stay the same as they have been. Many municipalities lowered tax rates as property values soared. That was fine. However, now property values are shrinking. Those same municipalities are going to have to raise their rates in light of this new reality. The third step is for all governments to cut spending. Plese note: I did not say “reduce the growth of spending”, I said “cut spending”. Gov. Kaine can start by making meaningful cuts to the state government headcount. Finally, the special interests must not be allowed to make the problem worse. The impact fees legislation (with its $8,000 per unit cap on impact fees for single family homes in NoVA) must be defated. This is just a special interest (developers) trying to preserve their profits by pushing more costs onto the backs of taxpayers. This is not the time to increase the already large handouts to the developer community.

    I predict that one year from today the Commonwealth of Virginia will be in the midst of an absolute economic crisis. This crisis will be painful. However, the pain in the future can be lowered by actions taken today.

  3. Like giving booze to an alcoholic…

    Man, he’s right about that.

    The last thing a defecit addicted government needs to do is hand out money it doesn’t have to give.

  4. Larry Gross Avatar
    Larry Gross

    The muni bond market is going belly up.

    What that means is the the credit worthiness of not only Virginia but it’s counties and cities who use bonds for schools and other capital projects has dropped – almost overnight

    .. because the property tax revenues are based on the value of the properties .. which have tanked also.

    So.. the counties that were already on the edge .. now may have their ratings dropped.. purely because their tax revenues have dropped.

    so they can borrow less.. than they could before.. and some may actually no longer have the ability to borrow .. at all.. or would have to pay very high rates of return.

    I lay this at the feet of the mortgage tax subsidy which was only ever intended originally to have some folks be able to get into their first modest house rather that it being used to leverage MacMansions.. second homes.. and even RVs.

    As long as the mortgage subsidy could make owning a house an investment strategy instead of an expenditure for housing.. and as long as houses gained in value – it seemed like a sure thing.

    The classic “bail out” for anyone who could not keep up with the escalating payments was to .. sell the house.. and everyone gets their money back.. no harm foul.

    the question is.. would the ‘market” have worked this way – if the mortgage subsidy was means-tested, limited to one house and capped at the maximum amount that would qualify for the subsidy .. and REQUIRED 10 or 20% owner equity to qualify.

    I think we basically allowed a substantial portion of our economy to be based on.. the home the spark plug for growth.

    Now the chickens are coming home to roost.. and .. as crazy as it sounds.. the “plan” is to rescue the bad mortgages.

    And what really gets me is that they are saying that even folks with good credit are getting caught up in this and they cite folks who had good credit scores .. signing up for ARMs with nothing down.

    My head is about to explode.

    How can someone on one hand, in theory, have good enough judgment to conduct their financial affairs in a way as to accrue a good credit score.. and that same person .. sign up for an ARM that is the financial equivalent of a ticking bomb?

    So.. I wonder also.. if the credit rating folks were also complicit in this madness…

    at any rate.. the government should not .. I repeat.. should NOT … REWARD greedy..irresponsible behavior whether it be on the part of individuals or companies.

    Let them crash and burn and then them develop LONG MEMORIES of the pain that results for really dumb stuff…

    I think all of this got started when folks starting thinking that PC language, grade inflation, wink-cheating and self-esteem were more important – than realities….

    the PIPER has showed up to be paid.

    let the whining begin..

  5. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Oh here we go again. Mortgage exemption bad. Larry, do you honestly believe that a tax exemption that has been around for eons is the problem? Let’s see, I buy a huge house and pay 40 grand in interest payments just so I can save 3 grand on my tax return.

    Yeah, that makes sense.

    Let’s go back in history. You had gold plated credit, followed all the advice and invested in IRA’s etc. and found that you were taking a bath on the crap shoot called Wall Street. So to counter that you go to the old standby, bonds, just in time for the Fed to dump interest rates. So how do you get ahead? Do you get back into the crap shoot? Or do you adjust your strategy to include hard assets, like houses? Now say you were a long time homeowner who didn’t use your equity as an ATM and for a low interest rate you can move up to a better house. What are you going to do? Well that’s what people did, except the mortgage game was run by the same crooks on Wall Street. And don’t forget the Clinton administration’s efforts to bring homeownership to the needy.

    So then we have homeowners and commercial developers all jumping on the creative financing bandwagon, the local governments couldn’t issue building permits fast enough or collect the taxes, the developers are jumping the sales price after every ten houses, the disadvantaged are buying the old house, and the world would have been pretty peachy. Enter the rule of unintended consequences. All those loans were bundled into more loans and even more loans, with everything relying on the value of the properties. The end result was trillions of dollars leveraged on collateral that was worth a tenth of the outstanding debt. The real money guys finally figured it out and stopped investing, then the proverbial house of cards crashed. The moneychangers, to keep from losing their shirts, began unwinding the process by tightening loan requirements forcing the unfortunate debtors into a position of not being able to refi into a fixed loan and not being able to continue with an ARM. But you ain’t seen nothing yet.

    Look around, how many commercial properties are in trouble or have postponed construction? How many governmental bodies are having bonding issues? Last I heard, none of them have mortgage exemptions. Yet you still have governments handing out cash for development, issuing bonds on faulty revenue projections, and increasing their budgets as if nothing is going on. Now we have the ultimate mortgage exemption, and you don’t even have to own a house to get the money. And the homeowners? Hey, we will give you a little more time to come up with the money you owe the crooks, as if a sucking chest wound gets better with time. All because we have a government that would rather bail out the crooks than their own citizens. But that nasty mortgage exemption is the root of all evil. Right.

