It appears that very few will qualify for "Hope". "Home must be worth more than mortgage". Not likely given the time period required for purchase (Jan '05-July '07) As time marches on, fewer will qualify.
Yes, but Robert, the government is not stepping and doing that. This is not a statute; it is not a legally binding mandate on the participants.
It is a bunch of industry participants being encouraged to take basically voluntary actions at the Treasury's behest. There is certainly government influence. But I've seen nothing that says a servicer or a security can't just ignore this if they want to.
The ASF docs are crystal clear that a service must do nothing that would affect REMIC or Q status. There are quite a few pools where nearly every loan falls into the sub-660 FICO bucket.
"In my reading of this, giving a deal to a borrower almost seems incidental."
Truer words never spoken. That was not, is not and will not be the goal of this action. This is about financial institutions trying to pretend the stuff they own is marketable, truth be damned.
I haven't read all the plan, but perhaps someone knows. If a person does "qualify" for a rate freeze, do they just get the freeze, or do they add the interest differential back into the principle amount for the five year freeze?
If so, bravo Wall Street, more debt slaves. If not then, go Mr. I can't afford my house guy five more years of cheap living.
We will just figure what happens in five years five years from now. In the meantime we will hope house prices turn around so the party can start again.
Yes, but Robert, the government is not stepping and doing that. This is not a statute; it is not a legally binding mandate on the participants.
I am not this smart but you are. Not binding, not a mandate but the President of The United States of America saw fit to announce and then have his subordinates follow up. Pleuuuze. You have a choice here. Nothing has changed or not. I'd like to hear which.
First time long time. I rely on your insights because of its clarity. But this new plan in your words is confusing. I just hope and pray everyone in control understands whats happening. Every action has a reaction. Seems like a more secure outcome. congress was asleep at the switch (im sure they profited) and now they are going to fix what they exploited. Let the markets decide. This sets a bad precedence. Perception is everything.
Any teeth we feared have been ground down to nubs on this plan. This doesn't resemble the scorched Earth approach that Bair advocated. It's just not worth anyone getting their panties in a twist over.
OTOH, the whole hoopla over it may have been helpful in one way - if the media attention spurs some borrowers-at-risk to pick up the phone and call their servicer who wouldn't have otherwise done so, that's worth something.
but the President of The United States of America saw fit to announce and then have his subordinates follow up.
Yeah, well, this is the same POTUS who makes announcements about "faith based initiatives" and not only has subordinates follow up, he gives money to outfits who want to explain to you exactly what kind of sex life you're allowed to have.
And we all ignore that.
Look, I share your frustration with the problems here. But suddenly pretending that the Bush administration has that kind of clout strikes me as a little ad hoc.
Who cares about this useless attempted bailout. Did you see the squeeze today? Wow, that was seriously the biggest pump of the worst stocks I've seen in 35 years.
I think many who are crying "foul" haven't read the qualifying criteria. What I've seen is quite restrictive. Now, the affect on buyer psychology can't be overlooked with this release. What I find interesting is that pols are willing to admit that RE has been a bad investment in return for a softening of the foreclosure blow for the securities market.
It's all in the implementation. I fear this becomes carte blanche for every servicer to let every Tom, Dick, or Harry coming into the office to get the fast-track mod.
I'm reminded of the 1986 illegal alien amnesty. Yes, there were rules for who was eligible. Yes, in the crush of Pedro, Juan, and Jose applying for amnesty they were completely ignored.
Further should this prove not enough, the precedent is set... if a little bit of Govt didn't fix the problem, then we'll just try a little bit more.
Tanta you can be sure FDIC examiners will proceed on this mandate with their assigned banks and expect other financial institution examiners to do the same. There will be strong government oversight and reports of examination will note substantial compliance and non-compliance. I think they are expecting widespread compliance and have not yet developed 'banker' penalties (if any) for substantial non-compliance.
do they just get the freeze, or do they add the interest differential back into the principle amount for the five year freeze?
It's just a freeze.
Actually, technically, what it is is that the noteholder waives its right to increase the interest rate at the change date that was specified in the note. What these mods are doing is just moving that first change date out a few years.
Hey. Suppose I've maxed out my home-ATM for that last vacation and don't like the idea of paying a higher rate when my loan resets next year - even if I can afford it. If the going refi rate is higher than my current pre-reset ARM rate then I'll just default now!! Then I'm certain to qualify for the freeze.
So why would ANY ARM borrower , whose loan resets next year, send January's payment?? To stay current precludes oneself from the freeze!
Nice analysis. I've only just begun going through the ASF document, but it's already clear this has nothing to do with helping out borrowers for their sake, no matter what Bush and Paulson say. It's entirely about minimising the damage to the securitisation industry and arguably to the wider economy. And I say that as someone with a vested interest in the health of the securitisation industry.
Tanta you can be sure FDIC examiners will proceed on this mandate with their assigned banks and expect other financial institution examiners to do the same.
Well, now, you know I firmly believe that banks are doing much better than this with their whole loan portfolios. Frankly that's why this is so anemic, in my view: those who don't have to mess with securitization rules are doing much more in the way of workouts.
That is actually an important fact. It gets to that "golden rule" thing these PSAs have in them (you can't service a loan in a pool in a way you wouldn't be willing to service your own loan). Portfolio lenders are modifying loans, more I suspect (much more) than securitized loans are being modified. So that kicks one of the legs out from under the "we can't modify securitized loans" excuses: if servicers are willing to modify their own portfolios, then servicers are saying that mods are in the investor's best interests.
Forgive me, but I don't think "anemic" does justice to the plan. If the right to modify terms for loans reasonably expected to default was already in the PSA terms, then all the Plan amounts to is "setting up a phone bank."
