A Lesson in Economic for Liberals

[cbirch2]

Real life example

Imagine you have $10,000 in assets and no debt (so also $10,000 in equity). You use that $10,000 as a 10% down payment on a $100,000 house. When you take out a mortgage you get an asset (the house) and a liability (the mortgage).

You expect your balance sheet to now be $100,000 in assets (a house) and $90,000 in liabilities (the mortgage for the $100,000 house, of which youve already paid $10,000). So thats still $10,000 in equity.

If, however, after you get your mortgage the price of housing drops by 33% (what it has dropped since its high), your balance sheet changes. You now have $66,000 in assets, but still $90,000 in liabilities. So you have -$24,000 in equity.

In other words the housing market pushes the balance sheets into insolvency (0 or negative equity), through no fault of the borrower.

So your equity is -$24,000, how does that hurt your cash flow?
You know you pay your martgage from cash flow, not equity, right?
Think back to your accounting. LOL!

Ok please remember what i originally said you little fool. I said "its not the borrowers fault that hes now underwater on his mortgage". Somehow, you turned that into "home prices dropping make it harder to pay your mortgage".

Never once did i say that. What it does do is give you an incentive to walk away from your mortgage. The longer you have it the worse your balance sheet gets. The problem right now is the debt overhang. When home prices shrunk, for some people that was the difference between having wealth, positive equity, or being insolvent, negative equity.

I never claimed lower housing prices makes it harder to pay a loan. But it does make a person less solvent, and pushes them into debt.

 

[Toddsterpatriot]

Real life example

Imagine you have $10,000 in assets and no debt (so also $10,000 in equity). You use that $10,000 as a 10% down payment on a $100,000 house. When you take out a mortgage you get an asset (the house) and a liability (the mortgage).

You expect your balance sheet to now be $100,000 in assets (a house) and $90,000 in liabilities (the mortgage for the $100,000 house, of which youve already paid $10,000). So thats still $10,000 in equity.

If, however, after you get your mortgage the price of housing drops by 33% (what it has dropped since its high), your balance sheet changes. You now have $66,000 in assets, but still $90,000 in liabilities. So you have -$24,000 in equity.

In other words the housing market pushes the balance sheets into insolvency (0 or negative equity), through no fault of the borrower.

So your equity is -$24,000, how does that hurt your cash flow?
You know you pay your martgage from cash flow, not equity, right?
Think back to your accounting. LOL!

Ok please remember what i originally said you little fool. I said "its not the borrowers fault that hes now underwater on his mortgage". Somehow, you turned that into "home prices dropping make it harder to pay your mortgage".

Never once did i say that. What it does do is give you an incentive to walk away from your mortgage. The longer you have it the worse your balance sheet gets. The problem right now is the debt overhang. When home prices shrunk, for some people that was the difference between having wealth, positive equity, or being insolvent, negative equity.

I never claimed lower housing prices makes it harder to pay a loan. But it does make a person less solvent, and pushes them into debt.

Great, it's nobody's fault that prices dropped.
Now you've admitted that dropping home prices didn't hurt cash flow, just "incentives". Thanks!

 

[cbirch2]

So your equity is -$24,000, how does that hurt your cash flow?
You know you pay your martgage from cash flow, not equity, right?
Think back to your accounting. LOL!

Ok please remember what i originally said you little fool. I said "its not the borrowers fault that hes now underwater on his mortgage". Somehow, you turned that into "home prices dropping make it harder to pay your mortgage".

Never once did i say that. What it does do is give you an incentive to walk away from your mortgage. The longer you have it the worse your balance sheet gets. The problem right now is the debt overhang. When home prices shrunk, for some people that was the difference between having wealth, positive equity, or being insolvent, negative equity.

I never claimed lower housing prices makes it harder to pay a loan. But it does make a person less solvent, and pushes them into debt.

Great, it's nobody's fault that prices dropped.
Now you've admitted that dropping home prices didn't hurt cash flow, just "incentives". Thanks!

Your making up things ive said so that you can claim victory.

