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He is a Bush appointee. 'Nuff said.
What a tool.
What comes across is that Paulson hates having to be a mouthpiece for the Bush party line, and he hates the chore of having to try to deal with a lot of mortgage industry details that he doesn't understand.
Securitized -- yes, he understands that. Not much more.
The LA Times editors are pretty sharp.
"I also have done some real research on this. I have found that when you prepare a simple, one-page document that says, "Your monthly payment is x and it could be as high as y in a couple of years, and you can't afford that, which is why we are denying your application for credit," you call it an "Adverse Action Notice" instead of a "Disclosure." But that kind of runs into that "cutting off credit" problem."
Wow, just three sentences...Refutted the entirety of Paulson. That is SWEET.
Cheers,
LOL at the "You Must Be Kidding" tag.
Why a transfer of servicing rights would, in and of itself, remove the incentive for working out loans is still kind of hard to see.
OK, I hate Bush administration appointees as much as the next guy, but it seemed pretty clear to me that Paulson was referring here (obliquely, of course) to the "class warfare" problem -- i.e. when a loan has been sliced and diced into different tranches with different characterstics, different "lenders" may have different exposures in the case of foreclosure. Hasn't that same point been made, many times, on this blog?
Yeah, he's a tool, but he's not a complete idiot.
Thanks, I guess the Dear Mr. Paulson letter already took care of the a lot of the issues.
[snip]
Henry Paulson:
And again, I think if you take the time, call in servicers, talk to people at Wells Fargo and others, take the time to really understand it, they'll see that once you get into the process of underwriting a new loan refinancing or modification and you go through all the paperwork they have to go through and collect the data, that takes a long time. And they don't have the resources to do that and handle the volume at the same time.
Tim Cavanaugh: Well, wait a second, they had the resources to do it and handle the volume when they wrote the loans in the first place.
Henry Paulson: Well, it's different than these were securitized. I'm not going to defend what went on, but I haven't talked to anyone out there, who is knowledgeable about the industry and is in the industry, who says they have the resources to handle all the underwritings to handle the modifications.
[snip]
Tim must have been taking truth/snark lessons from Tanta or more likely reading Calculated Risk.
unedited version of the LA times interview:
Peter Hong: did you get any homeowners this summer?
Henry Paulson: heck yes, like 50 of them - they were attacking me and my cousin - what would you do in that situation?
Jim Hong: So Henry, what did you use
Henry Paulson: A freakin' 12 gauge what d'ya think. Gosh...your retarded
Many of the servicers were also the originators of the loans. That has just GOT to make for some akward conversations after they underwrite a defaulting party for loan modification. Hank is merely trying to reduce the number of akward conversations out there, think of it as a social benefit.
The servicers would also have a tremendous amount of liability, either through buybacks or just getting sued seven ways from Sunday. It kind of puts a damper on the servicer wanting to go in and underwrite those loans (notice I didnt say, "underwrite those loans.. AGAIN").
I really wished I spelled awkward right. Dammit.
Time for me to give my weekly thanks to CR, Tanta and all the other commentators on this blog. Wish I could add something to this conversation, but recently the discussion has gone way beyond my comprehension.
It seems like maybe 10-20% of the general population in my area understands what's going on.... and that's generous. At least some of you older folks have gotten to enjoy prosperity... I know my back and other GenXYZ's are going to be carrying the load. Hopefully I can use some of the information on this blog and figure out how to do this on my own. As soon as the year rolls over I'm withdrawing most of the money from my mutual fund and putting it elsewhere... I no longer am naive enough to trust other people to manage my money (even if my parents and grandparents still feel that way).
Just wondering if the market is going to be stable the next week... if no one is working they can't produce bad news for now, right?
"Today we're dealing with two factors that make this more difficult. First, as you know, the institution or company that made the mortgage no longer holds it. It's spread all around the world with investors. That creates a cumbersome, complex decision-making process."
Not to mention, it is also a really slick conduit for siphoning off wealth while fraudulently reallocating risk/debt.
It's only "cumbersome and complex" when the Ponzi scheme breaks down.
Whoda' thunk rampant financial chicanery would crash the economy? Sheesh.
I haven't figured out whether Paulson is a complete moron or just a really bad liar - could be both.
I couldn't read the whole thing either, though the part where he claimed that his whatever-you-call-it with the lender/servicers would keep the housing market from collapsing was unbelieveably stupid and/or dishonest.
Just what you'd expect from GWB.
Paulson comes off as both stupid and dishonest, a not uncommon personality mix in former CEOs:
How does someone who speaks like this get this job?
And catch this:
Yes, trickle down is always about letting the poor and middle class borrowing from the rich. And paying it back, with interest.
Those interviewers were great - journalists on other newspapers can learn from them.
-K
Nothing really about the investors taking a huge haircut and the passing it along to the borrowers!
When they translate those losses to the homeowners, the pain will stop.
Lower the mortgages!!!
That is the only solution that is starting to make any sense.
I find it hilarious that the Bush administration will stand around and let stuff crash- their blame level in this is going to be astronomical.
Hoover II.
If the loan is only worth 50 cents on the open market, then buy it and mark down the loan to the payer, and in the process convert it into some paper worth owning in a portfolio.
