A related idea about bailout is that if we let it all go done the toilet, there are costs involved, like loss of taxes and taxpayers. For example ncreases in government services to the dispossessed(unless they are shipped overseas or otherwise eliminated or left to wonder the streets). And there are business with employees that normally service the dispossessed who will have to fire folks. This is the other side of the coin.
Not to mention that social dislocation leads to crime, violence and extreme political movements.
As allergic as I am to any sort of bail out for the rich and powerful, stupid RE investors and illiterate RE buyers, you can not assumed that things will just take care of itself without cost to you. There is a cost to no action that could be worst than a 'bailout'.
All I can hope for is that the guilty be made very uncomfortable, maybe even punished to some degree; That reasonable standards can be implemented in granted new credit and that new versions of the crisis are avoided and that the cost is reasonable.
Imposing a strict morality on something has a cost just as allowing the insanity continue. One has to make good judgments based on practical considerations.
We will never establish consensus on that point as long as anyone uses the term "bailout" to mean just any post-hoc action that could benefit someone. CR is using the term somewhat more specifically, in the sense of providing actual taxpayer funds to subsidize mortgagors or make whole mortgagees.
To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are.
Indeed, what troubles me is that so many people are letting themselves get worked up over the "bailout," they don't see that the pea is really under the "bailin" shell.
You can always get people worked up over tax dollars going to "deadbeats." You can't very often get people worked up over tax dollars going to large corporations under the rubric of "economic stimulus."
At some level anything you do will punish or reward the innocent and the guilty alike. I am personally getting tired of all the people who are upset because they colored inside the lines and the other kids didn't, but everyone will still get something from Santa. (Yes, that is often how some of these complaints strike me.)
You got pretty decent quotage in the San Francisco Chronicle today in an article about reactions to the subprime freeze plan -- the blog "Calculated Risk" is given as the source, but they specifically reference your piece "The Plan: My Initial Reaction."
The blog, and your article, is quoted as Serious Authority. Glad to see that the journos are waking up to where the real story is being told, and in words they can understand.
Imposing a strict morality on something has a cost just as allowing the insanity continue. One has to make good judgments based on practical considerations.
It's not that simple either - towards the end of the 30s the US economy appeared to be recovering rapidly even before WWII started.
Whereas Japan despite having a downturn that was far less severe appears to be languishing far longer than the US did in the 30s.
Is it coincidental that perhaps the most propserous decades in US history followed the Depression? Likewise for the growth that followed the "Great Recession" in the early 80s?
I don't know the answers to these questions, but I have a problem going down the same path as other countries when that path appears to not lead to good results.
My fear is that we are sacrificing long-term growth to avoid short-term pain.
To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are.
So it's just that simple? If Lenny the Loan Shark "isn't in trouble," then Lenny shouldn't reduce his vig to people who are "in trouble"?
Where'd these people who aren't in trouble get their wealth, anyway?
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
I imagine a bunch of folks with "wealth" that came to them in the form of RE capital gains that they were able to take because some fool got a foolish loan, now bitching because they might have to return some of that "wealth" to retroactively "correct" the loan terms.
I have described a short sale as a way of making your down payment after the fact. Middle-class taxpayers ponying up a few bucks to fund a hotline for distressed borrowers can, in the same vein, be described as adjusting your sales price down after the fact.
"FHA Modernization" might be a kind of bailout, but it's not, in my view, really much of a bailout of existing, defaulting mortgage securities. It's a "reflation" of the mortgage origination industry and the RE market (existing and new). That's the only rationale for pressing for FHA Modernization rather than pressing for easing restrictions on FHASecure. As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.
Tanta,
This is the piece that I have been looking for. As I reviewed the"Plan" which seemed to do so little for so few, I began to wonder what I was missing. Now I know, it is in FHA Modernization.
What a bad idea! Hank will push this one hard as it will allow, more safety in securitization of this subset of loans. Thus allowing the brokers / wall street bankers of this debt to make more $$$$.
Yep, socialize the risk and privatize the profit. Sounds like crony capitalism to me. Eventually, this mentality will bring down the economy.
What we need now is a hard honest look at the entire system and competent regulation to assist in getting us out of this situation. Additionally, we need strong regulation going forward to prevent it from happening again.
Tanta I think you are essentially right that there are no Federal direct loan programs, but I think there still may be a moribund Farmers Home direct loan program that does minimal business. I'll try and find the program #.
I'd consider FHASecure to be a bailout program. There are many mortgage investors out there with paper which will end up worth far less than par (and which can't be sold for anything like par for that reason). If FHASecure insures a refi, those investors will get all their money back. Eventually the homeowner will default - if nothing else because he'll be far underwater when he eventually must move - and the feds will eat the losses. So the feds have taken on the losses that will currently fall on the investors. Bailout. I don't think the fact that the actual losses lie in the future or the high uncertainty about the level of loss changes the fact that it's a bailout.
The main problem with the real estate market is the bubble created by low interest rates, lax lending standards, and creative financing products. Incomes can not support the inflated values.
The bubble must unwind. We do not need to follow the Japanese model. The deflation of the bubble is necessary because incomes can not support the current purchase prices of real estate. But the unwinding should be controlled so that the entire economy is not brought down.
FHA Modernization puts the federal government as a guarantor which may well reflate the market place. So, how does the government take on trillions of new guarantees with it's current fiscal condition. And who makes money off of this bailin?
This is not about home owners as much as Hank's cronies. They made the big money.
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
What gets me is I was "smart enough" only because of losses I've suffered in the past.
I told everybody who would listen that they should sell their houses (admittedly most of them probably couldn't) and most of them laughed. Including the person that bought my house.
My problem with bailouts right now is the timing (it's not lost on me that we wouldn't have society with out bailouts per se).
The people who were laughing at the suggestion that there were problems in housing aren't laughing about that anymore. But they are laughing at the suggestion that there might be problems in tech stocks or emerging market stocks or some other "get rich scheme" they might have right now (I talk to these people every day).
As I see it in my day to day life the underlying disease is still there. Nothing has fundamentally changed.
IMO you don't start bailing people out until they've learned from their past mistakes -- that's how we got the housing bubble to begin with.
mbartv, I think RECD still does a kind of direct lending that the old Farmer's Home used to do; last I knew it was the 50-50 deal (RECD funds a 50% first and the lender funds a 50% second).
But the loan amounts on those programs are so tiny that they don't even make a blip on the screen. Last time I had my hands on a RECD loan the total loan amount was $47,000 ($23,500 RECD loan and $23,500 lender loan).
If FHASecure insures a refi, those investors will get all their money back.
To be exact, not all the investors get all the money back.
The major difference between FHASecure and bog-standard FHA is that FHASecure allows a second lien that would make the CLTV too high to be kept out there, if the second lien holder resubordinates. (Under the normal program the borrower wouldn't qualify if they couldn't pay off that second in the new FHA loan.)
So that means, basically, that the first lien lenders are getting taken out by FHASecure refis (mostly the first liens were 80%, they're not that much underwater now). The second liens either get paid down some or just not paid.
And I personally can't think of anyone who deserves to get a shit sandwich more than the second lien lenders. What did they think was going to happen?
But the fact remains that payoff to the first lien lender also means the borrower is now in a much more sound loan. Insofar as there are borrowers--probably not in big bubble markets--who can make economic sense out of keeping their homes, that benefits them. The only way you can "deny bailout" to the first lien lenders is to deny refi opportunity to the borrowers. I resist thinking that all borrowers have to be punished to make sure that no lender is rewarded.
Remember that absent FHA Modernization, the FHA maximum loan amounts are still pretty modest.
I agree with ac. "Japanization" of the problem is not the optimal outcome.
Downturns are good. They are required for the economy to heal after the boom excesses. During downturns people start to do wise things instead of stupid ones. Delaying that only means that the recovering will be prolonged.
After the centrally-planed economies in Eastern Europe collapsed, there was a lot of pain. Some countries decided to freeze the process to make it less painful in while others let it restructure. And the latter countries fared better in the long run.
Any program that artificially supports the housing prices is steering the market out of the equilibrium. It may be good for some but it is bad for everybody.
OK, so obviously the Paulson Plan isn't a bailout.
I've read all your posts on it, and my question is: Is it anything? It seems like it's basically a well-publicized public statement of stuff that would have happened anyways.
Is it anything? It seems like it's basically a well-publicized public statement of stuff that would have happened anyways.
There is one respect in which it is different from what would have happened anyway.
It legitmates mortgage servicers continuing to operate without adequate (numbers and expertise) staff to handle workouts. In other words, what would have happened anyway was servicers trying to do old-fashioned case-by-case workouts, but only managing to do a small percentage of the required number of them, because they don't have the resources to keep up.
The plan gives them cover for doing a lot more mods in a half-assed fashion. It's "quick and dirty."
I wouldn't object so much if 1) it had been officially temporary (give the servicers six months to get staffed up, letting them do the quick and dirty thing in the interim) or if 2) it involved the servicers taking the money they're not spending on expertise and sending it to the reputable non-profits who can counsel the borrowers and "broker" the deals.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.
"To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are."
To me it does seem that simple, because I am one of those who are not in trouble. Is this "bailout" an attempt to prop up prices, which in turn will harm people like me, a first-time buyer? I believe so. Luckily I don't feel it's a very good attempt, but it's an attempt nonetheless.
"At some level anything you do will punish or reward the innocent and the guilty alike."
Correct. And that's why we discuss this isn't it? We are trying to figure out who gets rewarded and who gets punished. Yet it almost sounds as if some are claiming no one gets punished. In other words the government can just come in and magically help everyone. Silly us for worrying about the concept of fairness.
"I am personally getting tired of all the people who are upset because they colored inside the lines and the other kids didn't, but everyone will still get something from Santa. (Yes, that is often how some of these complaints strike me.)"
Are we all getting something from Santa? What are the savers and first-time home buyers getting? If only the bad kids get presents that's a problem.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.
Tanta
this is what worries me. who's to say Mozillo and his servicing cronies won't CONTINUE to make bad decisions or even manipulate the modernization to their benefit. they could for instance guide more loans that wouldn't have qualified into the program for their own benefit. every loan that keeps paying on an inflated mortgage keeps their service fees rolling in. preventing lawsuits against them by investors encourages this.
lets look at a real world example of the "bailout" that we are witnessing right now.
CFC and WM stock, two of the authors of this plan coincidentally, rallied hard the last few days after the announcement. shorts like me on the stock retraced some of our gains significantly. the market is anticipating a "bailout" of sorts for these servicers which hurts guys like me.
now u will say this is a necessary fallout to help society from undergoing irreparable harm for the common good. and there is the rub.
i would say that clowns like Mozillo need to be cleansed from the system and that this plan, or merely the suggestion of it, encourages the current system to grind on and Mozillo to remain CEO of CFC.
What are the savers and first-time home buyers getting?
Where are savers saving?
Look, the plan is supposed to be insuring that bondholders keep getting 8.00%, instead of getting no interest and (some of) their principal back, which principal would be reinvested in T-bills yielding a hell of lot less than 8.00%.
"Bondholders" are "savers."
I have a real problem with the idea that foreclosing on these current owners would be "good for" potential new owners right now. That argument assumes that the stuff could all be sold as REO in the near term at values that wouldn't continue to fall.
The fact is, nobody knows at this point how far values can fall even if we (especially if) we unload a big wave of REO into the market. So any lender making a new loan to a new first-timer who is trying to buy this REO is taking a big chance. This is my point about FHA Modernization: it's on the table because everyone recognizes that we will need government-insured loans to facilitate the purchase of this REO.
If you're thinking about buying a house in the next year or two, I'd say be careful what you ask Santa for: he might give it to you.
I'd like to second Fair Economist's point here. Tanta has focused on the private sector providing the capital. That's true, but I don't think it's very interesting. In FHA, the taxpayer takes the risk and the credit losses. I think asking the question "who takes the credit losses" is a lot more interesting than asking the question "who provides the capital."
FHA has produced "profits" for years. But their most recent actuarial study projects losses on the loans they are writing now, and that was besed on projections done BEFORE the credit crunch in August, with house price appreciation estimates that now look wildly optimistic. And it didn't factor in taking in delinquent subprime loans as refis. The fact that so many of these firsts will be underwater in light of the combined LTV on the first and second almost guarantees a lot of defaults.
And the states may be issuing the bonds in the mortgage revenue bond scenario, but the federal taxpayer is kicking in with tax expenditures to subsidize those bonds.
While I don't think they were smart enough to have planned it, I think the firestorm over the freeze has managed to distract a lot of attention away from the parts of the response that do represent taxpayer bailout.
but i would say that 1/3 of my portfolio is long. i only started shorting the mkt a year ago in anticipation of the downturn with much of my info gained from this site.
short sellers provide a needed function in the mkt. we are just guys on the other side of the trade. as ac would say, we provide fuel for sharp UPSWINGS in the mkt during squeezes. if we continue to get beaten down by bailouts there wouldn't be any more short sellers, or sellers in general, and the mkt would do nothing but go up. what a blessed thing u might say! but i would say nothing but anothe bubble to pop like the tech crash.
I resist thinking that all borrowers have to be punished to make sure that no lender is rewarded.
Crispy, but mentioned in the context of Bailouts and Bailins, another fine piece of not as crispy analysis on the subject of the Plan.
Tanta, what I continue to find amazing in your writings is how you are able to cut to the heart of complicated technical issues while retaining a moral compass that leads you to what is most worthwhile for society as a whole.
Bentham and Mill would be grateful for your ability to educate not just the masses, but some of the self-prclaimed elite as well.
I have tried to grasp this plan from all sides and my opinion is it will not work, or most likely will make things worse. Probably I am over analysing a simple stall till 01/20/2009.
Having lived through 2 housing busts in Texas early 80's and early 90's. My father bought a home in 1977 for 37500. In 1981 it was worth 100000 then dropped to the 50's in 1983. I bought it from him in 1996 for 80000 and sold it finally for 103000 in 2001. So 20 years to get back to peak nominally and a hell of a loss when adjusted for inflation.
The other part of the story we went through two rounds of people walking in droves. Now these were people who started by putting 20% down. I can only imagine people with little or nothing will walk regardless of what program you make available.
As for modernization of the FHA unless we are going to subsidize 0% loans to borrowers house prices will have to fall back to reality. So this will not do much to move future or existing homes either.
So long way around but what the heck are they wasting time for just let the chips fall where they may. Tampering with the free markets got us here in the first place. Recessions are like forest fires if they occur every few years and clear excess fuel they keep a forest healthy. The problem occurs if you put every small fire out. Yellowstone parks 2.5 million acre fire reminds me of what I see in this economy.
now u will say this is a necessary fallout to help society from undergoing irreparable harm for the common good. and there is the rub.
Without making a claim about this specific Plan being good for society, let me just say that we are talking residential home mortgage lending, not any old kind of "asset class" or company that produces "assets."
It has always had "public policy risk." That risk is there for the longs; it's there for the shorts. It's there for everyone.
Trust me; I've been in this business a long time. There are risks in mortgage-related investments just like there are risks in health-care related investments: the government always has some kind of interest in encouraging or discouraging various activities that might or might not be profitable to a private entity.
So I have to say, if you're shorting a federally chartered bank without taking into account that the federal government who handed out that charter will go a long, long way to keep that bank afloat, you're a naive investor.
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
Having sold all my non-personal use real estate at the height of the boom I'll take a stab at answering. The best analogy is driving down the highway with a bunch of speeding drunk drivers. When you complain to the police they hand you a beer and suggest you drive fast too. So I sold my car to a drunk. in truth i sold my last rental to a drunk road worker; my own realtor who used fancy financing.
I noticed a typo in your post: In that sense, you could call this a bailout: it's moving the risk of default. Should read: In that sense, this a bailout: it's moving the risk of default.
All I read is this is less of a bailout than might have to occur otherwise. The unspoken part of that assertion is that this is a bailout of a different group of people than might occur otherwise.
Bottom line; preserve the financial system as is for the benefit of the insiders of the current financial system by misusing the full faith and credit of the United States to force market distortions.
Tanta has focused on the private sector providing the capital. That's true, but I don't think it's very interesting.
It is very interesting if nobody feels like buying Ginnie Mae securities or below-market bond programs.
I was responding to people who seem to think that the FHA program either makes the loans, or makes the lenders make the loans. I am aware that you know better than that, but a whole lot of other folks apparently do not.
It seems to me that the prices people got for the homes they sold at the height of the boom were being driven up by the funny-money loans. I don't think that point is controversial.
The implication, however, is that the sellers received more sales proceeds than they would have if loan terms had been saner. So sellers benefitted from dumb loans as much as buyers did. Even if you yourself never took out a dumb loan, if you sold your house to someone who bought it with a dumb loan, you benefitted.
its always been about private sources of capital. the question was who would take on the credit risk?
the credit intermediaries, CFC, WM, GS, BSC, long ago relied on the GSE's to offload the risk. when that became too restrictive, they developed structured finance to expand the game. now that thats imploded they are looking to move that risk back onto the taxpayer to keep the game going. FHA modernization accomplishes that but not on the scale they would like. just wait til next as things worsen; they will propose even grander schemes. FHA modernization allow them to get their foot back in the door of the taxpayer.
idoc, shorts will continue to do fine in the current market. A blip following a big PR blitz is still just a blip.
There is no such thing as a 'free market' anyway. It's only a matter of who is manipulating what. Last week's manipulation was contrary to your position.
Also, no one thinks the Plan is a panacea. The fallout will be huge and RE will still continue its crash.
As Ella noted above, the RE problem is just a small part of the much bigger set of problems the U.S. economy is facing.
You'll do fine and I say that as someone who won't be joining you on the short side though I recognize the absolute need for shorts to make markets work, even ones that aren't 'free.
Re: The Plan exists because there is a big pile of loans that do not qualify for any of those refinancing opportunities.
Yes, opportunities, for who, the next round of flippers that will be part of the next problem which we wont call a bailout? Maybe this non-bailout will allow more appraisers to revalue the prices they pumper up for flippers, then maybe the loan writers can get another crack at actually looking at documentation and stated incomes......but lets not call it a bailout just yet, as the same people who got a slice of subprime origination will be the same people to profit from re-engineering loan modification which illegally alter collateral obligations...but then again, this is not a bailout!
Each and every one of these freeze plans (Treasury, CA) begins with a bit of advice for troubled borrowers: "Call your servicer, now! They can''t help you unless you call them." Even before the details of plans purporting to help these borrowers were announced we heard this same refrain.
I haven't heard anyone -- including, to my knowledge, any outside commentators -- tell these people to "GET A LAWYER, FAST." And certainly before you call your servicer.
It doesn't at all surprise me that the industry participants on the other side of this fiasco from underwater borrowers neglect to do so. They want to limit their losses. Keeping troubled borrowers naive as to the risks of these modifications, and their rights, is wholly within their interest. That government officials, including the Treasury Secretary, are failing to do so is outrageous.
I know, these borrowers are in severe financial distress. Paying a lawyer and financial experts is not going to be easy. But shouldn't they finally be told what time it is on this score? Shouldn't they finally be told that they are in their current predicament in no small part because they entered into probably the biggest financial obligation of their lives without legal and financial counsel from experts working solely in their interest?
Tanta, it is known if the servicers will be compensated for New Hope Plan work?
Are they generally compensated for mods?
Servicer compensation is specified in the PSA, and I see nothing in The Plan that would affect that.
Some servicers can bill the trust for the mod expenses; some can't (i.e., they cover that out of normal servicing fees). The contracts are, in my view, too heterogenous to make easy generalizations.
There is one sense in which the Plan is encouraging servicers to forgo some compensation: it is telling servicers to time the refis, if they do them, carefully so that whenever possible the borrower doesn't have to pay the prepayment penalty. In a lot of these PSAs, the prepayment penalty is servicer income, not investor income (it does vary). So that's telling servicers to go out of their way to eliminate a source of income.
This is just the first step of the eventual bailout. First we have government "involvement" by putting its nose in the tent(the current plan).
When this doesn't fully solve the problem (as 99.9% of the pundits say it won't), we'll slowly inch our way towards an all-out, inevitable, full blown tax-payer subsidized bailout.
As it regards 3Q Flow of Funds, according to this site: 404 - Error: 404
"The entire GSE expansion is explained by the unprecedented SAAR $759bn surge in Federal Home Loan Bank (FHLB) Loans & Advances. In nominal dollars, the $180bn Q3 increase in FHLB Loans & Advances amounted to a 112% growth rate, with y-o-y growth of 27.7% to $822bn."
i would argue that the "insurer" could be the most important part of this game. look at whats happening with MBIA, ABK, and ACA. if they get downgraded there will be huge problems with mortgage bonds they've insured and are currently being held by various banks and IB's. not to mention these these bond insurers will go BK. the entire stock mkt is being roiled by this threat.
substitute "FHA Modernization" or "taxpayer" for MBIA, etc.
It is very interesting if nobody feels like buying Ginnie Mae securities or below-market bond programs.
Tanta,
I think you are splitting hairs here. If there is government guarantee to these securities, then they are almost as good as treasuries and there is going to be demand for them. There would be no problem if the FHA insurance premium to the borrowers was based on the market value of their default and loss severity risks. But it's not, and this is government subsidy.
The following information focuses on static pools, static data and models used to estimate losses; the interesting aspect to me, is the problem related to industry-wide financial models that were engineered with a standard set of inputs, which at this point in time are "all" useless. The foreclosure/subprime problem is going parabolic with one axis, while these models have static forecasts that are going in the wrong direction!
An analysis of the credit quality of the underlying pool of
manufactured housing contracts in a particular securitization
transaction is performed by developing static pool data based on the
historical performance of the specific originator of the contracts.
This information (which is continuously updated) is then used to
predict expected cumulative net losses for the particular pool which
takes into account both foreclosure frequency and loss severity. The
historical data is adjusted depending on the Servicer's capacity to
service the loans, the type of collateral being financed, LTV ratios,
loan seasoning, underwriting of loan
Determination of Expected Losses--In order to
determine the correct amount of credit support which will be required
to support a particular rating for a class of auto loan Securities, a
base-case securitized pool loss assumption is calculated using the
following factors. Static pool data, if available, is compiled by
taking a discrete period of originations of the originator, such as a
financial quarter, and that pool's performance is tracked on a monthly
basis as the loans amortize, particularly focusing on loans which have
been outstanding (seasoned) 18-24 months and have been substantially
paid down. This allows a determination of the shape of the loss curve
and project timing of losses to be made. The cumulative net loss on the
less seasoned pools can then be extrapolated from the older pools.