  6. Anonymous Avatar

    Good discussion.

    How about a crack-down on illegal immigration? Does it make sense in a recession to import poverty when we have more than enough domestically? Go after the employers hard.

    Stop expanding programs. Why the devil are Tim Kaine and John Warner still calling for spending billions on the Tysons Detour (Dulles Rail)? BRT would move as many people at 10% of the cost.

    Implement the Wilder Commission recommendations. Put new programs on hold.

    Eliminate subsidies for businesses. A well run government with reasonably low taxes ought to be incentive enough to attract good businesses. Subsidies are inconsistent with free markets.


  7. Larry Gross Avatar
    Larry Gross

    The question is – would this have happened if there was no mortgage interest deduction.

    Subprime loans have significantly higher interest rates that make home ownership unaffordable compared to renting UNLESS you get reimbursed for the interest.

    Not my idea…

    and if things didn’t “work out”, then you just flip the house because in just a few months, it would sell for more than it was purchased for.

    Mortgage companies.. even greedy.. ruthless ones cannot sell homes to people who don’t see some advantage in it for themselves if the interest rates are sky-high… escalating… balloon notes, etc…

    UNLESS someone can get reimbursed…

    that’s my story and I’m sticking to it…

    but .. convince me I’m wrong.. about this…

  8. Anonymous Avatar

    Larry is like a petulant child or a dog. He can’t stand the dea that someone else is getting something he isn’t. His 30 year old home is probably paid for, and he can’t stand the idea that someone else might get something he has already had, whether it is infrastructure or mortgage. Especially if he can concoct some third order externality that makes it he is paying more than otherwise.

    Darryl is right. The mortgage deduction has been around for decades without previous problems. But, commercial properties can deduct their mortage interest as a business expense.

    Easing credit restrictions was intended to make homes possible to those otherwise denied, but some people gamed the system. Those who live on royalties or commission, self employed persons and others had a hard time under previous restrictive rules.

    Darryl is also right in saying tht money has to go somewhere. Every investment has risks, whether you are a banker investing in a car salesman’s home or a home buyer investing in a larger space. Yep, some people could have rented and saved money. Bankers could have invested in other things than homes.

    I don’t see what is happening as nearly as bad as some would think. The vast majority of homes are paid for or have normal loans with fixed interest. Even those the ultimately lose their home got to live in a place they might not have been able to – for a while.

    The flip side is that, right now, astute investors can snap up some (relative) bargains. The idea that the end result was trillions of dollars leveraged on collateral that was worth a tenth of the outstanding debt, is probably an overstatement. Even if I have a zero down loan and my home value crashes by 25%, it is a long way from 90% leverage, even after bundling.

    However, leverage does work both ways. If you put 10% down on a house worth a half million, and it goes up 10% you made your entire investment back. Taking away the interest deduction on the borrowed portion does not change the basic incentive.

    Neither does kicking that guy out of the market and moving him into a rental, because the rental owner still deducts the interest. It just makes it more unlikely that the guy will ever be able to participate in the economy the same way Larry did.

    Did bankers and lender get greedy? Sure. But, the first itme I got a loan I practically had to go through a colonoscopy to get it. The last time, I did it on the phne in ten minutes – and got much better terms. Overall, I think the system works much better now.

    It is easy to say, let the investors take the risk, and they should. But there is also such a thing as panic, which is an externality that affects us all. The government has a legitimate interest in trying to adjust for market failures that cause innocent bystanders to get hurt.

    There is a big difference between that, and bailing out lenders who deliberately made predatory loans.

    But, lets not forget what causes subprime loans: frequently they are caused, at root, by hyperinflated home prices, whether that means you have jumbo loans for large houses or loans for regular houses that regular people cannot afford.

    I can go buy 2500 sq ft houses all day long for between $105,000 and $170,000 – right here in Northern VA. Then it might cost another $10 or $15,000 to construct the foundation and hookups. That is the cost of a well constructed modular home.

    And yet a townhouse costs upwards of $400,000.

    THAT is where the market failure is, and it is primarily the fault of government, at the urging of people like Larry. In yesterday’s Fauquier Democrat there was a lenghty letter from a woman listing all the usal reasons that people like her think (or claim anyway) that residential housing doesn’t pay.

    Everything she said was true, as far as it went. But because it didn’t tell the whole story, it was only half true.

    People in Loudoun pay higher taxes. Yep, and they have more income and property value to pay it on. Etc. Etc. Etc.

    I’m fairly certain the woman who wrote that letter lives in a residence – but she was urging her government officials not to approve any more. She clearly does not understand that there is a risk and an expense in saying “no”. Undoubtedly, her residence has declined in value like everyone else’s. And the reason is that it was artificially inflated to begin with.

    By people like her, politically imposing their externality on the market.


  9. Anonymous Avatar

    My advice is to go out and buy some T. Rowe Price VA Tax Free Bond fund. It’s a good deal right now.

  10. Larry Gross Avatar
    Larry Gross

    I don’t have a problem with mortgage interest deductions designed to help folks get their first home as long as it is targeted to those who need it (means tested), capped (to only help with modest entry-level homes).

    In other words, it is purposely structured so that it can not be used for speculation.

