I absolutely agree with your points on "The Freeze." But I'd like to remind folks that government intervention involves more than "The Freeze." In the same press conferences they also talk about mortgage revenue bonds and FHA, which can involve the taxpayer.
10) This is not a bailout. There is no federal money involved.
With the freeze... no.
but many of us are concerned about the second part that Paulson is discussing... allowing municipalities to buy up these mortgages using tax free bonds.
Since they're tax free, that IS Federal money in a way.
it's also a garbage load of public money (city,state,federal)
I worry that this is the first step towards the govt buying all the toxic garbage, and another record bonus year for wall street.
The rate freeze is not a "bailout" -- you're correct. But everyone's forgetting that Paulson is also pushing for municipal bonds to be used to fund borrower refinancing.
The rate freeze is getting the attention, but the really significant part of this deal is likely here -- and it's being missed while everyone's dazzled with the rate freeze details.
I view this as part of one huge relief effort, which is why I'm still calling it a bailout effort.
I think there's another reason up there on the list. It gets borrowers (or as Jackson likes to call them, borriors) to call and shoehorns many into FHA, HUD, & other government programs, bailing out more loans onto our government than would otherwise end up there. It's burden shifting at the worst possible time, since most of these loans will be way underwater & fail soon anyhow.
After reviewing the pool's assets, the firm issued a report with several recommendations that we, as the SBA Board of Trustees, enacted last Tuesday. In the simplest terms, we supported a plan to isolate any distressed assets into a secure fund which will be allowed to mature and increase in value over time. The rest of the assets are of a high-grade money market quality and will be placed in a fund that is open to current and new investors. We also voted to create relationships with financial institutions to provide loans to investors seeking immediate access to capital.
In passing this reform, we had three guiding principles. Our primary goal was to adopt a plan that would provide the best opportunity for investors to ultimately retrieve every cent they originally placed in the fund. We also knew that it was essential for investors to have access to their assets as soon as possible, so that local entities could cover immediate needs such as issuing payroll for teachers and other public servants. Additionally, we understood the importance of restoring confidence in the new fund, which will be managed by independent financial asset managers and rated like many other money market funds.
The Local Government Investment Pool is a short-term investment pool used by a number of counties, school boards, and other government entities in Florida. Withdrawals escalated at a significant pace over the past few weeks, decreasing the pool's original balance of $27 billion to $14 billion. Whether or not this "run on the bank" was fueled by legitimate concerns, we immediately acted to temporarily suspend withdrawals and hire a world-renowned asset management firm to conduct a thorough review of the LGIP and recommend a proposal with the best chance at preserving investors' principal.
uncle festus, yeah, eleven, I fixed the numbering - hopefully right this time - I've been reading so many takes on the plan that my eyes have glazed over. I just tried to hit the high (low?) points.
P. Jackson, I agree there is much more than the Paulson plan - and there will probably be much more proposed (and possibly enacted) next year when people realize this didn't help.
Of course the level was set at 97% or greater LTV because the industry recognizes that anyone with less than 3% equity cannot refinance. For those with a 96% LTV mortgage - no worries - just wait a few months and the value will probably decline enough to put you in the plan.
I thought that part of the "fast track" notion in the plan was that the original value would be used to calculate the LTV ...
I guess it doesn't really matter much in the end though... These people are screwed (albeit, mostly from their own doing.)
Minimum borrower contribution
LTVs up to 100 percent
Flexibility on credit histories and nontraditional credit accepted
Section 8 homeownership vouchers accepted as income
Community Solutions option with additional flexibility for teachers, police officers, firefighters and health care workers
Great, they want to keep the housing bubble and make sure people have homes, but if that burden is placed on tax payers, in the form of higher tax subsidies, then this bank bailout better come with full disclosure!
CR, i'm not sure number 5 is stated very clearly. you are not excluded from the fast track if you have an LTV below 97. you're still segment 2 if you have an 80 LTV and are not FHASecure eligible for a different reason.
I'd also like to add that the plan is, in part, an effort to keep JoeCheapChardony feeling like help is coming so he keeps spending during the holidays.
As I was out walking the dog a bit ago, I thought of a metaphor for the current situation and "The Plan". Nothing that has been posted here really changes my thinking...
A house is burning (i.e. the economy), a fire truck arrives. The fireman (POTUS, FRB, UST, ASF, CFC, etc) all look vaguely familiar. They lay one hose and discover that the hydrant is dry (no liquidity). So they each grab a handy bucket of water (plans & press releases) and toss it against the flames (economy going south) while press photographers snap happy pictures for the folks out in MSM land.
The house still burns, but they might have saved the front door (if they are lucky).
NY Times -Like Subprime Mortgages, Some Construction Loans Are Delinquent
- Banks with more than $10 billion in assets have lower concentrations of construction loans now than they did at the end of 1989. But banks with less than that amount of assets are more than twice as dependent on construction loans as they were then...
"I thik there will be a wave of bank failures in the not-too-distant future although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly."
I've been tripping-out this evening on money supply data... one neat little datum from the NYTimes story is that.. the total volume of construction loans on the banks' books is about $616 billion.
This is almost as much as the total amount of US currency in circulation which is around $700 - $800 billion.
Even though I feel like the fractional reserve system is sensible... I'll never cease to be weirded-out by it.
Don't get me started on the notional amounts of derivatives outstanding..
Might the ABX be used as a measure of the success of this plan? It stabilized about the third week in November when talk of 'assistance' began. If there is no general belief that a significant number of foreclosures will be prevented by this, then there will be no ongoing stabilizing effect in markets for securities that derive from mortgages. And if there is that belief, markets will stabilize to some degree.
eli,
That number (construction loans) looks to be in the ballpark; maybe even just a bit low. Did they lump residential and nonresidential together or is that supposed to be only nonresidential (and presumably private, non-government)?
In a piece entitled, "Bankers Hope Bush Subprime Plan Will Scuttle House Bill," CongressDaily reports that "the mortgage industry hopes a White House plan designed to aid subprime borrowers at risk of losing their houses will help scuttle congressional efforts to refashion mortgages through the bankruptcy code. . . The announcement comes as Congress moves ahead with plans to make it easier for bankruptcy judges to refashion home mortgages that are on the verge of foreclosure -- legislation bitterly opposed by the housing industry. Bankers said they hope to use the White House approach as a prime example of why the bankruptcy legislation should not move forward, emphasizing that a voluntary effort can cover many of the estimated 2 million subprime loans that are scheduled to reset to higher rates over the next two years."
Bankers evidently dislike the bankruptcy proposals because they give borrowers some real power: they can write down the mortgage to the value of the property, and they can rewrite the mortgage into a fixed instrument. "Voluntary," according to the banks, is much better.
Of course, if the bankruptcy laws changed, the negotiations outside bankruptcy would change too. If families had the option to declare bankruptcy and cut the mortgage down to the size of the property, some mortgage servicers might start returning homeowner's phone calls and talking over other options.
Bankruptcy can't fix the whole subprime problem, and it is not a perfect solution even for those who would be helped. Families have to be in really bad shape to go bankrupt, and many will resist either because of the stigma or because they won't qualify for relief. But bankruptcy could help some of the families hit hardest. It would also move this crisis through the system faster. If a bankruptcy court determines that the family can't afford the home even with a decent mortgage, then they will have to give it up. A bankruptcy amendment will not put off the day of reckoning. It will help move toward a more stable (and more realistic) housing market faster.
So the administration's subprime mortgage plan is the bank lobby's dream. "Totally will sandbag the bankruptcy stuff." And totally sandbag American homeowners and would be homeowners.
Why exactly is not collecting taxes due on defaulted and forgiven loans not a taxpayer subsidy? Sorry, ignore that bit of rhetoric. I have a serious objection to only one of the eleven points: 7). These are not teaser rates.
I submit that these are teaser rates as their rate, terms, length,qualifying, fees, etc. were premised upon refinancing after a period of time that was premised upon a predetermined reset date. The act of refinancing would have generated fees that would offset the rates proffered. Many of these loans would never have been financed were they offered as being likely to last 6-7 years rather than 2-3 years. The cure would have been a combination of higher fees, higher rates and higher qualification standards. The "teaser" rates were but one line segment of the triangulation. when it is stretched without changing the other two legs the answer id undeniably one of an artificially low return either based upon inital conditions or now.
I see, so then I can assume that taxpayers will not pay one nickel for FHLB, FNM, FRE, FDIC, PBGC, or any other alphabet soup label? Not one thin dime? Who is paying for the hotline? Who is paying Paulson's salary. Are you telling me that the fed won't buy crappy mortgage bonds? What of the inflation tax we all pay because of the trillions that got dumped on the fraudsters? What of the state and municipal losses? No bailout my foot. They'll be bailing out every porthole of the good ship U.S.S. Lollypop, port and starboard. You can bet your last nickel that the grifters aren't going to pay.
You may be right, Robert, but a lender who takes that hard-line position will have a default to deal with and will lose a lot of money.
To me, the issue here is exactly what CR says in point #4 and the success or failure must therefore be measured with that in mind.
bacon dreamz, I'm just trying to point out the real goal - get the homeowners to pick up the phone and minimize the losses for the investors.
Yes, there are other aspects - and I think the burden shifting that barely noted is important too.
I also wanted to point out many of the incorrect statements about the plan that I'm reading (I can't believe how many think this is a bailout - the freeze isn't - or that the plan breaks contracts - it doesn't).
Wally,
Did you see the multimillion dollar tax refund the previous owner of Dunnmore Homes is getting because of his sale and subsequent bankruptcy of the company his father founded? Just google "dunmore homes tax refund bankrupt". $11.2 million 'saved' in the $500 sale. And when Morgan wrote down but wrote off 1/3rd due to tax savings? Then there is the "losing" money on these loans if allowed to proceed unintervened. these lenders made mistakes and have proven bad business models. It is supposed to hurt. If it doesn't bad business models are given a further competitive advantage over rational ones.
CR: will probably be much more proposed (and possibly enacted) next year when people realize this didn't help.
--
Ah, that was the one thing missing from your excellent post. You and Tanta have done a great job knocking down the myths, but I was wondering what you two think will be the impact of this proposal.
-ck-, I think you are right and it probably deserves position #1 on the list. Have Paulson short circuit Democrat boneheaded plans change the loan amounts, and pass the tab to the lenders. It would be the first step towards nationalizing the lenders. Great move. The government couldn't even regulate the lending industry, let alone operate it.
It would never fly anyhow. That's even more banana republicish than the current lame plan.
The ever gracious CR offers a reasonable common ground: Robert Coté, OK, not teaser rates in the common thinking about the rate: i.e. rates under 4%.Agreed, shall we call them "under market rates?"
You hit the nail on the head with "AND FINALLY: The purpose of the plan is to publicize that lenders will modify loans."
It's just a Holiday PR stunt to make it look like they are "trying" to accomplish something and help struggling homeowners keep their homes. When in fact it was exactly what they have been using to qualify borrowers before the "fake freeze."
CR, you said, "All of these modifications could have been made anyway without the freeze. But the problem was very few homeowners called their servicer before defaulting on their mortgages - and most homeowners didn't answer their servicer's calls once they were delinquent."
You are right that a lot of borrowers do not call their servicers or answer the debt collection calls that start on the 16th day after a late pay and continue non-stop all day long into the night via computer generated automated phone systems.
When they do pick up the phone, they DO NOT get a nice loss mitigation specialist on the other line saying "how can we help you?" No, they want full payment and nothing else.
The borrowers that do call in get the low level collections employee who's job is to make sure that that borrower does not get back to loss mit and to milk every dime from the homeowner.
Yes, this is business. They owe money on a contract they sign, yada, yada, yada...... I understand all that, but servicers ARE NOT and WILL NOT change their MO's.
Well, until the lawsuits come and CR they are coming BIG TIME en mass and no, not from investors, homeowners.
Class actions are going to change everyones tune sooner rather than later.