Static pool data is preferred over active pool data, which can mask
losses during periods when the originator's pool of loans is rapidly
growing.
mort-fin - "I think asking the question "who takes the credit losses" is a lot more interesting than asking the question "who provides the capital"
Exactly right. And this is precisely the worst possible time to assume the loss position when losses are about to rocket to levels not seen ever. Tranferring the risk from the lenders/bond insurers to the taxpayer. This is the bailout the lenders are after.
Re: This allows a determination of the shape of the loss curve
and project timing of losses to be made. The cumulative net loss on the
less seasoned pools can then be extrapolated from the older pools.
Static pool data is preferred over active pool data, which can mask
losses during periods when the originator's pool of loans is rapidly
growing.
Now think back to the bailout terms which use the impossible values of 3% equity and then take into account the time period of these foreclosures, which are what......maybe 2 years.............how do you model that?
the pt made above about the FHLB is a good one. this is a federal program already being exploited by the lenders to keep the game going. if only for the sake of simplicity and keeping close tabs on what lenders are doing, i think any expansion of gov't risk should be kept within FHLB. forget the FHA.
As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.-Tanta
please append to the end of that "provided by taxpayers".
then they are almost as good as treasuries and there is going to be demand for them
Well, sure. And after we're done charging these borrowers a much higher insurance premium, and having to make sure they can carry the payments, there will be a coupon on these babies that is not just as safe as Treasuries, it's the same as Treasuries.
How is everybody's 401(k) gonna keep showing gains if everybody goes back to buying Ginnie IIs?
In creating the base-case expected loss amount, a detailed
breakdown of originations, delinquencies, repossessions, gross and net
losses and recoveries are examined. Any understatement of portfolio
losses are isolated and all originators are placed on a comparable
basis by dividing net annual losses by the outstanding principal
balance of a prior period, which creates a growth adjustment factor.
Once expected losses are estimated, the expected cumulative losses are
derived by multiplying these expected losses by the weighted average
life of the collateral, using conservative assumptions regarding losses
and prepayments.
The pool of loans selected for the securitization is examined in
order to assure that it is representative of the base-line loss
assumption for that originator and has not been selected from lesser-
quality receivables. The selection process used by the originator is
monitored by checking the annual percentage rate on the loans, the
principal amount of the loan, the LTV ratios, original maturity date of
the loans and remaining maturity, the new and used mix, the model year
and mileage of the vehicles, the amortization methods and geographic
concentrations. The characteristics of the borrowers are also examined
to monitor representative creditworthiness and stability by looking at
gross income, monthly debt service, debt-to-gross income ratio, down
payment-to-value ratio, years of credit history, credit scores, length
of time at the borrower's residence, employment term and past credit
problems to make sure that these criteria are representative of the
originator's broader portfolio. Credit scoring is a relatively new
method used by lending facilities to assess a borrower's likelihood of
repaying a loan. The Rating Agencies monitor the correlation between
such scores and actual losses to refine the appropriate weighting to be
given to credit scores.
Delinquency data is broken out over 30-day, 60-day and 90-day
groups, and delinquencies are examined based on the loan contract
terms. In order to make sure that default data is not misleading, the
Rating Agencies examine whether all loans that are not performing and
are not charged off (even if the debtor is in bankruptcy or where the
automobile has been repossessed) are considered to be in default. The
originator's charge-off policy and accounting method used to calculate
losses are examined, as the timing of the charge-off is important
because it affects loss statistics, and delays in charge-offs put
stress on liquidity.
"Just letting servicers off the hook for being uprepared for the storm isn't impressing me any."
I agree, and have two questions regarding "half-assed" workouts.
Will these half-assed workouts result in more, or fewer, borrowers qualifying for the Hope program than would be the case with a proper workout analysis?
Could not a disgruntled investor sue based on the servicers not applying due care to the half assed workout analysis? Just because Paulson declares half assed workouts OK does not mean the courts will agree IMO.
I agree. Let's only take from those in trouble . . . according to their ability to be taken from.
So let's start with Angelo. Then let's take from Citi, and WAMU, and then let's go to Bear Stearns. . .they are all in trouble.
To my mind, George and Dick are in trouble. Let's take from them.
You see, it all depends how you define trouble.
Personally, I think it is grave moral hazard for the society if we let these folks get away free. The lesson to future generations will be that you can lie, rob, and finagle the books and live happily ever after.
Will these half-assed workouts result in more, or fewer, borrowers qualifying for the Hope program than would be the case with a proper workout analysis?-RThomas
r u kiddin me? it can only go up, like the stock mkt.
please append to the end of that "provided by taxpayers".
Only if you will admit that the potential taxpayer exposure is after the borrower paid 2.25% of the loan amount up front in an insurance premium, plus 0.50% per year thereafter. Plus the lenders pay Ginnie Mae a guarantee fee of 17 bps.
These amounts are paid on all loans. As long as some of them are performing, the performing loans are subsidizing the losses on the nonperforming loans.
The taxpayer doesn't kick in until we've spent the insurance premiums and g-fees. I am not claiming that those will always be adequate to cover losses. I am also not interested in pretending they aren't there. Too many internet cranks are busy asserting that FHA loans are "handouts." We don't have to accommodate that kind of thing here.
This is why I wrote the post the way I did: to help clear up the confusion about where and when the taxpayer money enters the picture. So don't expect me to then "sum up" by adding the original mystification back in.
Lord love a duck, folks. This is a Nerd blog. We are not going to oversimplify.
My oft-repeated line of thinking on this is that, to keep it legal ( as per the ASF) and still do it quick and dirty, the 97% or higher LTV test was the avenue for the servicers to do their stuff - but that avenue appears closed for a lot of the borrowers since they don't have a 97% or higher LTV (when V is taken to be the one at origination and L is the first lien). So the servicers will have to use the ineligibility for FHASecure test to keep it all legal. And that's going to cost time and money ( I hope).
Separately, I agree with Tanta that anybody who shorts GSEs without being aware of how much help it could get from the govt when its in trouble is being naive. I take it further - anybody who shorts without being aware of how many of the social mores, institutions, rules, tax incentives are against you ( and tax policy is a great indicator of what how much pox "society" wants to visit upon you ) is being naive.
If it eventually comes down to a question of Municipal or State bonds, it is important to remember that bonding capacities are limited, are usually pushed close to the limit at any time and will be decreasing if tax revenues decrease, as they will when property values or incomes decline.
Municipalities cannot subsidize investors at the same time they build schools, roads and bridges.
Is it coincidental that perhaps the most propserous decades in US history followed the Depression? Likewise for the growth that followed the "Great Recession" in the early 80s?
Don't underestimate some of the accomplishments of the New Deal. WPA, CCC, et al, put a lot of people back to work doing things that needed to be done (and kept them off the street corners). The high school I attended was partially constructed by WPA (an oldie, but a goodie). Some of the public works projects from those day are still valuable assets to the USA.
STRESS!!! This to me indicates the rating agencies are all full of total crap!!!
In developing a stress model, conservative assumptions are made as
to real estate market conditions, economic factors and expenses
associated with events of loss, applying a worst-case scenario
incorporating high unemployment, deflation and sharply falling real
estate values. The worst-case model considered by S&P to be appropriate
for its highest rating categories incorporates the foreclosure
frequencies and loss severity experienced during the Great Depression
of the 1930s, whereas other Rating Agencies use those experienced in
the Houston, Texas disastrous housing market in the mid-1980s. The
choice of economic model is selected based on the severity of the
stress to be applied. Generally, AAA'' andAA'' rated Securities
have to withstand so-called national depression models based on the
Great Depression/Houston, Texas models. For A'' andBBB'' rating
categories, other geographic severe depression models, such as Boston
in the 1980s or New York and Los Angeles in the early 1990s, might be
used as the basis for the stress model. Alternatively, a system of
local forecasting models or some other statistically derived stress
models may be created for these purposes. ``BB'' rated Securities or
lower would have to withstand less severe recession models.
You don't have to worry about winners/loser from The Plan. You can just focus on what's best for the economy, and that would be a quick return in real estate to market fundamentals. When housing prices soared, it encouraged too many people to be realtors, lenders, appraisers, builders, etc. By "too many" I mean that they could have been more productively used engaging in other activities. The price signal they looked at was distorted by the bubble.
The important thing is to "undistort" the price signal and get housing prices back to where they were, pre-bubble.
I think that The Plan just delays foreclosures, and sets the stage for more "bailouts" in the future. The problem, from the economy's point of view, is that this will keep housing prices distorted and it will drag out the needed move of people and resources out of real estate.
sure short selling is risky as in all stock mkt bets. but those of us who do short sell believe that the fundamentals of the bubble sphere have gotten so out of whack with reality that it can't go on w/o at least some correction which we haven't had yet IMO.
when you look at all the multidecadal records being broken to the downside in RE statistics, its hard not to bet on the short side. sure the gov't and Wall St are going to fight tooth
and nail to keep it all going and they probably will in the short run.
but then i look at the yearly charts of HB's, financials, & retailers and then i find solace.
Only if you will admit that the potential taxpayer exposure is after the borrower paid 2.25% of the loan amount up front in an insurance premium, plus 0.50% per year thereafter. Plus the lenders pay Ginnie Mae a guarantee fee of 17 bps.
Tanta,
This may be more than adequate in "normal" times. But the excesses of the recent boom make current times definitely not normal. Imagine that insurance companies wrote insurance for storm damage in Florida taking normal premia of a few hundred dollars or so and then realize that the superstorm of category 5+ is just off the coast and they stop insuring or require enormous premia. What if a government program start to happily insure based on the prestorm actuary tables? We'll get a government subsidy of "market premium minus government premium" or "storm losses minus premium collected", won't we? Either way it's a subsidy. In front (based on the market premia) or later (loss coverage).
The taxpayer doesn't kick in until we've spent the insurance premiums and g-fees. I am not claiming that those will always be adequate to cover losses
The problem is these fees will not be adequate and we know it now. Have you seen the prices of CDS?
to help clear up the confusion about where and when the taxpayer money enters the picture.
Taxpayer money is not involved yet but the commitment is being made. Now is the last chance to stop it. It doesn't matter that it will be a problem for taxpayers in a year or two because then there will be no way to undo it then.
So the Great Freeze will forestall, what, 100,000 foreclosures that otherwise would have happened over the next two years? Instead of 1,500,000 foreclosures there will be 1,400,000?
The ubiquitous taxpayer will be hurt much more by what actually happens than by what would have happened, but was avoided.
It will still hit the fan.
I'm thinking there's a 50bp cut coming next week even though the FFF are leaning heavily toward 25bps. Dropping the dollar is one way to bring RE prices more in line with reality. Eventually we'll all own $600k houses, but we'll still all be subprime because the dollar won't be worth as much as it is today.
poszi, I did not and am not claiming that there is no "taxpayer" exposure here.
I am getting a bit pissed with the idea that it's OK for current FHA borrowers to pay those premiums to cover losses now, but it would be a big deal if "we" had to make up the difference. It has always been the design of that program that it would work that way: if the premiums ever become not enough, "we" will step in. That's not a bug, that's a feature.
This is why I am resisting FHA Modernization: it takes so much risk, in my view, that shortfalls would be inevitable.
There is an agenda in the desire to simply gloss right over the fact that the FHA program's first loss is carried by performing FHA borrowers and lenders who pay the 17 bps. That is all I am saying. I don't, actually, need to have the mechanics of the program explained to me. I understand what "full faith and credit" guarantees mean, and what happens if the premiums aren't sufficient. That is why I am objecting to "Modernization."
Have I seen the prices of CDS?
Yes. I have. I pay attention to those things, you know.
"This is why I wrote the post the way I did: to help clear up the confusion about where and when the taxpayer money enters the picture."
You did a great job of explaining to us wanna be nerds the ins and outs.
The bloggers here are losing site of the ball and it is in the Modernization Plan.
That is the real place where the new risk to the taxpayer is.
People, pay attention to that which is the Paulson slight of hand. A little Quid Pro Quo for the banks and servicers while he tries to strong arm congress into the modernization plan.
Everyone is raising decent points. But keep your eye on the prize, Modernization.
poszi, I did not and am not claiming that there is no "taxpayer" exposure here.
I am getting a bit pissed with the idea that it's OK for current FHA borrowers to pay those premiums to cover losses now, but it would be a big deal if "we" had to make up the difference.
Well, the system is broken so we should not complain when it is getting even more broken? If the taxpayer exposure before the plan was x and after the plan is y and 0>x>y then y-x is a new amount being subsidized and is good enough to complain about another taxpayer subsidy.
Yes. I have. I pay attention to those things, you know.
ARW - under FHA, the servicer has to pay all the foreclosure costs but is only reimbursed for some of them. And the investor only gets 6 months of interest - if the foreclosure goes beyond that the investor has to eat the interest. If the investor wraps a Ginnie guaranty around the FHA loan the investor is then on the hook for zero.
Ella - some of FHA modernization might be a bad idea, but some parts, like risk based pricing, don't seem so bad, except to the extent that they are in conjunction with other stuff, like reaching farther down the credit spectrum.
But why is FHA modernization, which would expand FHA to reach lower FICO score borrowers, a bad idea, while FHA Secure, which expands FHA to reach currently delinquent borrowers, isn't?
Tanta - when even FHA, which has always been wildly optimistic in its projections, concedes that they are going to lose money on originations, I don't see how you can call a plan to expand FHA anything other than a taxpayer supported bailout of the investors holding the paper that's getting refinanced.
I frankly am more worried about FHA Modernization becoming a "bailin" than I am FHASecure being a "bailout."
Banking and bailout have always gone together, Modernization will be pushed as being great for the first time homeowners, achieving the American Dream and all that crap but it is also most a given that it will become a permanent feature. It will be pushed by the all the parties that will have the most to gain and it ain't the homeowners. The banks quest for the holly grail.
Because: 1. More risk is passed to the taxpayer, 2. The purpose of Modernization is to reflate originations and the real estate market, 3. reflation will most like lead to a prolonged situation and risk's the Japan effect, 4. How long before the new guarantees become highly leveraged in a new ponzi scheme to the benefit of the few and the ultimate loss to the many, 5. American incomes can not support the current real estate values that were created in the "bubble" and Modernization may well allow the bubble to continue,and 6. Asset bubbles are destructive to the economy.
Sure they are. And the hedgefunds that have levered this crap 10 or 20:1 -- they're all doing it to help widows and or orphans.
Hey, sweetheart, you can try spinning it any way you like, but this "plan" walks like a bailout, talks like a bailout, and stinks like a bailout. So why don't we all just admit it: it's a BAILOUT!
I have a real problem with the idea that foreclosing on these current owners would be "good for" potential new owners right now. That argument assumes that the stuff could all be sold as REO in the near term at values that wouldn't continue to fall.
The fact is, nobody knows at this point how far values can fall even if we (especially if) we unload a big wave of REO into the market. So any lender making a new loan to a new first-timer who is trying to buy this REO is taking a big chance. This is my point about FHA Modernization: it's on the table because everyone recognizes that we will need government-insured loans to facilitate the purchase of this REO.
Everyone recognizes that we will need government-insured loans? Why is this necessary? To keep the current inflated home values?
Your two paragraphs above are a bunch of bunk. We got where we are at now because of stupid government guarantees and your advocating more of it? Unbelievable. What's wrong with letting the home market correct down 40% in just a year or so? The quicker we get back to house-price normalcy, the better off we'll all be.
We need to get back to 20%-down loans, ratings agencies working for re-packaged loan buyers instead of sellers, and a little common sense. Government guarantees are no substitute for common sense.
And I agree with the other posters who said that Pualson should be encouraging these borrowers to walk away instead of continuing to make payments on an asset that is underwater and depreciating. I hope that's what these borrowers do.
It was not government guarantees that caused the asset bubble. It was Wall Street, lax lending standards (which should have been regulated so that they did not become lax), and creative financing (which should also have been regulated) that caused the bubble.
Piling more and more debt on now will not change it. Reflating housing will not help. Look what happened to Japan.
I'm with the anti-bailout crowd.. (though, I wish they'd post jeremiads using poetic meter... oh well).
I'm thinking we need to scale back a lot of these bailout-y seeming features of society..
The fire department should keep track of "who shoulda known better than to leave that space heater plugged in overnight".. so when that person's house burns down, we won't be wasting our money bailing them out.
Same goes for the police, only assist people who've gotten into trouble through no fault of their own. We'll have some fat bald guy make arbitrary decisions on what constitutes "shoulda known better!"
"Hello? There's a burglar in your house? How did they get past your guard dog or the metal bars on your windows? No bars.. no dog? Shoulda known better! [click]"
I like this idea of simplifying every social issue down to some extreme case. It makes it easier to believe that nothing should be done.
So.. I will continue to think of any attempts to slow down foreclosures as attempts to sanction reckless gambling by assholes with Hummers (he probably takes up TWO parking spots at the mall!!). I will refuse to wonder why society exists at all since I will know deep in my heart that if I am smart enough, I can take care of myself, and I will never need help from anyone. Social structures are for dumbshits who can't take care of themselves.
The world is simple and orderly. All is right in it.
So you're advocating "slowing down foreclosures" at the expense of borrowers who are least able to afford it? Give me a break. The best thing for these borrowers (and thus "society" -- these borrowers are members of "socitety" are they not? Or were you referring to your "high society" friends?) is to walk away from these loans. Actually, the best thing for them is to run.
Don't give me this crap about how this bailout is trying to help society when it's real aim is to keep poor idiots in their unaffordable mortgage pants.
I think we should assist families faced with foreclosure, but at the same time, we should create a new government employee whose sole job is to travel around the world with a stick and poke the brokers (and others responsible for supplying these loans) in the eye with this stick that he/she/it is carrying around.
Next time the mortgage lenders are thinking about loosening up standards and flooding the market with easy money..
They'll think of that poke in their eye with the sharp stick. They will think that there is nothing worse than that..
Maybe they'll even worry that next time.. they might get a poke in the eye with the sharp stick.. and a slap on the belly with a wet fish.
It was not government guarantees that caused the asset bubble. It was Wall Street, lax lending standards (which should have been regulated so that they did not become lax), and creative financing (which should also have been regulated) that caused the bubble.
I'm not so sure that the government didn't lead the way here. 1% interest rates certainly provided a spark. Don't the GSEs insure 0%-down loans? I wonder if the GSEs or the private sector was the first to provide 0%-down loans? It wouldn't surprise me if it was the GSEs and this caused the private sector to do the same in order to compete.
Don't give me this crap about how this bailout is trying to help society when it's real aim is to keep poor idiots in their unaffordable mortgage pants.
1stTimeBuyer,
If someone can't afford a mortgage and they want to walk, nothing is stopping them. I may be naive, but I am assuming that there are some people who wish to stay in their homes, who may not have understood what they were getting into, and who may not understand that a modification is an option.
I'm not going to cry for you just because you want to buy a home and this will slow down a potential price decline (which I doubt). Maybe you're just bored, smug and self-assured. If you are, then think of it this way:
These lame-ass pathetic people need help. This will further emphasize your superiority.
Feel free to think of them as the antithesis of you. They are everything you are not. If they did not exist, your righteousness would not be so well defined and impressive to the ladies.
Below is a commentary from the SF Chronicle that suggests that the "bailout" factor in the latest Paulson Plan is the legal cover it give IB from having their dodgy paper put back at par.
Does this ring true to you or is it just more overheated SF rhetoric?
<
blockquote> MORTGAGE MELTDOWN
Interest rate 'freeze' - the real story is fraud
Bankers pay lip service to families while scurrying to avert suits, prison
by Sean Olender
Sunday, December 9, 2007
New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.
Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."
Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spre
blockquote>
Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.
Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?
What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.
Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.
The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans d
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.
The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?
Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.
As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.
Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.
Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.
If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?
It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.
I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.
The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.
The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.
The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.S. investment banks, like Goldman, that were selling the bundled mortgages.
This logic is like saying shoppers seeking bargain-priced soup encourage the grocery store owner to steal it. I mean, we're talking about criminal fraud here. We are on the cusp of a mammoth financial crisis, and the Federal Reserve and the U.S. Treasury are trying to limit the liability of their banking friends under the guise of trying to help borrowers. At stake is nothing short of the continued existence of the U.S. banking system.
The latest effort to inflate the economic airbags came from the head of U.S. Treasury Department, Secretary Andrew William Mellon, who resigned from his position as the head of the nations largest bank to take the position, now serving Republican President Hoover. Oops. Sorry. Wrong post credit bubble era. I meant Treasury Department Secretary Henry Paulson, who resigned from his position as the head of the nations largest bank to take the position, now serving Republican President Bush. And, no, todays credit crisis has not resulted from cascading debt defaults after more than 50% of the nations banking resources were committed as margin credit to hyperinflated stock prices through non-transparent cross-investments among investment trusts. One could draw a virtuous comparison to the recent commitment of 60% of loans on the balance sheets of the nations banks to mortgage debt backing trillions of dollars of mortgages collateralized by hyperinflated housing prices and funded by risky and over-priced securitized debt instruments, but you have to drawn the line somewhere. We draw it here: were much, much smarter today than those dopes back in the 1920s and 1930s. To wit:
"Next to food and clothing, the housing of a nation is its most vital problem. . . . The sentiment for home ownership is embedded in the American heart [of] millions of people who dwell in tenements, apartments and rented rows of solid brick. . . . This aspiration penetrates the heart of our national wellbeing. It makes for happier married life. It makes for better children. It makes for courage to meet the battle of life. . . . There is a wide distinction between homes and mere housing. Those immortal ballads, 'Home, Sweet Home,' 'My Old Kentucky Home' and 'The Little Grey Home in the West' were not written about tenements or apartments. . . . They were written about an individual abode, alive with tender associations of childhood, the family life at the fireside, the free out-of-doors, the independence, the security and the pride in possession of the family's own home. . . . Many of our people must live under other conditions. But they never sing songs about a pile of rent receipts. . . ."
I don't think it is particularly outlandish or childish to think that the state is responsible for maintaining public order, but not, perhaps, responsible for managing the exchanging of homes amongst its citizens. Sadly, since I have neither the time nor inclination, I cannot spend 20 years studying or working in mortgage finance. On the other hand, people who have done so seem a bit too comfortable demanding that I hand them money (or, equivalently, take on risk) for my own good. Having seen obscurantism-as-expertise wielded as a weapon many times in my chosen career, programming, I remain skeptical.