Someday this war's gonna end...but the Cato institute and the deregulatory bunch are going to be howling in the wilderness a very long long long time.
it seemed pretty clear to me that Paulson was referring here (obliquely, of course) to the "class warfare" problem
Well of course it's "oblique." He doesn't seem to want to come right out and say that we designed a system that makes default not costly to either borrowers and lenders, because that would, um, answer the question about whether we should cut off the credit or not. So he does, in fact, say that defaults are "costly" to lenders; this leads him to explain the securitization angle as a mere question of cumbersome getting-of-permissions, not as a matter of how tranched deals mean that default can be much less costly than the alternative.
Stupid or dishonest? I go with dishonest.
Right on AllenM. No way are they able to hold this off for another 13 months.
Meanwhile Huckabee is doing his level best to rip the GOP to shreds from the bottom up.
Stupid or dishonest? I go with dishonest.
i'd go with a unique blend i like to call "essence de paulson."
Is it possible that Paulson's been getting subprime mortgage research briefings from George Tenet?
Stupid or Dishonest? Well you dont get to be top dog at GS by being stupid...dishonest on the other hand? Actually idiots cant lose billions of $, for that it takes some pretty high IQ's.
YLSP said: "It seems like maybe 10-20% of the general population in my area understands what's going on.... and that's generous. At least some of you older folks have gotten to enjoy prosperity... I know my back and other GenXYZ's are going to be carrying the load. Hopefully I can use some of the information on this blog and figure out how to do this on my own. As soon as the year rolls over I'm withdrawing most of the money from my mutual fund and putting it elsewhere... I no longer am naive enough to trust other people to manage my money (even if my parents and grandparents still feel that way)..."
A couple of points.
There may be a relatively small percentage of people who understand what's going on, but at the same time there are a relatively small number of people who are suffering any long-term financial injury from what's going on. A lot of people don't know or care, and there's no reason for them to. That includes most homeowners, whose far more serious concerns are things like their careers, marriage, children's education, health, and so on.
As to the prosperity of "older folks", don't worry about your own shot at the brass ring: You and others of your generation will simply age into it. As you get older your skills and knowledge become more valuable, you get paid more, and you accumulate assets.
Finally, before you pooh-pooh the naivete of your parents and grandparents, consider what you're doing: Relying on the advice of anonymous Internet posters.
This is an extremely reactionary board, responding to media reports that are calculated to agitate and provoke instead of quietly inform.
If you really want to learn something, get off of this blog and do your own original research. Or if you must visit this blog, whenever CR posts a link to the data he's using, get the raw data yourself and make your own appraisal of what it does or doesn't mean.
Sebastia
Is everyone sure that the L.A. times piece isn't a deliberate parody ? The tongue in cheek gets a little thick at times ... like when the interviewer says "This ain't Stockton". It honestly reads like a parody to me. I think it might actually be.
I would say that there's no way they can keep the plates spinning for another 12 months...
But if you'd told me that we'd be in the midst of a credit crisis, a housing crash, gold at $800, oil at $90, etc etc etc, I would have sworn that the market would have crashed 20%.
But it's still within spitting distance of all time highs. They say that the market can stay irrational longer than bears can stay solvent. This market certainly seems set out to break a record.
How bad is it in norcal? $200k plus underwater,PITI is $4800,home would rent for $1400 tops,1/3 of homes in development currently in foreclosure...and still making the payments.3 professional Gen-xer's on note.
It's like the blind man and the elephant. Paulson's expertise is concentrated in one area of the problem. As of yet, he's consistently underestimated the complexity and resources needed to accomplish his stated goal.
Paul Krugman speaks at google. Worth a watch if you have 70 minutes to spare.
YouTube - Authors@Google: Paul Krugman
Or if you must visit this blog
"I can't quit you, Tanta."
I do compare figures posted here to my own data, thanks.
OT but can you believe these shills talking about increased spending in November without saying there was an extra weekend of Christmas spending.
CR-
Great post.
" But, I've made the case several times, with all the disclosure there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years." The Fed I know has done some real consumer research on this."
Does anyone REALLY believe that this paper would have made any difference when borrowers have $$$$$$ in their eyes. It kind of reminds me of the instructions before a flight...your seat cushion can be used as a floatation device....seems to me to be just another piece of advice that people are going to ignore. Funny, but in both circumstances, the end result is drowning.
Tanta, welcome back, you've been missed!
"OT but can you believe these shills talking about increased spending in November without saying there was an extra weekend of Christmas spending."
shhhh
You'll spoil the Wile E. moment.
Fed lends another $20B to ease crunch and received bids for $58B
Business, financial, personal finance news - CNNMoney.com
"This is an extremely reactionary board, responding to media reports that are calculated to agitate and provoke instead of quietly inform."
But even so it is sufficiently influencial that Seb has to read every single post to ensure when his name is mentioned he appears or he is on hand to destroy any point of view that might be detrimental to his own interests - whatever they might be.
Yeah this blog is a complete waste of time and only idiots are reading it
Well, Paulsonomics appears to be working: real personal consumption expenditures (PCEs) are up 0.5% from October.
Or are they?
More homes vacant, awaiting sale, than ever before.
Home prices falling year over year.
Yet, 'real housing services' (14% of PCEs) are up, October to November?
http://www.bea.gov/national/nipaweb/nipa_underlying/TableView.asp#Mid
Geez, get some defensible metrics, BEA.
Start of a trend? Real disposable personal income (DPI) is down for the second consecutive month.
http://www.bea.gov/newsreleases/national/pi/2007/pdf/pi1107.pdf
Hey, Hank, please improve your Paulsonomics; we need a little more trickle down here on DPI.