I just hope it is staffed with folks numerate enough to figure out an LTV.
We're predicting massive "Credit Score Suicide" by consumers whose credit is too good to qualify
Oh, now there's a rational approach. Screw up your FICO and all your credit card rates shoot up to 29% and your auto insurance gets more expensive, but by jiminy you might be able to get a mod if you happen to be one of those high FICO subprime borrowers whose rate hasn't reset yet.
The really clever part of the plan was the part where Bush said 1-800 instead of 1-888 thus maximizing the political points, and minimizing actual effort required.
Who cares about this useless attempted bailout. Did you see the squeeze today? Wow, that was seriously the biggest pump of the worst stocks I've seen in 35 years.
Ouch!!!
We have a fantastic setup for the market tomorrow whether or not the ADP estimate pans out:
Forgive me for being so slow. But I'm still working on why they would verify income for those with FICOs above 660 but not those below 660. I think I may have finally got it.
Is it because they just figure those with FICO below 660 are financially strapped and are just assumed to be unable to handle the reset?
what does this do to the ABX prices and CDO prices? s&p says it could lead to downgrades. and, it certaily cant help with raising new MBS offerings because invetors will want higher rates, etc.
Elizabeth Warren's take on it at Economist's View is interesting:
"Slick Deal for Lenders [excerpt]
1) The lenders decide who gets the benefits and who doesn't. This seems to be the Goldilocks Game. If the borrower is too cold (not credit worthy even for the teaser rate), no deal. If the borrower is too hot (could pay on the reset), no deal. Only borrowers who are just right (can pay currently, but can't pay more) will get the deal. And the mortgage servicer decides who gets to be Goldilocks."
Were creating a way of segmenting the borrower class so that one class of borrowers can be presumed to meet all the requirements in the PSAs for modifications.
Welcome to the new American Caste System!(renters, now worries, you are still on the bottom).
"Sorry, young homeowner, hoping to time the market for a better interest rate when your housing value increased. Your one mistakes was that you didn't lie about your income on your loan docs. This day-laborer who earns $35K a year is clearly a better candidate for this class of modification."
If the note holder is waiving the increased interest payments during the freeze period then the total value of the loan (principle & interest) are now less for the borrower, no? And the value of the original investment will have to be marked down by the investor accordingly, no?
"Current Value of the home must exceed the mortgage" or words to that effect.
In the current market, it will be a challenge to determine the current value. HopeNow will also be known as the "Appraisers' Full Employment Program" and if you think they were under pressure to "meet the number" before just think what pressures there will be now.
Like I was predicting, a barely colorable fig leaf attempt that'll give them some good press and political credit. Essentially it sounds like they're brow beating the providers to try to co-ordinate work out attempts that they would probably be doing otherwise. I hate politicians as problem solvers.
In my opinion, Bush and Paulson are trying the old politician's dodge of trying to look like they're doing something all flashy out front and center so they can seem effective in john q. public's ADHD-like attention span and claim political credit for it, just like they are doing with the veto threat of the current war funding budget bills. Again, it's cynical, but the latest, flashiest, most sound-bite like news is the one more people remember, and perception is reality in politics.
I just hope we didn't just miss an opportunity to mitigate damage and fix things that we'll end up regretting later.
Oh Great Tanta - thank you for that wonderful, thorough and extensive analysis. Let me ask the next round of questions - will it be anywhere close to sufficient and is it workable ?
More specifically let me steal my own recent comment on BigPic where you are worshipfully referenced to make that point:
I'll start by noting my agreement with most of the points made above and then add a couple or three to think about that don't seem to be getting the attention they deserve:
1. Will this work ? With very narrow coverage it looks like it barely touches the problem.
2. Is it workable - the Great Tanta on CalculatedRisk has made the point that right now the number of skilled folks qual'd to help out is far below what's needed. Insufficient as this is it still doesn't begin to address the increased demand.
3. Even if it "works" a little it still leaves a big bunch on the table that will go to FC. OUCH.
4. What about the other structured debt instruments ? For example buyout based assets or corporate debt ? Why do we all discuss this as if it were only mortgages at risk. We're already seeing it spread to these other asset classes.
5. This ISN'T a failure of interest rate setting but a failure of due diligence brought about by a total lack of regulatory oversight as the hogs bellied up to the troughs. Where's the new mechanisms required to take the "shadow" finance system into the light as Gross keeps asking.
That's probably enough but one area to quibble w/BR about. Blame the FOMC all you want but what was your alternative at the time ? '03 was a war year and not a time to start raising rates. MUCH more importantly long-term rates didn't go up and the FOMC couldn't do anything about the conundrum. Which in terms of huge pools of leraged liquidities will still be with us ex post this mess. Then what ?
Tanta, one question: it is still not clear to me what happens when the interests of various investors in the same pool are very conflicting. For example, the super senior tranche investor may very well wish to foreclose on every last one of them, while the bottom tranche investor may be happy to freeze the rates to zero, rather than suffer a total wipe-out. Are the contracts clear in that respect? The servicer will have a mob of investors coming to them, each with his/her own agenda.
"Yeah, well, this is the same POTUS who makes announcements about "faith based initiatives" and not only has subordinates follow up, he gives money to outfits who want to explain to you exactly what kind of sex life you're allowed to have.
And we all ignore that."
Tanta |
Last year the US spent about $1.7 billion dollars on faith-based initiatives and government-sponsorship is now a lucrative part of religious services fundraising.
The people whose job it is to pay attention, pay attention.
But I'm still working on why they would verify income for those with FICOs above 660 but not those below 660. I think I may have finally got it.