    For those that think.. limiting mortgages in this way is “petulant” , all I can say.. is that it is more of the mindset that has caused the problem that we have…

    when you provide a subsidy so that it CAN be gamed … and then later claimed the problem was caused by “a few people gaming the system”, when, in fact, the problem was/is massive and directly related to house-sized loopholes purposefully allowed to exist…

    it’s like leaving a car with the keys in it.. and then whining that they are folks who will steal cars – as the reason the car got stole.

    This is why I am opposed to most subsidies.

    They start out with a narrow and noble purpose .. and then the special interests get a hold of them.. and they end up being a money/profit generator for folks whom the subsidy was never intended for in the first place.

    So.. what you have.. are folks who do not qualify for loans.. and even if they did… the interest rate would be so high as to not be worth it anyhow… EXCEPT.. you tell those folks.. they can right off the exorbitant interest rates so it won’t cost them AND…if everything goes to hell in a hand basket, then they can bail and flip the house and maybe even make a few bucks in the process.

    Remember the Savings and Loan FIASCO?

    It was the same exact situation.

    and in the end – WHO ends up having to bail out those who lost money ?

    taxpayers – who actually paid their bills including their mortgages…

    You wanna fix it?

    ONE means-tested, capped subsidy per person – PERIOD. (you CAN take it with you if you change homes – but it does NOT restart.. you just to get to continue to draw it down).

    no 2nd homes, no MacMansions, no RVs and NO FLIPPING HOMES for fun and profit.

    if this attitude is “petulant” then I plead guilty as charged… but guys look around you… at the carnage… this was not an accident.

    If it was an accident – there would be no reforms. The question is why do we wait until so many people abuse the subsidy and financial disaster ensures to do the reforms?

    Why not forestall those problems from the get go.. by not allowing the abuses to start with?

  11. Is the proper spelling McMansion or MacMansion?

  12. Every time I find myself agreeing with Larry I call my therapist and move up the date of my next appointment. After reading this thread I may have to go through the therapy drive thru on my way home tonight.

    I think Larry is right.

    The mortgauge deduction encourages borrowing and debt. While this is not bad in and of itself …

    1. Americans save too little. Encouraging debt and spending on interest does not help.

    2. The demographics of America are changing quickly. As baby boomers retire and move to smaller residences the long term demand for single family dwellings will cool. Encouraging people to invest in an asset that probably is over supplied is a bad idea.

    3. America has an atrocious defecit. Even if you think government borrowing is OK (questionable in my opinion) you have to worry about the escalation of the defecit lately. We need spending cuts and tax hikes. Sorry but that’s what I believe. Giving people a discount on their taxes to encourage borrowing when the government spends more than it takes in is … well … kooky.

    4. Home ownership has not been, is not and never should be a right. The idea of giving people a tax break to buy their first house is particularly questionable. Young couples should be saving – for their children’s education, for their retirement. They should not be stretching their finances in order to buy a home because it’s partially offset by the government.

  13. Jim Bacon Avatar

    Scary, Groveton, you and I have agreed about something twice on the same day — illegal aliens and the mortgage deduction. Wonders never cease.

  14. Anonymous Avatar

    Was the savings and loan fiasco the fault of people who bought homes, or the fault of people who made shaky loans?

    “ONE means-tested, capped subsidy per person – PERIOD.” That would last about two seconds. I’d make a deal with my neighbor to buy his house and rent it back to him, and vice versa. Presto, legitimate business deduction.

    How are you going to set the means test? We restrict housing such that the average income cannot buy the average house, then turn around and subsidise the purchase – based on inability to pay. How schizophrenic is that?

    “Americans save too little.” And despite interest and taxes, for most people their home is their biggest source of wealth. Let’s put that out of reach and let them pay rent. Their landlords can deduct the interest, and the tenants can all eat cake. The landlords can take the interest deduction and depreciation too, whoopee.

    “As baby boomers retire and move to smaller residences the long term demand for single family dwellings will cool.” There is a risk in any investment.———— On the other hand the birthrate just exceeded the repacement rate for the first time in 35 years. We are probably going to legalize a bunch of Catholic immigrants, to stabilize social security. When I start seeing homes sitting around vacant, I’ll start to worry.

    “America has an atrocious defecit.” We have that all right, and a big deficit, too.

    And it is going to have to be paid back by people who have jobs, homes, and earn money which can be taxed. Shutting down the housing industry and having a lot more people paying rent is going to help the deficit, How, Exactly?

    “NO FLIPPING HOMES for fun and profit.” Or, we could tax the profit to help pay the deficit. No interest deduction, fewer loans, less profit all around. I know some military people who always buy and always have a balloon note – knowing that they will be reassigned in a few years. For them, fixing and flipping makes it possible to live on a service salary. And your problem with profit is what? That it is someone else’s? How petulant is that?

    “purposely structured so that it can not be used for speculation.” Last I knew, speculation was a legitimate business that turns profit, on which taxes are paid. Why would you want to stop that? The grocery buys products in bulk and speculates it can sell for a profit. Why is it different if I speculate on truckloads of beef, construction equipment during the downturn, or houses?

    “look around you… at the carnage… this was not an accident.” A tiny fraction of all homes are being foreclosed on. Where is the carnage, really? This is mostly the bankers problem: they are going to have to unload foreclosed properties, and some speculator is going to get a deal.

    EXCEPT housing and constuction has been the one thing keeping the economy running. We shut that down, and we WILL have problems, and carnage, real carnage.

    “why do we wait until so many people abuse the subsidy” Who is we, and why is it our problem? Is that the buyers problem or the lenders problem? Everyone gets to deduct interest, but only the ones who default are abusers?