Do you think Hank has heard of Gordian Knot?
That could make for a "cumbersome" decision making process, no?
Thanks Seb and even more, Worried.
Time to wonder why 95 companies cannot be named at the TAF "Bread Line" and the coincidence of a market that despite every indicator you can think of, is not falling all that much.
The mortgage originator can't work out loans because FAS140-based accounting doesn't let them; the accounting pronouncement has very clear language about the assets being beyond the control of the seller. So even if they did want to help out their mortgage customers, they couldn't because it would cause all of those securitized assets to come back on book. I can guarantee you that's their primary concern.
I could see how multi-layered securitizations means it's very hard for the ultimate buyers to figure out with whom they have to work things out. Afterall, you could have a scenario where each of 10 ultimate buyers owns 10% of one person's mortgage.
So I could see a scenario where we can't connect a) ultimate lenders with real costs to get rid of and b) homeowners.
Excerpt from Moody's 2008 Forecast -
Forecast Summary
The current housing recession is expected to run through early 2009 and will ultimately be severe enough to be characterized as a housing crash. Home sales are expected to hit bottom in early 2008, declining by over 40% from their peak, housing starts will reach their nadir in mid-2008, falling by 55%, and house prices are expected to decline by 12% through early 2009. After accounting for the plethora of non-price discounts home sellers are offering to buyers, effective house-price declines peak to trough will total well over 15%.
I thought this last line was interesting.
there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years."
...but that won't matter because we will have already sold the home for a 50% profit!
Once people started believing that real estate only went up they stopped caring about minor things like unaffordable future payments.
jmay said: "But if you'd told me that we'd be in the midst of a credit crisis, a housing crash, gold at $800, oil at $90, etc etc etc, I would have sworn that the market would have crashed 20%."
Those things you mention sound "bad", but if examined in perspective how "bad" are they, really?
A credit "crisis" and a housing "crash"---but investors and institutions aren't bailing out of stocks to raise "desperately needed" cash?!?!
Gold at $800/oz.? It was that high a couple of decades ago, in nominal prices. Oil at $90/barrel is probably the inflation-adjusted price from a couple of decades ago. In the late 1970's I took a driving trip to CA and paid $3/gallon for gasoline that I had to wait in line for, LOL!
Conditions today simply aren't that bad, and a genuine understanding of historical events (and not just carefully-chosen correlations and anecdotes in isolation) tells us that.
Sebastia
I'm still waiting for Paulson to explain (and for that matter, a journalist with sufficient cajones to ask) about his role in creating this mess when he was still at Goldman. And in detail.
But what I really want for Christmas is a congressman to get him before a committee under oath and FORCE him to explain himself.
Sebastian - You make some valid points. And I, as well as many on this board I'm sure, do plenty of our own due diligence. The signal-to-noise ratio on this board is extremely high compared to your average financial blog.
But a statement like this? Come on:
[A]t the same time there are a relatively small number of people who are suffering any long-term financial injury from what's going on. A lot of people don't know or care, and there's no reason for them to.
I can't tell you how many times I heard a variation on this exact theme in the summer and fall of 2000. "Only 1 in 5 Americans own stocks directly, Larry, and a lot of these are holding big-cap blue chips." Or, "The buy-and-hold investor who just trusts his money to mutual funds won't care about this in the long run." Or, "Your average retail investor is simply not worried about huge exposure to the dot-com mess."
And at the denouement, gee, who could have predicted that an index of the 500 biggest blue chips in America would have been cut in half? Or that tens of thousands of company pensions, state treasuries, and local governments wasted billions chasing aggressive growth and investing in things they didn't understand? And a lot of folks who thought they "didn't care" had a real big reason to care all of a sudden, if they got laid off in the 9-month-long recession that followed the "contained" bursting of the bubble. Et cetera.
So, sure, keep on believing that you and most of the rest of America can keep on living outside the war. You can even have a laugh or two at the industry's expense if you'd like. Just remember the old saying: "It stops being funny when it starts being you."
DPI matters because it is one of the four primary variables that the NBER Business Cycle Dating Committe monitors to determine recession start date.
The Business-Cycle Peak of March 2001
The four primary variables are:
Employment (fell in October via household survey)
Real disposable personal income (fell in October and November)
Real wholesale/trade sales (I don't know where to find the inflation-adjusted figure)
Industrial production (fell in 0.7% in October, gained 0.3% in November)
I think the recession began in October. We'll see.
Why a transfer of servicing rights would, in and of itself, remove the incentive for working out loans is still kind of hard to see.
Not really. All one has to do is read the PSAs. Servicers make more money the longer a homeowner is kept in default. Virtually every prospectus that I've read in the last 5 years gives servicers late fees as additional servicing compensation. The longer a homeowner is kept in default status without foreclosing the more money a servicer makes - either in the form of late fees paid directly by the homeowner or in the form of equity from the property because the late fees were tacked on to the homeowner's account. This really isn't that difficult to understand. What IS a bit hard to comprehend is that, again, depending on how the PSAs are negotiated, servicers get to keep modification fees as additional servicing compensation as well.
What ultimately baffles me is the whole "foreclosures are costly to lenders/noteholders" argument. Bullshit, quite frankly. Any fees associated with a foreclosure action are tacked on to a borrower's loan. Foreclosure auctions usually begin bidding at whatever a borrower owes on a property. If a third party purchases the property then all fees, etc., are covered and the lender/noteholder's "foreclosure costs" are covered.