Is it because they just figure those with FICO below 660 are financially strapped and are just assumed to be unable to handle the reset?
I don't think so, Cal. I think it is strictly about deciding who is likely to be eligible for a refi or not.
Anybody with a FICO under 660 right now is probably not eligible for a refi. So it doesn't matter what their income is.
Folks over 660 might be eligible for a refi, if they have the income to meet (newer tighter) DTI standards. So for those borrowers, you have one more check (income) to see if they're refinanceable.
In it's way this is yet another faith based initiative courtesy of Bushco:
The servicer will determine the following for each Segment 2 borrower:
current owner occupancy status, current FICO score and the FICO score at
origination of the loan. Owner occupancy status will be determined solely
based on the borrowers representations at origination together with any
information known to or readily available to the servicer. For example,
the servicer may compare the current billing address with the property
address.
I am glad that the plan or structure or scheme or whatever is out on paper, now, where we can see it for what it is.
Not a government "cram-down," for sure, but that leaves us to wonder how effective or wide-spread the impact will be.
How long before some of you number-crunchers can give us some kind of estimate on how many borrowers in trouble will actually fall into the Goldilocks zone?
(Is there really any way to tell, other than waiting to see what happens?)
And if LTV ratios are so important, won't the plan be less likely to have a significant impact in areas where the run-up in values was greatest?
I think without a safe harbor law, you are right: this is not coercion or government stepping in to break contracts.
I see this as the government providing a fig leaf for the servicers' attempt to keep their costs down.
No income verification, no re-appraisal, no estimating home prices when calculating cash flows from mods, no search for second liens on the property.
None of that. Just a tommy-gun approach to mods, sanctioned by the industry and the government for purposes of submitting "exhibit A: agreed-upon best practices" during the first class action suit.
Beyond the conflict of interest between servicers and investors, there is a separate issue: the mods will reward fraud, pure and simple. Maybe fraud is only prevalent in CA, FL, NV, AZ, NJ, MA and DC. Okay, that's two thirds of subprime.
it is still not clear to me what happens when the interests of various investors in the same pool are very conflicting.
That's why the ASF and the rating agencies (and the servicers I know) say that the standard should always be without reference to any specific tranche. You calculate a "net present value basis" of the modified loan or estimated recoveries in a foreclosure, and you take the one that is the best deal on that basis.
There's no particular reason to believe that even one specific tranche or class has the same interest over time, let alone the same interest as other classes. You just have to use the effect on the trust as a whole.
Frankly I was pretty amused by the S&P claim that this would result in downgrades. What doesn't result in downgrades these days? Jeebus, a borrower blows his nose and the seniors get hit three notches lately. In any event it's hard to say why anyone would care about that at this point.
Id love to weigh in on the subprime plan for tomorrow, but the timing of the press conference late afternoon makes it logistically impossible to do it for tomorrows column. (I have to file a bit early because Im wearing my academic hat later today.)
So, go to Calculated Risk for informed reaction; Ill weigh in as soon as I can on this blog.
Ok, so the people in group 2 that have a FICO that DQ's them would be ill-advised to try to adjust that.
What about those in group 1 that are being prudent by giving up stuff to remain current? What might they do to drop themselves into group 2? Dump the max into their 401K, thus drop their available income so the rate reset would hurt them? I'd hardly think that suggesting that a borrower "forego retirement savings" would go over well.
Retro-active underwriting is not likely to work. That is what we seem to have here if we cut to the chase regarding New Hope. Or should it be called New Dope...??? There is a better way. FHA would need to implement higher loan limits in "high cost areas" as they currently do by county. They would need to go to 125% LTV (they have done this in the past w/ Title I home improvement loans) and use underwriting guidelines similar to their current streamline refinance program already in existence.
With the promise of lower rates and/or better terms and more affordable payments, borrowers would pick up the phone themselves to call about getting one of these loans. The current proposal seems to put servicers in the position of having to contact borrowers for financial info that should have been asked for upfront. Borrowers will not likely be very cooperative in my opinion.
If the borrowers in question qualify for the FHA insured loans, the new FHA origination will pay off the subprime loan and therefore some of the investors will receive their money at par value or close to it and get out more or less whole. The borrowers will be given a fair shake at maintaining ownership with an affordable and stable rate. I foresee a combo of partial debt forgiveness by the investor and/or servicers and partially new FHA/govt loans picking up maybe 80-90 cents on the dollar.
The new FHA loans would be used to back GNMA bonds which are easily sold because they carry the "full faith and credit" pledge and will be highly liquid like US Treasuries.
This will not help everyone but let's face it. Some of these deals were doomed from the git'go and should not be allowed to continue on in their misery.
To help ease the bill to the taxpayers, the UFMIP and monthly MIP should be raised to at least 3% on all FHA loans, purchases as well as refi's. It should be encouraged to put the burden of the extra insurance on the sellers in a purchase transaction. The UFMIP is typically financed into the FHA loan by the borrower.
This is the government managing the herd as a whole and not trying figure out which animals are sick and which one aren't and which will be tended to and which won't. Open up the gates to better pastures via FHA and GNMA and let those in the herd (all borrowers) who are able, get to the better pastures. Those animals that can't make it are to be left to be foreclosed on. I should add that HUD should use reasonable underwriting philosophies geared toward helping the herd as much as possible. The are not presently doing that it seems but I know changes are coming.
This is the best way to handle the situation and will make for a healthy herd of borrowers and thus a healthy, balanced housing market.
There is no getting out of this without some loss and pain. I am sorry for those in the herd who don't make it but it is best for all this way.