    If this is the lenders getting greedy, puhing loans that are not practical, why would it make any difference to them if the interest is dectible or not? A bad loan is still a bad loan. If you are right, we should be HAPPY they defaulted: that way we don;t have to continue the subsidy, because they won’t be paying the interest.

    Who is greedy here? Is it the guy who has been on the edge of buying a home that keeps escalating just out of his grasp? Or is it his neighbors who think “residential doesn’t pay” and lobby for infalted home prices? Or is it the mortgage broker who gets paid on commission, rather than on residuals. Or is it the lender who has to put the money someplace, at some price. You think homes are risky? How about Enron?

    Home ownership never has been a right, yet people have to live somewhere. We do have a right to have a government willing to not see us on the streets. If cnservatives and republicans follow your lead and throw people on the streets, the ones on the street won’t be voting Republican. If you want more Republicans, you want more rich people, so why do something to make them poor?

    “WHO ends up having to bail out those who lost money ?

    taxpayers – who actually paid their bills including their mortgages”

    See what I man about petulant? Most people pay their bills, including their mortgage – and they take the mortgage deduction.
    They are the lucky (and diligent) ones.

    You can be just as hardworking and diligent, yet lose your home in a heartbeat. Every time a lender makes a bad bet, the rest of us carry some of his losses. Every time a grocer’s bananas go bad he loses on his speculation, and we pay for his losses, in the price of good bananas.

    That doesn’t mean that just because someone else buys a good banana, that we subsidised him.

    Get over it and move on. Go speculate on your own banana. Try a little omphaloskepsis. Anything is better than profitophobia.

    Irrational fears have their negative impact, but among them, the fear of (someone else’s) profit is among the most widely held. This fear seems to derive from an ignorance of capitalism, but it is usually cured with a sufficient dose of money.


    “They start out with a narrow and noble purpose .. and then the special interests get a hold of them.. and they end up being a money/profit generator for folks whom the subsidy was never intended for in the first place.”

    This sounds like a property rights problem: we set out to buy something without being clear about what we were buying and what we were not buying. Now we have a hyperinflated case of buyers remorse.

    But, from what you say, it turned out to be a profit and money generator. So what’s not to like? Profit is what pays taxes that reduces the deficit.

    If we don’t find some new way to spend more than we get.

    Gee, maybe we could put a subsidy on solar panels and hyperinflate that market till it breaks.

  15. Larry Gross Avatar
    Larry Gross

    re: a “small” problem…

    “Tokyo Stocks Retreat in Morning After Wall Street Pullback

    Tokyo, Feb. 15 (Jiji Press)–Stocks fell back on the Tokyo Stock Exchange Friday morning, with investor sentiment sapped by Wall Street’s overnight pullback and U.S. Federal Reserve Chairman Ben Bernanke’s somber remarks about the U.S. economy.”

    Apparently.. we have encountered a small speedbump due to some “unfortunate” practices by a small segment of the mortgage industry involving a small percentage of home mortgages”

    signed… RH


    let’s not overreact folks…

    subsidies are still fundamentally a good policy.. we just need to tidy up some deck chairs and all will be well for the rest of the voyage…

    Subsidies are American as Apple Pie – it’s downright unpatriotic to argue against them…

  16. Larry Gross Avatar
    Larry Gross

    the basic problem is this:

    The Feds … subsidize .. what amounts to ..exceptionally risky financial transactions…

    while telling anyone who will listen that mortgage subsidies being good for American commerce…

    Groveton.. I’m sorry you have to increase the tempo of your therapist visits.. but look at it this way.. he/she probably has a huge mortgage payment on a McMansion (or was it a MacMansion?)

    At any rate.. pat yourself on your back for doing your part to rescue the economy.

  17. Anonymous Avatar

    Right, The Tokyo stock market panicked over the interest deduction I’ve been taking for thirty years. Remind me to buy some stock tomorrow – buy low, sell high.


    The feds subsidze home mortgages, which are usually pretty stable.

    A bunch of bunch of whizbangs figured out how to repackage the loans and game the system, so let’s blame it on the personal interest deduction and ignore business interest deductions.

    The markets have irrational exuberance and irrational panic. The smart money speculates and profits either way. How does eliminating the mortgage deduction change anything?

    I’m opposed to subsidies, too. Now, pick any home that is more than twenty years old, and show me where it is worth less than when it was built. Show me how that house subtracted from the economy.

    If you make a subsidy that returns more than it costs, then it’s an investment. If the government can’t invest in the future of it’s citizens, then what do we need it for? What is more central to the future of its citizens than their homes?

    (No doubt you will find some home in North Dakota that has lost value, and beat me over the head with it.)


  18. Larry Gross Avatar
    Larry Gross

    listen. v e r y c a r e f u l l y

    do NOT.. subsidize risky mortgages with high interest rates to folks who do not have good credit

    repeat after me.. the above…

    because what you are subsidizing then is no longer the interest on home mortgages but funky securities that no one in their right mind would buy.

    Think of sub-prime loans as Government-sanctioned payday loans.

    the government, in effect, has become an insurer of risky loans.

  19. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    How a few deadbeats brought the world economy to it’s knees.

    Ever hear of a margin call? Or a short squeeze? That is essentially what has occurred in the obscure realm of modern mortgage financing. You had homeowners buying a house with some form of mortgage. The banks were selling the cash flow and associated risk to investors who borrowed the money to buy these debts. Other investors were borrowing money to loan to the first investors. That is how a few billion in houses became collateral for trillions of dollars of other debt.