Earlier Tanta made a funny point about some of us being pissed that Santa Claus is ignoring who was good and who was bad. Cute. But Santa doesn't come around once a year demanding money, at the point of a gun, from me.
NB: I'm a prospective first-time buyer who sat the frenzy out in the bay area mainly due to a spreadsheet I created in 2002 doing some rudimentary salary/mortgage calculations, so I'm the big loser in this game.
"The goal of the freeze MAY be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing."
The writer hinges his opinion on the word MAY. I think that the author is like many of us looking beyond the "Plan" to try and figure out what is really going on. In order to may this determination, he/she is focusing on who will benefit the most from the "Plan"
I too have been reading and thinking about this very topic. Far too few homeowners will be helped by the "Plan", Further, the dollar amount of involve is relatively small when you consider the other shaky mortgages out there due to reset.
There is some validity in the opinion piece and it should be considered as we think about the large picture. As I continue my search for what is really going on behind the scenes of the "Plan", I will consider this opinion as part of the mix.
Whether they are playing dumb or not, the really scare me. After all they went along with the creation of the housing bubble. What the heck did they think was going on?
Further, they know so little about the credit markets I doubt at this point they can even vote intelligently on these issues.
Re: President Bush Signs Pension Reform Act; Cross Trading Exemption Included
President Bush this week signed the Pension Reform Act (H.R. 4), comprehensive pension legislation that represents a significant overhaul of the prohibited transaction provisions of the 32-year old Employee Retirement Security Income Act. H.R.4 is Public Law No: 109-280. The changes include a prohibited transaction exemption for cross-trading between separate pension accounts held with the same money manager and boost the level of ERISA assets that can be invested in investment vehicles such as hedge funds. Under the legislation, cross-trading would be allowed for private pension plans with at least $100M in assets, resulting in lower transaction costs for pension plans.
November 30, 2007 6:27 PM
Re: August 2006 - Landmark pension reform legislation passed last night by Congressand expected to be signed by the President this month includes the most significant changes to the fiduciary provisions of ERISA since its enactment in 1974. The new legislation (the "Pension Reform Act") significantly relaxes the rulesgoverning when asset-backed securities ("ABS"), including commercialmortgage backed securities ("CMBS") and collateralized debt obligations("CDOs"), may be offered to investors holding certain types of retirement planassets. Absent an exception, issuers of ABS, CMBS and CDOs that are not structuredas debt must comply with ERISA, including its stringent fiduciary and prohibited transaction rules -- which is not practical for most ABS, CMBS and CDO issuers. One regulatory exception (known as the "Significant Participation Exception") relied on by many issuers of either below-investmentgrade ABS, CMBS and CDOs or ABS, CMBS or CDOs that are not characterized as debt for tax (each of which typically cannot be characterized asdebt for ERISA purposes) applies if an issuer does not have "significant articipation" by "benefit plan investors".
Anyone know who grants the exceptions for your pensions..............huh........the DOL, The Dept Of Labor.......and so, you have 90% of the crooks in Washington voting for this current financial crisis/chaos and The DOL granting access to every bank in the country to pool securities into pools of pools that link massive amounts of risk to pension funds....or dont you get that CDOs are selling for pennies on the dollar? Who do you think will b
Great and these are the same folks that want to privatize SS. Just think soon the rest of us won't have a dime. What little we have will be in the coffers of the Uber Rich. Just the way they like it.
And they tell us that the Uber Rich make our economy run and need even more tax breaks. Yeah, right they never make a dime off the rest of us.
I love it. This is exactly how the whole Ponzi scam worked. Everybody was on it and made money while the going was good. Everybody participated in this criminal activity, the whole world, the entire US population right down to J6P who bought the house thinking that due to 20% per year appreciation he/she is going to retire in 5 years doing f**** all, were part of it. Now, when the music stopped and everybody got caught with their pants down, nobody wants to take the loses/responsibility. NO BAIL OUT FOR ANYBODY, LET ALL PARTICIPANTS EAT THE CRAP THEY CREATED.? No nation in human history got rich by printing money/creating credit out of thin air. Never, ever. It takes hard work to do it.
GODS MILLS ARE SLOW BUT FINE. EVEN BUSH/PAULSON/BERNANKE GANG CANT STOP CREDIT LIQUIDATION NOW.
Nobody knows where the bottom will be, but with mountains of debt and all the financial engineering of the last several years it will not be a soft landing for sure. It didnt help Japan to drop rates to zero, did it. I said this before several times before, and I will say it again. The FED controlled, through the banking system, only 20% of credit creation, the remainig 80% was pulled out of thin air by Wall Street alchemy. The rising asset prices allowed them to create more FC which in turn drove the asset prices higher leading to even more FC creation. It is called virtous circle. Now the entire Wall Street credit creating machinery is in reverse . It is called vicious circle and nothing but total credit bubble liquidation will stop it. This credit bubble isnt different then the tulip mania, South Sea bubble, Mississipi bubble, canal mania, British railroad mania,etc. The human nature never changes only asset classes beeing played are different. The end to every credit bubble is always the same.?This one is not going to be any different. See McKays Maddness of the crowds
In 1980, before the era of great prosperity/wealth creation commenced US GDP was $ 5 trillion and total debt outstanding $ 10 trillion. Today, after 27 years of relentless credit bubble blowing, US GDP is at $ 13 trillion and the total credit market borrowings stand at US 47.8 trillion. You tell me where all the wealth came from. Since economys income stream couldnt support the debt no wonder they couldnt create any more credit against the exisiting assets. They were running out of collateral to boot. The only way to extend the credit bubble was LEVERAGE. That is why the Wall Street magicians (followed by magicians all over the world, yes even Bangladesh has them) came up with the CDOs and the whole alphabet soup. By layering derivative (leveraged 1 to 15)on top of another derivative (leveraged 1 to 20) were they able to create more credit/FC against the same asset class. In order for this scam to succeed Wall Street needed three things, they had to identify the biggest single asset (it happens to be ones house) that individual can buy on credit, suckers they can sell
suckers they can sell the dream of infinite appreciation and having of something for free, and greedy idiots who would buy collaritized paper. Guess what? They found all three of them. Too bad that sucker who supposed to get filthy rich, got impatient waiting for get rich quick scheme to materialize, and started defaulting on its mortgages causing the whole structure to collapse. Imagine inverted pyramid with J6P as the apex supporting the whole weight above him. How long could he last? Since he is not an Atlas it took only 27 years to burry him under the rubble of all the debt.. Unless powers to be come up with another asset class (and suckers able and willing to play it again) that even more credit can be created against (the new Ponzi units have to support the old ones in expotential manner), the whole scam has to unravel. It will go down untill sound money, whatever it means, will be able to pay for greatly deflated assets. Survival of the fittest and the best prepared.
cryptogon.com
9/4/2006
Cover of Business Week: How Toxic Is Your Mortgage? :.
The option ARM is like the neutron bomb, says George McCarthy, a housing economist at New Yorks Ford Foundation. Its going to kill all the people but leave the houses standing.
This Business Week article is pretty good, but I feel the need to take you much deeper down the rabbit hole. Try to get comfortable, its not going to be pleasant.
An evidently reluctant Mr Paulson took fright at the gathering storm and decided that he had to act. The unavoidable consequence is that the administration now owns the problem in a way it did not before. As the housing slump worsens, as it seems bound to, and a chill once more silences the hope in voters hearts, the measures announced so far will be deemed (even more than they have been already) unfair and inadequate. It will be too late then to say: This is none of our concern.
From now on, every mortgage foreclosure will be seen as proof of the policys failure and partly the administrations fault. Merely to address the most obvious anomalies in the new arrangements, more comprehensive and more generous assistance seems likely before long. In other words, the massively distorted and mismanaged US housing-finance market is going to get more so. And taxpayers had better prepare to be mugged.
At Miami-based Yale Mortgage Corp., one of the industry's larger players, loan applications so far this year are up as much as 30 percent from a year earlier, translating to 50 to 75 additional submissions every day. At Alliance Portfolio, a much smaller hard-money lender in Aliso Viejo, Calif., submissions have jumped 50 percent, to about 50 a month in the wake of the subprime crisis that erupted over the summer.
Seattle Funding Group, a Bellevue, Wash., firm that is one of the largest hard-money lenders on the West Coast, recently installed a new phone system in part to handle the calls now flooding in from consumers desperate to fund new-home purchases and cash-out refinancings.
Maybe I'm misunderstanding your point, Tanta. I don't have a problem with existing FHA guarantees. They're going to cost us, but they were made in (more or less) good faith, so that's just life. I do think, without doubt, that for the FHA to guarantee loans at far below market prices (we know a 15% price drop is a foregone conclusion so 97% LTV mortgages are going to lose lots of money) is a bailout. Loans in places like CA and SFL will lose far more than that. Also, the 2nds can get a bailout - FHASecure refis can combine first and second mortgages. The biggest beneficiaries of this, by far, are WAMU and Countrywide, who can escape all the risk in their gruesome 2nd-lien-in-superbubble-areas loans using this program as long as they can find an appraiser who'll cough up an appraisal justifying a 3% equity. So this is a bailout, and it will benefit some of the worst offenders (both Countrywide and WAMU have had huge increases in their 2nd lien exposures this year)
I'm not completely sold on bailouts being evil, although right now I lean to the idea of allowing a full-out crash and having the government take over the banking system. But even if we want to do some bailouts of the investors and banks who are primarily responsible for this horror we face I think it can be much better designed than this. Having current investors take at least a haircut on existing predatory loans is IMO essential.
"These days, however, they are attracting a larger, more-affluent group of consumers."
"Hard-money lenders protect themselves by requiring that borrowers have substantial equity in their collateral - either their home, investment property or a business - of 30 percent to 40 percent or more. Moreover, interest rates are generally in the low teens, and fees can be as much as 5 percent of the loan's value."
"The home-appraisal process is more intense, as well. Because hard-money lenders base their underwriting on the underlying collateral, they analyze property and the local market more intently than do traditional lenders."
Yikes, this is bad news. Hmm, loan apps at this places are up, but how many of the apps are being funded.
People ask me all the time, Moe, if a pool of mortgages has only a small amount of toxic subprime waste, then whats the deal, why is the toxic waste going to kill the whole pool? They wonder why a small subprime default in a pool will create such an imbalance and end up causing the whole pool to be re-valued and cause default at a higher level, and thus impact yields in a pension....... they wonder why these trusts that are using pools are defaulting?
What am I gonna tell these suckers? Any ideas out there?
How many CDOs/RMBSs/ABSs/CCOs?etc are we talking about and why are so many going bad?
Re: Bob Gentzel, a spokesman for the Pennsylvania State Employees' Retirement System, said the pension fund doesn't have problems in the subprime area. It has no exposure in the structured investment vehicles that factored into the Florida situation, he said.
Gentzel said the pension fund actually made money in the subprime market because it took short positions in August and September.
In response to the situation in Florida, the Pennsylvania Treasury Department mailed a letter to participants of its Invest program, reassuring them that their investments are not exposed to subprime-backed investments. The Invest program provides low-cost liquid investments for local governments and nonprofits. It is similar in concept to a money-market fund.
Great....just what you want, some guy playing it safe with a pension fund, i.e, by going short subprime; sounds pretty damn safe there Bob, and I wonder, did you also play it safe with the pension by hedging a few other safe bets on a few puts that offset interest rates? Yah, thank God for people like this that know what to do!
In fact the Paulson plan is a bailout---an indirect but intended bailout for the thrifts and banks that got stuck with tens of billions of dollars in crappy loans when the secondary markets shut down. We now have a new industry-wide' standard for performing credit. Banks and thrifts can now modify their worst owned loans en masse by referring to the improved SFA definition of prudent servicing. They can cut their 30/60/90 days delinquencies, and I'll betcha that Bair and the other regulators are not going to insist on charging off the interest impairment from a freeze on aperforming' loan. A redefinition of loan performance is what happened in the '80's with FSLIC, when mortally wounded thrifts were permitted to continue lending against insured deposits until finally the music had to stop. Some of the larger thrifts will become insolvent if they charge off everything that should be charged off. These thrifts do not fit the `too big to fail' definition of the FDICIA, but they are large enough that FDIC would need backup financing from Treasury to close them. And that's a big political no-no. The taxpayer will pay, but down the road---and pay more.
I guess Im so used to smelling rats, that nothing seems right anymore:
Re: The board of the $35 billion Pennsylvania State Employees Retirement System last week approved a total commitment of $231 million to a of private equity funds and a real estate fund.
The systems board approved up to $30 million for the Fillmore West Fund, up to $100 million to New York Life Capital Partners IV and up to 70 million (US$101 million) to Nordic Capital Fund VII. The Fillmore fund is a real estate fund while the New York Life and Nordic Capital funds are private equity funds. The investments will be funded from cash as part of SERS long-term investment plan.
Nordic Capital is a rich source of mandates for White &Case, having appointed Airisto and Laura Huomo as advisers in the acquisitions of the Leaf Groups confectionary division and Outokumpu Copper Products.Both deals were the result of referrals from the firms London office. White & Case also represented Nordic Capital in the recapitalization of Ahlsell, a Nordicdistribution business. The financing for the recapitalization was arranged by Morgan Stanley and Nordea, and comprised senior, second lien, mezzanine andpayment-in-kind facilities.
The terms of the purchase are governed by the previously announced Stock Purchase Agreement (the Purchase Agreement) by and among the Registrant, Dangaard Holding, Dangaard Telecom, and Nordic Capital Fund VI (for purposes of Sections 6.16 and 12.14 only), consisting of: Nordic Capital VI Alpha, L.P. and Nordic Capital Beta, L.P., Jersey limited partnerships acting through their general partner Nordic Capital VI Limited, a Jersey company, NC VI Limited, a Jersey company, and Nordic Industries Limited, a Jersey company.
I have read that the nominal value of the derivatives market is in the hundreds of trillions, what the real value is I do not know. What portion of the derivatives market is based on US residential and commercial real estate mortgages, again I don't know.
But the CDO's, CDO's squared, ABCP, and the rest of them with subprime exposure, are at risk of failure for several reasons.
The various tranches of these securities that were sold were marked to model. (A computer program deicded what the value was, not the market.) If the underlying assets in the CDO have to be sold in the current market with few buyers, they are sold for fire sale prices. 20-30-40-50-cents on the dollar.
Now imagine that some of these CDO's were levered, $1 worth of assets to $15-20-30 dollars of leverage. The high leverage causes even more pain when the assets have to be sold at fire sale prices.
As long as the subprime and other loans are defaulting, then the chances are that the "mark to model" value of the CDO's is falling.
As the values fall, then the investors want their money back and try to get out of the hedge funds that hold the CDO's. (You have a crisis of confidence in the credit markets)
This causes panic, because as the mark to model value goes down, fire sales in the market make buyers think these CDO are worthless. Hedge funds declare bankruptcy ie 2 Bear Sterns hedge funds this summer. Hedge funds stop withdrawals.
The CDO's etc were sold to insurance companies, pension funds, banks and municipalities all over the world.
A whole bunch of money will be lost. Money needed by pension funds, insurance funds, and munis to run the governments.
There are also other varieties of derivatives that trigger loses when asset prices fall. ie Search articles on Norway loses.
So in this scenario, the subprime is like a bee sting to one who is highly allergic. Or the earthquake to the tsunami. Take your pick, my favorite is the latter.
moe showers, I think you found a RAT. Why in this market would the Penn fund do something that foolish. Not what I would call a prudent investment for the retirees fund.
Tanta, first thanks for a great set of articles. I dont necessarily agree with your conclusions, but have certainly learned a lot.
Now, disregarding for a moment technical considerations for what should and should not be considered a bailout, on a very fundamental level all these federal intrusions into the real estate market results in inflating the cash cost of putting a roof over ones head. Even if just by reducing the perceived risk to all parties of a debt financed purchase transaction. Back in the day of home prices being pretty much determined by construction costs, and with large numbers of unemployeds around that could conceivably get jobs in a buoyant construction industry, that might have been a noble goal with plausible positive social benefits. Especially so in an era when abject starvation was a real possibility for those on the losing end of a market correction.
All the meddling accomplishes now is to raise the price (or preventing its fall) of the land on which homes are built, indirectly imposing one of the most obviously regressive tax schemes since the passing of the feudal age. By choking off federal support for these schemes, and let prices fall to non assisted equilibrium levels, equivalent homes will get cheaper. Whatever additional risk individual home owners and mortgage investors may face in the absence of publicly funded insurance, will soon be priced in at purchase time.
So, according to this commonsensical line of reasoning, adding another layer of federal meddling to the mortgage and RE markets is indeed a bailout. It to some, however small, degree bails out home owners facing home depreciation, mortgage investors facing bond losses, and the whole industry built around matching the two, by keeping the RE and mortgage sector of the economy artificially enlarged. Those stuck with the bill are those too poor or too young to have bought even during the boom, those with non real estate financing needs stuck competing for funds and labor with artificially attractive RE investments and salaries, and those negatively exposed to inflation resulting from a massive credit expansion followed by the inevitable monetary loosening marking its end.
So rather than uptights coloring inside the lines, I suspect many of the voices opposing the latest federal RE scheme simply feel we have gone too far down that road already. And that the way to get back to a more equitable place is to stop and turn around, not continuing even further.
Since it took 27 years to inflate the credit bubble, there is no way it can deflate in six months, it will take years (and a lot cheaper asset prices) to do it.
Dec. 03, 2007
NovaStar Financial asked to explain jump in stock price
By DAN MARGOLIES
The Kansas City Star
The New York Stock Exchange asked NovaStar Financial Inc. to explain any developments that might have precipitated a 69 percent jump in its stock price Monday.
The Kansas City-based subprime mortgage lender responded publicly that its policy is not to comment on unusual market activity.
The companys stock price leaped $1.36 Monday, closing at $3.33, after more than 7.2 million shares changed hands about six times the stocks normal volume over the last three months.
Shares of NovaStar began 2007 at $106.60, after adjusting for a reverse stock split.
The unusual trading activity came three days after a waiver deadline set by Wachovia Corp., NovaStars principal lender. The bank had previously agreed to waive a $150 million net worth requirement for NovaStar until Nov. 30.
Neither NovaStar nor Wachovia has said whether the bank has agreed to extend the deadline again. NovaStar has indicated it may be forced to file for bankruptcy if the waiver is not extended.
As of Nov. 13, NovaStar owed Wachovia $83.9 million in short-term loans and $11.8 million in commitment fees, according to regulatory filings.
NovaStar last month reported a $598 million third-quarter net loss, its largest quarterly loss ever.
The New York Stock Exchange has threatened to delist NovaStars stock because the company no longer complies with the exchanges requirements
Since it took 27 years to inflate the credit bubble, there is no way it can deflate in six months, it will take years (and a lot cheaper asset prices) to do it.
kris b,
We will be very lucky if an unwind comes and all of this sort of deflates in an orderly manner.
The notional amount of credit default swaps outstanding was around $45 trillion (US) in the first half of this year. This amount was less than $1 trillion (US) in the second half of 2001.
The total amount of global currency in circulation is around $5 trillion (when viewed in terms of US$).
On top of this.. the notional amount of currency and interest rate swaps is about $347 trillion (US).
So, what we have is a situation where... if the global economy continues to be stressed, a lot of these CDS contracts will start blowing up.. and then the central banks will need to react.
But, if they react by flooding currency or drastically changing interest rates, the swaps written against those numbers will effing blow up big fucking time.
None of that has to happen, of course.
But, I repeat, we will be very lucky if this just slowly dwindles away.
Yah, a lot of panic, but some say, there is quality still embedded in the bad stuff being sold in the panic, which makes some wonder about manipulation to force prices down on the good stuff. So, as the babies are tossed out with the bathwater, is this all just hogwash, or, are we really about to see the economy go belly up?
Re: nd right now Persian Gulf countries are putting their cash to work through newly minted sovereign wealth funds (SWFs), which operate much like state owned hedge funds or private equity groups.
In the past six months alone, Middle Eastern SWFs have doled out serious cash for stakes in major international corporations. Just take a look:
Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C), which recently lost its status as largest bank by market capitalization to Bank of America Corp. (BAC).
Nov. 26: Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japans electronics and media juggernaut Sony Corp. (SNE).
Nov. 16: Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).
Oct. 20: Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC (OZM).
Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).
Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).
May 21: General Electric (GE) sold its plastics division to Saudi Basic Industries Corp. - the countrys largest public company, though 70% owned by the government - for $11.6 billion.
In terms of valuation, are we seeing banks like BAC getting a good deal, or are they simplying bailing out positions and protecting further losses?
Re: But then, late Wednesday, came some good news. Countrywide Financial Corporation was snatched from the edge by Bank of American Corporation which invested $2 billion in the nation's largest mortgage lender. Bank of America said it would buy non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price.
Bank of America's CEO Kenneth Lewis said, "We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets. In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."
Some analysts are speculating that total acquisition of Countrywide may be in Bank of America's plans.
Countrywide had suffered through a tough couple of weeks as its stock slid and its survival looked increasingly in doubt.
The company had to drain an $11.5 billion loan facility from 40 banks last week and said it was planning to funnel most of its mortgage origination through its bank. But then, in spite of its FDIC insured status, many customers began to withdraw funds from Countrywide's bank after the company confirmed and accelerated earlier plans to funnel most of its mortgage originations through the bank. For a while there were fears of a full-scale run on the bank.
Moody's downgraded the company's debt from A3 to Baa3, the lowest investment grade, and hinted the rating might go down even further, taking Countrywide into junk bond territory. Wachovia, however, upgraded Countrywide from under perform to market perform based on the infusion of Bank of America money.
I need help on this one, so any databank guru that can solve this....great! tHIS STORY IS ABOUT 2 YEARS OLD, BUT IT SEEMS AS IF THIS INVESTIGATION DROPPED DEAD IN ITS TRACKS.........iD LIKE TO KNOW WHY???? FYI, The FTC is a powerful force, if it wants to be, but why did they drop this, or did they?
Bear Stearns Is Told by FTC to Provide Data for Mortgage Probe
Dec. 30 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, was told by the U.S. Federal Trade Commission to provide data and documents in connection with an investigation of mortgage lending to risky borrowers.
Bear Stearns's EMC Mortgage Corp. unit, which buys and services home loans, received the demand following a Dec. 8 FTC resolution, according to a filing today with the Securities and Exchange Commission. The New York-based firm said EMC Mortgage is cooperating with the government's inquiry.
According to the filing, made by an $830 million mortgage trust set up by Bear Stearns, the FTC is investigating the so- called sub-prime mortgage market. It said the agency is trying to determine whether any lenders, brokers or companies that handle loan services such as payment collection violated consumer- protection laws.