In recognition of the vagary of public sector accounting standards, theGovernmental Accounting Standard Board recently announced probablechanges in its rules for public sector plans which will enhance disclosure butstill allow considerable flexibility.135And of course disclosure rules do nothingdirectly to require full funding of the plans. As acknowledged by RobertKurtter, senior vice president for state ratings at Moodys Investors Service, What this highlights, for us, is a big problem. . . .In any financial report,there are a wide range of assumptions and acceptable practices. But in thearea of public pension, it seems, the range of acceptable methods is extremely wide. Given that extremely wide spectrum, which runs fromextremely generous to extremely conservative, it becomes very difficultto value these systems on a consistent basis across the country.136
The main intent of Hope Now is to keep a narrow class of struggling homeowners paying interest on an asset that is worth less than they owe and will be worth far far less than they owe five years from now. These homeowners would be better off turning in their keys and renting.
The refinancing part of this will be left up to Congress as states and localities today may issue tax-exempt bonds only to assist first time homebuyers or homebuyers in designated distressed areas. So I can't see much coming out of that part, at least for a while. They are really making this a political issue, all parties want to play that game.
Homeowners don't have to pick up the phone - under the plan, the servicer can presume the homeowner has accepted the modification if he/she makes the payments the modification specifies. In other words, all the homeowner has to do is keep writing checks in the same amount he/she always did.
This plan is clearly lender-driven, as you observed. Look at the membership of the American Securitization Forum. My own suspicion is that, as -ck- said, the lenders are trying to avert cramdown; to maintain the original principal balance, they'll sacrifice maintaining the rate (for now, and after all it was an adjustable rate, which restricted the front-loaded income they could put on their balance sheets). Basically, the 2005 amendments to the Bankruptcy Code vitiated bifurcation (in which the security interest was revalued to the amount that could be realized on sale, with any remaining balance on the loan becoming an unsecured debt - which makes perfect sense) and with it the laws of those states that don't permit lenders to pursue borrowers for deficiencies after foreclosure and sale.
Reducing to market values the principal balance of the loans on their balance sheets, directly or indirectly, would probably be a cost they're unwilling to bear.
CR, I cannot help but notice your good sense. But do you feel the emotional headwind against what you and Nouriel Roubini (who I normally declaim as demigods) are sayin'?
They're not waiting for borrowers to pick up the phone:
"We recognize that servicers will not be able to make confirmed contact with all borrowers, particularly those in Segment 2 who meet the FICO test and for whom detailed analysis is not
required. ASF is of the view that borrowers who fall within the eligibility criteria for a fast track
loan modification should not fail to receive a modification solely due to the servicers inability to obtain a signed agreement. Generally, it would appear reasonable for a servicer to deem a borrower to have consented to the terms of the modification, if notice of the modification has
been sent to the borrower, and the borrower has made two monthly payments under the loan as modified after receiving notice of the modified terms in accordance with the modification."
I don't know there will be no litigation. It may be OK for the servicer to offer these borrowers a mod to avoid default but I'm not sure it's OK to offer them all the same mod without regard to their circumstances. It may be that for many of them, a 5 year freeze is the best that can be done -- these are people that no sane loan officer will give a new mortgage to, remember -- but surely some of them could afford some increase, even if they can't manage the full reset. To what extent can an investor expect his servicer to put the maximum squeeze on his borrowers? If the servicer fails to do so, for the servicer's convenience, has the investor grounds for a lawsuit?
realty-based lawyer, yes, very true - the serviced can just decide to freeze the rate - and probably send a nice letter telling the homeowner what a great servicer they are!
Avoiding cramdowns is probably part of the motivation, but I suspect many people will walk even with no reset.
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
-if- there is no change and no intervention then #8 takes on new importance: 8) There will be no lawsuits from investors (other than lawsuits that would have happened anyway).
I suggest that there will be substitution going on. Rather than sue over reduced returns the investors will sue over due diligence. Face it, there will be millions of revealed instances of false affirmations at every level from borrower to insurer. It may very well be that there is no standing regards returns and/or mods but sure as shootin' cram downs are coming as fraud is exposed.
..we do not believe that sustainable banking principles are being properly followed in the case of excessive focus on risky lending (such as over-emphasis of sub-prime mortgages)
Defining and Assessing Sustainability Risk
We define sustainability risk as the dual risk of (1) not meeting the expectations of some constituencies without unduly harming others social and economic welfare and (2) not meeting the needs of the present without unduly compromising the ability of future generations to meet their own needs. Sustainable banking is about making this happen. Areas of concern are human rights, securing life with dignity, preserving the environment and its biodiversity and being mindful of natural resources and the climate. The overall context for our assessment of managing sustainability risk is circumscribed by widely accepted public documents, such as (1) the Collevecchio Declaration of January 2003 spelling out the principles of sustainable banking now adopted by over 200 financial institutions worldwide, (2) the Equator Principles for managing environmental and social issues in project finance, adopted in June 2003 and embraced in time by over 50 banks or (3) the United Nations Principles for Responsible Investment of 2006, signed by over 180 institutions.
DBRS looks at sustainability risk in banking from the following angles:
(1) Business opportunities: The principles of sustainable banking should underpin the following key areas of activity of financial institutions:
Wholesale banking (i.e., corporate banking, project finance, trade finance).
Retail banking (i.e., mortgages, consumer credit, savings).
Private banking and asset management.
Financial and strategic investments.
Insurance.
In this context, we do not believe that sustainable banking principles are being properly followed in the case of excessive focus on risky lending (such as over-emphasis of sub-prime mortgages), financing ecologically or socially controversial projects or paying lip service to lofty goals while turning the institution into an agent of heightened risk in order to maximize short-term profitability.
(2) Governance and management: Our aim is to be able to integrate it into our overall risk management analysis, which is a key area underpinning DBRSs bank ratings. We consider sustainability risk as an integral component of a banks overall risk governance and management policies and processes, related to a large extent to its public image, franchise value and competitive position, but potentially also having direct financial consequences (for example, important categories of investors shunning a specific institution in light of its environmental or social governance deficiencies).
(3) Internal organization: We look at banks as at any business following sound social and environmental policies and practices. For example, the concern and practical steps taken by bank
Didn't we beat this LTV, CLTV and home equity aspect to death 2 posts ago and came to some conclusion which was:
Most subprime first loans weren't 97% LTV, they didn't offer those - so there AREN'T too many 97% or higher LTVs ( CLTV's yes not NOT LTVs) out there, AT ORIGINATION.
Agreed that few subprime borrowers have 3% or more equity ( that a foreclosure could strip them out off ) but that's because of second loans and so forth which has pushed their Cltv above 97% and equity less than 3% and even underwater.
SO from that I derive:
The guidelines for fast tracking eligibility are for 97% or higher LTV OR /AND inelibility to secure a FHA Secure loan. My read is that most people that do qualify will do because of the second clause NOT the first clause.
Establishing eligibility under the second clause ( unable to get a FHA secure ) is not as straightforward and will cost more time and money for the servicer AND open them up to lawsuits if they don't do it properly.
Other reasons for lawsuits have also
been discussed at
After reviewing the pool's assets, the firm issued a report with several recommendations that we, as the SBA Board of Trustees, enacted last Tuesday. In the simplest terms, we supported a plan to isolate any distressed assets into a secure fund which will be allowed to mature and increase in value over time. The rest of the assets are of a high-grade money market quality and will be placed in a fund that is open to current and new investors. We also voted to create relationships with financial institutions to provide loans to investors seeking immediate access to capital.
I just read that link (again at naked cap) and got this;
In light of current market conditions including home value trends, it appears that key elements of any net present value determination (such as default rates with or without a modification, and loss severities) cannot be accurately predicted based on historic data
Key elements in this context will be valuing the property and thereby using comps, which will be outdated in net present determinations, as the comps have all crashed in a spiral -- if you can find a current sale within the last year! The latest comp within a one mile radius may be VERY hard to find for this Key Element of a refi/bailout!
Weird World Stories Linked To SubPrime: UK institutions, meanwhile, have been trying to reassure investors after two banks, Deutsche and UBS, invoked clauses allowing property funds up to 12 months to liquidate assets to meet redemptions. This would force investors to wait for their cash.
A spokesman for Norwich Property Trust, which is managed by Aviva-owned Morley, said despite reports that it could suspend investor withdrawals from the £3.6bn fund no decision had yet been taken.
Morley has already started selling buildings to cover redemptions in its £1bn pooled pension fund, which is 100pc directly invested in bricks and mortar.
Scottish Widows, the insurance and fund management arm of British bank Lloyds TSB, said it had sufficient liquidity to cover redemptions from its SWIP Property Trust.
Unlike other funds, the trust cannot postpone redemptions. However, it can borrow up to 10pc of the value of the fund to meet them in cash. A spokesman said: "We're not in a position where we need to draw on this facility."
New Star, meanwhile, said it had seen net outflows since July of just over 5pc of its UK property fund but had plenty of cash to meet redemptions. Before the withdrawals, the fund had 25pc of its value in cash and shares. This has been reduced to 20pc. So far, the asset manager has not been required to put its assets on the market.
Hermes, whose property director Rupert Clarke was yesterday made chief executive, has said it will have adequate cash to meet redemptions. It has brought almost £500m to the market since September, including Princes Square shopping centre in Glasgow which sold last month for more than £100m. However, part of its shopping centre portfolio which includes its stake in Bluewater has yet to sell.
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
We probably disagree but I'd say; "The biggest concern for the investors is that it has become socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers."
Casey Serin paid no taxes last year. I paid an extra Lexus to the Feds and an extra Camry to California for my real estate adventures. The moral hazard is already built in. It will be impossible to re-establish responsibility as you and I remember it.
I had a client, twenty-something decide after the work agreed upon in advance for less than the not-to-exceed cost was too expensive. I've done this for a long time. I immediately wrote the entire job to zero including parts and travel. Cut my loses and move on with no strings. He continued to lay into me for more work and satisfaction. He wouldn't even stop abusing me and my company after I said 'what part of 'yes' didn't you understand?" What he agreed to in advance didn't matter. What he got was not important. The sense of entitlement, what he thought he wanted, was bewildering.
I seriously believe you and Tanta are overestimating the compliance factor for this new generation of borrowers.
A new dawn for German hedge fund investment
by Kris Devasabai 1 June 2007
HSBC Trinkaus has designed and launched a unique investment vehicle that gives German institutions greater flexibility to invest in hedge funds.
The structure which has been established as a German spezialfond was created for Nordrheinische Aerzteversorgung (NAEV), the pension fund for doctors in the North Rhine area.
The vehicle is unique in that it is not subject to the restrictions regarding target funds that bind existing fund of hedge funds in Germany, nor the 50 per cent limit usually exercised on investments in other hedge funds.
By utilising the new vehicle, NAEV will also sidestep the one per cent restriction applied to investments in single hedge funds by institutional investors under the German Federal State Insurance Supervision rules.
This product, which has been initiated for a tax-exempted investor, is unique in Germany, said Gina Slotosch, head of business development, custody services, at HSBC Trinkaus & Burkhardt, which will provide a full range of services for the new spezialfond, including portfolio and risk management and Master KAG as well as Depotbank services. We are not only perfectly positioned to provide the services to NAEV but we also have the know-how to support our clients with the process of selecting appropriate hedge funds, added Slotosch.
Commenting on the factors that drove NAEV to work with HSBC Trinkaus to develop the new structure, Professor Dr. Lepelmeier, managing director of NAEV, said: It was of great importance to us to find a regulated German solution as a platform for our hedge fund investment which simplifies the investment in foreign hedge funds and ensures consolidated reporting. Furthermore, it was a particular concern for us to strengthen the investment location in Germany. By initiating this model we have contributed to this development.
While pension funds have been keen to embrace alternative asset classes as part of liability driven investment strategies, local regulations and reporting rules have stunted the flow of German assets into the hedge fund industry. In many cases, investors have sought to gain access to hedge funds by way of certificates and other structured products issued by investment banks.