If the servicer/lender/noteholder purchases the property at auction then they get whatever equity may be left in the property because they are purchasing it for the amount of the outstanding note and NOT at FMV absorbing whatever equity may have been due to a borrower had the property sold for FMV.
In the case of a securitized loan, insurance policies cover the trust. A non-performing loan has already been covered by at least one insurance policy, possibly two if it had pmi coverage. That being the case, the full value of the loan has already been recouped leaving only "fees" to be covered at a foreclosure auction.
The only one for whom foreclosures are costly are the borrower. Everyone else has their collective asses covered.
I could see how multi-layered securitizations means it's very hard for the ultimate buyers to figure out with whom they have to work things out. Afterall, you could have a scenario where each of 10 ultimate buyers owns 10% of one person's mortgage.
Begbie,
Do you think this might be related to the foreclosure problems suffered by Deutche Bank in Ohio?
CR, Tanta, anyone:
Is the "freeze plan" a real document or just talk?
If it's a real document, is there a link where I can read it?
Thanks, all.
Worried said: "Yeah, this blog is a complete waste of time and only idiots are reading it."
It's not the idiots I'm worried about. It's the reasonable, serious-minded people who might be fooled into believing that an attractive-looking chart must represent the truth.
There's not a day (or an hour) that goes by on when some public figure isn't villified here because his apparent credibility doesn't match his actual credibility when compared with other evidence.
S.
So I had a large T bill due yesterday, at a major brokerage house. The money didn't get posted yesterday, when it was due. This morning when I called about it, the brokerage tells me they are working hard with the Treasury to get the money posted to accounts because they had a problem across the board, but that it might not happen until the end of the trading day. Has anyone else had trouble with T bill proceeds posting to their account yesterday or today?
I figure this could be a brokerage specific screw up, a Treasury screw up, a little of both, or something new. I'm escalating the issue with the broker, but WTH? Anyone ever seen this happen?
You missed this Markel:
It's amazing, the conversations I have in The White House or The Treasury or Wall Street are all about how you take the economic benefits of the working class and spread the benefits among upper management. And it's always about deregulation.
It's the reasonable, serious-minded people who might be fooled into believing that an attractive-looking chart must represent the truth.
E.g. Larry Kudlow last night showing the very pretty graph of steady state M1 as proof that there is no inflation.
Care to speculate as to the ratio of people fooled by that as opposed to say the r square 90% confidence graphs that start from zero unless otherwise noted we are forced to endure here?
So what would you expect from throwbacks to the types who adored Uncle Joe?
That was me anon at 11:40.
May I add that maybe Zell is going to change the LA Times.
"OT but can you believe these shills talking about increased spending in November without saying there was an extra weekend of Christmas spending."
Reminds me of a story out of CT in 2005. The state complained to one of the indian casinos that Feb 2005 slot revenue (which the state gets a slim piece of in lieu of taxes which they can't impose) was down 4% compared to the previous February. They asked the casino for an explanation, with an accusatory tone that suggested some skimming was going on. The casino responded by providing a calendar and inviting the state to count the days in each respective February.
Coincidentally, Feb 2005 had 4% less days than Feb 2004...a leap year.
Sebastion
True. 5 minutes after posting I thought to myself, "I don't trust myself either...". But that doesn't mean I can't take my gains and go home and be happy. Maybe with those gains I can figure out how to do my own research. If home prices can decrease 30%, than why not stock prices?
Gold at $800/oz.? It was that high a couple of decades ago . . .
jmay, while your cross-checking CR's data, you might do the same for Sebastian. Gold spiked spectacularly - and very briefly - in the early eighties, exhibiting nothing like the current trendlines.
"Conditions today simply aren't that bad, and a genuine understanding of historical events (and not just carefully-chosen correlations and anecdotes in isolation) tells us that."
circuit city plunges to 4 year low
S/B "while you're checking". Where's my coffee?
The only one for whom foreclosures are costly are the borrower. Everyone else has their collective asses covered.
If I loan you 500k, then forclose after a year and only get 300k out of the auction, my ass is, at best, only partially covered.
My God, someone, please protect the reasonable, serious-minded people! The Humanity!
"Those interviewers were great - journalists on other newspapers can learn from them.".
It's understandable why the journalists feel so free to be aggressive. The Tribune Corporation kicked the sh** out of that newsroom post takeover (i.e., this paper isn't a service to society boys, it's a business, etc.")
For once it must be nice to sit back and think how the executive editor can't possibly have a problem with your line of questioning, given that he's been shoving it up your a** the last few years.
The mortgage originator can't work out loans because FAS140-based accounting doesn't let them; the accounting pronouncement has very clear language about the assets being beyond the control of the seller. So even if they did want to help out their mortgage customers, they couldn't because it would cause all of those securitized assets to come back on book. I can guarantee you that's their primary concern.
I could see how multi-layered securitizations means it's very hard for the ultimate buyers to figure out with whom they have to work things out. Afterall, you could have a scenario where each of 10 ultimate buyers owns 10% of one person's mortgage.
Begbie, you have no idea what you are talking about.