Foreclosure is not the end of the world, it's a failure but not the end
Let me put it another way. You need a "best practice" criteria for selecting the cohort that is unable to refinance, but able to pay at the original rate. The best predictor of this is:
1) Fico
2) Documentation status; or
3) CLTV
If you answered 1), then how are you looking out for the interests of investors?
A former FDIC employee sent these comments out today. I try to place value in comments from people like this who actually worked to clean up the S&L Bank crisis we felt in 1980s Texas.
One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released). This is exactly what the Japanese banks did in the 90s when they did not quickly clean up their balance sheets and deal with the problem, and many of them still have bad debt from the late 80s on their books. SO, the result of this is that there will be a ticking time bomb in the banking / financial system AGAIN.
This action is too late to make any real impact on the housing problem. Real estate prices everywhere have already fallen and will continue to do so until there is something of a more normal relationship between real estate prices and their historic place in the proverbial basket of goods. Again, the last time real estate markets peaked in the middle of the decade was in the 1920s (1925 to be exact) and they did not begin to level out until 1934 and not rise until the early 1940s. Todays action only moves off the inevitable day of dealing with these underwater loans and thereby creates a longer-term problem than would otherwise be the case. This freeze requires homeowners to have 3% equity in their property in order to qualify, as prices continue to decline this will be fewer and fewer. Unfortunately, the ball has already gone over the edge of the building
This action is very similar to the actions taken in the early part of the S&L disaster when the sick institutions were allowed to keep goodwill on their balance sheets and classify it as core capital and we all remember where that mess ended up. Not dealing with real problems in the financial and banking systems always ends in disaster eventually. However, it allows those in power a quick fix and allow them to pass the problem on the next administration to deal with Regan did it to old Bush and now little Bush is doing it to whomever
Earnings at the financial institutions will appear to be significantly improved soon as they will not have to make any of those HUGE (billions of dollars) write-downs on their portfolios any time soon, but they will come.
That was my first reaction when I read the description.
They built a "formal process" for railroading a mod without verification required (ok minimal) so at that point investors can no longer sue for the PROCESS they will have to sue based on one by one loans that the process was not followed properly - hard to find and impossible to prove.
In a sense they are reducing interst rates to many so they don't have to continue wit rate cu and destroy the dollar. They just reduced intrest where it counts (including those who want to defraud - even their houses we don't want to loose price - do we not ?)
Tanta doesn't address (yet) two questions that may be more important that all this.
Capacity of servicers and their staffs to handle the business and their motivation to pursue it in terms of profitability. (She's written a lot about this.)
Transparency, so the public (or at least regulators) can see % of mods by category per institution.
That is the driver for the whole deal - the rest of this is window dressing - the number of borrowers and value of the securities affected will turn out to be so marginal many will be asking "Why bother?"
There are people who won't talk to their servicers when they get in trouble and the servicers have no choice but foreclose. It is possible all this attention might get thos people to call their servicers. This might be the greatest benefit to come from all this.
One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released).
Earnings at the financial institutions will appear to be significantly improved soon as they will not have to make any of those HUGE (billions of dollars) write-downs on their portfolios any time soon, but they will come.
ffdic, is this explicit or implied? this would be very, very big news,if it is true.
So, in effect, it is so complex that few of the intended recipients will know how to use it after all. After all the reason they are in the trouble they are in is that they didn't understand things in the first place. Will the government send out "helpers" to guide them through the process, or are they left to do it by themselves?
"One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value."
Anyone have anything more on this? That goes against everything we've been hearing lately regarding people having to market-to-market their portfolios.
If you can refi why don't you? Oh, because your stated income/assets were as real as the ratings of the sludge in Citi's SIVs. So if you have to bring in docs, maybe you get nailed for fraud. But you don't get a freeze because they think you can refi. Jingle mail.
You can't refi, LTV's getting real small, but you can (barely) make the monthly payment. Maintenance BAH! You're already eating Ramen 3 meals a day, and the heater hasn't been turned on yet...and won't be. You may qual for a freeze, but why bother. That ain't living that's existing, and your friends that rent and make the same income are enjoying Christmas time. Freeze? Fuhget about it. Jingle mail. Oh yeah, my stated income/assets were on the dodgy side as well.
You can't afford the current payment. Jingle mail.
This of course ignores the mind numbing size and actual complexity of the problem. Read this:
Nice job putting all that together, Tanta. If you would go out on a limb, do you think this plan will have a material impact on house prices going forword? Thanks again.
This testimony from the OCC'S John Dugan details regulatory oversight, penalties, laws, rules and regs to deal with some of these issues. It's a good read for those with oversight questions and concerns.
TESTIMONY OF JOHN C. DUGAN COMPTROLLER OF THE CURRENCY BEFORE THE COMMITTEE ON FINANCIAL SERVICES OF THE U.S. HOUSE OF REPRESENTATIVES DECEMBER 6, 2007 http://www.occ.treas.gov/ftp/release/2007-131b.pdf
On just the subject of the alleged violation of contract law. Any party to a contract can waive the performance by the other party to the contract of a duty that the other party is obligated to perform by the terms of the contract. A simplified version for this situation would be that the mortgage contract requires the borrower to pay interest to the lender at an initial interest rate, and then to pay the lender a higher reset rate beginning at the end of the initial period. Securitization of mortgages adds complexity and parties to the equation, but each party in the transaction can agree to waive another party's performance of a contractual obligation. Legally speaking, I'd view the Plan as the agreement by all the lenders/note holders to waive the borrower's payment of the rate reset.