When did i ever say that dropping home prices decrease cash flow? Huh??

I didnt say its no bodys fault that prices dropped, i said its the housing markets fault collectively. Unless you can pinpoint which mortgage purchases or sales drove the price of houses down nationally, then you pretty much have to take the same position.

 

[Toddsterpatriot]

If the borrower couldn't afford to make the payments and only bought the home because it "had to go up in value", yes, I blame that defaulting borrower for bringing the economy to its knees.

No no no. Your missing the point.

If the buyer bought a $200,000 home, is it his fault if the property drops from $200,000 to $133,000? No, he was forced by the market to over pay by $70,000 dollars. His ability to pay off debt is now worse than it was before, because his most valuable asset has depreciated.

Think back to what I said.

Is it the bank's fault the value drops?

Your contract doesn't say you only have to pay if the value stays the same or rises.

If your cash flow is unchanged, the value of the house doesn't impact your ability to repay.

Your ability to repay is not affected by a decline in your asset value.

You desire to repay is not the same as your ability to repay.

 

[Toddsterpatriot]

Ok please remember what i originally said you little fool. I said "its not the borrowers fault that hes now underwater on his mortgage". Somehow, you turned that into "home prices dropping make it harder to pay your mortgage".

Never once did i say that. What it does do is give you an incentive to walk away from your mortgage. The longer you have it the worse your balance sheet gets. The problem right now is the debt overhang. When home prices shrunk, for some people that was the difference between having wealth, positive equity, or being insolvent, negative equity.

I never claimed lower housing prices makes it harder to pay a loan. But it does make a person less solvent, and pushes them into debt.

Great, it's nobody's fault that prices dropped.
Now you've admitted that dropping home prices didn't hurt cash flow, just "incentives". Thanks!

Your making up things ive said so that you can claim victory.

When did i ever say that dropping home prices decrease cash flow? Huh??

I didnt say its no bodys fault that prices dropped, i said its the housing markets fault collectively. Unless you can pinpoint which mortgage purchases or sales drove the price of houses down nationally, then you pretty much have to take the same position.

When did i ever say that dropping home prices decrease cash flow? Huh??

You said "His ability to pay off debt is now worse than it was before"

You were wrong.

Let me know if you're confused about anything else. Glad to help.

 

[BluePhantom]

Well this has devolved into a complete cluster-fuck. Most of this I am not going to comment on for the following reasons:

1) How we got into this mess is not the point and it's been debated to death in other threads.

2) I am seeing the exact same arguments (some valid and some total bullshit) that have been covered or completely debunked on other threads (i.e. "Ownership Society" crap).

3) Many of these arguments are completely disingenuous (i.e. "The GOP chipping away at regulations caused the meltdown" then when Foxfyre shoves the Congressional record in someones face it become "oh well except for that....that had nothing to do with it". Yeah bullshit.)

The reality is there was not one single thing that created this mess. Did the repeal of Glass-Steagall contribute? Yes it did. Was that the only reason? Hell no. Was that repeal "all the Republican's fault?" Well 153 Democrats in the House and 38 Democrats in the Senate voted in favor of the final draft so I would say "well the Democrats played a little part in that too didn't they?" (1,2)

Did the Community Reinvestment Act contribute? Damn right it did. Was it the only thing that did it? No. Did the banks swindle home buyers? Yep. Did home buyers buy houses they had no prayer of being able to afford? Oh yeah. Did we as a community jack up so much debt that we collectively stiffed the banks? Yep. Did corruption and cronyism stop Congress from taking action? No question about it.

Did all of this contribute? Absolutely. Were any one of them responsible all by themselves? Absolutely not. Was either party responsible for it on their own? Hell no. All of this shit and plenty more contributed in creating a perfect financial storm around a house of cards and it was created by both sides through a combination of corruption, greed, naivety, politics, entitlement mentality, the wrong regulations in one place, the wrong lack of regulations in another place...blah, blah, blah. The Republicans did their part and the Democrats did their part.