Number one, we got squared away on that FAS140 thing back in the summer. The SEC has made it very explicitly vividly clear that working out loans for which default is "reasonably foreseeable" does not jeopardize anyone's Q status. I have posted on that several times. You may read the SEC letter here:
http://www.house.gov/apps/list/press/financialsvcs_dem/sec_response072507.pdf
Furthermore, investors in multi-class or single-class securities do not own "10% of one person's mortgage." They own an undivided interest in a pool of mortgages. That means they own a pro-rata share of a big cash flow. The trust owns 100% of all the mortgage loans, and can take actions on individual loans, when they benefit the cash flow. The trust does not have to go get permission from all the owners of the mutual fund that owns 10% of one class of a deal.
people, wake up! The deal is only good for lenders to get you to continue to make mortgage payments on a property not worth what you owe. It will continue to get worse over the years as property values continue to plummet. Stop paying! Walk away at foreclosure! Even if they "fix" your loan. Pocket all the money you can from now to foreclosure and then start fixing your credit again. By the time you fix your credit (a few years) you can buy again at a much lower price. If you continue making payments and struggling, you will have no money and own a home worth even less in the future. How long before you're back to even?
Mook said: "I can't tell you how many times I heard a variation on this exact theme in the summer and fall of 2000. "Only 1 in 5 Americans own stocks directly, Larry, and a lot of these are holding big-cap blue chips." Or, "The buy-and-hold investor who just trusts his money to mutual funds won't care about this in the long run." Or, "Your average retail investor is simply not worried about huge exposure to the dot-com mess."
And at the denouement, gee, who could have predicted that an index of the 500 biggest blue chips in America would have been cut in half?..."
The lowest as-reported TTM PE for the SP500 in 2000 was 23.55. As of yesterday's close, the as-reported PE was 17.19, and the peak PE for this year has been 18.43. Do you take my point?
Let me be clear: I don't give a good GD what Larry Kudlow says or thinks.
If you think I'm just another mindless bull, you're certainly entitled to that opinion.
However, I'm only interested in the objective conditions, and the objective conditions don't support a bear market for stocks, a nearby recession, or another major downleg for the housing market.
Sebastia
Is this the real Sebastian? It's hard to tell. He's right even if he's not the real one. Look at history and not just this week. Things are real bad but por favor not to go lemming.
I'm jing-jing-jingling, too.
"Conditions today simply aren't that bad, and a genuine understanding of historical events (and not just carefully-chosen correlations and anecdotes in isolation) tells us that." - Sebastian
versus
"job market softening, real income growth collapsing, household savings diminishing, consumer confidence on the decline, and inflation accelerating, it would defy the laws of physics too if consumer spending were to remain robust in the months ahead. We are still looking for a mild contraction (-.5%) in the first quarter of 2008" The economic outlook group.
So perhaps we are all overreacting even so. Mild is mild. A good word. Dont like the word collapsing though. Not a good word. Enhanced would be a better word.
Sweet, Tanta.
Tanta,
I understand your perspective.
What I don't understand is how "a pro-rata share of a big cash flow" squares with "tranche warfare".
Different tranche holders are fighting over who owns what. How confident is a judge that he is dealing with the correct party?
If you say "It's just too stupid to contemplate", I have to ask you about the valuation models that did not consider the possibility of negative HPA.
In other words, they didn't even consider foreclosure dynamics.
Not politically correct, but the right choice for my family. A "home" is where you live. A "house" is the real estate you bought. I put my "home" in order by getting rid of my "house". It feels great to be renting with peace of mind and saving money again. The house was a drag on my mind, my family and my wallet. I am now back to being the person I was before this mess (happy). I am saving, working on my credit again and looking forward to buying again at a realistic price with a better mortgage product. Lesson learned. Many people will realize this as time goes on. That is why the government is trying to come up with "bailouts" to keep people in. I have to look out for my family and future. I wish you all well.
OK - I am old - and remember lots of bad things - and all of you are young. But certainly not all of you are so young that you were in diapers during the dot.com boom and bust (smile). This was one of my favorite websites back then - take a look at Deathwatch:
Downside - the investor's reality check
I agree with Sebastian's point of view - especially the part about research and due diligence. And we are very lucky in that regard today. Thanks to the internet - we have access to all kinds of information and data that even professionals couldn't readily get their hands on 25 years ago. OTOH - even if you do your best - sometimes sh** happens.
Enough of the mindless Bush bashing. Bernanke/Paulson differ from Greenspan/Rubin how exactly? These hacks and shills are all cut from the same cloth. Rubin was a Goldman Sachs pigman of the highest order for 26 years and was co-chairman before he joined the Clinton administration. I can't think of one single person more responsible for the huge asset bubble/bust phenomena than Greenscam, ARM cheerleader number one.
I can't stand Bush, but he is a SYMPTOM of a much larger and more systemic/sinister problem that's been building for 40+ years, and maybe even for 80 years, he isn't the cause of these problems. Until you put all biases aside and learn to see reality for what it is, you will always be looking at the wrong things. Get over your bad selves, take the red pill, and vote for Ron Paul.
Mike, first, you're missing my point. If in fact you were correct that all PSAs have the same language, and that they all make defaults profitable to servicers, then, in fact, it would not matter how many times the servicing got transferred. All transferee servicers would behave in exactly the same way as the original servicer.
Paulson seems to be claiming that it is the sale of the loan itself, not the terms of the PSAs, that are creating the problem. I am objecting to that idea.