The filing didn't specify which data or documents EMC was told to provide. Bear Stearns spokeswoman Elizabeth Ventura wasn't available for comment.
Bear Stearns is one of the world's biggest underwriters of mortgage-backed bonds.
``The principal business of EMC has been the resolution of non-performing residential mortgage loan portfolios acquired from Resolution Trust Corp., from private investors and from the Department of Housing and Urban Development,'' according to the filing by Bear Stearns ARM Trust 2005-12.
Related to; November 08, 2007: 12:58 PM EST
NEW YORK (Associated Press) - HomeBanc Mortgage Corp. says it must complete the sale of its loan-servicing business to Bear Stearns Cos. and unload other assets before it can formulate a Chapter 11 plan.
The Atlanta-based lender is asking a federal bankruptcy court to extend by four months its exclusive right to propose a plan through April 7, 2008.
In a filing Wednesday with the U.S. Bankruptcy Court in Wilmington, Del., HomeBanc said that it has "communicated regularly" with its major creditor constituencies regarding the sale process and other potential means for maximizing value for its creditors.
An exclusivity extension is, however, necessary to allow the sale of the servicing business and other assets to close, and time for talks on plan terms, the liquidating lender said.
The sale of the company's servicing business to EMC Mortgage Corp., a Bear Stearns affiliate, is set to close Dec. 3. The deal, which calls for EMC to pay about $60 million to take over the servicing of about $7 billion worth of home loans, was approved by Judge Kevin Carey on Nov. 1.
IMHO, this subprime decoy is about chaotic credit enhancements and the bubble that finally exploded:
Re: We expect that most of our CDO subsidiaries will be cash flow arbitrage CDOs that will be exempt from investment company status under Rule 3a-7. CDO subsidiaries may also be structured to be excluded from investment company status under Section 3(c)(5), which excludes from investment company status issuers that are primarily engaged in holding mortgages and other liens on and interests in real estate, in owning obligations (such as credit card receivables and trade debt) that represent all or part of the purchase price of merchandise, insurance and services, in financing manufacturers, wholesalers and retailers with respect to specific merchandise, insurance and services or in any combination of the foregoing. Some of our CDOs may satisfy one or more the Section 3(c)(5) exceptions. We and the underwriters have received and, at the closing of this offering, will receive an opinion of counsel to the effect that, subject to the assumptions specified in such opinion, each of our CDO subsidiaries that has been formed since our initial private offering in February 2006 is not an investment company without regard to the provisions of Sections 3(c)(1) and 3(c)(7) of the 1940 Act.
Arbitrage CDOs can be further broken down into cash flow and market value categories. In a cash flow issue, the structure uses cash generated by a pool of corporate loans and bonds to satisfy its payment obligations. Since cash flow CDOs will hold assets with varying terms, the portfolio manager must ensure that payment obligations can be satisfied with incoming cash flows. In contrast, a market value CDO portfolio manager focuses on the pool's prospects for appreciation and high yield. A cash flow portfolio manager's strategy will typically be buy-and-hold (essentially matching asset flows with liability flows), whereas a market value CDO's portfolio manager actively trades the pool to enhance total return.
In addition, rating agencies review and monitor each structure differently. In a cash flow CDO, rating agencies will monitor overcollateralization (excess asset value) by comparing the present value of the pool's cash flows to the present value of the trust's obligations. A rating agency monitors overcollateralization in a market value CDO by considering the portfolio's market or liquidation value versus the trust's obligations.
There is the problem; you have rating agencies rating CDOs but CDOs are not under SEC radar, so...... if your CDO structure can pay for a TRIPLE AAA rating, who can say its not a great deal....right??
Re: If total bivariate risk exposure is substantial, then the portfolio will be analyzed using Standard & Poor's multi-jurisdictional default model, which assesses the
incremental default risk these assets introduce. This typically results in higher default estimates and credit
enhancement levels.
Re: The transparent and proven Monte Carlo methodology is no longer difficult to use, given today's fast PCs with superior computing power. The methodology is robust due to its ability to deal with complex
relationships between variables.
Thats it....the pension fund managers, and other financial gurus have faster PC's and therefore were able to model PlayStation-Synthetic-CDO/Dervatives into safer less risky investments, as they swapped this bet for that bet and tried in vain to out-gun the guy in the next booth that had an edge with a better model! yah!
Furthermore: The primary impetus for issuing a CDO is to take advantage of either an arbitrage opportunity or to improve a financial institution's capital ratios.
Hmm, why would someone take debt off the balance sheet and then start playing arb games to leverage debt...hmm, oh yah, monetization and leverage (see playstation speed above).
Hence: The first synthetic balance sheet CDOs were done by banks, which found the synthetic structures attractive because the risk transfer and resulting drop in regulatory capital requirements could be achieved without the expensive and cumbersome true sale of the assets. In contrast, arbitrage CDOs whether cash or synthetic, are motivated mainly by the purchaser of the most junior CDO liability tranche (also called equity,income notes, or first-loss piece) wishing to capture the excess spread between the return on the CDO collateral and the cost of risk transfer on the liabilities above the equity. (see Warren Buffy)
Finally (we have been here before and failed): In our opinion, much of the subpar performance surrounding the first wave of synthetic CDOs(1998-2001) can be attributed to imprudent portfolio selection in an extremely adverse credit environment coupled with structures that did not equitably share the economic risks and benefits of ownership across the entire capital structure. Many of the early static portfolios were assem-bled from the credits with the highest yield that satisfied the investment guidelines of the CDO (that is,credits that were trading wide for their rating).
Re: synthetic structures attractive because the risk transfer and resulting drop in regulatory capital requirements could be achieved without the expensive and cumbersome true sale of the assets.
Damn it, why cant we just substitute synthetic subprime loans for superimposed-subprime-synthetic CDOs and call off this bail out (Mr. Treasury Paulson).....LOL!
"But, I repeat, we will be very lucky if this just slowly dwindles away."
I am not smart enough to predict the final outcome of the credit bubble collapse, but I hope it will be fast and very painfull. I am sitting on a pile of cash waiting for 10 cent on a dollar bargains.
Re: Why else would the rating agencies be downgrading the CDO's as fast as possible.
I think those damn covenents are somehow involved; could it be, that a CDO has to be written like a contract, versus being a market security? I have to think on that..
Ironically, securitization (at least a semi-securitization derivation of it) allowed the US government to moderate the impact of the S&L debacle through the sale of securities backed by assets of the defunct thrifts. While the securities bore an indirect government guarantee and should not be viewed as true securitizations, these transactions redistributed the upside ownership value of the assets of defunct S&Ls among private investors.
By moving the upside value of assets back into private hands, this program became a model for government action to moderate credit cycle depressions that occur when governments believe they can somehow hold on until the assets of failed banks recover their value. Without a transfer to real private ownership, the overhang of government-controlled assets stymies all efforts to attract private investment and, as we have seen in Japan, slows or even precludes real recovery.
Procedures to resolve problems of the 1980s may have fostered the 1990s diversion between true securitizations and false ones. CMOs of the 1980s were precursors to true asset securitization structures of the 1990s that extended the enormous benefits of CMO tranching to all sorts of financial assets. Moreover, asset securitization techniques were developed that allowed aggregators to allocate collection and timing risks among different investors and interest holders so that true securitizations could support a much broader range of investment maturities.
On the other hand, the need to preserve liquidity at fundamentally sound banks where capital had been depleted by the market impact of resolving the S&L debacle led to the creation of several securitization formats that implicitly relied on the government's deposit guarantee for off-balance sheet lending. While not true securitizations (in many cases, all portfolio and liquidity risks were absorbed by the direct reliance on a sponsor), these structures played a key role to support economic recovery of the early 1990s. They also became a source for the growth of non-diversified credit portfolios of dependent off-balance sheet entities, creating (over time) the possibility of an off-balance sheet speculative bubble.
This development is one aspect of the credit boom of the late 1990s that the Financial Accounting Standards Board's (FASB) proposed interpretation of consolidation policy may force to be disclosed, on balance sheet, by special purpose entity (SPE) sponsors that fail to diversify their risk. In addition, FASB's consolidation reform may require disclosure of numerous other vehicles developed to bring the advantages of securitization to various non-financial assets. In many cases, use of SPEs for non-financial assets created a false appearance of significantly increased revenue. As a result, reform may now be necessary to preclude a new cycle of growth in off-balance sheet moral hazard lending activity (for example, certain Enron receivables structures) and to properly present
The ripple effect from an October 11 rating cuts may affect 461 CDOs in United States and 41 CDOs in Europe, Moody's said.
OOPS
Moody's made its announcements in a series of individual releases and did not provide the total amount of CDOs affected or the total amount of debt affected. Moody's said a full summary may be available at the end of the month.
"It's absurd," said Josh Rosner, a mortgage expert from Graham Fisher, a New York-based investment research firm. "It makes it harder to count the actual downgrades and they're doing it do draw less attention.
"The rating agencies are starting to feel increasingly like Britney Spears in their crashing and burning," Rosner said. "These downgrades feel like 'Oops, I did it again.'"
In Cincinnati, nervous depositors formed lines up to a block long and even slept on sidewalks overnight while waiting to withdraw their savings last week. Ohio Governor Richard Celeste finally stepped in and declared a three- day bank holiday for 71 savings and loan associations, probably the most extensive closure of U.S. financial institutions since the Great Depression. In Memphis, board of education officials were anxiously checking their investments. Elsewhere, communities from Beaumont, Texas, to Pompano Beach, Fla., were badly shaken.
The rapidly growing storm was touched off by the March 4 collapse of E.S.M. Government Securities, a Fort Lauderdale, Fla., dealer in bonds, notes and bills. The failure left dozens of creditors out as much as $300 million. E.S.M. had beguiled investors by offering high interest rates for short-term loans backed by U.S. Government securities. But some of E.S.M.'s customers never actually took possession of the securities, many of which now cannot be found.
So far, Ohio has been hardest hit by the E.S.M. scandal. Within days of the collapse, Cincinnati's Home State Savings Bank (assets: $1.4 billion), which may have lost up to $150 million as an E.S.M. investor, was shuttered by state banking authorities after a run on its deposits. That triggered a statewide panic when depositors at other thrifts, which had no dealings with E.S.M., rushed to withdraw their money, fearing that their savings were in jeopardy. At mid-week, the Ohio legislature created a $90 mil- lion emergency fund to supplement insurance for the savings and loan associations, but even that soon seemed inadequate in the face of mounting withdrawals. When he declared the bank holiday on Friday, Celeste explained that legislators and federal and state banking officials were working round the clock to formulate a plan to restore confidence in Ohio's financial institutions.
November, 1983--Bank Board raises net worth requirement for newly chartered S&Ls to 7%.
March, 1984--Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million.
April, 1984--Bank Board moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits.
July, 1984--Bank Board requires S&L management to adopt policies and procedures for managing interest rate risk.
January, 1985--Bank Board limits the amount of brokered deposits to 5% of deposits at FSLIC insured institutions failing to meet their net worth requirements. Bank Board also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10% of assets or twice the S&L's net worth, provided the institution meets regula
Unregulated transactions..sounds like mortgage brokers, appraisers, rating agencies and all the derivative trading! This is a problem that will continue to haunt America, because we have corrupt politicians (see Pension Reform Act and see Senate vote):
Home States losses were due to the failure on March 4, 1985, of a largelyunregulated government securities dealer, ESM Government Securities,following a massive fraud involving false audit reports. ESM was missingabout $300 million in customer funds. Home State was heavily exposed tothis failed securities dealer through repurchase agreement transactions.2Lax supervision had allowed Home State to borrow almost 50 percent ofits funds through ESM. As the result of ESMs failure, Home State andAmerican Savings and Loan Association in Florida, which werepart-owned by the same person, sustained substantial losses. Home Stateestimated losses at $150 million or more.Home States deposits, like those of the other state-chartered and privatelyinsured Ohio thrifts, were insured by the Ohio Deposit Guarantee Fund.Immediately before the run on Home State, the Guarantee Fund had totalassets of $130 million to guarantee about $4.3 billion in deposits for about500,000 depositors. According to Federal Reserve officials, the thrifts hadchosen private deposit insurance because such insurance was lessexpensive and burdensome compared to federal deposit insurance. TheGuarantee Fund had no legal power to ensure compliance by its membersand had no cease and desist power. According to a Guarantee Fundofficial, the privately insured Ohio thrifts were regulated by the OhioDepartment of Commerces Division of Savings and Loan Associations
The experience of banks and savings and loans in the 1980s providedample evidence of the seriousness of the risks involved in concentrationsof certain types of financial exposureparticularly when insufficientcapital is held to protect against risk exposures. The failure ofpolicymakers and regulators to effectively contain the savings and loancrisis proved costly to American taxpayers. Through FIRREA, Congresscreated a new agencythe Resolution Trust Corporationto resolvefailed savings and loans, liquidate their assets, and pay off insured depositors. The collapse of the savings and loan industry resulted intaxpayers incurring a large expense estimated, as of 1996, to be about$132 billion.
See Financial Audit: Resolution Trust Corporations 1995 and 1994 Financial Statements(GAO/GGD-96-123, July 2, 1996
The point here, IMHO, is that what we are about to come to terms with, is that this subprime/credit enhancement/unregulated derivative trading is going to result in a bailout!
Tanta is right that a segment of the audience here is just plain offended by the "bailout". I'm one of the offended. I don't want any government agency guaranteeing the repayment of loans to buy or re-finance houses at today's ridiculously inflated prices, and I don't buy into convoluted arguments that such a guarantee is not a subsidy.
Buying a home, instead of renting, inherently is a decision to take on some risk. (With 100% financing in non-recourse states, that actually became untrue, but...) I want the people who are entitled to keep most of the benefits of that risk - the borrowers/buyers - to put up most of the capital necessary to absorb the losses. That capital would be called a downpayment. And the downpayment needs to be as big as it takes to get private lenders to be willing to put up the rest of the money with NO government guarantees, quasi (FNMA..) or otherwise. If minimum downpayments have to go to 30%, fine. If that causes prices to drop by 50% or more, fine. The more I see the tortured logic of people looking to justify more guarantees and other price supports, the more I think we'd all be better off cutting off 90% of these constructions, and smartly.
If hedge funds want to lend money to people making low downpayments in return for higher rates, or a share of future home price appreciation, then that's fine too. Just no money for that kind of risky lending from govt-insured depositary institutions, and no other government guarantees, and no other ill-concealed attempts to boost home prices, well-intentioned or not, thank you.
Does anyone here really think that, if the FHA went out of the business of supporting home purchases, more people would be homeless 10 years from now? Every effort to make home purchases more affordable, unless limited to the poorest 10% or fewer of potential buyers, just ends up raising prices by an offsetting amount for the people it's designed to help. Getting the govt out of the business of subsidizing/guaranteeing higher home prices is not morality, it's efficiency, as measured over the next 50 years, not the next 5.
What Fair Economist said. Obviously anything that the FHA did in the past, needs the backing of the federal government. But it's just evil for the FHA to take on more risk in the current enviroment. That's a bailout.
Even if THIS plan doesn't help too many people, more and more plans will be dreamed up until we reach the point where the wreckless and cheats are rewarded and get to keep their homes while the responsible and honest are punished and made to pay (either with eternally high housing prices or by paying other peoples' mortgages). As long as this path leads the banks to richs, they'll keep trying to pull it off.
Even if the solution is just a bunch of bonds, I think we can all guess that those bonds will be rated AAA (despite the trash in them) and jammed into pension funds, retirement accounts, and mutual funds just like all the previous mortgage crud. A few years later, lots of the "saved" home-debtors default and these funds - such as our pension plans and retirement funds - take huge losses. Everyone is "surprised" and "nobody could have predicted this."
The eCONomic cycle in this nation is now firmly focused on keeping the good times rolling, privatizing the gains, and socializing the losses. Just because this plan in its current form may not do the best job of that greedy goal doesen't mean it won't be a real nightmare by the time they are done modifying it.
Also, with all due respect to Tanta (who said "everyone is getting something from Santa Claus") what am I getting out of this?
I can't afford a house now, despite good income, investing, and savings. This stupid bailout - or whatever you want to call it - is just going to drag out the pain for even more years. I didn't benefit in any way from the housing Bubble since all it did was drive me and countless other younger buyers out of the market because of the prices. I didn't "flip" any houses, so I got nothing.
As for the future, we'll have propped up housing prices to "enjoy" as well as having to now avoid even more investments that include these wretched "save the sheeple" bonds from this bail-out. So, I also get even more investments to avoid - not much of a "gift" from Santa, IMHO.
A good chunk of us got NO benefits from the Bubble AND are now watching this decline be dragged out as long as possible just so more crooked can make more money. I see no advantages to any of this.
As a great fan of clear writing, I just have to make the point that the vernacular is the vernacular. Insisting that expressions like "bail out" mean something precise is a waste of time. If you want precision from an expression like "bail out" you are going to have to add it. Sprinkle on some precision yourself, in expressions like "government bail out" or "bailed out by its parent" or some such.
If you really want precision, then use precise language, rather than expressions that have already become catch-alls in the vernacular. It saves time.
[I wouldn't object so much if 1) it had been officially temporary (give the servicers six months to get staffed up, letting them do the quick and dirty thing in the interim) or if 2) it involved the servicers taking the money they're not spending on expertise and sending it to the reputable non-profits who can counsel the borrowers and "broker" the deals.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.]
True, true, true.
However, the investors really haven't stepped up either. Up until v-e-r-y recently, some were vigorously opposed to modifying -any-of these loans.
The americansecuritization folks were suggesting that investors pay ~$1,500 to get bring these borrowers into the fold... and that's about as sensible an approach as I've heard.
The thing is, lenders were already modifying more of these loans, but the servicers don't have near the capacity to deal with this. When all the lights are green, the wind is blowing at your back, and the sun is shining, servicing can be profitable. But in an environment like this, it's no surprise that they can't keep up.
To make things worse, you have even MORE consolidation in the industry, and you run into situations like CITI not honoring stip-to-mods / performance mods that were set up at ABN. I talk to the loss mitters at CITI, and they tell me that they haven't added enough staff to handle to the volume. Gee, what a surprise. Wells did the same thing when they took over all that stuff from WAMU.
Depending on whose math you believe, someone loses $30-50k when a house goes REO. A $1,500 investment to avoid some of these is embarrassing.
I know REO Asset Managers who are finding it more and more difficult to get reasonable pricing decisions from the higher-ups.
In areas like Detroit, you have tax levels so high that the properties don't make sense to anyone at virtually any price. Will the treasurer look at rolling back tax levels? No.
There's enough resistance to a government bailout that we probably won't see any significant movement there.
We've got problems here, but all the stakeholders seem hell-bent on the idea that no one can make a buck.
This problem won't go away without a significant investment. One way or another, a price will be paid. By most of us.
A related idea about bailout is that if we let it all go done the toilet, there are costs involved, like loss of taxes and taxpayers. For example ncreases in government services to the dispossessed(unless they are shipped overseas or otherwise eliminated or left to wonder the streets). And there are business with employees that normally service the dispossessed who will have to fire folks. This is the other side of the coin.
Not to mention that social dislocation leads to crime, violence and extreme political movements.
As allergic as I am to any sort of bail out for the rich and powerful, stupid RE investors and illiterate RE buyers, you can not assumed that things will just take care of itself without cost to you. There is a cost to no action that could be worst than a 'bailout'.
All I can hope for is that the guilty be made very uncomfortable, maybe even punished to some degree; That reasonable standards can be implemented in granted new credit and that new versions of the crisis are avoided and that the cost is reasonable.
Imposing a strict morality on something has a cost just as allowing the insanity continue. One has to make good judgments based on practical considerations.
We will never establish consensus on that point as long as anyone uses the term "bailout" to mean just any post-hoc action that could benefit someone. CR is using the term somewhat more specifically, in the sense of providing actual taxpayer funds to subsidize mortgagors or make whole mortgagees.
To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are.
Well said, Vader.
Indeed, what troubles me is that so many people are letting themselves get worked up over the "bailout," they don't see that the pea is really under the "bailin" shell.
You can always get people worked up over tax dollars going to "deadbeats." You can't very often get people worked up over tax dollars going to large corporations under the rubric of "economic stimulus."
At some level anything you do will punish or reward the innocent and the guilty alike. I am personally getting tired of all the people who are upset because they colored inside the lines and the other kids didn't, but everyone will still get something from Santa. (Yes, that is often how some of these complaints strike me.)
Tanta:
You got pretty decent quotage in the San Francisco Chronicle today in an article about reactions to the subprime freeze plan -- the blog "Calculated Risk" is given as the source, but they specifically reference your piece "The Plan: My Initial Reaction."
The blog, and your article, is quoted as Serious Authority. Glad to see that the journos are waking up to where the real story is being told, and in words they can understand.
Loan bailout is not likely to help many homeowners
Anyway, congrats. We all appreciate the work the two of you do.
Imposing a strict morality on something has a cost just as allowing the insanity continue. One has to make good judgments based on practical considerations.
It's not that simple either - towards the end of the 30s the US economy appeared to be recovering rapidly even before WWII started.
Whereas Japan despite having a downturn that was far less severe appears to be languishing far longer than the US did in the 30s.
Is it coincidental that perhaps the most propserous decades in US history followed the Depression? Likewise for the growth that followed the "Great Recession" in the early 80s?
I don't know the answers to these questions, but I have a problem going down the same path as other countries when that path appears to not lead to good results.
My fear is that we are sacrificing long-term growth to avoid short-term pain.
To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are.
So it's just that simple? If Lenny the Loan Shark "isn't in trouble," then Lenny shouldn't reduce his vig to people who are "in trouble"?
Where'd these people who aren't in trouble get their wealth, anyway?
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
I imagine a bunch of folks with "wealth" that came to them in the form of RE capital gains that they were able to take because some fool got a foolish loan, now bitching because they might have to return some of that "wealth" to retroactively "correct" the loan terms.
I have described a short sale as a way of making your down payment after the fact. Middle-class taxpayers ponying up a few bucks to fund a hotline for distressed borrowers can, in the same vein, be described as adjusting your sales price down after the fact.
"FHA Modernization" might be a kind of bailout, but it's not, in my view, really much of a bailout of existing, defaulting mortgage securities. It's a "reflation" of the mortgage origination industry and the RE market (existing and new). That's the only rationale for pressing for FHA Modernization rather than pressing for easing restrictions on FHASecure. As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.