If it finds favour with other institutional investors, the new spezialfond structure, which has been issued by HSBC Trinkaus fund administration or Master KAG subsidiary INKA, could spark a wave of direct hedge fund investment in Germany.
Re: From 1933 to 1945 the Hitler salute was the common German greeting. Heil Hitler! ("Hail to Hitler!")[3] was used when directly addressing a citizen, or, in the Waffen-SS, a higher ranking officer. Hitler himself preferred to be addressed with "Heil, mein Führer!" (Hail, my Leader) or simply "Heil!", as address
"allowing property funds up to 12 months to liquidate assets to meet redemptions. This would force investors to wait for their cash."
That one has me rolling on the floor, laughing. Wait for WHAT cash? What it allows is for the fund managers to take 12 months to get their affairs in order, get out of town and cover all tracks. They should call it the 'headstart clause".
US Mercer has said it will "vigorously" defend a $1.8bn law suit by the State of Alaska, which alleges the actuary made mistakes in calculating the state pension plan's expected liabilities.
The lawsuit was filled in Alaska Superior Court yesterday by Attorney General Talis Colberg and the Department of Law, on behalf of Alaskas Public Employees Retirement System (PERS) and Teachers Retirement System (TRS) pension plans.
The suit seeks more than $1.8bn in damages from Mercer for alleged errors in calculating the pension plans expected liabilities, including mistaken actuarial assumptions and methods about future health care costs, as well as basic mathematical and technical errors.
Colberg noted: Just like any other professional, Mercer was required to use due care, skill and diligence in advising the state how to keep its retirement plans financially sound.
When it came to calculating expected health care costs for the plans, and in other areas, Mercer failed to meet those standards and caused a significant part of the current unfunded liability of the plans.
Annette Kreitzer, commissioner, Department of Administration, and a trustee of the Alaska Retirement Management Board, added: This is an important matter not only for the State of Alaska, but also for the 161 other political subdivision employers who participate in PERS and the 58 school district employers who participate in TRS, all of whom were severely harmed by Mercers errors.
The unfunded liability of the PERS and TRS plans as of 30 June 2006, totalled approximately $8.4bn.
Mercer has said in a statement: Mercer stands behind the quality of its actuarial work for the State of Alaska and will defend its interests vigorously.
It added the state's funding issues were caused by a number of economic factors, including skyrocketing medical costs, a downturn in the capital markets and employees retiring earlier and living longer than anticipated.
Mercer said, in 2002, it advised the state to significantly increase its contributions to the retirement systems.
The state is now attempting to hold Mercer accountable for these economic trends, over which our firm has no control, the statement said
I'm not sure I get this:
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
Is the meaning of "becomes socially acceptable" here just "customary" or "regular, common and habituated" ...like smoking pot for medicinal purposes (not like the respectable doctor who prefers his gin and tonic)?
I know I'm missing something here. Izit that 'Hop Skip Jump' really is group therapy for the disenfranchised sonot subprime "middle class"? I just don't think the therapists have that much upstairs, you know?
US - An internal Wilshire memo sent to all its senior consultants has warned them of potential legal pitfalls for clients when advising on the suitability of liability driven investment (LDI) products in the US.
The concerns centred on an advisory opinion given by the Department of Labor (DOL) in October 2006.
It was sought by Donald Myers of ReedSmith on behalf of JPMorgan Chase Bank and asked for clarification on whether it was prudent for a fiduciary to consider LDI under the Employee Retirement Income Security Act (ERISA).
Under ERISA, investment strategies must primarily benefit the pension plan. As LDI strategies seek to reduce pension fund volatility, it could be argued they could also benefit plan sponsors by reducing volatility on their overall balance sheet.
The DOL advisory opinion subsequently approved the use of LDI as described in the request, however, the Wilshire memo raised concerns LDI marketers didnt recognise the limits of the advisory opinion.
Dimitry Mindlin, managing director at Wilshire, told Global Pensions: It bothered me a great deal when many LDI marketers told us at conferences and presentations that this advisory opinion was the final word. I read the opinion and I found it inconclusive. Although I am not an attorney, I believe that if this ever ended up in a court of law, they would not find it very helpful.
One senior executive from an American asset manager, who asked not to be named, backed Mindlin. He noted: The advisory opinion does not address the significant potential conflict between two goals maximising the probability that the plans funding objective will be met by a particular investment strategy in the long run and reducing volatility of the plans funded status on an annual basis.
He said the first goal was clearly prudent under section 404 of ERISA, but the second goal was problematic if it conflicted with the first goal. He suggested the argument the benefit to the plan sponsor was more than incidental could be applied if, in a bid to reduce annual volatility, it adopted a strategy that reduced the probability of funding the plan in the long run.
Marc Van Allen, a partner and member of the ERISA litigation group at law firm Jenner & Block, said: From an ERISA fiduciary point of view, [when] looking to implement LDI, pension funds have to satisfy their twin duties; duty of loyalty and duty of care. The tricky part can be separating the benefits to the plan from the benefits to the plan sponsors balance sheet.
He said the ERISA fiduciary needed to be able to demonstrate they were principally focusing on the benefits of the plan. If there then turned out to be some sort of incidental benefit to the plan sponsor, then thats OK, he said.
Same anons ? but anyway, if you post something OT, then the customary style is :
Briefly state what the OT is about - and provide the link to the fuller article.
Above all, say what YOU think about it.
It would be better if you signed in with SOME, any handle. Too many anons, you know.. Who knows - somebody might actually want to pick up on your point and develop it and being able to reference the original author and post helps.
More on pension madness and the smoking gun behind subprime bailout (why do you think Florida is holding so many junk bonds in pension pools):
NIRS probes US public pensions
by Andrew Sheen 12 October 2007
US - The newly formed National Institute on Retirement Security (NIRS) has announced the appointment of Beth Almeida, to act as its first executive director. She will take up this position in early November.
NIRS was founded earlier this year as a research partnership between the USs largest public sector pensions bodies to conduct pure research and undertake education in the effects of defined benefit (DB) pension schemes in the US.
Almeida said: There is a need to examine pensions and their retirement security role, as well as the impacts on the financial markets, the economy and the recruitment and retention of public sector workers.
The bodies that make up NIRS the Council of Institutional Investors (CII), the National Association of State Retirement Administrators (NASRA) and the National Council on Teacher Retirement (NCTR) represent pension funds with combined assets of US$7tn.
A NIRS spokesperson told Global Pensions the organisation was not a lobby-group, but rather would investigate the social and economic effects that this level of investment exerted. She said, until now, there had been a lack of quantifiable research on this subject.
Almeida was previously assistant director for strategic resources and senior economist at the International Association of Machinists (IAM) and Aerospace Workers, where she was pivotal in transitioning 40,000 airline workers into the IAW DB scheme.
What I think is that this is driven by accounting. Lenders are concerned about capital deficiencies, so are engaged in a multi-front battle to preserve (the appearance of) unchanged principal and value (not, as you know, the same thing). So they don't adjust value: they use the original appraisal, without so much as a drive-by or BPO, even though quite widely publicized indices show that's false. And they resist any write-down (cramdown) of principal, even though the actual amount they can expect to realize from this intransigence is minimal, as Tanta, MOM and I agreed earlier (can't find the cite, my apologies).
Just another boglight suggesting trouble in the banking industry....
Once a few news stories hit about nice middle class families who had no choice but to make the wise financial decision to walk away from an underwater mortgage...and well, it was tough but it worked out allright in the end thanks to support from fellow church members and the family...well then the keys will start jingling into bank mail boxes all across the country. This sort of notion enters the national zeitgeist virally. It can't be stopped. Just check back in 28 days.
Maybe Anonymous is subtly trying to tell y'all to keep your eye on the big picture. Rules will have to be re-written as banking and pension systems fail. The freeze is a misdirection ploy as well as an attempt to front-run any congressional action with the goal of buying time. Back room deals will be made to immunize pension systems (among other investment pools) by segregating assets away from the ABS, CDO and SIV viruses. Beware of any congressional proposals that have the word 'reform' in the title.
"The goal of this plan is get homeowners to pick up the phone."
For the thousandth time, WHY WOULD ANYONE WANT TO PICK UP THE PHONE?!?!? Be serious guys. If you're underwater on a massive depreciating asset that you have no money invested in, what is the actual motivation to pick up the phone? Bueller?
If anyone can actually give a good answer to this, then maybe I'll consider that this plan was something other than politics, or perhaps a mechanism to hide fictitious capital losses for a while longer. Until then, consider me unconvinced.
DT - dont forget how stupid people were to get into this game late. Many of them will make yet another stupid decision to keep the home they wanted so badly. One reason (aside from all others) is not to lose face. Until you are on the street, no one knows your financial condition. Keep the dream alive! har.....
There are two points I think important which I've not seen covered. (Remarkably so, since it seems every bit of minutea has been discussed ad naseum.)
1) "Loan must be... in securitized pools"
A big purpose of the plan was to provide the cover of "industry standard practice" to Servicers so that they can do these mod's without lawsuits from the bond holders for failing to do the usual case-by-case investigation and review.
2) "Servicer may make following presumptions... borrower is willing to pay under the modification based on... the payment of 2 payments under the modified loan"
Let's see, apparently most of these sub-prime folk don't answer their phone or read their mail. I reckon the Servicers have learned by now these borrowers become despondent or indignant and simply stop making payments after the first rate hike. So, what's the solution? Don't rock the boat, send them some mail that won't get read informing them of the non-change in their payment; then hope the folks just keep making their payments and voila' loan successfully mod'ed. What's not to like?
So, where CR has said this is plan is for investors' benefit more than borrowers', I don't disagree. But I think moreso it is for Servicers' benefit more than investors'. And who was it that was at the table with Paulson? Countrywide and WaMu, two big Servicers that were completely free to do all of these things with their held-for-investment pool anyway they'd like. So why would they care about pool investors?
I think that reality-based lawyer got it 100% correct - it is all about keeping the number of NPA down:
Reducing to market values the principal balance of the loans on their balance sheets, directly or indirectly, would probably be a cost they're unwilling to bear.
realty-based lawyer | 12.08.07 - 8:51 pm | #
CR -
I agree that underwater borrowers may well walk.
What I think is that this is driven by accounting. Lenders are concerned about capital deficiencies, so are engaged in a multi-front battle to preserve (the appearance of) unchanged principal and value (not, as you know, the same thing). So they don't adjust value: they use the original appraisal, without so much as a drive-by or BPO, even though quite widely publicized indices show that's false. And they resist any write-down (cramdown) of principal, even though the actual amount they can expect to realize from this intransigence is minimal
The question is:
For how long this will look as if NPA has "stabelized" ?
So, where CR has said this is plan is for investors' benefit more than borrowers', I don't disagree. But I think moreso it is for Servicers' benefit more than investors'.
I agree wholeheartedly (its a stretch to call the ASF representative of investor interests) and I hope it blows up in the servicer's faces - by investor ( and who knows, borrowers and THAT would be irony ) lawsuits.
"10) This is not a bailout. There is no federal money involved."
Is it defined as a bailout only if federal money is invovled?
What if I, a new home buyer, must pay more for a home (because of reduced downward pressure on prices)? Or pay a higher interest rate as a result of this goverment intervention?
Somehow, the government intervention is making one party pay more, and another party pay less. Whoever the other party is remains to be seen. But that's what i would call a bailout. Doesn't just have to come from federal tax money.
And when the governments asks you to do something and you know that if you don't comply, things will be worse for you, it's not really voluntary.
The real purpose of this plan is to push the economic impact and ensuing headlines past Bush's term in office. Bush wants to preserve what little legacy he can, and certainly not be known as the president who shepherded the country into economic ruin. I have a hunch most Republicans want to lose the next election. The next incumbent will take the economic slump in the chin, as well as the blame. Then the Republicans can come charging in a la FDR to save the day, and probably stay there for 20 years. Hint: Bloomberg isn't running this time because he knows this.