Now that's about all I am going to say on the current direction of this thread. I will address those posts that are on topic between games.

1) GovTrack: House Vote on Conference Report: S. 900 [106th]: Gramm-Leach-Bliley Act

2) GovTrack: Senate Vote on Conference Report: S. 900 [106th]: Gramm-Leach-Bliley Act

 

[cbirch2]

If the borrower couldn't afford to make the payments and only bought the home because it "had to go up in value", yes, I blame that defaulting borrower for bringing the economy to its knees.

No no no. Your missing the point.

If the buyer bought a $200,000 home, is it his fault if the property drops from $200,000 to $133,000? No, he was forced by the market to over pay by $70,000 dollars. His ability to pay off debt is now worse than it was before, because his most valuable asset has depreciated.

Think back to what I said.

Is it the bank's fault the value drops?

Your contract doesn't say you only have to pay if the value stays the same or rises.

If your cash flow is unchanged, the value of the house doesn't impact your ability to repay.

Your ability to repay is not affected by a decline in your asset value.

You desire to repay is not the same as your ability to repay.

Yea im not sure you understand what i mean by ability to pay off debt...

Look into the difference between balance sheet solvency vs cash flow solvency.

"His ability to pay off debt is now worse than it was before"

That statement is still true. The ratio of this persons assets to liabilities is worse off than it was before. In the end cash flow doesnt matter, your balance sheet matters. Over the long term your assets have to exceed your liabilities, or else you go bankrupt. In the short term you pay for mortgage from cash flow + equity, if you dont take in enough cash. But over the long term your ability to finance all of your debts and level of spending depends on your balance sheet, not your cash flow.

So it might not make the mortgage harder to pay off, at least in the short term, but it squeezes the balance sheets of families and constrains their ability to pay off aggregate long term debt.

 

[Toddsterpatriot]

No no no. Your missing the point.

If the buyer bought a $200,000 home, is it his fault if the property drops from $200,000 to $133,000? No, he was forced by the market to over pay by $70,000 dollars. His ability to pay off debt is now worse than it was before, because his most valuable asset has depreciated.

Think back to what I said.

Is it the bank's fault the value drops?

Your contract doesn't say you only have to pay if the value stays the same or rises.

If your cash flow is unchanged, the value of the house doesn't impact your ability to repay.

Your ability to repay is not affected by a decline in your asset value.

You desire to repay is not the same as your ability to repay.

Yea im not sure you understand what i mean by ability to pay off debt...

Look into the difference between balance sheet solvency vs cash flow solvency.

"His ability to pay off debt is now worse than it was before"

That statement is still true. The ratio of this persons assets to liabilities is worse off than it was before. In the end cash flow doesnt matter, your balance sheet matters. Over the long term your assets have to exceed your liabilities, or else you go bankrupt. In the short term you pay for mortgage from cash flow + equity, if you dont take in enough cash. But over the long term your ability to finance all of your debts and level of spending depends on your balance sheet, not your cash flow.

So it might not make the mortgage harder to pay off, but it squeezes the balance sheets of families and constrains their ability to pay off aggregate long term debt.

Baloney. Debt is paid from cash flow. Not equity.

 

[cbirch2]

Think back to what I said.

Is it the bank's fault the value drops?

Your contract doesn't say you only have to pay if the value stays the same or rises.

If your cash flow is unchanged, the value of the house doesn't impact your ability to repay.

Your ability to repay is not affected by a decline in your asset value.

You desire to repay is not the same as your ability to repay.

Yea im not sure you understand what i mean by ability to pay off debt...

Look into the difference between balance sheet solvency vs cash flow solvency.

"His ability to pay off debt is now worse than it was before"

That statement is still true. The ratio of this persons assets to liabilities is worse off than it was before. In the end cash flow doesnt matter, your balance sheet matters. Over the long term your assets have to exceed your liabilities, or else you go bankrupt. In the short term you pay for mortgage from cash flow + equity, if you dont take in enough cash. But over the long term your ability to finance all of your debts and level of spending depends on your balance sheet, not your cash flow.