Tanta,
This is the piece that I have been looking for. As I reviewed the"Plan" which seemed to do so little for so few, I began to wonder what I was missing. Now I know, it is in FHA Modernization.
What a bad idea! Hank will push this one hard as it will allow, more safety in securitization of this subset of loans. Thus allowing the brokers / wall street bankers of this debt to make more $$$$.
Yep, socialize the risk and privatize the profit. Sounds like crony capitalism to me. Eventually, this mentality will bring down the economy.
What we need now is a hard honest look at the entire system and competent regulation to assist in getting us out of this situation. Additionally, we need strong regulation going forward to prevent it from happening again.
Tanta I think you are essentially right that there are no Federal direct loan programs, but I think there still may be a moribund Farmers Home direct loan program that does minimal business. I'll try and find the program #.
I'd consider FHASecure to be a bailout program. There are many mortgage investors out there with paper which will end up worth far less than par (and which can't be sold for anything like par for that reason). If FHASecure insures a refi, those investors will get all their money back. Eventually the homeowner will default - if nothing else because he'll be far underwater when he eventually must move - and the feds will eat the losses. So the feds have taken on the losses that will currently fall on the investors. Bailout. I don't think the fact that the actual losses lie in the future or the high uncertainty about the level of loss changes the fact that it's a bailout.
The main problem with the real estate market is the bubble created by low interest rates, lax lending standards, and creative financing products. Incomes can not support the inflated values.
The bubble must unwind. We do not need to follow the Japanese model. The deflation of the bubble is necessary because incomes can not support the current purchase prices of real estate. But the unwinding should be controlled so that the entire economy is not brought down.
FHA Modernization puts the federal government as a guarantor which may well reflate the market place. So, how does the government take on trillions of new guarantees with it's current fiscal condition. And who makes money off of this bailin?
This is not about home owners as much as Hank's cronies. They made the big money.
Wish I had another plan to put forth.
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
What gets me is I was "smart enough" only because of losses I've suffered in the past.
I told everybody who would listen that they should sell their houses (admittedly most of them probably couldn't) and most of them laughed. Including the person that bought my house.
My problem with bailouts right now is the timing (it's not lost on me that we wouldn't have society with out bailouts per se).
The people who were laughing at the suggestion that there were problems in housing aren't laughing about that anymore. But they are laughing at the suggestion that there might be problems in tech stocks or emerging market stocks or some other "get rich scheme" they might have right now (I talk to these people every day).
As I see it in my day to day life the underlying disease is still there. Nothing has fundamentally changed.
IMO you don't start bailing people out until they've learned from their past mistakes -- that's how we got the housing bubble to begin with.
I don't see that we've reached that point yet.
mbartv, I think RECD still does a kind of direct lending that the old Farmer's Home used to do; last I knew it was the 50-50 deal (RECD funds a 50% first and the lender funds a 50% second).
But the loan amounts on those programs are so tiny that they don't even make a blip on the screen. Last time I had my hands on a RECD loan the total loan amount was $47,000 ($23,500 RECD loan and $23,500 lender loan).
Wall street created the current credit markets. While credit is necessary, it should not become a substitute for income.
Today it has for many American become a substitute for income.
The economic problems that we face today are much larger then the real estate market.
so if I understand correctly : "socelize the risk privetize the profits" ???
You got that right Yal.
If FHASecure insures a refi, those investors will get all their money back.
To be exact, not all the investors get all the money back.
The major difference between FHASecure and bog-standard FHA is that FHASecure allows a second lien that would make the CLTV too high to be kept out there, if the second lien holder resubordinates. (Under the normal program the borrower wouldn't qualify if they couldn't pay off that second in the new FHA loan.)
So that means, basically, that the first lien lenders are getting taken out by FHASecure refis (mostly the first liens were 80%, they're not that much underwater now). The second liens either get paid down some or just not paid.
And I personally can't think of anyone who deserves to get a shit sandwich more than the second lien lenders. What did they think was going to happen?
But the fact remains that payoff to the first lien lender also means the borrower is now in a much more sound loan. Insofar as there are borrowers--probably not in big bubble markets--who can make economic sense out of keeping their homes, that benefits them. The only way you can "deny bailout" to the first lien lenders is to deny refi opportunity to the borrowers. I resist thinking that all borrowers have to be punished to make sure that no lender is rewarded.
Remember that absent FHA Modernization, the FHA maximum loan amounts are still pretty modest.
I agree with ac. "Japanization" of the problem is not the optimal outcome.
Downturns are good. They are required for the economy to heal after the boom excesses. During downturns people start to do wise things instead of stupid ones. Delaying that only means that the recovering will be prolonged.
After the centrally-planed economies in Eastern Europe collapsed, there was a lot of pain. Some countries decided to freeze the process to make it less painful in while others let it restructure. And the latter countries fared better in the long run.
Any program that artificially supports the housing prices is steering the market out of the equilibrium. It may be good for some but it is bad for everybody.
Question? How would the "Plan" effect the highly leveraged CDO's etc?
OK, so obviously the Paulson Plan isn't a bailout.
I've read all your posts on it, and my question is: Is it anything? It seems like it's basically a well-publicized public statement of stuff that would have happened anyways.
Is it anything? It seems like it's basically a well-publicized public statement of stuff that would have happened anyways.
There is one respect in which it is different from what would have happened anyway.
It legitmates mortgage servicers continuing to operate without adequate (numbers and expertise) staff to handle workouts. In other words, what would have happened anyway was servicers trying to do old-fashioned case-by-case workouts, but only managing to do a small percentage of the required number of them, because they don't have the resources to keep up.
The plan gives them cover for doing a lot more mods in a half-assed fashion. It's "quick and dirty."
I wouldn't object so much if 1) it had been officially temporary (give the servicers six months to get staffed up, letting them do the quick and dirty thing in the interim) or if 2) it involved the servicers taking the money they're not spending on expertise and sending it to the reputable non-profits who can counsel the borrowers and "broker" the deals.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.
"To me "bailout" means taking wealth from people who aren't in trouble and giving it to people who are."
To me it does seem that simple, because I am one of those who are not in trouble. Is this "bailout" an attempt to prop up prices, which in turn will harm people like me, a first-time buyer? I believe so. Luckily I don't feel it's a very good attempt, but it's an attempt nonetheless.
"At some level anything you do will punish or reward the innocent and the guilty alike."
Correct. And that's why we discuss this isn't it? We are trying to figure out who gets rewarded and who gets punished. Yet it almost sounds as if some are claiming no one gets punished. In other words the government can just come in and magically help everyone. Silly us for worrying about the concept of fairness.
"I am personally getting tired of all the people who are upset because they colored inside the lines and the other kids didn't, but everyone will still get something from Santa. (Yes, that is often how some of these complaints strike me.)"
Are we all getting something from Santa? What are the savers and first-time home buyers getting? If only the bad kids get presents that's a problem.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.
Tanta
this is what worries me. who's to say Mozillo and his servicing cronies won't CONTINUE to make bad decisions or even manipulate the modernization to their benefit. they could for instance guide more loans that wouldn't have qualified into the program for their own benefit. every loan that keeps paying on an inflated mortgage keeps their service fees rolling in. preventing lawsuits against them by investors encourages this.
Tanta,
lets look at a real world example of the "bailout" that we are witnessing right now.
CFC and WM stock, two of the authors of this plan coincidentally, rallied hard the last few days after the announcement. shorts like me on the stock retraced some of our gains significantly. the market is anticipating a "bailout" of sorts for these servicers which hurts guys like me.
now u will say this is a necessary fallout to help society from undergoing irreparable harm for the common good. and there is the rub.
i would say that clowns like Mozillo need to be cleansed from the system and that this plan, or merely the suggestion of it, encourages the current system to grind on and Mozillo to remain CEO of CFC.
What are the savers and first-time home buyers getting?
Where are savers saving?
Look, the plan is supposed to be insuring that bondholders keep getting 8.00%, instead of getting no interest and (some of) their principal back, which principal would be reinvested in T-bills yielding a hell of lot less than 8.00%.
"Bondholders" are "savers."
I have a real problem with the idea that foreclosing on these current owners would be "good for" potential new owners right now. That argument assumes that the stuff could all be sold as REO in the near term at values that wouldn't continue to fall.
The fact is, nobody knows at this point how far values can fall even if we (especially if) we unload a big wave of REO into the market. So any lender making a new loan to a new first-timer who is trying to buy this REO is taking a big chance. This is my point about FHA Modernization: it's on the table because everyone recognizes that we will need government-insured loans to facilitate the purchase of this REO.
If you're thinking about buying a house in the next year or two, I'd say be careful what you ask Santa for: he might give it to you.
I'd like to second Fair Economist's point here. Tanta has focused on the private sector providing the capital. That's true, but I don't think it's very interesting. In FHA, the taxpayer takes the risk and the credit losses. I think asking the question "who takes the credit losses" is a lot more interesting than asking the question "who provides the capital."
FHA has produced "profits" for years. But their most recent actuarial study projects losses on the loans they are writing now, and that was besed on projections done BEFORE the credit crunch in August, with house price appreciation estimates that now look wildly optimistic. And it didn't factor in taking in delinquent subprime loans as refis. The fact that so many of these firsts will be underwater in light of the combined LTV on the first and second almost guarantees a lot of defaults.
And the states may be issuing the bonds in the mortgage revenue bond scenario, but the federal taxpayer is kicking in with tax expenditures to subsidize those bonds.
While I don't think they were smart enough to have planned it, I think the firestorm over the freeze has managed to distract a lot of attention away from the parts of the response that do represent taxpayer bailout.
Tanta,
i know how u feel about shorts.
but i would say that 1/3 of my portfolio is long. i only started shorting the mkt a year ago in anticipation of the downturn with much of my info gained from this site.
short sellers provide a needed function in the mkt. we are just guys on the other side of the trade. as ac would say, we provide fuel for sharp UPSWINGS in the mkt during squeezes. if we continue to get beaten down by bailouts there wouldn't be any more short sellers, or sellers in general, and the mkt would do nothing but go up. what a blessed thing u might say! but i would say nothing but anothe bubble to pop like the tech crash.
I resist thinking that all borrowers have to be punished to make sure that no lender is rewarded.
Crispy, but mentioned in the context of Bailouts and Bailins, another fine piece of not as crispy analysis on the subject of the Plan.
Tanta, what I continue to find amazing in your writings is how you are able to cut to the heart of complicated technical issues while retaining a moral compass that leads you to what is most worthwhile for society as a whole.
Bentham and Mill would be grateful for your ability to educate not just the masses, but some of the self-prclaimed elite as well.
Thank you.
Tanta,
I have tried to grasp this plan from all sides and my opinion is it will not work, or most likely will make things worse. Probably I am over analysing a simple stall till 01/20/2009.
Having lived through 2 housing busts in Texas early 80's and early 90's. My father bought a home in 1977 for 37500. In 1981 it was worth 100000 then dropped to the 50's in 1983. I bought it from him in 1996 for 80000 and sold it finally for 103000 in 2001. So 20 years to get back to peak nominally and a hell of a loss when adjusted for inflation.
The other part of the story we went through two rounds of people walking in droves. Now these were people who started by putting 20% down. I can only imagine people with little or nothing will walk regardless of what program you make available.
As for modernization of the FHA unless we are going to subsidize 0% loans to borrowers house prices will have to fall back to reality. So this will not do much to move future or existing homes either.
So long way around but what the heck are they wasting time for just let the chips fall where they may. Tampering with the free markets got us here in the first place. Recessions are like forest fires if they occur every few years and clear excess fuel they keep a forest healthy. The problem occurs if you put every small fire out. Yellowstone parks 2.5 million acre fire reminds me of what I see in this economy.
now u will say this is a necessary fallout to help society from undergoing irreparable harm for the common good. and there is the rub.
Without making a claim about this specific Plan being good for society, let me just say that we are talking residential home mortgage lending, not any old kind of "asset class" or company that produces "assets."
It has always had "public policy risk." That risk is there for the longs; it's there for the shorts. It's there for everyone.
Trust me; I've been in this business a long time. There are risks in mortgage-related investments just like there are risks in health-care related investments: the government always has some kind of interest in encouraging or discouraging various activities that might or might not be profitable to a private entity.
So I have to say, if you're shorting a federally chartered bank without taking into account that the federal government who handed out that charter will go a long, long way to keep that bank afloat, you're a naive investor.
This reminds me of all those people who are preening because they were "smart enough" to have sold their homes at the height of the boom.
Well, they sold those homes to someone. How many of these sellers asked where the buyers were getting the dough?
Having sold all my non-personal use real estate at the height of the boom I'll take a stab at answering. The best analogy is driving down the highway with a bunch of speeding drunk drivers. When you complain to the police they hand you a beer and suggest you drive fast too. So I sold my car to a drunk. in truth i sold my last rental to a drunk road worker; my own realtor who used fancy financing.
I noticed a typo in your post: In that sense, you could call this a bailout: it's moving the risk of default. Should read: In that sense, this a bailout: it's moving the risk of default.
All I read is this is less of a bailout than might have to occur otherwise. The unspoken part of that assertion is that this is a bailout of a different group of people than might occur otherwise.
Bottom line; preserve the financial system as is for the benefit of the insiders of the current financial system by misusing the full faith and credit of the United States to force market distortions.
Tanta has focused on the private sector providing the capital. That's true, but I don't think it's very interesting.
It is very interesting if nobody feels like buying Ginnie Mae securities or below-market bond programs.
I was responding to people who seem to think that the FHA program either makes the loans, or makes the lenders make the loans. I am aware that you know better than that, but a whole lot of other folks apparently do not.
Tanta, it is known if the servicers will be compensated for New Hope Plan work?
Are they generally compensated for mods?
Thanx for great work!
Robert, I don't understand your analogy.
It seems to me that the prices people got for the homes they sold at the height of the boom were being driven up by the funny-money loans. I don't think that point is controversial.
The implication, however, is that the sellers received more sales proceeds than they would have if loan terms had been saner. So sellers benefitted from dumb loans as much as buyers did. Even if you yourself never took out a dumb loan, if you sold your house to someone who bought it with a dumb loan, you benefitted.
its always been about private sources of capital. the question was who would take on the credit risk?
the credit intermediaries, CFC, WM, GS, BSC, long ago relied on the GSE's to offload the risk. when that became too restrictive, they developed structured finance to expand the game. now that thats imploded they are looking to move that risk back onto the taxpayer to keep the game going. FHA modernization accomplishes that but not on the scale they would like. just wait til next as things worsen; they will propose even grander schemes. FHA modernization allow them to get their foot back in the door of the taxpayer.
idoc, shorts will continue to do fine in the current market. A blip following a big PR blitz is still just a blip.
There is no such thing as a 'free market' anyway. It's only a matter of who is manipulating what. Last week's manipulation was contrary to your position.
Also, no one thinks the Plan is a panacea. The fallout will be huge and RE will still continue its crash.
As Ella noted above, the RE problem is just a small part of the much bigger set of problems the U.S. economy is facing.
You'll do fine and I say that as someone who won't be joining you on the short side though I recognize the absolute need for shorts to make markets work, even ones that aren't 'free.
Re: The Plan exists because there is a big pile of loans that do not qualify for any of those refinancing opportunities.
Tanta:
Each and every one of these freeze plans (Treasury, CA) begins with a bit of advice for troubled borrowers: "Call your servicer, now! They can''t help you unless you call them." Even before the details of plans purporting to help these borrowers were announced we heard this same refrain.
I haven't heard anyone -- including, to my knowledge, any outside commentators -- tell these people to "GET A LAWYER, FAST." And certainly before you call your servicer.
It doesn't at all surprise me that the industry participants on the other side of this fiasco from underwater borrowers neglect to do so. They want to limit their losses. Keeping troubled borrowers naive as to the risks of these modifications, and their rights, is wholly within their interest. That government officials, including the Treasury Secretary, are failing to do so is outrageous.
I know, these borrowers are in severe financial distress. Paying a lawyer and financial experts is not going to be easy. But shouldn't they finally be told what time it is on this score? Shouldn't they finally be told that they are in their current predicament in no small part because they entered into probably the biggest financial obligation of their lives without legal and financial counsel from experts working solely in their interest?
Tanta, it is known if the servicers will be compensated for New Hope Plan work?
Are they generally compensated for mods?
Servicer compensation is specified in the PSA, and I see nothing in The Plan that would affect that.
Some servicers can bill the trust for the mod expenses; some can't (i.e., they cover that out of normal servicing fees). The contracts are, in my view, too heterogenous to make easy generalizations.
There is one sense in which the Plan is encouraging servicers to forgo some compensation: it is telling servicers to time the refis, if they do them, carefully so that whenever possible the borrower doesn't have to pay the prepayment penalty. In a lot of these PSAs, the prepayment penalty is servicer income, not investor income (it does vary). So that's telling servicers to go out of their way to eliminate a source of income.
This is just the first step of the eventual bailout. First we have government "involvement" by putting its nose in the tent(the current plan).
When this doesn't fully solve the problem (as 99.9% of the pundits say it won't), we'll slowly inch our way towards an all-out, inevitable, full blown tax-payer subsidized bailout.
I think.
As it regards 3Q Flow of Funds, according to this site:
404 - Error: 404
"The entire GSE expansion is explained by the unprecedented SAAR $759bn surge in Federal Home Loan Bank (FHLB) Loans & Advances. In nominal dollars, the $180bn Q3 increase in FHLB Loans & Advances amounted to a 112% growth rate, with y-o-y growth of 27.7% to $822bn."
its always been about private sources of capital. the question was who would take on the credit risk?
Part of the problem with the bailouts is that the public takes on the risks while the investment banks, hedgies, etc. get all the rewards.
This is the kind of redirection and pooling of wealth we saw prior to the Depression.
A rich hedge fund manager that "gets all the money" can't go to Taco Bell 12 times a day no matter how much money he has.
Our current economic configuration cannot work if wealth gets too concentrated.
i would argue that the "insurer" could be the most important part of this game. look at whats happening with MBIA, ABK, and ACA. if they get downgraded there will be huge problems with mortgage bonds they've insured and are currently being held by various banks and IB's. not to mention these these bond insurers will go BK. the entire stock mkt is being roiled by this threat.
substitute "FHA Modernization" or "taxpayer" for MBIA, etc.
It is very interesting if nobody feels like buying Ginnie Mae securities or below-market bond programs.
Tanta,
I think you are splitting hairs here. If there is government guarantee to these securities, then they are almost as good as treasuries and there is going to be demand for them. There would be no problem if the FHA insurance premium to the borrowers was based on the market value of their default and loss severity risks. But it's not, and this is government subsidy.
The following information focuses on static pools, static data and models used to estimate losses; the interesting aspect to me, is the problem related to industry-wide financial models that were engineered with a standard set of inputs, which at this point in time are "all" useless. The foreclosure/subprime problem is going parabolic with one axis, while these models have static forecasts that are going in the wrong direction!
An analysis of the credit quality of the underlying pool of
manufactured housing contracts in a particular securitization
transaction is performed by developing static pool data based on the
historical performance of the specific originator of the contracts.
This information (which is continuously updated) is then used to
predict expected cumulative net losses for the particular pool which
takes into account both foreclosure frequency and loss severity. The
historical data is adjusted depending on the Servicer's capacity to
service the loans, the type of collateral being financed, LTV ratios,
loan seasoning, underwriting of loan
Determination of Expected Losses--In order to
determine the correct amount of credit support which will be required
to support a particular rating for a class of auto loan Securities, a
base-case securitized pool loss assumption is calculated using the
following factors. Static pool data, if available, is compiled by
taking a discrete period of originations of the originator, such as a
financial quarter, and that pool's performance is tracked on a monthly
basis as the loans amortize, particularly focusing on loans which have
been outstanding (seasoned) 18-24 months and have been substantially
paid down. This allows a determination of the shape of the loss curve
and project timing of losses to be made. The cumulative net loss on the
less seasoned pools can then be extrapolated from the older pools.
Static pool data is preferred over active pool data, which can mask
losses during periods when the originator's pool of loans is rapidly
growing.
mort-fin - "I think asking the question "who takes the credit losses" is a lot more interesting than asking the question "who provides the capital"
Exactly right. And this is precisely the worst possible time to assume the loss position when losses are about to rocket to levels not seen ever. Tranferring the risk from the lenders/bond insurers to the taxpayer. This is the bailout the lenders are after.
Re: This allows a determination of the shape of the loss curve
and project timing of losses to be made. The cumulative net loss on the
less seasoned pools can then be extrapolated from the older pools.
Static pool data is preferred over active pool data, which can mask
losses during periods when the originator's pool of loans is rapidly
growing.
Now think back to the bailout terms which use the impossible values of 3% equity and then take into account the time period of these foreclosures, which are what......maybe 2 years.............how do you model that?
the pt made above about the FHLB is a good one. this is a federal program already being exploited by the lenders to keep the game going. if only for the sake of simplicity and keeping close tabs on what lenders are doing, i think any expansion of gov't risk should be kept within FHLB. forget the FHA.
Did anyonw catch that:
Static pool data is preferred over active pool data, which can mask
losses during periods when the originator's pool of loans is rapidly
growing.
As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.-Tanta
please append to the end of that "provided by taxpayers".
then they are almost as good as treasuries and there is going to be demand for them
Well, sure. And after we're done charging these borrowers a much higher insurance premium, and having to make sure they can carry the payments, there will be a coupon on these babies that is not just as safe as Treasuries, it's the same as Treasuries.
How is everybody's 401(k) gonna keep showing gains if everybody goes back to buying Ginnie IIs?
"We're all coupon-clippers now."
understatements?
In creating the base-case expected loss amount, a detailed
breakdown of originations, delinquencies, repossessions, gross and net
losses and recoveries are examined. Any understatement of portfolio
losses are isolated and all originators are placed on a comparable
basis by dividing net annual losses by the outstanding principal
balance of a prior period, which creates a growth adjustment factor.
Once expected losses are estimated, the expected cumulative losses are
derived by multiplying these expected losses by the weighted average
life of the collateral, using conservative assumptions regarding losses
and prepayments.