    And what happens when an asset drops in value and no one wants to buy it? You default on the loan or sell other assets to make the payments. In the financial world, that means selling stocks and other items at garage sale prices. In the homeowner’s world it means foreclosure, renting the house at less than expenses, or just toughing it out. And a whole lot of people have lost the freedom to change jobs or migrate to other cities because they have an unintended consequence of being stuck with the new American Nightmare.

  20. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Here’s some numbers for you number crunchers. The total outstanding mortgage debt for the US is around 12 trillion dollars. Now let’s be overly positive and pretend that only 2 trillion was encapsulated in Wall Street’s ponzi scheme. In order to develop that small cash flow into actual mortgage loans, someone borrowed about 1.6 trillion dollars to leverage the loans. Those someones are hedge funds, pension funds, and other investors. Notice I didn’t include Countrywide or banks. That’s because all of the hundreds of billions they have been losing are on loans that those moneychangers can’t bundle. The investors won’t invest anymore. It’s the visible tip of the bookeeping iceberg, so to speak.

    Then there is the 4 trillion in revolving credit, 10 trillion in commercial credit, and of course our government’s 10 trillion. All of which is tied into these toxic waste dump investment schemes to allow them to have a prime credit rating. It took a high school dropout to expose the flaws in the PhD’s masterpiece.

    And to think that some idiot bureaucrat actually believes that giving people a few hundred bucks will be the glue to hold this house of cards together.

  21. Anonymous Avatar

    “do NOT.. subsidize risky mortgages with high interest rates to folks who do not have good credit”

    The high interest rates are supposed to counter the risk to the lender. That is how the mrket works.

    Whether the interest is tax exempt makes no difference. If the borrower defaults – no more subsidy.

    It is a level laying field. Some players are willing to take more risks than you and I. They will either be superstars or wind up as cripples.

    Is this a great country, or what?


  22. Anonymous Avatar

    “That is how a few billion in houses became collateral for trillions of dollars of other debt. “

    And why is that the home buyers problem? Isn’t it the lenders, and the lenders to the lenders?


  23. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake


    But you know what they say about rolling down hill.

    Because there is no cash flow, there is no capital for loans. No loans, no jobs. No jobs, no money. No money, no honey. Then it doesn’t really matter whether you are subprime or gold plated or even free and clear.

  24. Anonymous Avatar

    “And what happens when an asset drops in value and no one wants to buy it? …….In the homeowner’s world it means foreclosure, renting the house at less than expenses, or just toughing it out. “

    In the homeowners world, it means they are paying a mortgage on an asset that is no longer worth what it once was – to others. To the homeowner, it is still home. Providing he still has a job (he doesn’t work in lending ata bank) he is no worse off than before.

    Providing he doesn’t turn out to be a deadbeat, how does his loan affect the financial markets?

    Now, if he has to sell for some reason, or if he is a speculator and planned to sell, then he has a problem.

    As for renting for less than expenses, so what? Thousands of landlords do just that, and still profit from it. Why? because housing appreciates over time, and because they take depreciation as an expense. If you think the mortgage deduction is a scam – take a look at this little gem.

    Even if they don’t take the depreciation, the loss is tax deductible.

    Darrell (sorry, I misspelled your name earlier), I don’t doubt your numbers, but what is the source?

    Even supposing we have 12 trillion in morgage debt, the vast majority of it is (so far, still) secure. We are looking at less than 5% of the market which is subprime loans. That is 600 million dollars: about what we spend in three days in Iraq. And not all of the subprime loans are in default, not by a long shot.

    The guy who is the second or third lender is still at risk. So what?
    The reason the banks sold the loans was to offload the risk. Ostensibly, the risky loans were packaged with “matured” loans, to spread the risk. This was done by second parties, not the original lenders.

    Still, there was a lot of reverse leverage here, but we are not talking about unsophisticated investors anymore.

    Sorry, I don’t see how the revolving credit or commercial credit ties into this. Most commercial credit is not tied to someone’s house.


  25. Anonymous Avatar

    “the government, in effect, has become an insurer of risky loans.”

    Not true. If the government insured the loans they would be responsible. As it stands, if a loan goes south, the government no longer allows the deduction.

    It is a big difference.

    Now, if the government later decides to bail out Country Home Mortgage, then that’s different still. CHM probably makes bigger political contributions than I do.

    Let’s not confuse, conflate, or exxagerate the issues.


  26. Anonymous Avatar

    “Panelists, predictably, expressed worries about the “overheated” housing markets in Arizona, California, Florida, Maryland, Nevada, and Virginia. Real estate speculators, indeed, did enter these markets looking to “flip” houses and condos in order to make a quick buck. This denotes, sure enough, that lenders were shoveling money out the door to all comers looking for a mortgage loan – be it speculators, permanent residents, or buyers of second homes. “

    Does anyone understand that these are among the very states that have exhibitid the greatest restrictions against growth, combined with the greatest economic expansion – and the largst increases in immigrants?

  27. Larry Gross Avatar
    Larry Gross

    If the government allows someone to write off the interest – even if the interest is extremely high because it is a risky loan….

    the government is.. in essence.. encouraging risky loan practices…

    because if that guy could not write off the high interest, it would be cheaper for him to rent rather than buy.

    so by allowing the write off of higher interests rates that are DUE to poor credit – the government is encouraging this guy to buy rather than rent and all that goes to hell in a handbasket if housing prices fall and the guy walks away from the loan.