Bonus points: If the next Hoover is a woman or black, Americans won't vote for another non-white non-male for 50 years.
You're more optimistic than Paulson himself. He said litigation should be manageable'; he has good reason to hedge there. Briefly, master servicing contracts differ. Not all of them contain the wording in the Bear Stearns prospectus you've quoted; some contracts specifically prohibit interest rate modifications; others specifically require loan-by-loan analysis before modification. Even with the seemingly clear Bear contract, realize thatdefault' (as in reasonably foreseeable') is a term of art, and under FFIEC and BMA it means four or more months delinquent. A lawyer can argue that a period of delinquency must elapse before default is foreseeable. Another can argue the opposite. The point is not which lawyer is right in the abstract, but rather that servicers face uncertainty about how a court will rule. The ASF claiming that a servicer can proactively modify a loan could indeed be interpreted as tortious interference with a private contract. And that is why the AFS document explicitly states that they are not offering a legal opinion, merelyguidelines'. Will a bondholder sue? Who knows. Could a bondholder sue: yes, even with the Bear Stearns contract.
IANAL, but I do wonder if anyone actually would have standing to sue. The servicers' contracts aren't with the holders of the CDOs, they're with the pool managers.
But Steve, you are assuming that anyone wants to sue over such things as "reasonably forseeable" standards.
Now, I am aware that there are people who will sue anyone any time whenever they think any rule has been broken. It does not matter to these people that they were not harmed, or the "harm" is trivial compared to the costs of the suit. They sue on principle. While I think this kind of plaintiff mostly hangs out in PTAs and condo boards, I'm sure some of them own MBS classes.
Professional investors? Good heavens, as far as I can tell they're thrilled that servicers are being "guided" by the ASF to get somewhat creative with the standard. The ASF is professional investors.
PSAs for multi-class REMICs are complex enough that anyone can sue anyone for about 100 reasons, for doing something, for doing nothing, or for some combination thereof. But that doesn't automatically supply anyone with a motive for suing.
I suspect Paulson thinks suits are "manageable" because he is aware that it will be harder than a lot of people think to show that the securities are harmed.
CR: I agree with you and support this plan, despite its many deficiencies.
The plan makes sense for the interests of a huge segment of the population, of whom I am one; that is people who have substantial equity in their homes, but even more substantial equity in other assets-stocks, bonds and privately-held businesses. Everyone needs to remember that although it is substantial, home equity still represents only a small part of total household equity. We don't really care if fools with 110 % LTV loans in some development on the edge of the desert lose homes they should never have bought. Nor do we care if homebuilders, who represent a tiny fraction of the stock market all go bust. We care about our home equity, but most of us bought before 2002 with significant down payments, and can ride out a fall in prices from levels that we recognized as inflated. Many of us live in non-bubble areas and may not see much more than a 10 % correction anyway.
So, what do we care about?
Limiting the damage to the financial system and therefore limiting any losses to our stock portfolios, which are largely in solid companies who are actually doing quite well in the global market, if not in the US.
Making sure that foreclosures are kept out of the old, leafy inner-ring suburbs where most of us live.
To the extent this plan will help with those 2 goals, and I think it will, it makes sense.
The servicers' contracts aren't with the holders of the CDOs, they're with the pool managers.
That's another myth, actually.
This is not about CDOs, it's about ABS/MBS/REMICs.
CDOs are not backed by pools of mortgage loans that are serviced under a PSA. They are backed by (among other things) tranches of many different ABS/MBS/REMICs.
There are "high grade" CDOs and "mezzanine" CDOs (and what Atrios would call "shitpile" CDOs). The high-grade CDOs are backed by senior notes of a bunch of diffferent underlying MBS. The mezz are backed by junior notes. You could easily have one CDO that owns notes from 100 different REMICs. That's 100 different PSAs.
So the "senior notes" of a mezz CDO are priority cash-flows on bonds that are themselves first-loss (low priority) cash flows of the underlying security.
So all this hoo-haw I keep reading about the interests of the "senior classes" or the "subordinate classes" is pretty confused in re CDOs. There are plenty of senior CDO classes that will suffer unless the action helps the junior MBS classes.
In any case, at no time is a CDO manager a party to a PSA. The CDO is, legally and practically, a contract entered into subsequent to the original establishment of the ABS (tranches of which the CDO is formed to buy). A CDO manager is in the exact same position as any other buyer of the notes issued under the original REMIC prospectus.
Derivatives, derivatives. They're everywhere, and they don't have the same contractual interests that the original parties have. It does not matter in the slightest what the CDO prospectus said about your priority in the CDO cashflow: if the CDO is backed by mezzanine bonds from REMICs, you did not just become a "senior noteholder" in the REMIC.
CA observes that investors worry that it'll become socially acceptable for middle-class, prime borrowers to walk away from their underwater homes. Robert Coté says he did business with a 20something who felt entitled to keep getting services after the contract was satisfied (at least, that's my interpretation of that hurredly written post).
On the other hand, we get Geoff saying, "Many of them will make yet another stupid decision to keep the home they wanted so badly." And Darth Toll saying, "If you're underwater on a massive depreciating asset that you have no money invested in, what is the actual motivation to pick up the phone?"
My answer to that question is simply: "Because I promised to." We sign promissory notes in which we make promises.
There are other motivations to pick up the phone, such as preventing the cost and disruption (especially with school-age children) of moving.
But let's focus on that one issue of personal honor. Is it silly and old-fashioned to keep paying your mortgage when you're underwater? Yes, it's as silly as paying a car loan that's underwater, and as old-fashioned as remaining monogamous after uttering your marriage vows.
So ... is it a generational thing? Do the over-40s take their promises more seriously?
Queequeg. I am an over 40 who takes his commitments seriously. Married to the same woman for almost 25 years (God, sometimes it seems like only 5 years). I would stay in a house I contracted to buy as long as I could make the payments, regardless of being above or below water and regardless of whether I expected the price to rise or fall. If I had a mortgage that was at the kind of usorious rates that some sub-primes appear to be, I would be negotiating with the lender to get a lower rate so as to ensure that I could stay and meet my commitments. That said, I wouldn't generalize too much- I think there are under 40s who keep commitments and over 40s who don't
I am still unconvinced as to the purpose of this plan which helps so few. Particularly in view of the following article. I have quoted the first paragraph of the article and find it very persuasive. I would love hear comments from CR, Tanta and bloggers.
Personally, I think that there is a lot more going on then we are being told.
"The Government and the market are trying to boil this down to a sub-prime thing, especially with all constant talk of resets. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called The Mortgage Meltdown because many different exotic loan types are imploding currently belonging to what lenders considered qualified or prime borrowers. This will continue to worsen over the next few of years. When prime loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have Round 2′. It is not that far away."
What many fail to do is see this housing bust in the context of a generalized decline. I would agree that it seems to be a trigger and part of the larger problem that can be described as debt overload. This band-aid plan seems to assume a vibrant growing economy and fighting the present battle. Wait till the jobloss picture begins sour in '08. The foreclosure tsunami will move across the established suburbs so fast the politicians won't have enough time to react.
Promises? We're talking about people who have participated in fraud, and little wonder that they do not wish to discuss "modifications," to have their admissions reduced to writing and put into a file subject to discovery.
Look, in real terms this program will only help at the margins. The key is what is the psychological effect. In the end, markets, whether stock, real estate or any other, are influenced as much by emotion and perception as by reality. So we need to wait and see.
In any event, what plan do the detractors have, other than let everything crash and damn the guilty and innocent alike?
"So all this hoo-haw I keep reading about the interests of the "senior classes" or the "subordinate classes" is pretty confused in re CDOs. There are plenty of senior CDO classes that will suffer unless the action helps the junior MBS classes."
Interestingly enough, the people I've spoken to and reports I've read suggest that (ceteris paribus) the ASF plan favours junior investors over senior investors (who are almost always controlling creditors). Most obviously by reducing the foreclosure rate, but also because modifications undermine triggers that divert cashflows to the senior investors. From S&P: "Although loan modifications that extend the mortgages fixed rate period may result in lower defaults, the reduction in excess spread may offset the benefits of lower defaults, resulting in diminished investor protection. Also, as noted above, should a borrower redefault on the modified loan, the losses may be greater to the rated securities. Not only would foreclosure timelines be extended beyond initial expectations, but also the potential impact on transaction mechanisms (such as performance triggers, principal distribution amount calculations, step-down dates) may result in higher losses to certain classes in the rated securitisation."
Two things seem to flow from this:
a) This "class warfare" will be the source of most of the lawsuits
b) Larger write downs on high grade CDOs of ABS than otherwise.
Of course, the extent to which loan modifications can affect MBS is limited by the transaction documents, so it might not be a big enough impact to materially hit super senior tranches.
Also, the ASF explicitly says it is looking at the trigger issue and will be issuing guidance.
I'm seeing many quibbles with the points of your post, so I'd just like to counter that with my appreciation for the way you have attempted to correct much of the current spin surrounding the mortgage rate freeze plan. Good job. It's too bad an amateurish outfit like the AP doesn't have as much journalistic integrity as you do.
Hi! I work at CurrentForeclosures.com a foreclosures site. This article is a good read. Informative and helpful. I think not all foreclosures cases can automatically qualify for government aid. I guess the applicants applying for financial aid (or negotiations for reduction of rates) are still subject for review.
It is good to hear that the government has sit up, has noticed the plight of affected homeowners and the problem of the increasing trend in foreclosure incidents, and has initiated a solution which could alleviate the despondency of the situation. At the moment, while it may not be the best long term solution, but it just could be the right immediate alternative. Although many fear that government efforts are more geared towards the troubled homeowners, the move to coordinate a concerted effort between the lenders and homeowners is still a welcome move.
I absolutely agree with your points on "The Freeze." But I'd like to remind folks that government intervention involves more than "The Freeze." In the same press conferences they also talk about mortgage revenue bonds and FHA, which can involve the taxpayer.
All good points. But the "ten things" seem to be eleven things (it goes to 11?). And the countdown is a bit garbled.
But thanks for doing the thinking
10) This is not a bailout. There is no federal money involved.
With the freeze... no.
but many of us are concerned about the second part that Paulson is discussing... allowing municipalities to buy up these mortgages using tax free bonds.
Since they're tax free, that IS Federal money in a way.
it's also a garbage load of public money (city,state,federal)
I worry that this is the first step towards the govt buying all the toxic garbage, and another record bonus year for wall street.
crony capitalism.
uncle festus - It's One More!
The rate freeze is not a "bailout" -- you're correct. But everyone's forgetting that Paulson is also pushing for municipal bonds to be used to fund borrower refinancing.
The rate freeze is getting the attention, but the really significant part of this deal is likely here -- and it's being missed while everyone's dazzled with the rate freeze details.
I view this as part of one huge relief effort, which is why I'm still calling it a bailout effort.
mort_fin, agreed. FHA Secure is government involvement.
Best Wishes,
Just curious. Who pays for 1.888.995.HOPE hotline and hopenow website?
I think there's another reason up there on the list. It gets borrowers (or as Jackson likes to call them, borriors) to call and shoehorns many into FHA, HUD, & other government programs, bailing out more loans onto our government than would otherwise end up there. It's burden shifting at the worst possible time, since most of these loans will be way underwater & fail soon anyhow.
Subprime ScapeGoat & The Real Liquidity Crisis
Keeping watch on investment funds
December 10, 2007
Topic Galleries -- South Florida Sun-Sentinel.com
After reviewing the pool's assets, the firm issued a report with several recommendations that we, as the SBA Board of Trustees, enacted last Tuesday. In the simplest terms, we supported a plan to isolate any distressed assets into a secure fund which will be allowed to mature and increase in value over time. The rest of the assets are of a high-grade money market quality and will be placed in a fund that is open to current and new investors. We also voted to create relationships with financial institutions to provide loans to investors seeking immediate access to capital.