The pool of loans selected for the securitization is examined in
order to assure that it is representative of the base-line loss
assumption for that originator and has not been selected from lesser-
quality receivables. The selection process used by the originator is
monitored by checking the annual percentage rate on the loans, the
principal amount of the loan, the LTV ratios, original maturity date of
the loans and remaining maturity, the new and used mix, the model year
and mileage of the vehicles, the amortization methods and geographic
concentrations. The characteristics of the borrowers are also examined
to monitor representative creditworthiness and stability by looking at
gross income, monthly debt service, debt-to-gross income ratio, down
payment-to-value ratio, years of credit history, credit scores, length
of time at the borrower's residence, employment term and past credit
problems to make sure that these criteria are representative of the
originator's broader portfolio. Credit scoring is a relatively new
method used by lending facilities to assess a borrower's likelihood of
repaying a loan. The Rating Agencies monitor the correlation between
such scores and actual losses to refine the appropriate weighting to be
given to credit scores.
Delinquency data is broken out over 30-day, 60-day and 90-day
groups, and delinquencies are examined based on the loan contract
terms. In order to make sure that default data is not misleading, the
Rating Agencies examine whether all loans that are not performing and
are not charged off (even if the debtor is in bankruptcy or where the
automobile has been repossessed) are considered to be in default. The
originator's charge-off policy and accounting method used to calculate
losses are examined, as the timing of the charge-off is important
because it affects loss statistics, and delays in charge-offs put
stress on liquidity.
Tanta,
"Just letting servicers off the hook for being uprepared for the storm isn't impressing me any."
I agree, and have two questions regarding "half-assed" workouts.
Thanks for your great blog.
AC
I agree. Let's only take from those in trouble . . . according to their ability to be taken from.
So let's start with Angelo. Then let's take from Citi, and WAMU, and then let's go to Bear Stearns. . .they are all in trouble.
To my mind, George and Dick are in trouble. Let's take from them.
You see, it all depends how you define trouble.
Personally, I think it is grave moral hazard for the society if we let these folks get away free. The lesson to future generations will be that you can lie, rob, and finagle the books and live happily ever after.
Joe
r u kiddin me? it can only go up, like the stock mkt.
please append to the end of that "provided by taxpayers".
Only if you will admit that the potential taxpayer exposure is after the borrower paid 2.25% of the loan amount up front in an insurance premium, plus 0.50% per year thereafter. Plus the lenders pay Ginnie Mae a guarantee fee of 17 bps.
These amounts are paid on all loans. As long as some of them are performing, the performing loans are subsidizing the losses on the nonperforming loans.
The taxpayer doesn't kick in until we've spent the insurance premiums and g-fees. I am not claiming that those will always be adequate to cover losses. I am also not interested in pretending they aren't there. Too many internet cranks are busy asserting that FHA loans are "handouts." We don't have to accommodate that kind of thing here.
This is why I wrote the post the way I did: to help clear up the confusion about where and when the taxpayer money enters the picture. So don't expect me to then "sum up" by adding the original mystification back in.
Lord love a duck, folks. This is a Nerd blog. We are not going to oversimplify.
My oft-repeated line of thinking on this is that, to keep it legal ( as per the ASF) and still do it quick and dirty, the 97% or higher LTV test was the avenue for the servicers to do their stuff - but that avenue appears closed for a lot of the borrowers since they don't have a 97% or higher LTV (when V is taken to be the one at origination and L is the first lien). So the servicers will have to use the ineligibility for FHASecure test to keep it all legal. And that's going to cost time and money ( I hope).
Separately, I agree with Tanta that anybody who shorts GSEs without being aware of how much help it could get from the govt when its in trouble is being naive. I take it further - anybody who shorts without being aware of how many of the social mores, institutions, rules, tax incentives are against you ( and tax policy is a great indicator of what how much pox "society" wants to visit upon you ) is being naive.
-K
If it eventually comes down to a question of Municipal or State bonds, it is important to remember that bonding capacities are limited, are usually pushed close to the limit at any time and will be decreasing if tax revenues decrease, as they will when property values or incomes decline.
Municipalities cannot subsidize investors at the same time they build schools, roads and bridges.
Is it coincidental that perhaps the most propserous decades in US history followed the Depression? Likewise for the growth that followed the "Great Recession" in the early 80s?
Don't underestimate some of the accomplishments of the New Deal. WPA, CCC, et al, put a lot of people back to work doing things that needed to be done (and kept them off the street corners). The high school I attended was partially constructed by WPA (an oldie, but a goodie). Some of the public works projects from those day are still valuable assets to the USA.
STRESS!!! This to me indicates the rating agencies are all full of total crap!!!
In developing a stress model, conservative assumptions are made as
to real estate market conditions, economic factors and expenses
associated with events of loss, applying a worst-case scenario
incorporating high unemployment, deflation and sharply falling real
estate values. The worst-case model considered by S&P to be appropriate
for its highest rating categories incorporates the foreclosure
frequencies and loss severity experienced during the Great Depression
of the 1930s, whereas other Rating Agencies use those experienced in
the Houston, Texas disastrous housing market in the mid-1980s. The
choice of economic model is selected based on the severity of the
stress to be applied. Generally, AAA'' andAA'' rated Securities
have to withstand so-called national depression models based on the
Great Depression/Houston, Texas models. For A'' andBBB'' rating
categories, other geographic severe depression models, such as Boston
in the 1980s or New York and Los Angeles in the early 1990s, might be
used as the basis for the stress model. Alternatively, a system of
local forecasting models or some other statistically derived stress
models may be created for these purposes. ``BB'' rated Securities or
lower would have to withstand less severe recession models.
You don't have to worry about winners/loser from The Plan. You can just focus on what's best for the economy, and that would be a quick return in real estate to market fundamentals. When housing prices soared, it encouraged too many people to be realtors, lenders, appraisers, builders, etc. By "too many" I mean that they could have been more productively used engaging in other activities. The price signal they looked at was distorted by the bubble.
The important thing is to "undistort" the price signal and get housing prices back to where they were, pre-bubble.
I think that The Plan just delays foreclosures, and sets the stage for more "bailouts" in the future. The problem, from the economy's point of view, is that this will keep housing prices distorted and it will drag out the needed move of people and resources out of real estate.
sure short selling is risky as in all stock mkt bets. but those of us who do short sell believe that the fundamentals of the bubble sphere have gotten so out of whack with reality that it can't go on w/o at least some correction which we haven't had yet IMO.
when you look at all the multidecadal records being broken to the downside in RE statistics, its hard not to bet on the short side. sure the gov't and Wall St are going to fight tooth
and nail to keep it all going and they probably will in the short run.
but then i look at the yearly charts of HB's, financials, & retailers and then i find solace.
Only if you will admit that the potential taxpayer exposure is after the borrower paid 2.25% of the loan amount up front in an insurance premium, plus 0.50% per year thereafter. Plus the lenders pay Ginnie Mae a guarantee fee of 17 bps.
Tanta,
This may be more than adequate in "normal" times. But the excesses of the recent boom make current times definitely not normal. Imagine that insurance companies wrote insurance for storm damage in Florida taking normal premia of a few hundred dollars or so and then realize that the superstorm of category 5+ is just off the coast and they stop insuring or require enormous premia. What if a government program start to happily insure based on the prestorm actuary tables? We'll get a government subsidy of "market premium minus government premium" or "storm losses minus premium collected", won't we? Either way it's a subsidy. In front (based on the market premia) or later (loss coverage).
The taxpayer doesn't kick in until we've spent the insurance premiums and g-fees. I am not claiming that those will always be adequate to cover losses
The problem is these fees will not be adequate and we know it now. Have you seen the prices of CDS?
to help clear up the confusion about where and when the taxpayer money enters the picture.
Taxpayer money is not involved yet but the commitment is being made. Now is the last chance to stop it. It doesn't matter that it will be a problem for taxpayers in a year or two because then there will be no way to undo it then.
WSJ Error Page - WSJ.com
this is all normal.
So the Great Freeze will forestall, what, 100,000 foreclosures that otherwise would have happened over the next two years? Instead of 1,500,000 foreclosures there will be 1,400,000?
The ubiquitous taxpayer will be hurt much more by what actually happens than by what would have happened, but was avoided.
It will still hit the fan.
I'm thinking there's a 50bp cut coming next week even though the FFF are leaning heavily toward 25bps. Dropping the dollar is one way to bring RE prices more in line with reality. Eventually we'll all own $600k houses, but we'll still all be subprime because the dollar won't be worth as much as it is today.
poszi, I did not and am not claiming that there is no "taxpayer" exposure here.
I am getting a bit pissed with the idea that it's OK for current FHA borrowers to pay those premiums to cover losses now, but it would be a big deal if "we" had to make up the difference. It has always been the design of that program that it would work that way: if the premiums ever become not enough, "we" will step in. That's not a bug, that's a feature.
This is why I am resisting FHA Modernization: it takes so much risk, in my view, that shortfalls would be inevitable.
There is an agenda in the desire to simply gloss right over the fact that the FHA program's first loss is carried by performing FHA borrowers and lenders who pay the 17 bps. That is all I am saying. I don't, actually, need to have the mechanics of the program explained to me. I understand what "full faith and credit" guarantees mean, and what happens if the premiums aren't sufficient. That is why I am objecting to "Modernization."
Have I seen the prices of CDS?
Yes. I have. I pay attention to those things, you know.
Tanta,
"This is why I wrote the post the way I did: to help clear up the confusion about where and when the taxpayer money enters the picture."
You did a great job of explaining to us wanna be nerds the ins and outs.
The bloggers here are losing site of the ball and it is in the Modernization Plan.
That is the real place where the new risk to the taxpayer is.
People, pay attention to that which is the Paulson slight of hand. A little Quid Pro Quo for the banks and servicers while he tries to strong arm congress into the modernization plan.
Everyone is raising decent points. But keep your eye on the prize, Modernization.
I am with Tanta, it is a bad idea.
What if a government program start to happily insure based on the prestorm actuary tables?
We call that a state of emergency and claim we'll be right there to help you re-build. Whether that truly happens not is another story.
poszi, I did not and am not claiming that there is no "taxpayer" exposure here.
I am getting a bit pissed with the idea that it's OK for current FHA borrowers to pay those premiums to cover losses now, but it would be a big deal if "we" had to make up the difference.
Well, the system is broken so we should not complain when it is getting even more broken? If the taxpayer exposure before the plan was x and after the plan is y and 0>x>y then y-x is a new amount being subsidized and is good enough to complain about another taxpayer subsidy.
Yes. I have. I pay attention to those things, you know.
It was a rhetorical question, you know.
Correction. In the post above. Replace "0>x>y" by
"0
How much of an investor's capital is at risk under FHA?
OK. Stupid HTML
Replace "0>x>y" by "0<x<y"
ARW - under FHA, the servicer has to pay all the foreclosure costs but is only reimbursed for some of them. And the investor only gets 6 months of interest - if the foreclosure goes beyond that the investor has to eat the interest. If the investor wraps a Ginnie guaranty around the FHA loan the investor is then on the hook for zero.
wally - one of the proposals is to expand the amount of tax exempt financing that state and locals can do.
Ella - some of FHA modernization might be a bad idea, but some parts, like risk based pricing, don't seem so bad, except to the extent that they are in conjunction with other stuff, like reaching farther down the credit spectrum.
But why is FHA modernization, which would expand FHA to reach lower FICO score borrowers, a bad idea, while FHA Secure, which expands FHA to reach currently delinquent borrowers, isn't?
Tanta - when even FHA, which has always been wildly optimistic in its projections, concedes that they are going to lose money on originations, I don't see how you can call a plan to expand FHA anything other than a taxpayer supported bailout of the investors holding the paper that's getting refinanced.
I frankly am more worried about FHA Modernization becoming a "bailin" than I am FHASecure being a "bailout."
Banking and bailout have always gone together, Modernization will be pushed as being great for the first time homeowners, achieving the American Dream and all that crap but it is also most a given that it will become a permanent feature. It will be pushed by the all the parties that will have the most to gain and it ain't the homeowners. The banks quest for the holly grail.
Mort_fin,
Because: 1. More risk is passed to the taxpayer, 2. The purpose of Modernization is to reflate originations and the real estate market, 3. reflation will most like lead to a prolonged situation and risk's the Japan effect, 4. How long before the new guarantees become highly leveraged in a new ponzi scheme to the benefit of the few and the ultimate loss to the many, 5. American incomes can not support the current real estate values that were created in the "bubble" and Modernization may well allow the bubble to continue,and 6. Asset bubbles are destructive to the economy.
"Bondholders" are "savers."
Sure they are. And the hedgefunds that have levered this crap 10 or 20:1 -- they're all doing it to help widows and or orphans.
Hey, sweetheart, you can try spinning it any way you like, but this "plan" walks like a bailout, talks like a bailout, and stinks like a bailout. So why don't we all just admit it: it's a BAILOUT!
I have a real problem with the idea that foreclosing on these current owners would be "good for" potential new owners right now. That argument assumes that the stuff could all be sold as REO in the near term at values that wouldn't continue to fall.
The fact is, nobody knows at this point how far values can fall even if we (especially if) we unload a big wave of REO into the market. So any lender making a new loan to a new first-timer who is trying to buy this REO is taking a big chance. This is my point about FHA Modernization: it's on the table because everyone recognizes that we will need government-insured loans to facilitate the purchase of this REO.
Everyone recognizes that we will need government-insured loans? Why is this necessary? To keep the current inflated home values?
Your two paragraphs above are a bunch of bunk. We got where we are at now because of stupid government guarantees and your advocating more of it? Unbelievable. What's wrong with letting the home market correct down 40% in just a year or so? The quicker we get back to house-price normalcy, the better off we'll all be.
We need to get back to 20%-down loans, ratings agencies working for re-packaged loan buyers instead of sellers, and a little common sense. Government guarantees are no substitute for common sense.
And I agree with the other posters who said that Pualson should be encouraging these borrowers to walk away instead of continuing to make payments on an asset that is underwater and depreciating. I hope that's what these borrowers do.
1stTimeBuyer,
It was not government guarantees that caused the asset bubble. It was Wall Street, lax lending standards (which should have been regulated so that they did not become lax), and creative financing (which should also have been regulated) that caused the bubble.
Piling more and more debt on now will not change it. Reflating housing will not help. Look what happened to Japan.
Tanta,
I'm with the anti-bailout crowd.. (though, I wish they'd post jeremiads using poetic meter... oh well).
I'm thinking we need to scale back a lot of these bailout-y seeming features of society..
The fire department should keep track of "who shoulda known better than to leave that space heater plugged in overnight".. so when that person's house burns down, we won't be wasting our money bailing them out.
Same goes for the police, only assist people who've gotten into trouble through no fault of their own. We'll have some fat bald guy make arbitrary decisions on what constitutes "shoulda known better!"
"Hello? There's a burglar in your house? How did they get past your guard dog or the metal bars on your windows? No bars.. no dog? Shoulda known better! [click]"
I like this idea of simplifying every social issue down to some extreme case. It makes it easier to believe that nothing should be done.
So.. I will continue to think of any attempts to slow down foreclosures as attempts to sanction reckless gambling by assholes with Hummers (he probably takes up TWO parking spots at the mall!!). I will refuse to wonder why society exists at all since I will know deep in my heart that if I am smart enough, I can take care of myself, and I will never need help from anyone. Social structures are for dumbshits who can't take care of themselves.
The world is simple and orderly. All is right in it.
eli,
So you're advocating "slowing down foreclosures" at the expense of borrowers who are least able to afford it? Give me a break. The best thing for these borrowers (and thus "society" -- these borrowers are members of "socitety" are they not? Or were you referring to your "high society" friends?) is to walk away from these loans. Actually, the best thing for them is to run.
Don't give me this crap about how this bailout is trying to help society when it's real aim is to keep poor idiots in their unaffordable mortgage pants.
Oh.. one thing I would like to clarify...
I think we should assist families faced with foreclosure, but at the same time, we should create a new government employee whose sole job is to travel around the world with a stick and poke the brokers (and others responsible for supplying these loans) in the eye with this stick that he/she/it is carrying around.
Next time the mortgage lenders are thinking about loosening up standards and flooding the market with easy money..
They'll think of that poke in their eye with the sharp stick. They will think that there is nothing worse than that..
Maybe they'll even worry that next time.. they might get a poke in the eye with the sharp stick.. and a slap on the belly with a wet fish.
This would keep them in line.
It was not government guarantees that caused the asset bubble. It was Wall Street, lax lending standards (which should have been regulated so that they did not become lax), and creative financing (which should also have been regulated) that caused the bubble.
I'm not so sure that the government didn't lead the way here. 1% interest rates certainly provided a spark. Don't the GSEs insure 0%-down loans? I wonder if the GSEs or the private sector was the first to provide 0%-down loans? It wouldn't surprise me if it was the GSEs and this caused the private sector to do the same in order to compete.
Don't give me this crap about how this bailout is trying to help society when it's real aim is to keep poor idiots in their unaffordable mortgage pants.
1stTimeBuyer,
If someone can't afford a mortgage and they want to walk, nothing is stopping them. I may be naive, but I am assuming that there are some people who wish to stay in their homes, who may not have understood what they were getting into, and who may not understand that a modification is an option.
I'm not going to cry for you just because you want to buy a home and this will slow down a potential price decline (which I doubt). Maybe you're just bored, smug and self-assured. If you are, then think of it this way:
These lame-ass pathetic people need help. This will further emphasize your superiority.
Feel free to think of them as the antithesis of you. They are everything you are not. If they did not exist, your righteousness would not be so well defined and impressive to the ladies.
Tanta:
Below is a commentary from the SF Chronicle that suggests that the "bailout" factor in the latest Paulson Plan is the legal cover it give IB from having their dodgy paper put back at par.
Does this ring true to you or is it just more overheated SF rhetoric?
<
blockquote>
MORTGAGE MELTDOWN
Interest rate 'freeze' - the real story is fraud
Bankers pay lip service to families while scurrying to avert suits, prison
by Sean Olender
Sunday, December 9, 2007
New proposals to ease our great mortgage meltdown keep rolling in. First the Treasury Department urged the creation of a new fund that would buy risky mortgage bonds as a tactic to hide what those bonds were really worth. (Not much.) Then the idea was to use Fannie Mae and Freddie Mac to buy the risky loans, even if it was clear that U.S. taxpayers would eventually be stuck with the bill. But that plan went south after Fannie suffered a new accounting scandal, and Freddie's existing loan losses shot up more than expected.
Now, just unveiled Thursday, comes the "freeze," the brainchild of Treasury Secretary Henry Paulson. It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of "teaser" subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.
And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.
I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."
Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spre
Rest of story with link:
<
blockquote>
Despite Thursday's ballyhooed new deal with mortgage lenders, does anyone really think that it can ultimately stop fraud lawsuits by mortgage bond investors, many of them spread out across the globe?
The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.
The problem isn't just subprime loans. It is the entire mortgage market. As home prices fall, defaults will rise sharply - period. And so will the patience of mortgage bondholders. Different classes of mortgage bonds from various risk pools are owned by different central banks, funds, pensions and investors all over the world. Even your pension or 401(k) might have some of these bonds in it.
Perhaps some U.S. government department can make veiled threats to foreign countries to suggest they will suffer unpleasant consequences if their largest holders (central banks and investment funds) don't go along with the plan, but how could it be possible to strong-arm everyone?
What would be prudent and logical is for the banks that sold this toxic waste to buy it back and for a lot of people to go to prison. If they knew about the fraud, they should have to buy the bonds back. The time to look into this is before the shredders have worked their magic - not five years from now.
Those selling the "freeze" have suggested that mortgage-backed securities investors will benefit because they lose more with rising foreclosures. But with fast-depreciating collateral, the last thing investors in mortgage bonds ought to do is put off foreclosures. Rate freezes are at best a tool for delaying the inevitable foreclosures when even the most optimistic forecasters expect home prices to fall. In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years. To minimize losses, a mortgage bondholder would obviously be better off foreclosing on a home before prices plunge.
The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the "real" wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, "Fraud? What fraud?! You knew the borrower's real income and asset information later when he refinanced!"
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans d
More of commentary:
<
blockquote>
The key is to refinance borrowers whose current loans involved fraud in the origination process. And I assure you it was a minority of borrowers whose loans didn't involve fraud.
The government is trying to accomplish wide-scale refinancing by tricking bond investors, or by tricking U.S. taxpayers. Guess who will foot the bill now that the FHA is entering the fray?
Ultimately, the people in these secret Paulson meetings were probably less worried about saving the mortgage market than with saving themselves. Some might be looking at prison time.
As chief of Goldman Sachs, Paulson was involved, to degrees as yet unrevealed, in the mortgage securitization process during the halcyon days of mortgage fraud from 2004 to 2006.
Paulson became the U.S. Treasury secretary on July 10, 2006, after the extent of the debacle was coming into focus for those in the know. Goldman Sachs achieved recent accolades in the markets for having bet heavily against the housing market, while Citigroup, Morgan Stanley, Bear Sterns, Merrill Lynch and others got hammered for failing to time the end of the credit bubble.
Goldman Sachs is the only major investment bank in the United States that has emerged as yet unscathed from this debacle. The success of its strategy must have resulted from fairly substantial bets against housing, mortgage banking and related industries, which also means that Goldman Sachs saw this coming at the same time they were bundling and selling these loans.
If a mortgage bond investor sues Goldman Sachs to force the institution to buy back loans, could Paulson be forced to testify as to whether Goldman Sachs knew or had reason to know about fraud in the origination process of the loans it was bundling?
It is truly amazing that right now everyone in the country is deferring to Paulson and the heads of Countrywide, JPMorgan, Bank of America and others as the best group to work out a solution to this problem. No one is talking about the fact that these people created the problem and profited to the tune of hundreds of billions of dollars from it.
I suspect that such a group first sat down and tried to figure out how to protect their financial interests and avoid criminal liability. And then when they agreed on the plan, they decided to sell it as "helping working families stay in their homes." That's why these meetings were secret, and reporters and the public weren't invited.
The next time that Paulson is before the Senate Finance Committee, instead of asking, "How much money do you think we should give your banking buddies?" I'd like to see New York Sen. Chuck Schumer ask him what he knew about this staggering fraud at the time he was chief of Goldman Sachs.
The Goldman report in October suggests that rampant investor demand is to blame for origination fraud - even though these investors were misled by high credit ratings from bond rating agencies being paid billions by the U.