So it might not make the mortgage harder to pay off, but it squeezes the balance sheets of families and constrains their ability to pay off aggregate long term debt.

Baloney. Debt is paid from cash flow. Not equity.

In the short term. Over the long term its the balance sheet. Assets must exceed liabilities. cash flow and equity are essentially the same thing, at least part of two views of the same thing. If your cash flow is positive your equity is increasing.

Besides, at any given moment how much you can spend depends on the value of your equity, NOT your cash flow. So if you have enough money coming in to pay your mortgage, but your equity is still less, that just means you long term aggregate spending will have to decrease. So the fact that you could still pay your mortgage just means you have to offset that by not spending money at a later time.

 

[cbirch2]

O, and beside cash flow is just changes to the balance sheet. Theyre two views of the same thing. Falling home prices are negative cash flows for home owners because cash flow is just the change in the price of your assets and your liabilities.

 

[Toddsterpatriot]

O, and beside cash flow is just changes to the balance sheet. Theyre two views of the same thing. Falling home prices are negative cash flows for home owners because cash flow is just the change in the price of your assets and your liabilities.

Baloney, again.

My home could drop $100,000 in value today and not impact my cash flow a bit.

Oops, it dropped another $100,000, still hasn't changed by ability to pay at all.

 

[cbirch2]

O, and beside cash flow is just changes to the balance sheet. Theyre two views of the same thing. Falling home prices are negative cash flows for home owners because cash flow is just the change in the price of your assets and your liabilities.

Baloney, again.

My home could drop $100,000 in value today and not impact my cash flow a bit.

Oops, it dropped another $100,000, still hasn't changed by ability to pay at all.

REPOST:

In the short term. Over the long term its the balance sheet. Assets must exceed liabilities. cash flow and equity are essentially the same thing, at least part of two views of the same thing. If your cash flow is positive your equity is increasing.

Besides, at any given moment how much you can spend depends on the value of your equity, NOT your cash flow. (If you take in a lot of money but have a lot of debt, you cant spend as much). So if you have enough money coming in to pay your mortgage, but your equity has decreased, that just means you long term aggregate spending will have to decrease as well. So the fact that you could still pay your mortgage just means you have to offset that by not spending money at a later time.

Essentially your consolation to these homeowners is that they are liquid, but insolvent. What a relief!

 

[snjmom]

Just for the record, the majority of sub-prime loans that were the initial wave of defaulters were for real estate investment, not owner-occupiers. One should differentiate between the motives between the two. If your motive is to have a home to live in, then the cash flow dominates the decision as you are committed to the long term use and can wait for the market to climb back. If your motive is to profit in the short-term, then the balance sheet account dominates the decision, like any other business proposition, you bankrupt and walk away when your liabilities exceed your assets.

The pursuit of short term profits at the expense of long term investment is the beast that killed our economy. I shall continue to do so, just as it will the rest of the world, until the fever breaks. Or the architects are swung from the noose. Whichever comes first.

 

[cbirch2]

Just for the record, the majority of sub-prime loans that were the initial wave of defaulters were for real estate investment, not owner-occupiers. One should differentiate between the motives between the two. If your motive is to have a home to live in, then the cash flow dominates the decision as you are committed to the long term use and can wait for the market to climb back. If your motive is to profit in the short-term, then the balance sheet account dominates the decision, like any other business proposition, you bankrupt and walk away when your liabilities exceed your assets.

The pursuit of short term profits at the expense of long term investment is the beast that killed our economy. I shall continue to do so, just as it will the rest of the world, until the fever breaks. Or the architects are swung from the noose. Whichever comes first.

Correct but in the long term both look at the balance sheet.

 

[Foxfyre]

O, and beside cash flow is just changes to the balance sheet. Theyre two views of the same thing. Falling home prices are negative cash flows for home owners because cash flow is just the change in the price of your assets and your liabilities.

Baloney, again.

My home could drop $100,000 in value today and not impact my cash flow a bit.

Oops, it dropped another $100,000, still hasn't changed by ability to pay at all.