In passing this reform, we had three guiding principles. Our primary goal was to adopt a plan that would provide the best opportunity for investors to ultimately retrieve every cent they originally placed in the fund. We also knew that it was essential for investors to have access to their assets as soon as possible, so that local entities could cover immediate needs such as issuing payroll for teachers and other public servants. Additionally, we understood the importance of restoring confidence in the new fund, which will be managed by independent financial asset managers and rated like many other money market funds.
The Local Government Investment Pool is a short-term investment pool used by a number of counties, school boards, and other government entities in Florida. Withdrawals escalated at a significant pace over the past few weeks, decreasing the pool's original balance of $27 billion to $14 billion. Whether or not this "run on the bank" was fueled by legitimate concerns, we immediately acted to temporarily suspend withdrawals and hire a world-renowned asset management firm to conduct a thorough review of the LGIP and recommend a proposal with the best chance at preserving investors' principal.
Check out Ohio and how FHA, Freddies, etc will connect to local munis, which are obviously Fed funds, so Paulson and company are full of crap!
The page cannot be found
I might add, the illiquidity in local munis will be of interest as cash flow is impacted by defaults!
How did they "isolate any distressed assets into a secure fund"? Who bought that fund?
uncle festus, yeah, eleven, I fixed the numbering - hopefully right this time - I've been reading so many takes on the plan that my eyes have glazed over. I just tried to hit the high (low?) points.
P. Jackson, I agree there is much more than the Paulson plan - and there will probably be much more proposed (and possibly enacted) next year when people realize this didn't help.
Best Wishes.
The "first" number #5 says:
Of course the level was set at 97% or greater LTV because the industry recognizes that anyone with less than 3% equity cannot refinance. For those with a 96% LTV mortgage - no worries - just wait a few months and the value will probably decline enough to put you in the plan.
I thought that part of the "fast track" notion in the plan was that the original value would be used to calculate the LTV ...
I guess it doesn't really matter much in the end though... These people are screwed (albeit, mostly from their own doing.)
have to point this out from the link:
The program offers:
Minimum borrower contribution
LTVs up to 100 percent
Flexibility on credit histories and nontraditional credit accepted
Section 8 homeownership vouchers accepted as income
Community Solutions option with additional flexibility for teachers, police officers, firefighters and health care workers
Great, they want to keep the housing bubble and make sure people have homes, but if that burden is placed on tax payers, in the form of higher tax subsidies, then this bank bailout better come with full disclosure!
Great points CR!
By having a standard, the guideline can be publicized. The goal of this plan is get homeowners to pick up the phone.
Too bad there's not a blog out there as dedicated to PR (Publicized Risk) as this one is to CR (Calculated Risk).
My guess is THAT blog would be having a field day heading into next year's presidential election, but hey, maybe that's just me.
CR, i'm not sure number 5 is stated very clearly. you are not excluded from the fast track if you have an LTV below 97. you're still segment 2 if you have an 80 LTV and are not FHASecure eligible for a different reason.
I'd also like to add that the plan is, in part, an effort to keep JoeCheapChardony feeling like help is coming so he keeps spending during the holidays.
As I was out walking the dog a bit ago, I thought of a metaphor for the current situation and "The Plan". Nothing that has been posted here really changes my thinking...
A house is burning (i.e. the economy), a fire truck arrives. The fireman (POTUS, FRB, UST, ASF, CFC, etc) all look vaguely familiar. They lay one hose and discover that the hydrant is dry (no liquidity). So they each grab a handy bucket of water (plans & press releases) and toss it against the flames (economy going south) while press photographers snap happy pictures for the folks out in MSM land.
The house still burns, but they might have saved the front door (if they are lucky).
NY Times -Like Subprime Mortgages, Some Construction Loans Are Delinquent
- Banks with more than $10 billion in assets have lower concentrations of construction loans now than they did at the end of 1989. But banks with less than that amount of assets are more than twice as dependent on construction loans as they were then...
"I thik there will be a wave of bank failures in the not-too-distant future although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly."
OFF THE CHARTS; Like Subprime Mortgages, Some Construction Loans Are Delinquent - NY Times
It is not a bailout but more like the day after pill taken a week later.
FFDIC,
I've been tripping-out this evening on money supply data... one neat little datum from the NYTimes story is that.. the total volume of construction loans on the banks' books is about $616 billion.
This is almost as much as the total amount of US currency in circulation which is around $700 - $800 billion.
Even though I feel like the fractional reserve system is sensible... I'll never cease to be weirded-out by it.
Don't get me started on the notional amounts of derivatives outstanding..
Might the ABX be used as a measure of the success of this plan? It stabilized about the third week in November when talk of 'assistance' began. If there is no general belief that a significant number of foreclosures will be prevented by this, then there will be no ongoing stabilizing effect in markets for securities that derive from mortgages. And if there is that belief, markets will stabilize to some degree.
eli,
That number (construction loans) looks to be in the ballpark; maybe even just a bit low. Did they lump residential and nonresidential together or is that supposed to be only nonresidential (and presumably private, non-government)?
wally,
From what I can tell.. they are including single-family homes, condos, commercial.. everything.
Reason # 12 (via naked capitalism) -- Further Confirmation of the Political Motivations for the Subprime Rescue Plan
Further Confirmation of the Political Motivations for the Subprime Rescue Plan « naked capitalism
In a piece entitled, "Bankers Hope Bush Subprime Plan Will Scuttle House Bill," CongressDaily reports that "the mortgage industry hopes a White House plan designed to aid subprime borrowers at risk of losing their houses will help scuttle congressional efforts to refashion mortgages through the bankruptcy code. . . The announcement comes as Congress moves ahead with plans to make it easier for bankruptcy judges to refashion home mortgages that are on the verge of foreclosure -- legislation bitterly opposed by the housing industry. Bankers said they hope to use the White House approach as a prime example of why the bankruptcy legislation should not move forward, emphasizing that a voluntary effort can cover many of the estimated 2 million subprime loans that are scheduled to reset to higher rates over the next two years."
Bankers evidently dislike the bankruptcy proposals because they give borrowers some real power: they can write down the mortgage to the value of the property, and they can rewrite the mortgage into a fixed instrument. "Voluntary," according to the banks, is much better.
Of course, if the bankruptcy laws changed, the negotiations outside bankruptcy would change too. If families had the option to declare bankruptcy and cut the mortgage down to the size of the property, some mortgage servicers might start returning homeowner's phone calls and talking over other options.
Bankruptcy can't fix the whole subprime problem, and it is not a perfect solution even for those who would be helped. Families have to be in really bad shape to go bankrupt, and many will resist either because of the stigma or because they won't qualify for relief. But bankruptcy could help some of the families hit hardest. It would also move this crisis through the system faster. If a bankruptcy court determines that the family can't afford the home even with a decent mortgage, then they will have to give it up. A bankruptcy amendment will not put off the day of reckoning. It will help move toward a more stable (and more realistic) housing market faster.
So the administration's subprime mortgage plan is the bank lobby's dream. "Totally will sandbag the bankruptcy stuff." And totally sandbag American homeowners and would be homeowners.
I know he is the Decider but does this make Bush The Freezer? Or is that Paulson?
In hindsight, someone will decide to market this differently.
Why exactly is not collecting taxes due on defaulted and forgiven loans not a taxpayer subsidy? Sorry, ignore that bit of rhetoric. I have a serious objection to only one of the eleven points:
7). These are not teaser rates.
I submit that these are teaser rates as their rate, terms, length,qualifying, fees, etc. were premised upon refinancing after a period of time that was premised upon a predetermined reset date. The act of refinancing would have generated fees that would offset the rates proffered. Many of these loans would never have been financed were they offered as being likely to last 6-7 years rather than 2-3 years. The cure would have been a combination of higher fees, higher rates and higher qualification standards. The "teaser" rates were but one line segment of the triangulation. when it is stretched without changing the other two legs the answer id undeniably one of an artificially low return either based upon inital conditions or now.
I see, so then I can assume that taxpayers will not pay one nickel for FHLB, FNM, FRE, FDIC, PBGC, or any other alphabet soup label? Not one thin dime? Who is paying for the hotline? Who is paying Paulson's salary. Are you telling me that the fed won't buy crappy mortgage bonds? What of the inflation tax we all pay because of the trillions that got dumped on the fraudsters? What of the state and municipal losses? No bailout my foot. They'll be bailing out every porthole of the good ship U.S.S. Lollypop, port and starboard. You can bet your last nickel that the grifters aren't going to pay.
You may be right, Robert, but a lender who takes that hard-line position will have a default to deal with and will lose a lot of money.
To me, the issue here is exactly what CR says in point #4 and the success or failure must therefore be measured with that in mind.
bacon dreamz, I'm just trying to point out the real goal - get the homeowners to pick up the phone and minimize the losses for the investors.
Yes, there are other aspects - and I think the burden shifting that barely noted is important too.
I also wanted to point out many of the incorrect statements about the plan that I'm reading (I can't believe how many think this is a bailout - the freeze isn't - or that the plan breaks contracts - it doesn't).
Best to all.
Robert Coté, OK, not teaser rates in the common thinking about the rate: i.e. rates under 4%.
Best Wishes.
Wally,
Did you see the multimillion dollar tax refund the previous owner of Dunnmore Homes is getting because of his sale and subsequent bankruptcy of the company his father founded? Just google "dunmore homes tax refund bankrupt". $11.2 million 'saved' in the $500 sale. And when Morgan wrote down but wrote off 1/3rd due to tax savings? Then there is the "losing" money on these loans if allowed to proceed unintervened. these lenders made mistakes and have proven bad business models. It is supposed to hurt. If it doesn't bad business models are given a further competitive advantage over rational ones.
CR: will probably be much more proposed (and possibly enacted) next year when people realize this didn't help.
--
Ah, that was the one thing missing from your excellent post. You and Tanta have done a great job knocking down the myths, but I was wondering what you two think will be the impact of this proposal.
And with that comment sounds like...not much.
-ck-, I think you are right and it probably deserves position #1 on the list. Have Paulson short circuit Democrat boneheaded plans change the loan amounts, and pass the tab to the lenders. It would be the first step towards nationalizing the lenders. Great move. The government couldn't even regulate the lending industry, let alone operate it.
It would never fly anyhow. That's even more banana republicish than the current lame plan.
The ever gracious CR offers a reasonable common ground: Robert Coté, OK, not teaser rates in the common thinking about the rate: i.e. rates under 4%.Agreed, shall we call them "under market rates?"
All good points. But the "ten things" seem to be eleven things (it goes to 11?). And the countdown is a bit garbled.
Hmmmm, This is Spinal Tap fan?
CR,
You hit the nail on the head with "AND FINALLY: The purpose of the plan is to publicize that lenders will modify loans."
It's just a Holiday PR stunt to make it look like they are "trying" to accomplish something and help struggling homeowners keep their homes. When in fact it was exactly what they have been using to qualify borrowers before the "fake freeze."
CR, you said, "All of these modifications could have been made anyway without the freeze. But the problem was very few homeowners called their servicer before defaulting on their mortgages - and most homeowners didn't answer their servicer's calls once they were delinquent."
You are right that a lot of borrowers do not call their servicers or answer the debt collection calls that start on the 16th day after a late pay and continue non-stop all day long into the night via computer generated automated phone systems.
When they do pick up the phone, they DO NOT get a nice loss mitigation specialist on the other line saying "how can we help you?" No, they want full payment and nothing else.
The borrowers that do call in get the low level collections employee who's job is to make sure that that borrower does not get back to loss mit and to milk every dime from the homeowner.
Yes, this is business. They owe money on a contract they sign, yada, yada, yada...... I understand all that, but servicers ARE NOT and WILL NOT change their MO's.
Well, until the lawsuits come and CR they are coming BIG TIME en mass and no, not from investors, homeowners.
Class actions are going to change everyones tune sooner rather than later.
Cheers!