Waiver can be very a useful tool in the contract tool box. One of the parties to a contract cannot perform one or more of the terms of the contract, but both parties nonetheless want to continue with the contract. What are their choices? The contract could be declared in default, but that would terminate the contract and, as I wrote, both parties want to continue it despite the performance issue. They could renegotiate, but that can be like starting from scratch, and it may not be in one or even both parties' interest. So, the party that's owed the performance agrees to waive (permanently or temporarily) the other party's failure to deliver performance of the contract requirement(s) which preserves their original contract and keeps everyone performing most of their mutual agreement.
If you answered 1), then how are you looking out for the interests of investors?
David, this is not about looking out for the interests of investors.
It is about coming up with a "rule of thumb" approach to defining a very technical class of borrowers ("refinanceable") in a way that is intentionally superficial so that servicers can go along being understaffed and muddle through somehow and not get sued.
You are horrified by using FICOs in this context? In a context in which the term "fast track modification" is used??? I'm sorry, but that's like sending a patient in cardiac arrest to the corner doc in the box instead of the trauma center, and then worrying that the doc in the box uses a stethoscope instead of an EKG.
This is about how to do something (or appear to be doing something) on the cheap. Fast. Streamlined. And the only interest in play is making sure that 1) the servicers don't get sued and 2) the issuers don't have to take these babies on balance sheet because of a Q boo-boo.
If that's the context, hell, let 'em use horoscopes. It makes FICOs seem almost respectable.
Thanks, that was very helpful and I appreciate your time. It was so good that even a J6P Supermodel like myself could understand. Seriously.
Looks like the Rancher is publically warning the flock as to be able to say I warned you? He does that a lot.
I think the bearish conspiracy group needs to take a breather. This situation is bad and every little bit helps. It's bad! I HATE, I HATE, I HATE the idea that Benny is going to cut but the voices in my head are telling me that it's needed to stem some of these defaults. The oil bubble needs to pop NOW.
I still think housing prices will fall into line as fundamentals are not there. Inventories are still VERY high.
Stock market Stock market Stock market! Who cares about the stock market! It's been disconnected for months! Good Gravy Man!
gaius marius - I copied and sent the entire post from the former FDIC guy including his 2 links. The FDIC is not mandated to help consumers directly except in limited areas most visibly based on discrimination laws. It's entire mandate at least until now has been to maintain a healthy banking system with each 'insured' bank. All of the consumer issues relates to bank customers and not FDIC's customers. FDIC's customers are the banks. When banks fail and there is a direct payout to depositors and no assuming bank then those former bank customers do become customers of the FDIC. The FDIC damn sure doesn't want nor can its current staffing compliment handle more failed bank customers. Besides they are a pain in the ass.
What will the plan do in a truly macroeconomic sense? Save us all from a slowdown, merely nibble at the margins, or simply be the most hyped string to have ever been pushed?
Am I missing something here? If they freeze the rates, don't the mortgages lose their self-amortizing feature? Are they extending the terms of the mortgages, or how is this getting dealt with, if at all? It seems to me that, if all these loan stop amortizing, we're not only just putting off the pain, but making it substantially worse. Yes?
That is probably a good thing given most of the options being bandied about.
It probably makes it easier to keep 100,000-200,000 or so people in their homes that would have otherwise met with foreclosure. Probably an equal number of folks have foreclosure delayed for a few years leading to a slightly more orderly decline in housing prices, which is inevitable.
The program has little in the way of taxpayer dollars going to it, respects contracts, and does not directly subsidize financial irresponsibility.
And, better the "freeze" than dropping the FFR to try to keep housing more affordable at the margin. (Not the the FFR and LIBOR are that well coupled these days).
Thanks to Tanta, I now understand why this plan is structured the way it is, since as noted it not exactly intuitive. Though it appears to designed to allow some mods on the fast, cheap and easy plan, it looks like it still requires a whole lot of review work just to to sort into the initial three buckets and it is not clear there is the capacity to do even that. Lots of smoke.
Of course if FFDIC's info is correct -- yipes--gotta read that link.
I think that Barney Frank has a point when he notes that pushing refi's while ignoring prepayment penalties is a problem, but I suppose addressing that would get you back into contract modification territory. Though IMO those penalties are predatory.
If I understood how the stock market actually worked, I would be a lot wealthier than I am now.
-JLR
Case-Shiller-based estimated loss on the equity in my house for 2008: $30,000. Largest paper loss in my life. Good thing I'm not planning on moving soon.
If they freeze the rates, don't the mortgages lose their self-amortizing feature?
No.
"Freezing" a rate is the same thing as "fixing" a rate. As in a "fixed rate loan." (Although in this case the freezing or fixing might be just for five years, not for the entire length of the loan.) That's all. The loan still amortizes, it just amortizes at the initial rate.
Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years).
All the servicer is doing is moving the first rate adjustment date in the note out by a few years. So if you were originally scheduled to reset in January of 2008, you might get that date moved to January of 2011. Your loan continues on just as it is today, amortized (or IO if it's an IO loan) at the current (initial) rate.
I keep seeing posts that suggest no fast track for upside down loans. Sorry, but I can't find that in the description.
Since your earlier skepticism, I have been trying to reconfirm it myself. There are quite a few blog posts claiming this, but if you follow the links they all lead back to a single source: Atrios' reporting of what CNN was saying before the official announcement. As this appears to be the only source for all these posts, it is very possible they are in error.
"What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
Ah, okay; thanks. Though doesn't that necessarily mean that the new reset amount will be higher than the original reset would have been, in order to amortize properly?
Seriously, I don't you think the servicers played fast and loose with this one? They are the real winners in this whole scheme. I just wonder why those "Securitization Forum" stooges went along. Could be Rangel was in the background threatening bankruptcy reform. Still, if I were an ABS investor, and obviously, dear God, I'm glad I'm not, then I'd be pissed.