Furthermore, you keep assuming that there is never any cost to a delinquent loan that might offset the revenues in the form of late fees. Even if you believe that every servicer out there intentionally screws up loans in order to collect late fees, you have to assume that the servicer pays those people to do the screwing up. Late fees are income only to the extent that the fee revenue exceeds the cost of handling a deliquent loan.
What would you do differently? Write a contract in which the late fee went to the investor? How would that fix the incentive problem? Or would you just declare late fees illegal? That certainly wouldn't make anyone interested in investing in mortgages. If your issue is really about misapplied payments creating "false defaults," then that's your issue. The late fee thing is a red herring.
When RE times are good, servicers can in fact make money on late fees: either the borrower will pay them (because the economy is good enough) or the value of the RE will cover them. In a down RE market, adding a bunch of accumulated late fees to the payoff just takes money out of the investor's pocket and puts into the servicer's pocket. Investors don't usually put up with that for long. So there is a countervailing interest here: investors don't want to see all liquidation proceeds eaten up by servicer expenses and fees. They therefore monitor those delinquency levels and time-frames, and servicers who have too many delinquent loans can find themselves having to cover their own expenses.
Tanta, just thinking out loud.
These are trusts, no?
With trustees, and beneficiaries.
Who are the beneficiaries? The investors?
If different trancheholders are fighting in court, then they have different interests.
For whose benefit will the trustees act?
I made the point above about Gordian Knot.
These things were never designed to meet the needs of here and now.
Picking up the pieces.
"Investors don't usually put up with that for long."
If this was true, why do FCB's and sovereign funds KEEP buying agencies and propping up the banking system? FCB's added another net $5B in agencies in the last week. Nothing better to spend the money on?
Worried said: "...So perhaps we are all overreacting even so. Mild is mild. A good word. Dont like the word collapsing though. Not a good word. Enhanced would be a better word."
We faced nuclear holocaust, so people of my generation have a different perspective on "bad.":)
YouTube - Lewis Black on Nuclear Holocaust
Sebastia
Different tranche holders are fighting over who owns what. How confident is a judge that he is dealing with the correct party?
But they aren't fighting over who owns what. The trust owns the loans. There is no legal question about that. (Apparently there have been some FC filings lately where the trust did not include the proof--in the form of an assignment--that it owned the loans. But the FC filing is made by the trustee, on behalf of the trust, not by Bob and Carol and Ted and Alice the investors. So this wasn't a case where the judge threw the filing out because it was made by the trustee instead of the investors; it was more like the judge threw it out because we didn't prove that we had the right trustee.)
Note: any investor who did go to court to claim that he/she/it really "owned" those loans, not the trust, would be shooting himself in the foot with the IRS. The tax treatment of a REMIC depends on the whole idea that the loans are owned by the trust, which passes through principal and interest, and not by any individual bondholder.
Investors might well be fighting over the question of what maximizes the cash flow: foreclosing or working out. Some tranches might benefit from the one more than the other. But having some group of investors insisting that the trustee should FC instead of modify is not an argument about who owns those loans. It is an argument about which action increases or decreases cash flowing to investors.
So no judge is deciding "who owns what" (with the exception, of course, of the judges having to assure that the trustee owns the loan). If investors sue over workouts, they would be arguing that the trustee took an action that did not maximize cash flow to the investors. They would not be arguing that they "own" the loans and those other class-holders don't.
Tanta - I would suggest that you just don't like Paulson - since as a matter of fact he is just saying what you and CR said 6 months ago:
e.g. MBS means the homeowner has to negotiate with a party of people all of whom may not have the same interests as each other. That inevitably makes negotiations more difficult.
And his suggestion that reducing 5 pages of fine print to 10 sentences of what can happen is completely reasonable given the average skills of most home buyers. Not rocket science. But reasonable.
If your issue is that he isn't dealing with structural issues, or that he is late to the game, or ... ok. But I would suggest it serves no purpose to denigrate forward motion.
If this was true, why do FCB's and sovereign funds KEEP buying agencies and propping up the banking system? FCB's added another net $5B in agencies in the last week. Nothing better to spend the money on?
Well, maybe because that's my point? They're still buying this stuff because they don't have any particular reason to believe that most servicers are nefariously creating delinquencies just to squeeze late fees out of the borrowers?
You mentioned "agencies." The agencies have pretty solid rules about how long a loan can be delinquent before the servicer has to buy it out of the pool. That would be because the agencies have a real interest in not letting servicers get away with "creating" delinquencies. As the agencies are on the hook for the credit guarantee.
That is exactly an example of an interest (the guarantor's) that counter-balances another interest (the servicer's).
As Tanta stated previously, the Servicer does have the ability to modify loans and can do so without violating FAS 140 or the REMIC requirements.
However, the Pooling and Servicing Agreements (PSA) or the Amended and Restated Indenture Agreement may inadvertently prevent the Servicer from modifying the loan. That is, depending how the agreements define the term "Realized Loss" and depending on how the Realized Loss is calculated, certain junior classes may not receive the whole loss from a loan modification but rather, the losses from a loan modification would be felt pro rata among all tranches, including the AAA classes. It is the Realized Loss definition and its calculation that will or will not permit the servicer from making the loan modification.
Memo to Secretary Paulson:
Stop inhaling the sewer gas from your fellow CEOs. Spend some time reading Calculated Risk, and go out and learn something about the underwriting business from people like Tanta. Better yet, just resign because you continue to make yourself look like either a fool or a crook. Learn some history too because if things get really bad people will end up living in Paulsonvilles. Do you want that as your legacy?