In recognition of the vagary of public sector accounting standards, theGovernmental Accounting Standard Board recently announced probablechanges in its rules for public sector plans which will enhance disclosure butstill allow considerable flexibility.135And of course disclosure rules do nothingdirectly to require full funding of the plans. As acknowledged by RobertKurtter, senior vice president for state ratings at Moodys Investors Service, What this highlights, for us, is a big problem. . . .In any financial report,there are a wide range of assumptions and acceptable practices. But in thearea of public pension, it seems, the range of acceptable methods is extremely wide. Given that extremely wide spectrum, which runs fromextremely generous to extremely conservative, it becomes very difficultto value these systems on a consistent basis across the country.136
The main intent of Hope Now is to keep a narrow class of struggling homeowners paying interest on an asset that is worth less than they owe and will be worth far far less than they owe five years from now. These homeowners would be better off turning in their keys and renting.
10) This is not a bailout. There is no federal money involved.
I think they are saving that for plan 3.
The refinancing part of this will be left up to Congress as states and localities today may issue tax-exempt bonds only to assist first time homebuyers or homebuyers in designated distressed areas. So I can't see much coming out of that part, at least for a while. They are really making this a political issue, all parties want to play that game.
And the Freeze Plan anthem could be.....
YouTube - Phish: Tweezer (part 1) 2/16/97
CR,
Homeowners don't have to pick up the phone - under the plan, the servicer can presume the homeowner has accepted the modification if he/she makes the payments the modification specifies. In other words, all the homeowner has to do is keep writing checks in the same amount he/she always did.
This plan is clearly lender-driven, as you observed. Look at the membership of the American Securitization Forum. My own suspicion is that, as -ck- said, the lenders are trying to avert cramdown; to maintain the original principal balance, they'll sacrifice maintaining the rate (for now, and after all it was an adjustable rate, which restricted the front-loaded income they could put on their balance sheets). Basically, the 2005 amendments to the Bankruptcy Code vitiated bifurcation (in which the security interest was revalued to the amount that could be realized on sale, with any remaining balance on the loan becoming an unsecured debt - which makes perfect sense) and with it the laws of those states that don't permit lenders to pursue borrowers for deficiencies after foreclosure and sale.
Reducing to market values the principal balance of the loans on their balance sheets, directly or indirectly, would probably be a cost they're unwilling to bear.
CR, I cannot help but notice your good sense. But do you feel the emotional headwind against what you and Nouriel Roubini (who I normally declaim as demigods) are sayin'?
Just sayin'...
They're not waiting for borrowers to pick up the phone:
"We recognize that servicers will not be able to make confirmed contact with all borrowers, particularly those in Segment 2 who meet the FICO test and for whom detailed analysis is not
required. ASF is of the view that borrowers who fall within the eligibility criteria for a fast track
loan modification should not fail to receive a modification solely due to the servicers inability to obtain a signed agreement. Generally, it would appear reasonable for a servicer to deem a borrower to have consented to the terms of the modification, if notice of the modification has
been sent to the borrower, and the borrower has made two monthly payments under the loan as modified after receiving notice of the modified terms in accordance with the modification."
I don't know there will be no litigation. It may be OK for the servicer to offer these borrowers a mod to avoid default but I'm not sure it's OK to offer them all the same mod without regard to their circumstances. It may be that for many of them, a 5 year freeze is the best that can be done -- these are people that no sane loan officer will give a new mortgage to, remember -- but surely some of them could afford some increase, even if they can't manage the full reset. To what extent can an investor expect his servicer to put the maximum squeeze on his borrowers? If the servicer fails to do so, for the servicer's convenience, has the investor grounds for a lawsuit?
Robert Coté, yes!
realty-based lawyer, yes, very true - the serviced can just decide to freeze the rate - and probably send a nice letter telling the homeowner what a great servicer they are!
Avoiding cramdowns is probably part of the motivation, but I suspect many people will walk even with no reset.
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
Best to all.
-if- there is no change and no intervention then #8 takes on new importance: 8) There will be no lawsuits from investors (other than lawsuits that would have happened anyway).
I suggest that there will be substitution going on. Rather than sue over reduced returns the investors will sue over due diligence. Face it, there will be millions of revealed instances of false affirmations at every level from borrower to insurer. It may very well be that there is no standing regards returns and/or mods but sure as shootin' cram downs are coming as fraud is exposed.
..we do not believe that sustainable banking principles are being properly followed in the case of excessive focus on risky lending (such as over-emphasis of sub-prime mortgages)
DBRS.com
Date of Commentary: 6 December 2007
Defining and Assessing Sustainability Risk
We define sustainability risk as the dual risk of (1) not meeting the expectations of some constituencies without unduly harming others social and economic welfare and (2) not meeting the needs of the present without unduly compromising the ability of future generations to meet their own needs. Sustainable banking is about making this happen. Areas of concern are human rights, securing life with dignity, preserving the environment and its biodiversity and being mindful of natural resources and the climate. The overall context for our assessment of managing sustainability risk is circumscribed by widely accepted public documents, such as (1) the Collevecchio Declaration of January 2003 spelling out the principles of sustainable banking now adopted by over 200 financial institutions worldwide, (2) the Equator Principles for managing environmental and social issues in project finance, adopted in June 2003 and embraced in time by over 50 banks or (3) the United Nations Principles for Responsible Investment of 2006, signed by over 180 institutions.
DBRS looks at sustainability risk in banking from the following angles:
(1) Business opportunities: The principles of sustainable banking should underpin the following key areas of activity of financial institutions:
Wholesale banking (i.e., corporate banking, project finance, trade finance).
Retail banking (i.e., mortgages, consumer credit, savings).
Private banking and asset management.
Financial and strategic investments.
Insurance.
In this context, we do not believe that sustainable banking principles are being properly followed in the case of excessive focus on risky lending (such as over-emphasis of sub-prime mortgages), financing ecologically or socially controversial projects or paying lip service to lofty goals while turning the institution into an agent of heightened risk in order to maximize short-term profitability.
(2) Governance and management: Our aim is to be able to integrate it into our overall risk management analysis, which is a key area underpinning DBRSs bank ratings. We consider sustainability risk as an integral component of a banks overall risk governance and management policies and processes, related to a large extent to its public image, franchise value and competitive position, but potentially also having direct financial consequences (for example, important categories of investors shunning a specific institution in light of its environmental or social governance deficiencies).
(3) Internal organization: We look at banks as at any business following sound social and environmental policies and practices. For example, the concern and practical steps taken by bank
Didn't we beat this LTV, CLTV and home equity aspect to death 2 posts ago and came to some conclusion which was:
SO from that I derive:
The guidelines for fast tracking eligibility are for 97% or higher LTV OR /AND inelibility to secure a FHA Secure loan. My read is that most people that do qualify will do because of the second clause NOT the first clause.
Other reasons for lawsuits have also
been discussed at
Subprime Rescue Plan: Investors Indeed Have Grounds for Lawsuits « naked capitalism
I have a bias - this plan is such a crock and I want it to fail .
-K
Yah that is weird; how do you isolate distressed funds?
Keeping watch on investment funds
December 10, 2007
South Florida - Broward, Palm Beach and Miami-Dade breaking news, sports, weather, traffic, hurricane coverage, restaurants, jobs, real estate, classifieds and consumer help - South Florida Sun-Sentinel.com news...0,3457587.story
After reviewing the pool's assets, the firm issued a report with several recommendations that we, as the SBA Board of Trustees, enacted last Tuesday. In the simplest terms, we supported a plan to isolate any distressed assets into a secure fund which will be allowed to mature and increase in value over time. The rest of the assets are of a high-grade money market quality and will be placed in a fund that is open to current and new investors. We also voted to create relationships with financial institutions to provide loans to investors seeking immediate access to capital.
I just read that link (again at naked cap) and got this;
In light of current market conditions including home value trends, it appears that key elements of any net present value determination (such as default rates with or without a modification, and loss severities) cannot be accurately predicted based on historic data
fine fine. I'll link you on all my blogs. You're that goood. Damn.
Weird World Stories Linked To SubPrime: UK institutions, meanwhile, have been trying to reassure investors after two banks, Deutsche and UBS, invoked clauses allowing property funds up to 12 months to liquidate assets to meet redemptions. This would force investors to wait for their cash.
A spokesman for Norwich Property Trust, which is managed by Aviva-owned Morley, said despite reports that it could suspend investor withdrawals from the £3.6bn fund no decision had yet been taken.
Morley has already started selling buildings to cover redemptions in its £1bn pooled pension fund, which is 100pc directly invested in bricks and mortar.
Scottish Widows, the insurance and fund management arm of British bank Lloyds TSB, said it had sufficient liquidity to cover redemptions from its SWIP Property Trust.
Unlike other funds, the trust cannot postpone redemptions. However, it can borrow up to 10pc of the value of the fund to meet them in cash. A spokesman said: "We're not in a position where we need to draw on this facility."
New Star, meanwhile, said it had seen net outflows since July of just over 5pc of its UK property fund but had plenty of cash to meet redemptions. Before the withdrawals, the fund had 25pc of its value in cash and shares. This has been reduced to 20pc. So far, the asset manager has not been required to put its assets on the market.
Hermes, whose property director Rupert Clarke was yesterday made chief executive, has said it will have adequate cash to meet redemptions. It has brought almost £500m to the market since September, including Princes Square shopping centre in Glasgow which sold last month for more than £100m. However, part of its shopping centre portfolio which includes its stake in Bluewater has yet to sell.
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
We probably disagree but I'd say; "The biggest concern for the investors is that it has become socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers."
Casey Serin paid no taxes last year. I paid an extra Lexus to the Feds and an extra Camry to California for my real estate adventures. The moral hazard is already built in. It will be impossible to re-establish responsibility as you and I remember it.
I had a client, twenty-something decide after the work agreed upon in advance for less than the not-to-exceed cost was too expensive. I've done this for a long time. I immediately wrote the entire job to zero including parts and travel. Cut my loses and move on with no strings. He continued to lay into me for more work and satisfaction. He wouldn't even stop abusing me and my company after I said 'what part of 'yes' didn't you understand?" What he agreed to in advance didn't matter. What he got was not important. The sense of entitlement, what he thought he wanted, was bewildering.
I seriously believe you and Tanta are overestimating the compliance factor for this new generation of borrowers.
Ach-Tung!!!!!
Ach-Tung!!!!!
ICFA online
A new dawn for German hedge fund investment
by Kris Devasabai 1 June 2007
HSBC Trinkaus has designed and launched a unique investment vehicle that gives German institutions greater flexibility to invest in hedge funds.
The structure which has been established as a German spezialfond was created for Nordrheinische Aerzteversorgung (NAEV), the pension fund for doctors in the North Rhine area.
The vehicle is unique in that it is not subject to the restrictions regarding target funds that bind existing fund of hedge funds in Germany, nor the 50 per cent limit usually exercised on investments in other hedge funds.
By utilising the new vehicle, NAEV will also sidestep the one per cent restriction applied to investments in single hedge funds by institutional investors under the German Federal State Insurance Supervision rules.
This product, which has been initiated for a tax-exempted investor, is unique in Germany, said Gina Slotosch, head of business development, custody services, at HSBC Trinkaus & Burkhardt, which will provide a full range of services for the new spezialfond, including portfolio and risk management and Master KAG as well as Depotbank services. We are not only perfectly positioned to provide the services to NAEV but we also have the know-how to support our clients with the process of selecting appropriate hedge funds, added Slotosch.
Commenting on the factors that drove NAEV to work with HSBC Trinkaus to develop the new structure, Professor Dr. Lepelmeier, managing director of NAEV, said: It was of great importance to us to find a regulated German solution as a platform for our hedge fund investment which simplifies the investment in foreign hedge funds and ensures consolidated reporting. Furthermore, it was a particular concern for us to strengthen the investment location in Germany. By initiating this model we have contributed to this development.