    If that practice – of encouraging those with poor credit and high interest rates to buy- becomes widespread – then (all taxpayers) DO get caught holding the bag and even those with good credit and good interest rates can be affected if they lose their jobs.

    My view is that this would not have happened if the government would not allow high interest loans to be written off – because then the folks with poor credit could not afford to buy those homes and would instead.. rent…

    that means that folks who build “spec” homes.. don’t profit.. and won’t build them.. which means you don’t get a bloat of homes.. that then causes prices to drop.

    All of this goes back to what convinced folks with poor credit to buy a house in the first place.

    .. a subsidy… a government policy that was/is predicated on the idea that we cannot build too many homes… that homebuilding is what keeps our economy “healthy”.

    It’s a dumb concept in my view.

    ANYTIME – you give a subsidy for something that has a normal supply/demand cycle – you are encouraging over-consumption and over-investment – a ponzi scheme – that ultimately will fail.. when the supply overwhelms the demand.

    Wanna make some side bets on eventually what the “reforms” that will be instituted will be?

    well you can tell the mortgage companies to not make bad loans..

    gee.. I wonder why they did not listen before?

    OR we can change the way we let interest be deducted…

    Remember when the interest on cars was allowed to be deducted?

    what happened .. and why?

  28. Jim Bacon Avatar

    I could care less if rich financial gurus, who made billions of dollars in fees in packaging and leveraging and re-selling this crappy mortgages, lose their shirts. Easy come, easy go. I am totally, 100 percent opposed to bailing them out.

    I don’t feel much more charitably inclined toward the little guys — many of them speculators who were flipping properties and making money with each turn — who found themselves overextended when the game of musical chairs was over. Same greed, same speculation, just on a smaller scale.

    It’s symptomatic of what’s wrong with our country. When you make a profit, you want to keep it for yourself. When you make a loss, you want to socialize the loss — get a subsidy or a bail-out. It encourages reckless, speculative and unproductive behavior.

  29. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    Well Jim, I don’t disagree. I’ve been a pretty strong advocate for fiscal restraint. But the problem is our entire economy is tied to these creative financing schemes. Ray asks what commercial lending has to do with homeowners. Pretty simple really. They have been taking out loans the same way the homeowners have, and they have had even local governments offsetting their risk through taxpayer paid incentives. The governments have also been spending money and issuing bonds to pay for their excesses. And all those loans end up in the same place, encapsulated in sophisticated liens on the cash flow of this nation. A simple down to earth guy running a pizza shop can tell you what happens if cash flow dries up.

    So it isn’t a matter of some deadbeat foreclosing his house, that’s just a line entry in someones books. What keeps Ben and his buddies up at night isn’t deadbeats. His nightmare is wondering what happens when a monetary system based on faith, instead of real wealth, loses faith.

  30. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake


    Let’s keep things simple, without resorting to boring government reports and wierd math. Here is a blogspot addressing the current condition.

    And here is a news article where Greenspan says high levels of debt aren’t a problem. It also points out that 75 percent of total debt is mortgages.

  31. Anonymous Avatar

    the government is.. in essence.. encouraging risky loan practices…

    I fail to see why whether my interest is deductible has anything whatsoever to do with how risky my loan officer chooses to act.

    “it would be cheaper for him to rent rather than buy.”

    But, the place he would rent would still depend on interest, and that interest would be deductible. Bankers charge more interest for rental homes, because there is more risk involved when the owners are not occupants.

    “higher interests rates that are DUE to poor credit” You pay higher interest rates on jumbo loans because there is more risk involved, not because your credit is bad. There are more jumbo loans because houses are undersupplied and overpriced.

    Otherwise theer might be some truth to the statement that deductible interest encourages those with bad credit – to become owners and get mroe responsible. It also encourages those with good credit, so I don’t see the point.

    “all that goes to hell in a handbasket if housing prices fall and the guy walks away from the loan.” And that is primarily the lenders problem, which has litle or nothing to do with deductible interest.

    If you want to raise taxes (on others, since you have been in your home thirty years) by eliminating the interest deduction, then come out and say so. Don’t make a bunch of phony arguments.

    You can’t seriously believe there is an oversupply of homes. What is going on here resembles nothing like a ponzi scheme.


  32. Larry Gross Avatar
    Larry Gross

    I think this is the fourth time I’ve said this.

    KEEP the mortgage interest subsidy but stop the abuses…

    DO allow mortgage interest deductions on a limited basis to people with credit at good credit interest rates only.

    You will not get to deduct high interest rates – get it?

    Means test the recipients to limit it to people who need it and cap the amount to apply to only modestly priced homes.

    And limit it to one home only and not second homes or RVs.

    In other words – do the deduction but take away the speculative gravy train.

    Let’s do it like it was originally intended and actually practiced by folks who got them …30 years ago.

    You know… back when you actually had to pay MORE for mortgage insurance if you had poor credit and/or not a 20% down payment?

    re: “You can’t seriously believe there is an oversupply of homes.”

    are you kidding or daft?

    I have about 150 homes within 5 miles of where I live that are now owned by banks… and the selling price of homes has dropped by almost 100K in a year.

    .. and from what I understand.. we’re not at the bottom yet…

    … so you seriously don’t think we have an oversupply of homes eh ?

  33. Anonymous Avatar

    “DO allow mortgage interest deductions on a limited basis to people with credit at good credit interest rates only.