Don't blame the boomers -- this mess was created by Alan Greenspan and his Randian Chicago School buddies giving the full Monica to the BushCo Gangstas -- they did everything in their power to cook the economy in order to prop up this failed regime.
Thank you. So, If it is fully amortized, then the value of that loan drops as well. This also would, seemingly help the borrower a bit. If FFDIC is correct (and I don't doubt him) then the investor doesn't need to mark this to market, which certainly makes their balance sheets look better.
However, if they are IO, then when the defrost button is pressed on the giant microwave in the sky, the debtor's payment must go higher than if the reset occurred today, because there are fewer years to pay the principle, right?
There's something interesting pinging around about this in my head right now. Can't put my finger on it though.
I have heard 4 stories this week about co-workers havng ARM's resetting. They either had no idea or as one said "so thats why the bank has been sending all that mail."
I will spare you the details but as mentioned above getting the staff and systems (correct paper flow procedure) is not going to work out well.
I would not even trust the numbers coming out in a year when xxx and yyy say the "saved the dream" of x amount of homeowners. The people who could do the number crunching, assuming they even find a way to tag them (refi's) is not there.
This is another Shrub foto op in front of the church in N.O.
BTW -- all the talk above about investors no longer having to mark to market: where is this coming from? Seems like a decision for FASB to make, not Paulson et all.
This plan might help a little bit but all hope is based on US consumers continuing consuming. Most of the subprime and ARM mortgage borrowers have jobs in retailing or in other consumer related sectors.
When US consumer has finally maxed out that last credit card, those jobs will simply disappear and fast. When you are unemployed and have no savings, it really does not matter whether the monthly mortgage payment is $500 or $1500. Foreclosure is just around the corner anyway
Where is the financial box the lying, cheating and free loading lotto winners need to be put into so that they can no longer access credit above and beyond of what they already are stealing?
At a minimum they need to get black marks on their credit record and get taxed on the windfall profits of debt forgiveness.
Allowing them to preserve any semblance of a FICO score just encourages future massive defaults on other types of debt in addition to the secured debt.
"If FFDIC is correct (and I don't doubt him) then the investor doesn't need to mark this to market, which certainly makes their balance sheets look better"
May be FFDIC can explain his rational. But I disagree that onwer of the mortgage don't have to mark to market. The plan did not change any of the accounting treatment for the underlying mortgage or the securitization. All it does is changing how much interest the loan can collect. So why would all of a sudden that the mortgage doesn't have to mark to market?? That doesnot make any sense..
Forget about the plan itself, what are the consequences of the plan?
It seems that in restructuring the mortgage system, Alt A, no doc and subprime loans will be gone? If these loans are done, where are they going to find people who'll qualify for 15-30 year loans with 20% down? That was the problem the last 5 years. The industry had to lower standards to find buyers. Where are the people who are going to buy up the record high inventory? Downsizing boomers and increasing foreclosures will only add to the inventory. Itstead of flushing out the system with 2-3 years of pain, it seems that this will be a much longer drawn out process with prices inching down for many years to come.
Rate freeze yes, but these owners will come to see that their home was not a good investment.
Thus only folks who are so blinded by their free markets fundamentalism and opposition to any government intervention in market failures would be so obfuscated by their ideological blinders that they would realize that this plan however modest and partially faulty and incomplete implies a better market-oriented resolution and much lower losses to private investors than a disorderly and mission impossible case-by-case workout of millions of actual or threatened mortgage defaults. Systemic market failures and crises require systemic response where governement resolve the collective action problems of individual creditors rushing to the exits and causing a disorderly workout of severe debt problems. This mortgage disaster is a case where sound public intervention is necessary and desirable.
Death by firing squad or death by starvation. I guess if you choose starvation a miracle might occur that saves you. Now I see. That's what "Hope" means.
Though doesn't that necessarily mean that the new reset amount will be higher than the original reset would have been, in order to amortize properly?
No.
When an ARM's rate resets, it just means that a new payment is calculated over the remaining term at the current balance and the new interest rate. It doesn't matter what the old interest rate used to be. The rate could, theoretically, go down at an adjustment date.
The thing is, the lower the initial rate is, the faster the loan actually amortizes during that initial rate period. So by the time it gets to the (postponed) reset date, the balance to be recalculated is actually (marginally) lower than it would have been if the borrower had only had two years at the lower rate.
Tanta,
Quite the piece! I do not imagine you are going to have any time free, but I would direct your (and the boards) attention towards this article: Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
This is more what I have been talking about. It is the negative amoritization loans, pay option arms, and real teaser rate arms that I mistakenly thought were being targeted. The subprime mess is nowhere near the size of the Prime and Alt-A mess. And the freeze plan only targets a miniscule part of the subprime.
Countrywide Financial Corp. (CFC) Thursday said it identified about 82,000 borrowers facing a rate-reset through 2008 that will be eligible for assistance through its $16 billion home-preservation program.
The Calabas, Calif., financial-services company said its program is aligned with the recently announced HOPE NOW initiative, which is intended to provide loan modification assistance to borrowers at risk of delinquency due to interest-rate resets
owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case.
As others point out, this would be big news but I can find no confirmation - and the two links in that post from that person have nothing about this. Perhaps, FDIC you could go back to that person and tell him/her people are looking for confirmation ?
Also:
This freeze requires homeowners to have 3% equity in their property in order to qualify, as prices continue to decline this will be fewer and fewer.
Here the links WERE of help and they contradict that assertion. The bloomberg link states:
"To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property."
i.e you must be barely above water or worse to qualify and as time goes on and(|if) prices drop, more and more will be underwater and so will qualify.