While pension funds have been keen to embrace alternative asset classes as part of liability driven investment strategies, local regulations and reporting rules have stunted the flow of German assets into the hedge fund industry. In many cases, investors have sought to gain access to hedge funds by way of certificates and other structured products issued by investment banks.
If it finds favour with other institutional investors, the new spezialfond structure, which has been issued by HSBC Trinkaus fund administration or Master KAG subsidiary INKA, could spark a wave of direct hedge fund investment in Germany.
Re: From 1933 to 1945 the Hitler salute was the common German greeting. Heil Hitler! ("Hail to Hitler!")[3] was used when directly addressing a citizen, or, in the Waffen-SS, a higher ranking officer. Hitler himself preferred to be addressed with "Heil, mein Führer!" (Hail, my Leader) or simply "Heil!", as address
"allowing property funds up to 12 months to liquidate assets to meet redemptions. This would force investors to wait for their cash."
That one has me rolling on the floor, laughing. Wait for WHAT cash? What it allows is for the fund managers to take 12 months to get their affairs in order, get out of town and cover all tracks. They should call it the 'headstart clause".
Alaska sues Mercer
by Heather Dale 7 December 2007
US Mercer has said it will "vigorously" defend a $1.8bn law suit by the State of Alaska, which alleges the actuary made mistakes in calculating the state pension plan's expected liabilities.
The lawsuit was filled in Alaska Superior Court yesterday by Attorney General Talis Colberg and the Department of Law, on behalf of Alaskas Public Employees Retirement System (PERS) and Teachers Retirement System (TRS) pension plans.
The suit seeks more than $1.8bn in damages from Mercer for alleged errors in calculating the pension plans expected liabilities, including mistaken actuarial assumptions and methods about future health care costs, as well as basic mathematical and technical errors.
Colberg noted: Just like any other professional, Mercer was required to use due care, skill and diligence in advising the state how to keep its retirement plans financially sound.
When it came to calculating expected health care costs for the plans, and in other areas, Mercer failed to meet those standards and caused a significant part of the current unfunded liability of the plans.
Annette Kreitzer, commissioner, Department of Administration, and a trustee of the Alaska Retirement Management Board, added: This is an important matter not only for the State of Alaska, but also for the 161 other political subdivision employers who participate in PERS and the 58 school district employers who participate in TRS, all of whom were severely harmed by Mercers errors.
The unfunded liability of the PERS and TRS plans as of 30 June 2006, totalled approximately $8.4bn.
Mercer has said in a statement: Mercer stands behind the quality of its actuarial work for the State of Alaska and will defend its interests vigorously.
It added the state's funding issues were caused by a number of economic factors, including skyrocketing medical costs, a downturn in the capital markets and employees retiring earlier and living longer than anticipated.
Mercer said, in 2002, it advised the state to significantly increase its contributions to the retirement systems.
The state is now attempting to hold Mercer accountable for these economic trends, over which our firm has no control, the statement said
I'm not sure I get this:
The biggest concern for the investors is that it becomes socially acceptable for people to walk way from their underwater home - especially for middle class / prime borrowers.
Is the meaning of "becomes socially acceptable" here just "customary" or "regular, common and habituated" ...like smoking pot for medicinal purposes (not like the respectable doctor who prefers his gin and tonic)?
I know I'm missing something here. Izit that 'Hop Skip Jump' really is group therapy for the disenfranchised sonot subprime "middle class"? I just don't think the therapists have that much upstairs, you know?
The most important info:
Credit squeeze expected.
Daily Herald | Credit squeeze expected
Wilshire memo warns on US LDI products
by Alex Beveridge 7 December 2007
US - An internal Wilshire memo sent to all its senior consultants has warned them of potential legal pitfalls for clients when advising on the suitability of liability driven investment (LDI) products in the US.
The concerns centred on an advisory opinion given by the Department of Labor (DOL) in October 2006.
It was sought by Donald Myers of ReedSmith on behalf of JPMorgan Chase Bank and asked for clarification on whether it was prudent for a fiduciary to consider LDI under the Employee Retirement Income Security Act (ERISA).
Under ERISA, investment strategies must primarily benefit the pension plan. As LDI strategies seek to reduce pension fund volatility, it could be argued they could also benefit plan sponsors by reducing volatility on their overall balance sheet.
The DOL advisory opinion subsequently approved the use of LDI as described in the request, however, the Wilshire memo raised concerns LDI marketers didnt recognise the limits of the advisory opinion.
Dimitry Mindlin, managing director at Wilshire, told Global Pensions: It bothered me a great deal when many LDI marketers told us at conferences and presentations that this advisory opinion was the final word. I read the opinion and I found it inconclusive. Although I am not an attorney, I believe that if this ever ended up in a court of law, they would not find it very helpful.
One senior executive from an American asset manager, who asked not to be named, backed Mindlin. He noted: The advisory opinion does not address the significant potential conflict between two goals maximising the probability that the plans funding objective will be met by a particular investment strategy in the long run and reducing volatility of the plans funded status on an annual basis.
He said the first goal was clearly prudent under section 404 of ERISA, but the second goal was problematic if it conflicted with the first goal. He suggested the argument the benefit to the plan sponsor was more than incidental could be applied if, in a bid to reduce annual volatility, it adopted a strategy that reduced the probability of funding the plan in the long run.
Marc Van Allen, a partner and member of the ERISA litigation group at law firm Jenner & Block, said: From an ERISA fiduciary point of view, [when] looking to implement LDI, pension funds have to satisfy their twin duties; duty of loyalty and duty of care. The tricky part can be separating the benefits to the plan from the benefits to the plan sponsors balance sheet.
He said the ERISA fiduciary needed to be able to demonstrate they were principally focusing on the benefits of the plan. If there then turned out to be some sort of incidental benefit to the plan sponsor, then thats OK, he said.
Say it aint so baby!
re:
Anonymous | 12.08.07 - 9:04 pm
Anonymous | 12.08.07 - 9:36 pm
Anonymous | 12.08.07 - 9:57 pm
Anonymous | 12.08.07 - 10:02 pm
Anonymous | 12.08.07 - 10:08 pm
Same anons ? but anyway, if you post something OT, then the customary style is :
That's enough of MY OT ( ed. )
-K
More on pension madness and the smoking gun behind subprime bailout (why do you think Florida is holding so many junk bonds in pension pools):
NIRS probes US public pensions
by Andrew Sheen 12 October 2007
US - The newly formed National Institute on Retirement Security (NIRS) has announced the appointment of Beth Almeida, to act as its first executive director. She will take up this position in early November.
NIRS was founded earlier this year as a research partnership between the USs largest public sector pensions bodies to conduct pure research and undertake education in the effects of defined benefit (DB) pension schemes in the US.
Almeida said: There is a need to examine pensions and their retirement security role, as well as the impacts on the financial markets, the economy and the recruitment and retention of public sector workers.
The bodies that make up NIRS the Council of Institutional Investors (CII), the National Association of State Retirement Administrators (NASRA) and the National Council on Teacher Retirement (NCTR) represent pension funds with combined assets of US$7tn.
A NIRS spokesperson told Global Pensions the organisation was not a lobby-group, but rather would investigate the social and economic effects that this level of investment exerted. She said, until now, there had been a lack of quantifiable research on this subject.
Almeida was previously assistant director for strategic resources and senior economist at the International Association of Machinists (IAM) and Aerospace Workers, where she was pivotal in transitioning 40,000 airline workers into the IAW DB scheme.
CR -
I agree that underwater borrowers may well walk.
What I think is that this is driven by accounting. Lenders are concerned about capital deficiencies, so are engaged in a multi-front battle to preserve (the appearance of) unchanged principal and value (not, as you know, the same thing). So they don't adjust value: they use the original appraisal, without so much as a drive-by or BPO, even though quite widely publicized indices show that's false. And they resist any write-down (cramdown) of principal, even though the actual amount they can expect to realize from this intransigence is minimal, as Tanta, MOM and I agreed earlier (can't find the cite, my apologies).
Just another boglight suggesting trouble in the banking industry....
Time Magazine - Monday, Dec. 14, 1931
Home, Sweet Home
THE PRESIDENCY: Home, Sweet Home - TIME
Once a few news stories hit about nice middle class families who had no choice but to make the wise financial decision to walk away from an underwater mortgage...and well, it was tough but it worked out allright in the end thanks to support from fellow church members and the family...well then the keys will start jingling into bank mail boxes all across the country. This sort of notion enters the national zeitgeist virally. It can't be stopped. Just check back in 28 days.
You mean the freeze wasn't the end of the world? Bummer.
My corrollary to (1): There is no way on God's green earth that this will help Toll.
Maybe Anonymous is subtly trying to tell y'all to keep your eye on the big picture. Rules will have to be re-written as banking and pension systems fail. The freeze is a misdirection ploy as well as an attempt to front-run any congressional action with the goal of buying time. Back room deals will be made to immunize pension systems (among other investment pools) by segregating assets away from the ABS, CDO and SIV viruses. Beware of any congressional proposals that have the word 'reform' in the title.
"The goal of this plan is get homeowners to pick up the phone."
For the thousandth time, WHY WOULD ANYONE WANT TO PICK UP THE PHONE?!?!? Be serious guys. If you're underwater on a massive depreciating asset that you have no money invested in, what is the actual motivation to pick up the phone? Bueller?
If anyone can actually give a good answer to this, then maybe I'll consider that this plan was something other than politics, or perhaps a mechanism to hide fictitious capital losses for a while longer. Until then, consider me unconvinced.
DT - dont forget how stupid people were to get into this game late. Many of them will make yet another stupid decision to keep the home they wanted so badly. One reason (aside from all others) is not to lose face. Until you are on the street, no one knows your financial condition. Keep the dream alive! har.....
Greetings,
There are two points I think important which I've not seen covered. (Remarkably so, since it seems every bit of minutea has been discussed ad naseum.)
1) "Loan must be... in securitized pools"
A big purpose of the plan was to provide the cover of "industry standard practice" to Servicers so that they can do these mod's without lawsuits from the bond holders for failing to do the usual case-by-case investigation and review.
2) "Servicer may make following presumptions... borrower is willing to pay under the modification based on... the payment of 2 payments under the modified loan"
Let's see, apparently most of these sub-prime folk don't answer their phone or read their mail. I reckon the Servicers have learned by now these borrowers become despondent or indignant and simply stop making payments after the first rate hike. So, what's the solution? Don't rock the boat, send them some mail that won't get read informing them of the non-change in their payment; then hope the folks just keep making their payments and voila' loan successfully mod'ed. What's not to like?
So, where CR has said this is plan is for investors' benefit more than borrowers', I don't disagree. But I think moreso it is for Servicers' benefit more than investors'. And who was it that was at the table with Paulson? Countrywide and WaMu, two big Servicers that were completely free to do all of these things with their held-for-investment pool anyway they'd like. So why would they care about pool investors?
I think that reality-based lawyer got it 100% correct - it is all about keeping the number of NPA down:
Reducing to market values the principal balance of the loans on their balance sheets, directly or indirectly, would probably be a cost they're unwilling to bear.
realty-based lawyer | 12.08.07 - 8:51 pm | #
CR -
I agree that underwater borrowers may well walk.
What I think is that this is driven by accounting. Lenders are concerned about capital deficiencies, so are engaged in a multi-front battle to preserve (the appearance of) unchanged principal and value (not, as you know, the same thing). So they don't adjust value: they use the original appraisal, without so much as a drive-by or BPO, even though quite widely publicized indices show that's false. And they resist any write-down (cramdown) of principal, even though the actual amount they can expect to realize from this intransigence is minimal
The question is:
For how long this will look as if NPA has "stabelized" ?
================================
So, where CR has said this is plan is for investors' benefit more than borrowers', I don't disagree. But I think moreso it is for Servicers' benefit more than investors'.
I agree wholeheartedly (its a stretch to call the ASF representative of investor interests) and I hope it blows up in the servicer's faces - by investor ( and who knows, borrowers and THAT would be irony ) lawsuits.