    You will not get to deduct high interest rates – get it?”

    I still don’t see the point. “Good” credit interest rates are all over the map. At one time I had a mortgage at 10.25 % and that was considered “Good”. (Had I been able to get the local zoning board off the dime, it would have been 7.25%).

    As far as I can see there is no way to do this without throwing the baby out with the bathwater.

    The people with what you call bad credit are the ones that need help the most: not to be consigned to the scrap heap of permanent rentals. (Yes, I recognize there are times when rentals make sense.)

    I’ll tell you when I think we have an oversupply of homes: when the average home sells for less than what the average income can afford to buy – without a high risk loan.

    What you are telling me is that the banks are the ones with a problem. Them and the bank stockholders. Tough tutu.

    If the price the banks are selling for has dropped over 100k in a year, then the banks loaned a 100k too much. Don’t take it out on the buyers.

    If the price the banks are selling for have dropped 100k, and they still aren’t selling, then they have not yet reached the price people can afford to pay – or even one that is anywhere reasonable.

    I can buy a 2500 sq ft home right here in Northern VA all day long for between $110,000 and $170,000.

    Believe it or not. And it might cost another $10,000 to $15,000 to put a foundation under it and connect it to the outside world.

    The land to put that hopme up already exists, and someone owns it.

    So, what is missing? And why do townhouses cost $400,000 and up?

    Permission to build.

    THAT is what has caused the current “crisis”, which isn’t a crisis at all.

    I guarantee you, those homes will all be bought – when the price is right.

    “Let’s do it like it was originally intended and actually practiced by folks who got them …30 years ago.”

    You are kidding, right? “I walked four miles in the snow to the bus stop….”

    Only, we don’t have snow anymore.

    Originally intended by who? God?
    The information age means that we can make loans for a fraction of the transaction costs as previously. Credit scores, based on every tube of hair coloring or bottle of Jim Beam you ever bought pop up in seconds.

    Maybe they need to be refined a little. But surely we can do a better job than thirty years ago.

    Sure, I traded in my boat to make my first home down payment, and I had to pay mortgage insurance for a few years. But, my interest was still deductible, and I built a new boat in the back yard. (Try that with an HOA).

    The loan on my boat had a lower interest rate than my home. Go figure. Frankly, I thought the situation thirty years ago was sick. What we have now is a lot better over all, even given the “recent difficulties”.

    I’m sorry, I traded my “RV” in on my home. I don’t see any reason that if a person bought a home, (with deductible interest) he shouldn’t be allowed to do it again. Let’s reward the people who succeed, not punish them.

    And if they retire to an RV, like my parents did, so what? Where does it say that a home has to have a foundation? I lived on my boat for years before I threw out an anchor landside.

    In those days, the interest on the boat was deductible, and it is today, subject to some restrictions. I knew dozens of happily retired couples, cruising around the world.

    What possible excuse could you have for beating up on people who just want to enjoy life liberty and the pursuit of happiness?

    Unless you think they should pay you for the privilege.


  34. Larry Gross Avatar
    Larry Gross

    re: mortgage interest rates

    you give the deduction – for whatever the prime was so everyone gets to deduct the same amount and the ones that had good credit get to deduct most of it.

    re: folks with bad credit with “needs”.

    right… here’s the deal

    they get the same deal as everyone else – but we don’t reward them with more than others because they have shown an inability or refusal to use prudent judgment in their financial affairs.

    Giving them a loan even one where they can only deduct part of the interest – is an opportunity for them to rehabilitate their credit.

    Sub prime loans are the equivalent of payday loans and why there might be an argument about whether businesses should be able to loan them money at outrageous interests rates -there should be no argument that the government would allow them to write these rates off because in doing so, the government is then rewarding irresponsible behaviors on the part of those getting the loans but worse, they are encouraging businesses that primarily profit at the expense of those who cannot conduct their own financial affairs in a prudent manner.

    We don’t want to encourage either side with government policies.

    What public purpose is served by incentivizing irresponsible and greedy financial practices?

  35. Larry Gross Avatar
    Larry Gross

    re: RV interest deduction

    if it qualifies as your only home and you’ve sold your other residence AND you still qualify for the deduction – fine.

    As usual, you prefer to confuse and obfuscate the purpose of subsidies – which are supposed to help people who through no fault of their own – could use a little assistance and that was the originally purpose of the home interest deduction.

    It is bad economic policy to subsidize something that already has a strong demand (like housing) or worse to give subsidies to people that do not need them.

    You seem to believe that universal subsidies are good economic policy because they help everyone.

    Subsidies that help everyone are oxymoron because by definition – subsidies are wealth transfers where some benefit at the expense of others.

    For instance, the guy with a small townhouse with a smaller interest deduction than someone who has a McMansion, a second home and an RV – is getting much more back in interest dedications; the guy in the townhouse is then actually subsidizing the wealthier guy.

    In that regard – the mortgage interest deduction is actually regressive in the way it works.

    The folks who benefit the most from the interest deduction are the ones who are already well off and who spend lavishly and don’t need help to start with.

    That’s why we should cap the total amount and means test those that get it.

  36. Larry Gross Avatar
    Larry Gross

    re: restrictive growth policies and the price of housing.

    What kind of intelligent person could take a helicopter over NoVa and look out over the sea of housing and blather on about how restrictive zoning and growth policies has prevented the availability of affordable housing that would allow folks to live close to where they work?