It is all kinda weird though- you must be quite a deadbeat to qualify ( 660 or less ), and have little or no stake in the house ( 3% equity of less ). Tanta's explanation of course laid out THEIR logic well(thanks Tanta), but when logic leads you to daft behavior one should question one's assumptions and premises and really think outside the box, not follow the logic to its remorseless conclusion.
Tanta said: "Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
A sincere "thank-you" for the detailed explanation, but this has got to be the most egregious case of "burying the lead" I've ever seen. You couldn't have said this up-front?
But it keeps you working if you have no equity. My best part is Bush's speech where he states:
Congress needs to reform Freddie and Fannie. They provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission.
STRENGHTENS INDEPENDENT REGULATION???
What that means is they are to be deregulated!
So the GSEs will be strenghtened by letting them answer to themselves. Wow that is a great way to get rid of government.
I thought the nice thing about ARMs was they can adjust DOWNWARDs in an environment where the reference interest rates ( LIBOR, cost of funds) are dropping.
Didn't these subprime ARMS have that feature ? Were they always to adjust upwards ? That's a bit unfair!
Assuming that these were what I call normal ARMS then what's going to happen if the reference rates go DOWN ? ( over 5 years anything can happen)
Will they be frozen in place ? Not THAT would be justice - rough justice, but justice !
According to the ASF document linked earlier, current loans with LTVs above 97% cannot be eligible for FHA refinancing and thus can be fast tracked without further reference to FHA guidelines. If a current loan has an LTV below 97% it must first be checked against FHA Secure guidelines on delinquency history, DTI at origination, and loan amount to confirm that it's not eligible for an FHA refinance before it can be fast tracked.
So in terms of the executive summary, I'm getting the much ado about nothing vibe. If this is liability proof, then nothing has really changed about the contracts and whatever could be done for the borrower could have been done anyway! LOL!!!!!!
But this Hope Now thingy does accomplish two ACTUAL things that I can see:
1.) provides political cover for GW and allows him to put some distance between himself and the "Ownership Society" nonsense. It shoes he cares and is doing SOMETHING, LOL!
2.) Juices the markets and allows GS and the rest of the "market participants" to offload fictitious capital ponzi units at the highest possible price and protect the Santa rally and Wall St. bonuses. Likely this bunch of conmen are looking for places to bury the bodies before they start stinking too much.
And their frozen rates will be based on those reference rates ( + quite a bit )
Now, under my understanding of standard ARMS, they reset kinda every 3/6 months ( this is what happened in the UK to me ) after the fixed period - and I'd be betting that LIBOR will be going down - for someone with a 2006 reference rate their bar is 5.5 over the next 5 years - Will LIBOR drop below that ? WIth the tizzy that the central Banks are in, as a betting man, I'd bet on it - and I'd get mad if I was frozen at a HIGHER rate than was prevailing at that future time - that's what I'm getting at.
HI
Thanks again boomers for screwing the rest of us.
Don't blame the boomers -- this mess was created by Alan Greenspan and his Randian Chicago School buddies giving the full Monica to the BushCo Gangstas -- they did everything in their power to cook the economy in order to prop up this failed regime.
-ck- | 12.06.07 - 6:40 pm | #
Thanks from a boomer that only rents in Calif. Uncle Al come the Milton (screw the little people) Freidman school and have to say it been fun to watch and for just a moment I thought I might be able to by a home when I retire in 2010.
Thanks to Tanta/CR and everyone else here with some great info.
jo6pac
The American Securitization Forum wrote the rate freeze presented to the public by the President of the United States of America.
It would appear that some of the firms that sold a lot of the bad debt, are members of the industry group for the lending and investment banking business, belong to the American Securitization Forum
Members include Countrywide Home Loans, Ameriquest Mortgage Company, Capital One, Citi Global Markets Inc., Fannie Mae, Freddie Mac, GMAC, JPMorgan Chase, Thornburg Mortgage, Inc., Washington Mutual Bank, MetLife
DBRS, Fitch Ratings, Moodys Investors Service, and Standard & Poors
ABN AMRO, Inc., Banc of America Securities LLC, Barclays Capital Inc., Bear, Stearns & Co. Inc., Countrywide Securities, Credit Suisse, Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley, UBS Investment Bank, PIMCO,
Who is going to profit from the rate freeze modifications?
Who is going to look good if it works, but very bad if it doesn't?
In the executive summary of Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans,
it looks like theyre not going to check howmeowner income, and will be allowed to modify loans even if they don't make contact with the homeowner
wow
Whos stocks went up after the announcement?
Notables
CHAIR Greg MedcrafT, Managing Director, Global Head of Securitization,
Societe Generale Corporate & Investment Banking DEputy CHAIR DianE W old, Managing Director, HEAD OF Investment Banking, GMAC-ResCap
SECRETARY Sanjeev Handa, Head of global public markets, TIAA -CREF
TREASURER nelson soares, managing director, HEAD OF U.S. SECURITIZATION BANKIN G GROUP, LEHMAN BROTHERS
EXECUTIVE VICE PRESIDENT JASON H.P. KRAVITT , SENIOR PARTNER , SECURITIZATION PRACTICE , MAYER BROWN, ROWE & MAY LP
EXECUT IVE VICE PRESIDENT LAWRENCE RUBENSTEIN , GENERAL COUNSEL , WELLS FAR GO ASSET SECURITIES CORPORATION
and I'd get mad if I was frozen at a HIGHER rate than was prevailing at that future time
You are forgetting the margin.
Most subprime ARMs have a margin in the 5.50-6.00 range. That is added to the index, then subject to the caps, to get the adjusted rate.