-K
"10) This is not a bailout. There is no federal money involved."
Is it defined as a bailout only if federal money is invovled?
What if I, a new home buyer, must pay more for a home (because of reduced downward pressure on prices)? Or pay a higher interest rate as a result of this goverment intervention?
Somehow, the government intervention is making one party pay more, and another party pay less. Whoever the other party is remains to be seen. But that's what i would call a bailout. Doesn't just have to come from federal tax money.
And when the governments asks you to do something and you know that if you don't comply, things will be worse for you, it's not really voluntary.
The real purpose of this plan is to push the economic impact and ensuing headlines past Bush's term in office. Bush wants to preserve what little legacy he can, and certainly not be known as the president who shepherded the country into economic ruin. I have a hunch most Republicans want to lose the next election. The next incumbent will take the economic slump in the chin, as well as the blame. Then the Republicans can come charging in a la FDR to save the day, and probably stay there for 20 years. Hint: Bloomberg isn't running this time because he knows this.
Bonus points: If the next Hoover is a woman or black, Americans won't vote for another non-white non-male for 50 years.
I mis placed this ina different thread:
MORTGAGE MELTDOWN / Interest rate 'freeze' - the real story is fraud / Bankers pay lip service to families while scurrying to avert suits, prison
Regarding litigation & contracts---
You're more optimistic than Paulson himself. He said litigation should be manageable'; he has good reason to hedge there. Briefly, master servicing contracts differ. Not all of them contain the wording in the Bear Stearns prospectus you've quoted; some contracts specifically prohibit interest rate modifications; others specifically require loan-by-loan analysis before modification. Even with the seemingly clear Bear contract, realize thatdefault' (as in reasonably foreseeable') is a term of art, and under FFIEC and BMA it means four or more months delinquent. A lawyer can argue that a period of delinquency must elapse before default is foreseeable. Another can argue the opposite. The point is not which lawyer is right in the abstract, but rather that servicers face uncertainty about how a court will rule. The ASF claiming that a servicer can proactively modify a loan could indeed be interpreted as tortious interference with a private contract. And that is why the AFS document explicitly states that they are not offering a legal opinion, merelyguidelines'. Will a bondholder sue? Who knows. Could a bondholder sue: yes, even with the Bear Stearns contract.
IANAL, but I do wonder if anyone actually would have standing to sue. The servicers' contracts aren't with the holders of the CDOs, they're with the pool managers.
Can anyone say "figleaf"?
Fixing the problem--the same as Iraq, Katrina, climate change....
But Steve, you are assuming that anyone wants to sue over such things as "reasonably forseeable" standards.
Now, I am aware that there are people who will sue anyone any time whenever they think any rule has been broken. It does not matter to these people that they were not harmed, or the "harm" is trivial compared to the costs of the suit. They sue on principle. While I think this kind of plaintiff mostly hangs out in PTAs and condo boards, I'm sure some of them own MBS classes.
Professional investors? Good heavens, as far as I can tell they're thrilled that servicers are being "guided" by the ASF to get somewhat creative with the standard. The ASF is professional investors.
PSAs for multi-class REMICs are complex enough that anyone can sue anyone for about 100 reasons, for doing something, for doing nothing, or for some combination thereof. But that doesn't automatically supply anyone with a motive for suing.
I suspect Paulson thinks suits are "manageable" because he is aware that it will be harder than a lot of people think to show that the securities are harmed.
"Standing" - another nail in the securatization cofin:
The Big Picture
CR: I agree with you and support this plan, despite its many deficiencies.
The plan makes sense for the interests of a huge segment of the population, of whom I am one; that is people who have substantial equity in their homes, but even more substantial equity in other assets-stocks, bonds and privately-held businesses. Everyone needs to remember that although it is substantial, home equity still represents only a small part of total household equity. We don't really care if fools with 110 % LTV loans in some development on the edge of the desert lose homes they should never have bought. Nor do we care if homebuilders, who represent a tiny fraction of the stock market all go bust. We care about our home equity, but most of us bought before 2002 with significant down payments, and can ride out a fall in prices from levels that we recognized as inflated. Many of us live in non-bubble areas and may not see much more than a 10 % correction anyway.
So, what do we care about?
To the extent this plan will help with those 2 goals, and I think it will, it makes sense.
The servicers' contracts aren't with the holders of the CDOs, they're with the pool managers.
That's another myth, actually.
This is not about CDOs, it's about ABS/MBS/REMICs.
CDOs are not backed by pools of mortgage loans that are serviced under a PSA. They are backed by (among other things) tranches of many different ABS/MBS/REMICs.
There are "high grade" CDOs and "mezzanine" CDOs (and what Atrios would call "shitpile" CDOs). The high-grade CDOs are backed by senior notes of a bunch of diffferent underlying MBS. The mezz are backed by junior notes. You could easily have one CDO that owns notes from 100 different REMICs. That's 100 different PSAs.
So the "senior notes" of a mezz CDO are priority cash-flows on bonds that are themselves first-loss (low priority) cash flows of the underlying security.
So all this hoo-haw I keep reading about the interests of the "senior classes" or the "subordinate classes" is pretty confused in re CDOs. There are plenty of senior CDO classes that will suffer unless the action helps the junior MBS classes.
In any case, at no time is a CDO manager a party to a PSA. The CDO is, legally and practically, a contract entered into subsequent to the original establishment of the ABS (tranches of which the CDO is formed to buy). A CDO manager is in the exact same position as any other buyer of the notes issued under the original REMIC prospectus.
Derivatives, derivatives. They're everywhere, and they don't have the same contractual interests that the original parties have. It does not matter in the slightest what the CDO prospectus said about your priority in the CDO cashflow: if the CDO is backed by mezzanine bonds from REMICs, you did not just become a "senior noteholder" in the REMIC.
Is there a generational misunderstanding here?
CA observes that investors worry that it'll become socially acceptable for middle-class, prime borrowers to walk away from their underwater homes. Robert Coté says he did business with a 20something who felt entitled to keep getting services after the contract was satisfied (at least, that's my interpretation of that hurredly written post).
On the other hand, we get Geoff saying, "Many of them will make yet another stupid decision to keep the home they wanted so badly." And Darth Toll saying, "If you're underwater on a massive depreciating asset that you have no money invested in, what is the actual motivation to pick up the phone?"
My answer to that question is simply: "Because I promised to." We sign promissory notes in which we make promises.
There are other motivations to pick up the phone, such as preventing the cost and disruption (especially with school-age children) of moving.
But let's focus on that one issue of personal honor. Is it silly and old-fashioned to keep paying your mortgage when you're underwater? Yes, it's as silly as paying a car loan that's underwater, and as old-fashioned as remaining monogamous after uttering your marriage vows.
So ... is it a generational thing? Do the over-40s take their promises more seriously?
Queequeg. I am an over 40 who takes his commitments seriously. Married to the same woman for almost 25 years (God, sometimes it seems like only 5 years). I would stay in a house I contracted to buy as long as I could make the payments, regardless of being above or below water and regardless of whether I expected the price to rise or fall. If I had a mortgage that was at the kind of usorious rates that some sub-primes appear to be, I would be negotiating with the lender to get a lower rate so as to ensure that I could stay and meet my commitments. That said, I wouldn't generalize too much- I think there are under 40s who keep commitments and over 40s who don't
I am still unconvinced as to the purpose of this plan which helps so few. Particularly in view of the following article. I have quoted the first paragraph of the article and find it very persuasive. I would love hear comments from CR, Tanta and bloggers.
Personally, I think that there is a lot more going on then we are being told.
Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
"The Government and the market are trying to boil this down to a sub-prime thing, especially with all constant talk of resets. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called The Mortgage Meltdown because many different exotic loan types are imploding currently belonging to what lenders considered qualified or prime borrowers. This will continue to worsen over the next few of years. When prime loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have Round 2′. It is not that far away."
What many fail to do is see this housing bust in the context of a generalized decline. I would agree that it seems to be a trigger and part of the larger problem that can be described as debt overload. This band-aid plan seems to assume a vibrant growing economy and fighting the present battle. Wait till the jobloss picture begins sour in '08. The foreclosure tsunami will move across the established suburbs so fast the politicians won't have enough time to react.
Looks like Fannie is trouble. Or maybe they are trying to find more cash to buy up loans. Ummm
Fannie Mae Revises Retirement Benefits
Fannie Mae Revises Retirement Benefits - WashBiz Blog - A blog about businesses in the Washington, D.C., metropolitan region, written by The Washington Post's Dan Beyers and Terri Rupar
Promises? We're talking about people who have participated in fraud, and little wonder that they do not wish to discuss "modifications," to have their admissions reduced to writing and put into a file subject to discovery.
Look, in real terms this program will only help at the margins. The key is what is the psychological effect. In the end, markets, whether stock, real estate or any other, are influenced as much by emotion and perception as by reality. So we need to wait and see.
In any event, what plan do the detractors have, other than let everything crash and damn the guilty and innocent alike?
"So all this hoo-haw I keep reading about the interests of the "senior classes" or the "subordinate classes" is pretty confused in re CDOs. There are plenty of senior CDO classes that will suffer unless the action helps the junior MBS classes."
Interestingly enough, the people I've spoken to and reports I've read suggest that (ceteris paribus) the ASF plan favours junior investors over senior investors (who are almost always controlling creditors). Most obviously by reducing the foreclosure rate, but also because modifications undermine triggers that divert cashflows to the senior investors. From S&P: "Although loan modifications that extend the mortgages fixed rate period may result in lower defaults, the reduction in excess spread may offset the benefits of lower defaults, resulting in diminished investor protection. Also, as noted above, should a borrower redefault on the modified loan, the losses may be greater to the rated securities. Not only would foreclosure timelines be extended beyond initial expectations, but also the potential impact on transaction mechanisms (such as performance triggers, principal distribution amount calculations, step-down dates) may result in higher losses to certain classes in the rated securitisation."
Two things seem to flow from this:
a) This "class warfare" will be the source of most of the lawsuits
b) Larger write downs on high grade CDOs of ABS than otherwise.
Of course, the extent to which loan modifications can affect MBS is limited by the transaction documents, so it might not be a big enough impact to materially hit super senior tranches.
Also, the ASF explicitly says it is looking at the trigger issue and will be issuing guidance.
I'm seeing many quibbles with the points of your post, so I'd just like to counter that with my appreciation for the way you have attempted to correct much of the current spin surrounding the mortgage rate freeze plan. Good job. It's too bad an amateurish outfit like the AP doesn't have as much journalistic integrity as you do.
The first comment on this thread made a very valid point. Using tax free munis IS a bailout of lenders and borrowers and it does use taxpayer money.
Worse, taxpayers get stuck with all of the future default risk... Which is far from zero.
I still say the bonds to fund this will end up in our pension plans, retirement accounts, and mutual funds, so WE WILL BE BAILING THIS PEOPLE OUT!
Yes, few of them may benefit, but it is the same old crud: Wall Street keeps the profits, and everyone else gets hosed.
To top it off, they reward the worst of stupid buyers, AND try to keep housing prices propped up for even longer. Typical!
Hi! I work at CurrentForeclosures.com a foreclosures site. This article is a good read. Informative and helpful. I think not all foreclosures cases can automatically qualify for government aid. I guess the applicants applying for financial aid (or negotiations for reduction of rates) are still subject for review.
It is good to hear that the government has sit up, has noticed the plight of affected homeowners and the problem of the increasing trend in foreclosure incidents, and has initiated a solution which could alleviate the despondency of the situation. At the moment, while it may not be the best long term solution, but it just could be the right immediate alternative. Although many fear that government efforts are more geared towards the troubled homeowners, the move to coordinate a concerted effort between the lenders and homeowners is still a welcome move.
[But bankruptcy could help some of the families hit hardest.]
You're kidding, right?
Depending on whose numbers you believe, 65-80% of all Chapter 13 filings result in a dismissal, not a discharge.