Last:
Great stuff here:
Mortgage Market Off the Rails, Economy to Follow - Eric Janszen - iTulip.com
The latest effort to inflate the economic airbags came from the head of U.S. Treasury Department, Secretary Andrew William Mellon, who resigned from his position as the head of the nations largest bank to take the position, now serving Republican President Hoover. Oops. Sorry. Wrong post credit bubble era. I meant Treasury Department Secretary Henry Paulson, who resigned from his position as the head of the nations largest bank to take the position, now serving Republican President Bush. And, no, todays credit crisis has not resulted from cascading debt defaults after more than 50% of the nations banking resources were committed as margin credit to hyperinflated stock prices through non-transparent cross-investments among investment trusts. One could draw a virtuous comparison to the recent commitment of 60% of loans on the balance sheets of the nations banks to mortgage debt backing trillions of dollars of mortgages collateralized by hyperinflated housing prices and funded by risky and over-priced securitized debt instruments, but you have to drawn the line somewhere. We draw it here: were much, much smarter today than those dopes back in the 1920s and 1930s. To wit:
"Next to food and clothing, the housing of a nation is its most vital problem. . . . The sentiment for home ownership is embedded in the American heart [of] millions of people who dwell in tenements, apartments and rented rows of solid brick. . . . This aspiration penetrates the heart of our national wellbeing. It makes for happier married life. It makes for better children. It makes for courage to meet the battle of life. . . . There is a wide distinction between homes and mere housing. Those immortal ballads, 'Home, Sweet Home,' 'My Old Kentucky Home' and 'The Little Grey Home in the West' were not written about tenements or apartments. . . . They were written about an individual abode, alive with tender associations of childhood, the family life at the fireside, the free out-of-doors, the independence, the security and the pride in possession of the family's own home. . . . Many of our people must live under other conditions. But they never sing songs about a pile of rent receipts. . . ."
eli,
I don't think it is particularly outlandish or childish to think that the state is responsible for maintaining public order, but not, perhaps, responsible for managing the exchanging of homes amongst its citizens. Sadly, since I have neither the time nor inclination, I cannot spend 20 years studying or working in mortgage finance. On the other hand, people who have done so seem a bit too comfortable demanding that I hand them money (or, equivalently, take on risk) for my own good. Having seen obscurantism-as-expertise wielded as a weapon many times in my chosen career, programming, I remain skeptical.
Earlier Tanta made a funny point about some of us being pissed that Santa Claus is ignoring who was good and who was bad. Cute. But Santa doesn't come around once a year demanding money, at the point of a gun, from me.
NB: I'm a prospective first-time buyer who sat the frenzy out in the bay area mainly due to a spreadsheet I created in 2002 doing some rudimentary salary/mortgage calculations, so I'm the big loser in this game.
Cheers,
prat
Norkawest,
"The goal of the freeze MAY be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing."
The writer hinges his opinion on the word MAY. I think that the author is like many of us looking beyond the "Plan" to try and figure out what is really going on. In order to may this determination, he/she is focusing on who will benefit the most from the "Plan"
I too have been reading and thinking about this very topic. Far too few homeowners will be helped by the "Plan", Further, the dollar amount of involve is relatively small when you consider the other shaky mortgages out there due to reset.
There is some validity in the opinion piece and it should be considered as we think about the large picture. As I continue my search for what is really going on behind the scenes of the "Plan", I will consider this opinion as part of the mix.
What a mess.
Schumer doesnt have the balls to push the Goldman/Paulson collusion questions and the rest of congress and sentae are in on the play dumb game!
Moe Showers,
Whether they are playing dumb or not, the really scare me. After all they went along with the creation of the housing bubble. What the heck did they think was going on?
Further, they know so little about the credit markets I doubt at this point they can even vote intelligently on these issues.
You want some background on collusion?
Dear Senator Boxer,
First, thank you for your vote, last year!
Re: U.S. Senate: Legislation & Records Home > Votes > Roll Call Vote
U.S. Senate Roll Call Votes 109th Congress - 2nd Session
as compiled through Senate LIS by the Senate Bill Clerk under the direction of the Secretary of the Senate
Vote Summary :
YEAs 93
NAYs ---5
Boxer (D-CA)
Burr (R-NC)
Coburn (R-OK)
Cornyn (R-TX)
Feingold (D-WI)
Not Voting - 2
Baucus (D-MT)
Lieberman (D-CT)
Re: President Bush Signs Pension Reform Act; Cross Trading Exemption Included
President Bush this week signed the Pension Reform Act (H.R. 4), comprehensive pension legislation that represents a significant overhaul of the prohibited transaction provisions of the 32-year old Employee Retirement Security Income Act. H.R.4 is Public Law No: 109-280. The changes include a prohibited transaction exemption for cross-trading between separate pension accounts held with the same money manager and boost the level of ERISA assets that can be invested in investment vehicles such as hedge funds. Under the legislation, cross-trading would be allowed for private pension plans with at least $100M in assets, resulting in lower transaction costs for pension plans.
November 30, 2007 6:27 PM
Re: August 2006 - Landmark pension reform legislation passed last night by Congressand expected to be signed by the President this month includes the most significant changes to the fiduciary provisions of ERISA since its enactment in 1974. The new legislation (the "Pension Reform Act") significantly relaxes the rulesgoverning when asset-backed securities ("ABS"), including commercialmortgage backed securities ("CMBS") and collateralized debt obligations("CDOs"), may be offered to investors holding certain types of retirement planassets. Absent an exception, issuers of ABS, CMBS and CDOs that are not structuredas debt must comply with ERISA, including its stringent fiduciary and prohibited transaction rules -- which is not practical for most ABS, CMBS and CDO issuers. One regulatory exception (known as the "Significant Participation Exception") relied on by many issuers of either below-investmentgrade ABS, CMBS and CDOs or ABS, CMBS or CDOs that are not characterized as debt for tax (each of which typically cannot be characterized asdebt for ERISA purposes) applies if an issuer does not have "significant articipation" by "benefit plan investors".
Anyone know who grants the exceptions for your pensions..............huh........the DOL, The Dept Of Labor.......and so, you have 90% of the crooks in Washington voting for this current financial crisis/chaos and The DOL granting access to every bank in the country to pool securities into pools of pools that link massive amounts of risk to pension funds....or dont you get that CDOs are selling for pennies on the dollar? Who do you think will b
moe showers,
Great and these are the same folks that want to privatize SS. Just think soon the rest of us won't have a dime. What little we have will be in the coffers of the Uber Rich. Just the way they like it.
And they tell us that the Uber Rich make our economy run and need even more tax breaks. Yeah, right they never make a dime off the rest of us.
I love it. This is exactly how the whole Ponzi scam worked. Everybody was on it and made money while the going was good. Everybody participated in this criminal activity, the whole world, the entire US population right down to J6P who bought the house thinking that due to 20% per year appreciation he/she is going to retire in 5 years doing f**** all, were part of it. Now, when the music stopped and everybody got caught with their pants down, nobody wants to take the loses/responsibility. NO BAIL OUT FOR ANYBODY, LET ALL PARTICIPANTS EAT THE CRAP THEY CREATED.? No nation in human history got rich by printing money/creating credit out of thin air. Never, ever. It takes hard work to do it.
GODS MILLS ARE SLOW BUT FINE. EVEN BUSH/PAULSON/BERNANKE GANG CANT STOP CREDIT LIQUIDATION NOW.
Nobody knows where the bottom will be, but with mountains of debt and all the financial engineering of the last several years it will not be a soft landing for sure. It didnt help Japan to drop rates to zero, did it. I said this before several times before, and I will say it again. The FED controlled, through the banking system, only 20% of credit creation, the remainig 80% was pulled out of thin air by Wall Street alchemy. The rising asset prices allowed them to create more FC which in turn drove the asset prices higher leading to even more FC creation. It is called virtous circle. Now the entire Wall Street credit creating machinery is in reverse . It is called vicious circle and nothing but total credit bubble liquidation will stop it. This credit bubble isnt different then the tulip mania, South Sea bubble, Mississipi bubble, canal mania, British railroad mania,etc. The human nature never changes only asset classes beeing played are different. The end to every credit bubble is always the same.?This one is not going to be any different. See McKays Maddness of the crowds
In 1980, before the era of great prosperity/wealth creation commenced US GDP was $ 5 trillion and total debt outstanding $ 10 trillion. Today, after 27 years of relentless credit bubble blowing, US GDP is at $ 13 trillion and the total credit market borrowings stand at US 47.8 trillion. You tell me where all the wealth came from. Since economys income stream couldnt support the debt no wonder they couldnt create any more credit against the exisiting assets. They were running out of collateral to boot. The only way to extend the credit bubble was LEVERAGE. That is why the Wall Street magicians (followed by magicians all over the world, yes even Bangladesh has them) came up with the CDOs and the whole alphabet soup. By layering derivative (leveraged 1 to 15)on top of another derivative (leveraged 1 to 20) were they able to create more credit/FC against the same asset class. In order for this scam to succeed Wall Street needed three things, they had to identify the biggest single asset (it happens to be ones house) that individual can buy on credit, suckers they can sell
suckers they can sell the dream of infinite appreciation and having of something for free, and greedy idiots who would buy collaritized paper. Guess what? They found all three of them. Too bad that sucker who supposed to get filthy rich, got impatient waiting for get rich quick scheme to materialize, and started defaulting on its mortgages causing the whole structure to collapse. Imagine inverted pyramid with J6P as the apex supporting the whole weight above him. How long could he last? Since he is not an Atlas it took only 27 years to burry him under the rubble of all the debt.. Unless powers to be come up with another asset class (and suckers able and willing to play it again) that even more credit can be created against (the new Ponzi units have to support the old ones in expotential manner), the whole scam has to unravel. It will go down untill sound money, whatever it means, will be able to pay for greatly deflated assets. Survival of the fittest and the best prepared.
cryptogon.com
9/4/2006
Cover of Business Week: How Toxic Is Your Mortgage? :.
The option ARM is like the neutron bomb, says George McCarthy, a housing economist at New Yorks Ford Foundation. Its going to kill all the people but leave the houses standing.
This Business Week article is pretty good, but I feel the need to take you much deeper down the rabbit hole. Try to get comfortable, its not going to be pleasant.
How about politics? Anyone see Obama, Hillary or any other wanna be paid off politician voting against this crooked reform??
Ella,
Dont you get, they did privatize social security and you didnt get a say!
An evidently reluctant Mr Paulson took fright at the gathering storm and decided that he had to act. The unavoidable consequence is that the administration now owns the problem in a way it did not before. As the housing slump worsens, as it seems bound to, and a chill once more silences the hope in voters hearts, the measures announced so far will be deemed (even more than they have been already) unfair and inadequate. It will be too late then to say: This is none of our concern.
From now on, every mortgage foreclosure will be seen as proof of the policys failure and partly the administrations fault. Merely to address the most obvious anomalies in the new arrangements, more comprehensive and more generous assistance seems likely before long. In other words, the massively distorted and mismanaged US housing-finance market is going to get more so. And taxpayers had better prepare to be mugged.
FT.com / Columnists / Clive Crook - The trouble with the Paulson plan
Its going to kill all the people but leave the houses standing.
Might not be a bad thing the gene pool could use a good cleaning.
Kris B, good points! This is so much bigger than a few subprime loans.
moe showers, ssn not quite yet.
Mortgage seekers turn to high-cost loans of last resort - Salt Lake Tribune
Wait, its ok!!
At Miami-based Yale Mortgage Corp., one of the industry's larger players, loan applications so far this year are up as much as 30 percent from a year earlier, translating to 50 to 75 additional submissions every day. At Alliance Portfolio, a much smaller hard-money lender in Aliso Viejo, Calif., submissions have jumped 50 percent, to about 50 a month in the wake of the subprime crisis that erupted over the summer.
Seattle Funding Group, a Bellevue, Wash., firm that is one of the largest hard-money lenders on the West Coast, recently installed a new phone system in part to handle the calls now flooding in from consumers desperate to fund new-home purchases and cash-out refinancings.
Maybe I'm misunderstanding your point, Tanta. I don't have a problem with existing FHA guarantees. They're going to cost us, but they were made in (more or less) good faith, so that's just life. I do think, without doubt, that for the FHA to guarantee loans at far below market prices (we know a 15% price drop is a foregone conclusion so 97% LTV mortgages are going to lose lots of money) is a bailout. Loans in places like CA and SFL will lose far more than that. Also, the 2nds can get a bailout - FHASecure refis can combine first and second mortgages. The biggest beneficiaries of this, by far, are WAMU and Countrywide, who can escape all the risk in their gruesome 2nd-lien-in-superbubble-areas loans using this program as long as they can find an appraiser who'll cough up an appraisal justifying a 3% equity. So this is a bailout, and it will benefit some of the worst offenders (both Countrywide and WAMU have had huge increases in their 2nd lien exposures this year)
I'm not completely sold on bailouts being evil, although right now I lean to the idea of allowing a full-out crash and having the government take over the banking system. But even if we want to do some bailouts of the investors and banks who are primarily responsible for this horror we face I think it can be much better designed than this. Having current investors take at least a haircut on existing predatory loans is IMO essential.
"These days, however, they are attracting a larger, more-affluent group of consumers."
"Hard-money lenders protect themselves by requiring that borrowers have substantial equity in their collateral - either their home, investment property or a business - of 30 percent to 40 percent or more. Moreover, interest rates are generally in the low teens, and fees can be as much as 5 percent of the loan's value."
"The home-appraisal process is more intense, as well. Because hard-money lenders base their underwriting on the underlying collateral, they analyze property and the local market more intently than do traditional lenders."
Yikes, this is bad news. Hmm, loan apps at this places are up, but how many of the apps are being funded.
The news just get worse.
Thanks for the link moe showers.
This plan has the potential to cost the tax payers a ton of money. How is this possible if it's not a bail out?
People ask me all the time, Moe, if a pool of mortgages has only a small amount of toxic subprime waste, then whats the deal, why is the toxic waste going to kill the whole pool? They wonder why a small subprime default in a pool will create such an imbalance and end up causing the whole pool to be re-valued and cause default at a higher level, and thus impact yields in a pension....... they wonder why these trusts that are using pools are defaulting?
What am I gonna tell these suckers? Any ideas out there?
How many CDOs/RMBSs/ABSs/CCOs?etc are we talking about and why are so many going bad?
Re: Bob Gentzel, a spokesman for the Pennsylvania State Employees' Retirement System, said the pension fund doesn't have problems in the subprime area. It has no exposure in the structured investment vehicles that factored into the Florida situation, he said.
Gentzel said the pension fund actually made money in the subprime market because it took short positions in August and September.
In response to the situation in Florida, the Pennsylvania Treasury Department mailed a letter to participants of its Invest program, reassuring them that their investments are not exposed to subprime-backed investments. The Invest program provides low-cost liquid investments for local governments and nonprofits. It is similar in concept to a money-market fund.
Story not found - PennLive.com
Great....just what you want, some guy playing it safe with a pension fund, i.e, by going short subprime; sounds pretty damn safe there Bob, and I wonder, did you also play it safe with the pension by hedging a few other safe bets on a few puts that offset interest rates? Yah, thank God for people like this that know what to do!
In fact the Paulson plan is a bailout---an indirect but intended bailout for the thrifts and banks that got stuck with tens of billions of dollars in crappy loans when the secondary markets shut down. We now have a new industry-wide' standard for performing credit. Banks and thrifts can now modify their worst owned loans en masse by referring to the improved SFA definition of prudent servicing. They can cut their 30/60/90 days delinquencies, and I'll betcha that Bair and the other regulators are not going to insist on charging off the interest impairment from a freeze on aperforming' loan. A redefinition of loan performance is what happened in the '80's with FSLIC, when mortally wounded thrifts were permitted to continue lending against insured deposits until finally the music had to stop. Some of the larger thrifts will become insolvent if they charge off everything that should be charged off. These thrifts do not fit the `too big to fail' definition of the FDICIA, but they are large enough that FDIC would need backup financing from Treasury to close them. And that's a big political no-no. The taxpayer will pay, but down the road---and pay more.
I guess Im so used to smelling rats, that nothing seems right anymore:
Re: The board of the $35 billion Pennsylvania State Employees Retirement System last week approved a total commitment of $231 million to a of private equity funds and a real estate fund.
The systems board approved up to $30 million for the Fillmore West Fund, up to $100 million to New York Life Capital Partners IV and up to 70 million (US$101 million) to Nordic Capital Fund VII. The Fillmore fund is a real estate fund while the New York Life and Nordic Capital funds are private equity funds. The investments will be funded from cash as part of SERS long-term investment plan.
Sniffing for rats:
Nordic Capital is a rich source of mandates for White &Case, having appointed Airisto and Laura Huomo as advisers in the acquisitions of the Leaf Groups confectionary division and Outokumpu Copper Products.Both deals were the result of referrals from the firms London office. White & Case also represented Nordic Capital in the recapitalization of Ahlsell, a Nordicdistribution business. The financing for the recapitalization was arranged by Morgan Stanley and Nordea, and comprised senior, second lien, mezzanine andpayment-in-kind facilities.
Hmmmm
The terms of the purchase are governed by the previously announced Stock Purchase Agreement (the Purchase Agreement) by and among the Registrant, Dangaard Holding, Dangaard Telecom, and Nordic Capital Fund VI (for purposes of Sections 6.16 and 12.14 only), consisting of: Nordic Capital VI Alpha, L.P. and Nordic Capital Beta, L.P., Jersey limited partnerships acting through their general partner Nordic Capital VI Limited, a Jersey company, NC VI Limited, a Jersey company, and Nordic Industries Limited, a Jersey company.
moe showers,
I have read that the nominal value of the derivatives market is in the hundreds of trillions, what the real value is I do not know. What portion of the derivatives market is based on US residential and commercial real estate mortgages, again I don't know.
But the CDO's, CDO's squared, ABCP, and the rest of them with subprime exposure, are at risk of failure for several reasons.
So in this scenario, the subprime is like a bee sting to one who is highly allergic. Or the earthquake to the tsunami. Take your pick, my favorite is the latter.
moe showers, I think you found a RAT. Why in this market would the Penn fund do something that foolish. Not what I would call a prudent investment for the retirees fund.
I don't think there is any question that FHA Secure is a bailout. It's a temporary program target at borrowers that cannot afford their reset payment.
Tanta, first thanks for a great set of articles. I dont necessarily agree with your conclusions, but have certainly learned a lot.
Now, disregarding for a moment technical considerations for what should and should not be considered a bailout, on a very fundamental level all these federal intrusions into the real estate market results in inflating the cash cost of putting a roof over ones head. Even if just by reducing the perceived risk to all parties of a debt financed purchase transaction. Back in the day of home prices being pretty much determined by construction costs, and with large numbers of unemployeds around that could conceivably get jobs in a buoyant construction industry, that might have been a noble goal with plausible positive social benefits. Especially so in an era when abject starvation was a real possibility for those on the losing end of a market correction.
All the meddling accomplishes now is to raise the price (or preventing its fall) of the land on which homes are built, indirectly imposing one of the most obviously regressive tax schemes since the passing of the feudal age. By choking off federal support for these schemes, and let prices fall to non assisted equilibrium levels, equivalent homes will get cheaper. Whatever additional risk individual home owners and mortgage investors may face in the absence of publicly funded insurance, will soon be priced in at purchase time.
So, according to this commonsensical line of reasoning, adding another layer of federal meddling to the mortgage and RE markets is indeed a bailout. It to some, however small, degree bails out home owners facing home depreciation, mortgage investors facing bond losses, and the whole industry built around matching the two, by keeping the RE and mortgage sector of the economy artificially enlarged. Those stuck with the bill are those too poor or too young to have bought even during the boom, those with non real estate financing needs stuck competing for funds and labor with artificially attractive RE investments and salaries, and those negatively exposed to inflation resulting from a massive credit expansion followed by the inevitable monetary loosening marking its end.
So rather than uptights coloring inside the lines, I suspect many of the voices opposing the latest federal RE scheme simply feel we have gone too far down that road already. And that the way to get back to a more equitable place is to stop and turn around, not continuing even further.
Ella,
Since it took 27 years to inflate the credit bubble, there is no way it can deflate in six months, it will take years (and a lot cheaper asset prices) to do it.
Kris B, I concur
Dec. 03, 2007
NovaStar Financial asked to explain jump in stock price
By DAN MARGOLIES
The Kansas City Star
The New York Stock Exchange asked NovaStar Financial Inc. to explain any developments that might have precipitated a 69 percent jump in its stock price Monday.
The Kansas City-based subprime mortgage lender responded publicly that its policy is not to comment on unusual market activity.
The companys stock price leaped $1.36 Monday, closing at $3.33, after more than 7.2 million shares changed hands about six times the stocks normal volume over the last three months.
Shares of NovaStar began 2007 at $106.60, after adjusting for a reverse stock split.
The unusual trading activity came three days after a waiver deadline set by Wachovia Corp., NovaStars principal lender. The bank had previously agreed to waive a $150 million net worth requirement for NovaStar until Nov. 30.
Neither NovaStar nor Wachovia has said whether the bank has agreed to extend the deadline again. NovaStar has indicated it may be forced to file for bankruptcy if the waiver is not extended.
As of Nov. 13, NovaStar owed Wachovia $83.9 million in short-term loans and $11.8 million in commitment fees, according to regulatory filings.
NovaStar last month reported a $598 million third-quarter net loss, its largest quarterly loss ever.
The New York Stock Exchange has threatened to delist NovaStars stock because the company no longer complies with the exchanges requirements
Since it took 27 years to inflate the credit bubble, there is no way it can deflate in six months, it will take years (and a lot cheaper asset prices) to do it.
kris b,
We will be very lucky if an unwind comes and all of this sort of deflates in an orderly manner.
The notional amount of credit default swaps outstanding was around $45 trillion (US) in the first half of this year. This amount was less than $1 trillion (US) in the second half of 2001.
Go here for that data.
The total amount of global currency in circulation is around $5 trillion (when viewed in terms of US$).
On top of this.. the notional amount of currency and interest rate swaps is about $347 trillion (US).
So, what we have is a situation where... if the global economy continues to be stressed, a lot of these CDS contracts will start blowing up.. and then the central banks will need to react.
But, if they react by flooding currency or drastically changing interest rates, the swaps written against those numbers will effing blow up big fucking time.
None of that has to happen, of course.
But, I repeat, we will be very lucky if this just slowly dwindles away.
Ella,
Yah, a lot of panic, but some say, there is quality still embedded in the bad stuff being sold in the panic, which makes some wonder about manipulation to force prices down on the good stuff. So, as the babies are tossed out with the bathwater, is this all just hogwash, or, are we really about to see the economy go belly up?
Re: nd right now Persian Gulf countries are putting their cash to work through newly minted sovereign wealth funds (SWFs), which operate much like state owned hedge funds or private equity groups.