Sebastian
YouTube - ? v=Sbw6Nxf8dYU
Very good. But i lived thru that too and while home hunting last week i noticed i was drawn to houses with concrete cellars.
And when the iranians took the hostages every military jet or helicopter that went over was like something very scary.
I know i am neurotic but for sure i would like to see you use more than just words to say all is well.
If all is well where are the pretty graphs to say so??
Bankers are saying we need more transparancy but there is none at all. Thats whats freeking me out.
Sebastian,
I don't mind if you criticize me, others who post or the blog itself.
But your "global",and "general" accusations without reference is obnoxious
you posted, "This is an extremely reactionary board, responding to media reports that are calculated to agitate and provoke instead of quietly inform...If you really want to learn something, get off of this blog and do your own original research" (at 10:58)
Fact is many here have leaned much from CR and Tanta. Plus there are many long time posters who share a wealth of knowlege. We do get an occasional nut posting here but that's the price of freedom.
You argue that most people are not getting hurt by what's going on today in the market place.
You sir are talking foolishly and appear to fail to understand history which is repeleat with examplkes of how people were having a good time right before everyhing went to hell.
I challenge you to tell us here how the following factors can be minimized or ignored; as we assess the us economy going forward
10 trillion dollar federal debt;
increasing concentration of wealth;
decline in the real purchasing power of the middle class;
quadrupling in the cost of oil;
delining purchasing power of the us dollar;
unfunded committments to future social service expenditures especially, pensions, social security, and medicade;
Japan and China holding half of our increasing national debt. (in US bills bonds and notes)'
a war that costs more than 10 billion per month up front and thousands of lost lives.
a war that costs more than a trillion dollars in postponed costs, hardware replacement,veterans medical costs, and the destruction of the middle level officer corps' and more:
and finally, what is discussed here which is nothing less than a "financial" crisis based upon a debt ponzi scheme with fat cats sifting insane profits off the top of a system that resembles the business model for street drug sales.
(note to Seb...the term financial crisis is used repeatedly in business journals in reference to this credit mess) if you followed half of the great hyperlinks provided by people who post here you would know this.
Finally. you got one thing half way right when you indicated most people dont know... Here is the scary thin, the interconnected, convoluted, incestuous triple dealing, super computer quantum model financial mess were are in is little understood by the experts and even the architects who created the monster. We are in uncharted territory and more than half the lights on the dash are blinking red.
Sebastian...WAKE-UP
Tanta - I would suggest that you just don't like Paulson - since as a matter of fact he is just saying what you and CR said 6 months ago:
e.g. MBS means the homeowner has to negotiate with a party of people all of whom may not have the same interests as each other. That inevitably makes negotiations more difficult.
OK, for the sake of argument let's assume that Paulson is, actually, nodding his head to the "class warfare" issue here, not just the old "complex decision-making due to too many servicing transfers" thing.
What would be the implication of that? Is it still true that defaults are not in the lender's interest, as Paulson says here? If class A's interest in FC is cancelled out by class B's interest in a workout, then it's neutral, right? So in that case, you would simply do what benefits the borrower. If either class A or class B's interest outweighs the other, then it is either costly for the trust to FC or not.
In fact, Paulson endorsed the ASF guidelines, which state clearly that the only valid measure for loss mitigation is calculating the net present value of FC recoveries on one hand and modification cash flows on the other, and taking the lesser of in terms of the loss. That treats every class-holder the same.
The problem is that not every class-holder wants to be treated the same. Absolutely I agree that this is a problem with the securitization model. But I don't see Paulson admitting that. I see him trying to obscure that.
Nobody--I mean, nobody--objects to easier, simpler disclosures. But the problem Paulson is glossing over is that we wouldn't have loans that have this low rate x for a year or two and then this high rate y if we were qualifying people correctly.
You note, for instance, that as soon as the Nontraditional Mortgage Guidance was released and required lenders to qualify borrowers at the fully-indexed rate, not that teaser start rate, the 2/28 ARM product had completely disappeared within months. Lenders just couldn't offer it any more if they couldn't qualify the dumb way. So it is perfectly legit to wonder why we need to focus energy right now in re-writing disclosures for loan products nobody is offering at the moment. I think it is certainly fair to call that misdirection.
Mock turtle
On the other hand maybe we are just looking at this too myopicly?
We are currently travelling thru space in a home surrounded by a vacuum that is filled with molten material and for sure we are all going to die!
Maybe just maybe if we just switched off and forgot all about this crap we would just be fine and really be no worse off?
Maybe in fact the world has always been this fucked up but nobody ever realised before?
Better to be mushrooms maybe? in the dark and fed shit.
worried,
We are talking about economic policy here not the meaning of "being and nothingness".
Almost without exception, major players in the current US government structure should just keep their mouths shut and stick to their knitting. The lack of understanding, intelligence, mastery of subject, long-term thinking and basic decency is continually revealed as they speak. Actions speak and the voice they speak in is read in charts, facts and reality. Get those right and everything is fine. If not, you should quit the job.
"re-writing disclosures for loan products nobody is offering at the moment. I think it is certainly fair to call that misdirection."
Tanta |12:54 pm
Thanks (yet again) for pointing out something I'd've missed.
Sebastion -- The lowest as-reported TTM PE for the SP500 in 2000 was 23.55. As of yesterday's close, the as-reported PE was 17.19, and the peak PE for this year has been 18.43. Do you take my point?