But you probably have an investment in your home worth the wait too and/or are the kind of person who honors his debts. When the government first started promoting home ownership for persons of more limited means, a lower down payment (5% or 10% instead of the standard 20%) was allowed BUT the people still had to be of good reputation, have no bad debts or bankruptcies on their record, etc. In an economic downturn in the 60's and 70's not very many people actually defaulted on their loans that were mostly transferrable. In other words you could buy another person's equity from the person and, if you had good credit, could take over their loan. Many homes were sold in just that way.

And if folks simply could not find a buyer for their equity, rather than declare bankruptcy or have a foreclosure, they would allow somebody to just take up the payments without buying their equity. A lot of homes were sold that way too and the departing owner would lose most or all of his life savings in the process, but he avoided the stigma of a repossession or bankruptcy and it is was worth it to him. A bankruptcy or repossession could prevent somebody from getting another loan for 7 to 10 years.

But the more the government meddled and the more they social engineered everything into the late 70's, 80's and 90's, everything began to change. Because of sky high interest rates in the Carter Administration into the Reagan Administration, the financial institutions phased out the transferrable loans. Each home buyer had to take out a brand new mortgage at the higher interest rate. And, when they still had little investment in the property, when they couldn't make the mortgage payments, they walked away from the property. There was little or no stigma in a repossession and you could always blame somebody else. But because the economy was strong there wasn't enough of that to seriously affect the housing market.

And now we have a lousy economy, and the people investing little to nothing in the property they buy are fully infused with an entitlement mentality that the government is supposed to take care of them in hard times and they are not expected to take care of themselves. All this contributed to the bursting of the housing bubble.

To fix it:

1. The government could continue to back FHA loans, but should go back to the original really tough standards for qualification for the loans. And other than for sufficient regulation to keep financial institutions from easily defrauding or manipulating the market, the government should then stay out of it.

2. Bundling of loans should be expressly forbidden and full disclosure must be required in all transactions involving the loans.

3. Those who enter into bad mortgage contracts that they can't pay for should accept the consequences for that contract which means they default on the loan and likely lose their investment in the property.

4. Financial institutions making bad loans should have to suffer the consequences for that too and if that means they close their doors, well that is how it has always been up to the last 10-15 years.

 

[Toddsterpatriot]

O, and beside cash flow is just changes to the balance sheet. Theyre two views of the same thing. Falling home prices are negative cash flows for home owners because cash flow is just the change in the price of your assets and your liabilities.

Baloney, again.

My home could drop $100,000 in value today and not impact my cash flow a bit.

Oops, it dropped another $100,000, still hasn't changed by ability to pay at all.

REPOST:

In the short term. Over the long term its the balance sheet. Assets must exceed liabilities. cash flow and equity are essentially the same thing, at least part of two views of the same thing. If your cash flow is positive your equity is increasing.

Besides, at any given moment how much you can spend depends on the value of your equity, NOT your cash flow. (If you take in a lot of money but have a lot of debt, you cant spend as much). So if you have enough money coming in to pay your mortgage, but your equity has decreased, that just means you long term aggregate spending will have to decrease as well. So the fact that you could still pay your mortgage just means you have to offset that by not spending money at a later time.

Essentially your consolation to these homeowners is that they are liquid, but insolvent. What a relief!

Increased equity doesn't change your cash. Not now, not in the long term.
Neither does decreased equity.
Maybe you need to take an accounting class?

 

[cbirch2]

Baloney, again.

My home could drop $100,000 in value today and not impact my cash flow a bit.

Oops, it dropped another $100,000, still hasn't changed by ability to pay at all.

REPOST:

In the short term. Over the long term its the balance sheet. Assets must exceed liabilities. cash flow and equity are essentially the same thing, at least part of two views of the same thing. If your cash flow is positive your equity is increasing.

Besides, at any given moment how much you can spend depends on the value of your equity, NOT your cash flow. (If you take in a lot of money but have a lot of debt, you cant spend as much). So if you have enough money coming in to pay your mortgage, but your equity has decreased, that just means you long term aggregate spending will have to decrease as well. So the fact that you could still pay your mortgage just means you have to offset that by not spending money at a later time.