In the past six months alone, Middle Eastern SWFs have doled out serious cash for stakes in major international corporations. Just take a look:
Nov. 27: Abu Dhabi pours $7.5 billion into ailing Citigroup Inc. (C), which recently lost its status as largest bank by market capitalization to Bank of America Corp. (BAC).
Nov. 26: Dubai International Capital, a state-owned holding company, acquired an undisclosed stake in Japans electronics and media juggernaut Sony Corp. (SNE).
Nov. 16: Abu Dhabi invested $622 million (an 8.1% stake) in California-based microchip-maker Advanced Micro Devices Inc. (AMD).
Oct. 20: Dubai International Capital agreed to invest $1.26 billion in the initial public offering of hedge fund Och-Ziff Capital Management Group LLC (OZM).
Aug. 22: Dubai World, another investment arm of the state, plunked down $5.1 billion for a 9.5% stake in MGM Mirage (MGM).
Aug. 14: Istithmar, part of Dubai World, was cleared to buy Barneys New York Inc. for $942.3 million from Jones Apparel Group Inc. (JNY).
May 21: General Electric (GE) sold its plastics division to Saudi Basic Industries Corp. - the countrys largest public company, though 70% owned by the government - for $11.6 billion.
Is this all just hogwash, or, are we really about to see the economy go belly up? I do not know.
Very interesting the buying binge of the SWF. It makes you wonder.
In terms of valuation, are we seeing banks like BAC getting a good deal, or are they simplying bailing out positions and protecting further losses?
Re: But then, late Wednesday, came some good news. Countrywide Financial Corporation was snatched from the edge by Bank of American Corporation which invested $2 billion in the nation's largest mortgage lender. Bank of America said it would buy non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price.
Bank of America's CEO Kenneth Lewis said, "We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets. In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."
Some analysts are speculating that total acquisition of Countrywide may be in Bank of America's plans.
Countrywide had suffered through a tough couple of weeks as its stock slid and its survival looked increasingly in doubt.
The company had to drain an $11.5 billion loan facility from 40 banks last week and said it was planning to funnel most of its mortgage origination through its bank. But then, in spite of its FDIC insured status, many customers began to withdraw funds from Countrywide's bank after the company confirmed and accelerated earlier plans to funnel most of its mortgage originations through the bank. For a while there were fears of a full-scale run on the bank.
Moody's downgraded the company's debt from A3 to Baa3, the lowest investment grade, and hinted the rating might go down even further, taking Countrywide into junk bond territory. Wachovia, however, upgraded Countrywide from under perform to market perform based on the infusion of Bank of America money.
Umm,
Credit contraction for me and you. Asset consolidation for the big boys.
Hey,
I need help on this one, so any databank guru that can solve this....great! tHIS STORY IS ABOUT 2 YEARS OLD, BUT IT SEEMS AS IF THIS INVESTIGATION DROPPED DEAD IN ITS TRACKS.........iD LIKE TO KNOW WHY???? FYI, The FTC is a powerful force, if it wants to be, but why did they drop this, or did they?
Bear Stearns Is Told by FTC to Provide Data for Mortgage Probe
Dec. 30 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, was told by the U.S. Federal Trade Commission to provide data and documents in connection with an investigation of mortgage lending to risky borrowers.
Bear Stearns's EMC Mortgage Corp. unit, which buys and services home loans, received the demand following a Dec. 8 FTC resolution, according to a filing today with the Securities and Exchange Commission. The New York-based firm said EMC Mortgage is cooperating with the government's inquiry.
According to the filing, made by an $830 million mortgage trust set up by Bear Stearns, the FTC is investigating the so- called sub-prime mortgage market. It said the agency is trying to determine whether any lenders, brokers or companies that handle loan services such as payment collection violated consumer- protection laws.
The filing didn't specify which data or documents EMC was told to provide. Bear Stearns spokeswoman Elizabeth Ventura wasn't available for comment.
Bear Stearns is one of the world's biggest underwriters of mortgage-backed bonds.
``The principal business of EMC has been the resolution of non-performing residential mortgage loan portfolios acquired from Resolution Trust Corp., from private investors and from the Department of Housing and Urban Development,'' according to the filing by Bear Stearns ARM Trust 2005-12.
Related to; November 08, 2007: 12:58 PM EST
NEW YORK (Associated Press) - HomeBanc Mortgage Corp. says it must complete the sale of its loan-servicing business to Bear Stearns Cos. and unload other assets before it can formulate a Chapter 11 plan.
The Atlanta-based lender is asking a federal bankruptcy court to extend by four months its exclusive right to propose a plan through April 7, 2008.
In a filing Wednesday with the U.S. Bankruptcy Court in Wilmington, Del., HomeBanc said that it has "communicated regularly" with its major creditor constituencies regarding the sale process and other potential means for maximizing value for its creditors.
An exclusivity extension is, however, necessary to allow the sale of the servicing business and other assets to close, and time for talks on plan terms, the liquidating lender said.
The sale of the company's servicing business to EMC Mortgage Corp., a Bear Stearns affiliate, is set to close Dec. 3. The deal, which calls for EMC to pay about $60 million to take over the servicing of about $7 billion worth of home loans, was approved by Judge Kevin Carey on Nov. 1.
moe showers, have you tried searching the FTC web page?
IMHO, this subprime decoy is about chaotic credit enhancements and the bubble that finally exploded:
Re: We expect that most of our CDO subsidiaries will be cash flow arbitrage CDOs that will be exempt from investment company status under Rule 3a-7. CDO subsidiaries may also be structured to be excluded from investment company status under Section 3(c)(5), which excludes from investment company status issuers that are primarily engaged in holding mortgages and other liens on and interests in real estate, in owning obligations (such as credit card receivables and trade debt) that represent all or part of the purchase price of merchandise, insurance and services, in financing manufacturers, wholesalers and retailers with respect to specific merchandise, insurance and services or in any combination of the foregoing. Some of our CDOs may satisfy one or more the Section 3(c)(5) exceptions. We and the underwriters have received and, at the closing of this offering, will receive an opinion of counsel to the effect that, subject to the assumptions specified in such opinion, each of our CDO subsidiaries that has been formed since our initial private offering in February 2006 is not an investment company without regard to the provisions of Sections 3(c)(1) and 3(c)(7) of the 1940 Act.
Ella,
I have searched FTC, SEC, Google, and no bones. There wasnt a case per say, but as to why there was no follow up data, seems strange!
Back to CDOs:
Arbitrage Type CDOs: Cash Flow vs. Market Value
Arbitrage CDOs can be further broken down into cash flow and market value categories. In a cash flow issue, the structure uses cash generated by a pool of corporate loans and bonds to satisfy its payment obligations. Since cash flow CDOs will hold assets with varying terms, the portfolio manager must ensure that payment obligations can be satisfied with incoming cash flows. In contrast, a market value CDO portfolio manager focuses on the pool's prospects for appreciation and high yield. A cash flow portfolio manager's strategy will typically be buy-and-hold (essentially matching asset flows with liability flows), whereas a market value CDO's portfolio manager actively trades the pool to enhance total return.
In addition, rating agencies review and monitor each structure differently. In a cash flow CDO, rating agencies will monitor overcollateralization (excess asset value) by comparing the present value of the pool's cash flows to the present value of the trust's obligations. A rating agency monitors overcollateralization in a market value CDO by considering the portfolio's market or liquidation value versus the trust's obligations.
There is the problem; you have rating agencies rating CDOs but CDOs are not under SEC radar, so...... if your CDO structure can pay for a TRIPLE AAA rating, who can say its not a great deal....right??
Guess the CDO's didn't pay enough for their ratings or maybe they failed to make their installment payment.
Why else would the rating agencies be downgrading the CDO's as fast as possible.
Here yah go, S&P had is all figured out, just like Moody's: http://www2.standardandpoors.com/spf/pdf/fixedincome/cdo_criteria2002.pdf
Re: If total bivariate risk exposure is substantial, then the portfolio will be analyzed using Standard & Poor's multi-jurisdictional default model, which assesses the
incremental default risk these assets introduce. This typically results in higher default estimates and credit
enhancement levels.
Re: The transparent and proven Monte Carlo methodology is no longer difficult to use, given today's fast PCs with superior computing power. The methodology is robust due to its ability to deal with complex
relationships between variables.
Thats it....the pension fund managers, and other financial gurus have faster PC's and therefore were able to model PlayStation-Synthetic-CDO/Dervatives into safer less risky investments, as they swapped this bet for that bet and tried in vain to out-gun the guy in the next booth that had an edge with a better model! yah!
Furthermore: The primary impetus for issuing a CDO is to take advantage of either an arbitrage opportunity or to improve a financial institution's capital ratios.
Hmm, why would someone take debt off the balance sheet and then start playing arb games to leverage debt...hmm, oh yah, monetization and leverage (see playstation speed above).
Hence: The first synthetic balance sheet CDOs were done by banks, which found the synthetic structures attractive because the risk transfer and resulting drop in regulatory capital requirements could be achieved without the expensive and cumbersome true sale of the assets. In contrast, arbitrage CDOs whether cash or synthetic, are motivated mainly by the purchaser of the most junior CDO liability tranche (also called equity,income notes, or first-loss piece) wishing to capture the excess spread between the return on the CDO collateral and the cost of risk transfer on the liabilities above the equity. (see Warren Buffy)
Finally (we have been here before and failed): In our opinion, much of the subpar performance surrounding the first wave of synthetic CDOs(1998-2001) can be attributed to imprudent portfolio selection in an extremely adverse credit environment coupled with structures that did not equitably share the economic risks and benefits of ownership across the entire capital structure. Many of the early static portfolios were assem-bled from the credits with the highest yield that satisfied the investment guidelines of the CDO (that is,credits that were trading wide for their rating).
Amen, and may all your CDOs have childre
Re: synthetic structures attractive because the risk transfer and resulting drop in regulatory capital requirements could be achieved without the expensive and cumbersome true sale of the assets.
Eli,
"But, I repeat, we will be very lucky if this just slowly dwindles away."
I am not smart enough to predict the final outcome of the credit bubble collapse, but I hope it will be fast and very painfull. I am sitting on a pile of cash waiting for 10 cent on a dollar bargains.
Ell,
Re: Why else would the rating agencies be downgrading the CDO's as fast as possible.
I think those damn covenents are somehow involved; could it be, that a CDO has to be written like a contract, versus being a market security? I have to think on that..
Ironically, securitization (at least a semi-securitization derivation of it) allowed the US government to moderate the impact of the S&L debacle through the sale of securities backed by assets of the defunct thrifts. While the securities bore an indirect government guarantee and should not be viewed as true securitizations, these transactions redistributed the upside ownership value of the assets of defunct S&Ls among private investors.
By moving the upside value of assets back into private hands, this program became a model for government action to moderate credit cycle depressions that occur when governments believe they can somehow hold on until the assets of failed banks recover their value. Without a transfer to real private ownership, the overhang of government-controlled assets stymies all efforts to attract private investment and, as we have seen in Japan, slows or even precludes real recovery.
Procedures to resolve problems of the 1980s may have fostered the 1990s diversion between true securitizations and false ones. CMOs of the 1980s were precursors to true asset securitization structures of the 1990s that extended the enormous benefits of CMO tranching to all sorts of financial assets. Moreover, asset securitization techniques were developed that allowed aggregators to allocate collection and timing risks among different investors and interest holders so that true securitizations could support a much broader range of investment maturities.
On the other hand, the need to preserve liquidity at fundamentally sound banks where capital had been depleted by the market impact of resolving the S&L debacle led to the creation of several securitization formats that implicitly relied on the government's deposit guarantee for off-balance sheet lending. While not true securitizations (in many cases, all portfolio and liquidity risks were absorbed by the direct reliance on a sponsor), these structures played a key role to support economic recovery of the early 1990s. They also became a source for the growth of non-diversified credit portfolios of dependent off-balance sheet entities, creating (over time) the possibility of an off-balance sheet speculative bubble.
This development is one aspect of the credit boom of the late 1990s that the Financial Accounting Standards Board's (FASB) proposed interpretation of consolidation policy may force to be disclosed, on balance sheet, by special purpose entity (SPE) sponsors that fail to diversify their risk. In addition, FASB's consolidation reform may require disclosure of numerous other vehicles developed to bring the advantages of securitization to various non-financial assets. In many cases, use of SPEs for non-financial assets created a false appearance of significantly increased revenue. As a result, reform may now be necessary to preclude a new cycle of growth in off-balance sheet moral hazard lending activity (for example, certain Enron receivables structures) and to properly present
This is still great to re-read from October:
The ripple effect from an October 11 rating cuts may affect 461 CDOs in United States and 41 CDOs in Europe, Moody's said.
OOPS
Moody's made its announcements in a series of individual releases and did not provide the total amount of CDOs affected or the total amount of debt affected. Moody's said a full summary may be available at the end of the month.
"It's absurd," said Josh Rosner, a mortgage expert from Graham Fisher, a New York-based investment research firm. "It makes it harder to count the actual downgrades and they're doing it do draw less attention.
"The rating agencies are starting to feel increasingly like Britney Spears in their crashing and burning," Rosner said. "These downgrades feel like 'Oops, I did it again.'"
Aftershocks - TIME
In Cincinnati, nervous depositors formed lines up to a block long and even slept on sidewalks overnight while waiting to withdraw their savings last week. Ohio Governor Richard Celeste finally stepped in and declared a three- day bank holiday for 71 savings and loan associations, probably the most extensive closure of U.S. financial institutions since the Great Depression. In Memphis, board of education officials were anxiously checking their investments. Elsewhere, communities from Beaumont, Texas, to Pompano Beach, Fla., were badly shaken.
The rapidly growing storm was touched off by the March 4 collapse of E.S.M. Government Securities, a Fort Lauderdale, Fla., dealer in bonds, notes and bills. The failure left dozens of creditors out as much as $300 million. E.S.M. had beguiled investors by offering high interest rates for short-term loans backed by U.S. Government securities. But some of E.S.M.'s customers never actually took possession of the securities, many of which now cannot be found.
So far, Ohio has been hardest hit by the E.S.M. scandal. Within days of the collapse, Cincinnati's Home State Savings Bank (assets: $1.4 billion), which may have lost up to $150 million as an E.S.M. investor, was shuttered by state banking authorities after a run on its deposits. That triggered a statewide panic when depositors at other thrifts, which had no dealings with E.S.M., rushed to withdraw their money, fearing that their savings were in jeopardy. At mid-week, the Ohio legislature created a $90 mil- lion emergency fund to supplement insurance for the savings and loan associations, but even that soon seemed inadequate in the face of mounting withdrawals. When he declared the bank holiday on Friday, Celeste explained that legislators and federal and state banking officials were working round the clock to formulate a plan to restore confidence in Ohio's financial institutions.
November, 1983--Bank Board raises net worth requirement for newly chartered S&Ls to 7%.
March, 1984--Failure of Empire Savings of Mesquite, TX. "Land flips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers approximately $300 million.
April, 1984--Bank Board moves jointly with the FDIC to attempt to eliminate deposit insurance for brokered deposits. Federal court rejects this attempt in mid-1984 as overstepping statutory limits.
July, 1984--Bank Board requires S&L management to adopt policies and procedures for managing interest rate risk.
January, 1985--Bank Board limits the amount of brokered deposits to 5% of deposits at FSLIC insured institutions failing to meet their net worth requirements. Bank Board also limits direct investment (equity securities, real estate, service corporations, and operating subsidiaries) to the greater of 10% of assets or twice the S&L's net worth, provided the institution meets regula
Unregulated transactions..sounds like mortgage brokers, appraisers, rating agencies and all the derivative trading! This is a problem that will continue to haunt America, because we have corrupt politicians (see Pension Reform Act and see Senate vote):
Home States losses were due to the failure on March 4, 1985, of a largelyunregulated government securities dealer, ESM Government Securities,following a massive fraud involving false audit reports. ESM was missingabout $300 million in customer funds. Home State was heavily exposed tothis failed securities dealer through repurchase agreement transactions.2Lax supervision had allowed Home State to borrow almost 50 percent ofits funds through ESM. As the result of ESMs failure, Home State andAmerican Savings and Loan Association in Florida, which werepart-owned by the same person, sustained substantial losses. Home Stateestimated losses at $150 million or more.Home States deposits, like those of the other state-chartered and privatelyinsured Ohio thrifts, were insured by the Ohio Deposit Guarantee Fund.Immediately before the run on Home State, the Guarantee Fund had totalassets of $130 million to guarantee about $4.3 billion in deposits for about500,000 depositors. According to Federal Reserve officials, the thrifts hadchosen private deposit insurance because such insurance was lessexpensive and burdensome compared to federal deposit insurance. TheGuarantee Fund had no legal power to ensure compliance by its membersand had no cease and desist power. According to a Guarantee Fundofficial, the privately insured Ohio thrifts were regulated by the OhioDepartment of Commerces Division of Savings and Loan Associations
http://209.85.173.104/search?q=cache:DVCHMD3-dssJ:www.gao.gov/cgi-bin/getrpt%3FGAO/GGD-97-96+S%26L%5E%22bank+holiday+%22%5Efailure%5EFDIC%5E%22E.S.M.+Government+Securities%22&hl=en&ct=clnk&cd=2&gl=us
The experience of banks and savings and loans in the 1980s providedample evidence of the seriousness of the risks involved in concentrationsof certain types of financial exposureparticularly when insufficientcapital is held to protect against risk exposures. The failure ofpolicymakers and regulators to effectively contain the savings and loancrisis proved costly to American taxpayers. Through FIRREA, Congresscreated a new agencythe Resolution Trust Corporationto resolvefailed savings and loans, liquidate their assets, and pay off insured depositors. The collapse of the savings and loan industry resulted intaxpayers incurring a large expense estimated, as of 1996, to be about$132 billion.
See Financial Audit: Resolution Trust Corporations 1995 and 1994 Financial Statements(GAO/GGD-96-123, July 2, 1996
The point here, IMHO, is that what we are about to come to terms with, is that this subprime/credit enhancement/unregulated derivative trading is going to result in a bailout!
Tanta is right that a segment of the audience here is just plain offended by the "bailout". I'm one of the offended. I don't want any government agency guaranteeing the repayment of loans to buy or re-finance houses at today's ridiculously inflated prices, and I don't buy into convoluted arguments that such a guarantee is not a subsidy.
Buying a home, instead of renting, inherently is a decision to take on some risk. (With 100% financing in non-recourse states, that actually became untrue, but...) I want the people who are entitled to keep most of the benefits of that risk - the borrowers/buyers - to put up most of the capital necessary to absorb the losses. That capital would be called a downpayment. And the downpayment needs to be as big as it takes to get private lenders to be willing to put up the rest of the money with NO government guarantees, quasi (FNMA..) or otherwise. If minimum downpayments have to go to 30%, fine. If that causes prices to drop by 50% or more, fine. The more I see the tortured logic of people looking to justify more guarantees and other price supports, the more I think we'd all be better off cutting off 90% of these constructions, and smartly.
If hedge funds want to lend money to people making low downpayments in return for higher rates, or a share of future home price appreciation, then that's fine too. Just no money for that kind of risky lending from govt-insured depositary institutions, and no other government guarantees, and no other ill-concealed attempts to boost home prices, well-intentioned or not, thank you.
Does anyone here really think that, if the FHA went out of the business of supporting home purchases, more people would be homeless 10 years from now? Every effort to make home purchases more affordable, unless limited to the poorest 10% or fewer of potential buyers, just ends up raising prices by an offsetting amount for the people it's designed to help. Getting the govt out of the business of subsidizing/guaranteeing higher home prices is not morality, it's efficiency, as measured over the next 50 years, not the next 5.
What Fair Economist said. Obviously anything that the FHA did in the past, needs the backing of the federal government. But it's just evil for the FHA to take on more risk in the current enviroment. That's a bailout.
Why I still say this IS a bail-out.
The eCONomic cycle in this nation is now firmly focused on keeping the good times rolling, privatizing the gains, and socializing the losses. Just because this plan in its current form may not do the best job of that greedy goal doesen't mean it won't be a real nightmare by the time they are done modifying it.
Also, with all due respect to Tanta (who said "everyone is getting something from Santa Claus") what am I getting out of this?
A good chunk of us got NO benefits from the Bubble AND are now watching this decline be dragged out as long as possible just so more crooked can make more money. I see no advantages to any of this.
We wall know what government guarantees on student loans has done to the price of higher education.
As a great fan of clear writing, I just have to make the point that the vernacular is the vernacular. Insisting that expressions like "bail out" mean something precise is a waste of time. If you want precision from an expression like "bail out" you are going to have to add it. Sprinkle on some precision yourself, in expressions like "government bail out" or "bailed out by its parent" or some such.
If you really want precision, then use precise language, rather than expressions that have already become catch-alls in the vernacular. It saves time.
[I wouldn't object so much if 1) it had been officially temporary (give the servicers six months to get staffed up, letting them do the quick and dirty thing in the interim) or if 2) it involved the servicers taking the money they're not spending on expertise and sending it to the reputable non-profits who can counsel the borrowers and "broker" the deals.
Just letting servicers off the hook for being unprepared for the storm isn't impressing me any.]
True, true, true.
However, the investors really haven't stepped up either. Up until v-e-r-y recently, some were vigorously opposed to modifying -any-of these loans.
The americansecuritization folks were suggesting that investors pay ~$1,500 to get bring these borrowers into the fold... and that's about as sensible an approach as I've heard.
The thing is, lenders were already modifying more of these loans, but the servicers don't have near the capacity to deal with this. When all the lights are green, the wind is blowing at your back, and the sun is shining, servicing can be profitable. But in an environment like this, it's no surprise that they can't keep up.
To make things worse, you have even MORE consolidation in the industry, and you run into situations like CITI not honoring stip-to-mods / performance mods that were set up at ABN. I talk to the loss mitters at CITI, and they tell me that they haven't added enough staff to handle to the volume. Gee, what a surprise. Wells did the same thing when they took over all that stuff from WAMU.
Depending on whose math you believe, someone loses $30-50k when a house goes REO. A $1,500 investment to avoid some of these is embarrassing.
I know REO Asset Managers who are finding it more and more difficult to get reasonable pricing decisions from the higher-ups.
In areas like Detroit, you have tax levels so high that the properties don't make sense to anyone at virtually any price. Will the treasurer look at rolling back tax levels? No.
There's enough resistance to a government bailout that we probably won't see any significant movement there.
We've got problems here, but all the stakeholders seem hell-bent on the idea that no one can make a buck.
This problem won't go away without a significant investment. One way or another, a price will be paid. By most of us.