(Disclaimer) I do not know what I am talking about. BUT... how many of those profits are based on booking future profits? How many of those profits are based on keeping things off balance sheet? I just don't think 'profits' are measured in an upfront and obvious way. As someone with a small savings (but large to most Americans) and no financial training I have a hard time trusting people whose motivation is to manipulate numbers to make them look good. Can I trust ratings agencies, brokerages and regulators to tell me that a company is totally above board and working in MY interest? The vast majority of Americans are in the same boat with me, lets hope their pension fund and retirement fund managers are up to the task of going head to head with the IBs. I have my doubts, simply based on human nature and past results.
Does anyone REALLY believe that this paper would have made any difference when borrowers have $$$$$$ in their eyes.
Not a bit.. unless you were buying a home to live in, and expected to make the payments for all those years. The "flippers" would have glanced at it and thought (quietly): I'll have my 100k long before that could happen.
pop goes the economy.
Just came on line--haven't read many of the comments yet but the one by
sunsetbeachguy | 12.21.07 - 10:12 am
regarding the lack of resources to review the loans properly has a clear answer.
Sure, there were plenty of resources available when the borrower was paying a commission to the broker and all the other "fees" that went into the kitty. But it's not likely that the borrower is in a position or willing to foot the bill for a reassessment of the loan; that would cost the lender/servicer and they're not willing to pay either.
w said: "...BUT... how many of those profits are based on booking future profits? How many of those profits are based on keeping things off balance sheet? I just don't think 'profits' are measured in an upfront and obvious way...."
The earnings I was referring to (in the PE ratios) are for the appropriate TTM (trailing twelve month) period. No forecasting involved, the recent 17.19 PE is based on actual as-reported earnings for the last quarter (Q3) with 99% of the results in.
As to the rest, you're right, of course. There's considerable conflict of interest, double-dealing, and other questionable practices. However, if they're serious enough to have a major negative impact on the stock market and the economy, they'll show up as a serious negative impact on the stock market and the economy.
They haven't.
Sebastia
Sorry, a correction. I use peak SP500 earnings in my calcs on valuation for consistent comparisons throughout (and between) business cycles. The peak of SP500 TTM as-reported EPS was in Q2, which is where I derived my 17.19 PE number came from, not in Q3.
S.
Sebastian,
Did you ready my questions to you at post 12:42 above.
I would appreciate your answer.
If you really want to learn something, get off of this blog and do your own original research. Or if you must visit this blog, whenever CR posts a link to the data he's using, get the raw data yourself and make your own appraisal of what it does or doesn't mean.
Sebastian
As usual, Sebastian is both the last person to the party and failing to understand that for most posters here already understand the basic rules of the game(whether it be posting or economic fundementals) and are discussing matters at a deeper level or are looking for understanding at that level.
Merry Christmas, may the Tio Caga leave you a suitable present.
mock turtle said: "I would appreciate your answer."
You have no interest in any answer I'd offer.
Sebastia
Sebastian,
there are so many others who read and post here.
for their benefit if not for my unworthy non seeing eyes...
do tell us how you respond to the 10 indicators of crisis that I posted above...or just respond to a few, if you prefer!
Thank you
and don't be afraid...I'm just a turtle...and a mock turtle at that!
Thanks for the reply, Tanta.
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Tent city in suburbs is cost of U.S. home crisis
ONTARIO, Calif., Dec 21 (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.
The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.
To be fair, I think Paulson has a point there - it's not as easy for a homebuyer to negotiate on better terms in an effort to avoid foreclosure as it used to be. Tanta's points are valid too of course, but of all crappy ideas of how to ease the pain from this mess, this is NOT the worst one.
mock turtle said: "do tell us how you respond to the 10 indicators of crisis that I posted above...or just respond to a few, if you prefer!"
First, none of those things in that list are actual indicators, most of them just snapshot conditions at one point in time.
For example, the national debt has been rising for decades: Why is $10 trillion the "magic" number that will cause the economy to decline into recession? Why wasn't it $9 trillion? Or $8 trillion before that?
Increasing concentration of wealth? Been going on for decades. Again, so?
Japan and China owning half our debt? Japan has been an ally and trading partner since before I was born, and China is a key trading partner, has been for years. Once again, so? It's a global economy where we all depend on each other, so that's a positive.
Get a real indicator that you've backtested for real predictive ability (like I have with my indicators) and I'll be more than happy to compare notes.
Sebastia
About those commercial banks and their bi-weekly anonymous feeds at the TAFs, Kasriel has some definite opinions in the latest edition of Econtrarian (Charts 20-24):
The Econtrarian
How's that New Century stock buy recommendation working out for you and your follower-chumps, Sebastian?
For those who don't know, Sebastian showed up here in February pumping New Century (subprime collapse poster child) as a great value buy. Yes, he really did. He pumped it hard the week before it crashed to zero.
In fact, it certainly looked like Seb was a paid stock promoter flooding the blogs. But then he stayed.
Bottom line: Seb is a pump n dumper....beware.
I wish you guys would just ignore Sebastian. You won't persuade him; he won't persuade you. He ignore facts -- ignore him.
In the interview, Paulson said this:
And I wouldn't forget the fact that 93% of the people who have mortgages in this country make their payment every month and they make it on time, and that most of the sub-prime borrowers are going to keep their homes.
Is this news? I was unaware that 7% of mortgage holders were not current. That seems very high to me.