    What exactly would you change in NoVa?

    there is virtually no more room for single family homes and not even townhouses unless your idea is to allow existing SFH subdivisions to redeveloped into more townhouses and condos.

    Is that .. or something like that.. what you mean when you say “restrictive zoning” has prevented the building of affordable homes that folks could live closer to where they work?

    Are you basically in favor of anyone who owns a home in an existing subdivision to convert their home to a more dense multi-family housing?

  37. Anonymous Avatar

    Basically, yes.

    What I think is that there should be rules stipulating under what conditions you can subdivide, as opposed to rules that simply say you cannot.

    “there is virtually no more room for single family homes ” Hogwash.

    There are plenty of people, just like yourself, who have been upzoned – to prevent more housing.

    Take your pick: either the zoning for sites that create jobs is not restrictive enough, or else the zoning for housing is too restrictive for the jobs that have been allowed.

    When the average salary can buy the average home – I’ll change my tune. If that means the average home is a condo – so be it.

    But right now we know for a fact we can buy homes for a fraction of what they actually sell for. Anyone can buy a perfectly nice house for $150,000. And the problem isn’t finding a place to put it, it is getting permission to do so.

    Somebody is getting huge subsidies thanks to overly restrictive zoning. That somebody is Big Builders, and existing homeowners.

  38. Anonymous Avatar

    “Subsidies that help everyone are oxymoron because by definition – subsidies are wealth transfers where some benefit at the expense of others.”

    Not always.

    It is possible to have subsidies that make everyone better off, including the losers in th wealth transfer.

    It is also possible to not have subsidies when you should, and this results in a transfer of wealth.


  39. Larry Gross Avatar
    Larry Gross

    you apparently do not subscribe to the concept of supply/demand increasing the price of something – and it is due solely to the free market and not government involvement?

    so.. house prices don’t go up as a result of supply/demand but instead because of government “interference”?

    i.e. – waterfront property costs more because of the government?

    townhouses in DC next to Congress cost more than townhouses in Spotsylvania because of the Government?

  40. Larry Gross Avatar
    Larry Gross

    “either the zoning for sites that create jobs is not restrictive enough”

    are you advocating government restrictions on commercial land?

    do you agree or disagree with the government’s ability to zone land as commercial, industrial or residential?

    Isn’t this.. using your ideas, a type of discrimination also?

    so if someone wants to put a trailer court next to the AOL would be wrong for the government to say that – that land can only have commercial development on it…?

  41. Anonymous Avatar

    My starting argument is that there should be no restrictions. If you have a problem that is big enough, then sue your neighbor. The flip side is that if government controls, your ability to sue for redress is pretty much gone.

    Failing that, I recognize that government restrictions and zoning do exist. The reason they exist is supposedly to protect proerty values.

    And yet, I can be turned down under zoning for an action that will INCREASE property values. The founding principles of zoning have been subverted and turned upside down. One reason this can happen is that a mob can show up at a hearing and shout that their property values are reduced: without presenting evidence.

    There is no cost associated with saying “No”. Consequently that infrastructure is over used. We know from KELO that if the increase is sufficient, not only will your zoning be changed, but your land will be taken as well.

    Therefore, my second argument is that we ought to put a price on zoning. We should make the process of rezoning tranparent, predictable, and fair.

    That way, neighbors will know what they have bought, and what they have not bought (control over their neighbors). Predicitibility will make it more fair, necessarily. People will know, up front, that zoning does not protect them from change under any circumstances or forever. After all, such an expectation is equivalent to allowing them to claim infinite value for their property, over someone elses.


    You may not get the logical leap here, but it is transparent to me. You cannot expect to allow businesses to grow unfettered and at the same time expect draconian controls on housing, which is pretty much where we are now.

    You can remove the controls on housing, so that density can support the needs of business. You can increase the controls on business, so that we do not have to export housing, and create heroic transportaion systems to support business.

    Or some rational combination of both.

    I don’t see how you can advocate strict controls on housing (land use), and no controls on business.
    Yet, the idea that housing cost more than it brings in, and it is “supported” by business, does exactly that. It is precisely the sort of argument that says we (residents) should expect our problems to be paid for by others(businesses).

    If housing isn’t paying its own way, then obviously we need to raise the taxes. And not just on new housing. But, if we simply consider that heroic transportation systems are there to support business, then that takes a lot of the weight off of housing, and puts it where it belongs. If we did that, business would be so frightened at their transportation costs (A La Tysons) that they would move voluntarily.

    So, either unrestrict housing, place more restriction on business(disperse it to where the housing is), or some rational combination of both.

    My definition of rational is whan the winners can pay the losers in such a way that everyone is better off than before.

    So, yes, If I propose an apartment building for a residential neighborhood, and I have signed options for leases to fill it, then that (more or less) proves that my use is more valuable than my neighbors (SFH) use.

    They SHOULD have no reason to complain, as long as they can also get what I have. OR, as long as they can keep what they have AND get a share of what I have.

    I think zoning should figure out those rules, rather than just proscribe this or that. Zoning should be cost and value based, market based, and we should be up front about it, instead of lying through our teeth until a KELO develops.


  42. Anonymous Avatar

    No zoning restrictions. Isn’t that what turned NovA into the soulless wasteland that it is today.

    Good zoning is not about maximizing the value of the land, but about creating an efficient and liveable place for people to live and work. Increase in the tax base is only one concern of many.

    The “mob” you refer to is just the voice of the people justifiably afraid of traffic or blight.

  43. bail bonds orange county Avatar
    bail bonds orange county

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