Essentially your consolation to these homeowners is that they are liquid, but insolvent. What a relief!

Increased equity doesn't change your cash. Not now, not in the long term.
Neither does decreased equity.
Maybe you need to take an accounting class?

What are you talking about, i said that opposite. I didnt say an increase in equity increases your cash. i said an increase in cash increases your equity, as long as you dont increase your liabilities at the same time.

You really dont understand this point do you? A person can be insolvent, but still able to make mortgage payments in the short term. Thats being insolvent, but still being liquid.

You would rather be the opposite, illiquid but solvent. An entity thats liquid but insolvent is doomed to bankrupty, just not in the immediate future.

 

[cbirch2]

Basically a decrease in home prices is fine if your cash flow is positive. But if your cash flow is negative, and youve have to eat into savings (equity) to finance your spending and have no way of cutting spending, then a decrease in housing prices can make you bankrupt.

If your cash flow is negative, and a lot are during a recession, then you have to finance that deficit with your equity. If your assets depreciate, housing prices fall, then your assets decrease in value and your equity decreases. if housing prices decrease by the inverse of your leverage (mathematical formula, assets:equity) then you become insolvent.

 

[Toddsterpatriot]

REPOST:

In the short term. Over the long term its the balance sheet. Assets must exceed liabilities. cash flow and equity are essentially the same thing, at least part of two views of the same thing. If your cash flow is positive your equity is increasing.

Besides, at any given moment how much you can spend depends on the value of your equity, NOT your cash flow. (If you take in a lot of money but have a lot of debt, you cant spend as much). So if you have enough money coming in to pay your mortgage, but your equity has decreased, that just means you long term aggregate spending will have to decrease as well. So the fact that you could still pay your mortgage just means you have to offset that by not spending money at a later time.

Essentially your consolation to these homeowners is that they are liquid, but insolvent. What a relief!

Increased equity doesn't change your cash. Not now, not in the long term.
Neither does decreased equity.
Maybe you need to take an accounting class?

What are you talking about, i said that opposite. I didnt say an increase in equity increases your cash. i said an increase in cash increases your equity, as long as you dont increase your liabilities at the same time.

You really dont understand this point do you? A person can be insolvent, but still able to make mortgage payments in the short term. Thats being insolvent, but still being liquid.

You would rather be the opposite, illiquid but solvent. An entity thats liquid but insolvent is doomed to bankrupty, just not in the immediate future.

Changes in equity don't change your cash balance.
We're talking about people being able to make their mortgage payments. Or not.
We're not talking about decreasing, or increasing, net worth.

My house goes down $50,000 this month. Does that make it harder for me to pay my mortgage?
It goes up $50,000 next month. Does this make it easier for me to pay my mortgage?
The answers are no and no.

 

[cbirch2]

Increased equity doesn't change your cash. Not now, not in the long term.
Neither does decreased equity.
Maybe you need to take an accounting class?

What are you talking about, i said that opposite. I didnt say an increase in equity increases your cash. i said an increase in cash increases your equity, as long as you dont increase your liabilities at the same time.

You really dont understand this point do you? A person can be insolvent, but still able to make mortgage payments in the short term. Thats being insolvent, but still being liquid.

You would rather be the opposite, illiquid but solvent. An entity thats liquid but insolvent is doomed to bankrupty, just not in the immediate future.

Changes in equity don't change your cash balance.
We're talking about people being able to make their mortgage payments. Or not.
We're not talking about decreasing, or increasing, net worth.

My house goes down $50,000 this month. Does that make it harder for me to pay my mortgage?
It goes up $50,000 next month. Does this make it easier for me to pay my mortgage?
The answers are no and no.

Wow is it really impossible for you to understand the diference between long term and short term? Apparently so.

In the short term you base your spending on your cash flow statement. In the long term you have to base your liabilities with your assets, otherwise you become insolvent.