If your margin is 6% and your current rate is 7.7% (my ballpark estimate of the average for subprime ARMs), then you go up at your next adjustment as long as 6 month LIBOR is more than 1.7%.
I have explained all this in past posts. I guess I could dig out the link.
I really would, however, like those people who tend to get insulting about "those dumb borrowers" to reflect on how much time and space can be taken up on these comment threads just on clearing up misconceptions about how these ARMs work. I think that should, basically, suggest some humility and perhaps make folks think twice about calling these borrowers dumb.
I think K makes some interesting points about rates.
Could this deal result in borrowers committing to a fixed rate during the very time that interest rates return to historically low levels and so they otherwise might have been able to refi out of this problem?
Or would lower future value of their RE and prepayment penalty clauses have made a move to lower rates impossible?
=======================
re Yalt
Bloomberg's not quite right here.
According to the ASF document linked earlier, current loans with LTVs above 97% cannot be eligible for FHA refinancing and thus can be fast tracked without further reference to FHA guidelines. I
There are come double negatives here - am I right in thinking that ASF is saying that 97% LTV or higher CAN be fast tracked(i.e. IS eligible) ?
I thought that's what bloomberg said - Am I getting these greater than, less than wrong ?
I'm assuming that "LTV above 97" means numbers like 98, 99, 100, 101, meaning 3% equity(value), 2%, 1, no equity, underwater by 1%.
Remember the promised "Shock and Awe" campaign that was supposed to end the 2nd Iraq war swiflty? After considering the big "Rate Freeze" plan that was supposed to help so many, I have to say if you have to ask, it isn't shock and awe! What a dud.
I was including the margin by saying "reference rates ( + quite a bit )"
Your numbers of 6% margin may well make the likelihood of the situation arising low - I'm just checking on assumptions first ( that ARMS CAN go down as well as up even for these subprime loans ) and if that assumption holds then describing the scenarios that can occur. I'll have to look at some rate sheets now I suppose.
Death by firing squad or death by starvation. I guess if you choose starvation a miracle might occur that saves you. Now I see. That's what "Hope" means.
I disagree. Death by firing squad is better because you get to see the 40 virgins a lot sooner.
The classic build up to nothing. It would be funny if its weren't so serious. Banks!!! and the treasury (!!!!) design a plan for end investors to take a hit. No govt money and no bank money, just end investor money! what a crock of sh*t. no wonder they are trying to make out that contracts are being honored.
Check out paper money and a panel on this issue. All are sell side bufoons that want both new money in the mortgage sec. market and for existing holders of sh*tty paper to accep a haircut. So take a loss now because otherwise you get nothing. Oh and by the way, we need new money too, because otherwise we are all f**k*d
Grand humor. The able to refinance category assumes second mortgages will subordinate to a refinanced first.
"If the borrower also has a second lien on the property, this Statement
contemplates that the borrower is able to refinance the first lien only,
on a no cash out basis. In order for the loan to fall into this segment,
the second lien does not have to be refinanced; however any second
lienholder will need to agree to subordinate their interest to the
refinanced first lien."
It is all kinda weird though- you must be quite a deadbeat to qualify ( 660 or less ), and have little or no stake in the house ( 3% equity of less ). Tanta's explanation of course laid out THEIR logic well(thanks Tanta), but when logic leads you to daft behavior one should question one's assumptions and premises and really think outside the box, not follow the logic to its remorseless conclusion.
They want to keep the F'd borrowers in their Mcshitboxes, don't want em back,savvy? ie....better to make em keep em than leave em. Alway's crunch the numbers.
Excellent summary Tanta. You said in one of the comments:
"Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
Investment bank Barclays Capital reported that out of the 2 million subprime loans resetting through 2009, roughly 240,000 would be covered under the current plan.
If you are shifting the adjustment date of the loan reset and as you say, converting a 2/28 mortgage into a 5/25 mortgage, unless I'm missing something, isn't the current plan speculating that the current borrower will either have:
a) More income to cover a higher mortgage payment in the future since it will amortize fully on a shorter time frame
b) Betting the housing market will improve to allow more time for housing appreciation
c) Buying more time for more government help
Logic would follow that if a current subprime borrower cannot make the payment today in 2007 without fixing their rate what is to say they will be able to afford the payment in 2010 when the rate resets and the payment will be higher because of the higher cost of amortizing on a shorter schedule? The subtle implication is that the buyer will have a higher income in the future to cover the payment or housing will be booming again so he can simply sell it off.
I have a question with regard to the 3% equity rule. Is the equity percentage calcuated based on the initial appraisal, or rather on a new appraised value of the property?
If the latter (i.e. new appraisal), since the appraisers (who used to have financial incentive to inflate appraisals) will now have an incentive to deflate (perhaps even below the market clearing prices in order to show < 3% equity), might this actually make it more difficult for buyers and refinancers and folks applying for HELOC to get their mortgages / LOCs?
Man o man o man... I can't believe all the posters here who are following the fingers and not the little walnut shells.
Folks, this is not about helping homeowners or bailing people out.
The purpose of this action is to artificially impose 'stability' so that securities based on mortrgages can be priced. This is being done for all the major financial institutions who are being pulled through the knothole screaming in terror. This is being done so that our financial system does not completely lock up and so that private individuals can still fly in private planes to private islands owned by their pals in the Carib so that can have private weddings undisturbed by the unwashed masses, who will now be put to work for 5 more years making very high rent payments before they are tossed out into the streets.
Also pay attention to the other unannounced half of the deal: if rates are higher in 5 years this all still falls apart. But... who controls rates? Think about it.
I liked the Bush plan for whining New Orleans Americans better. Find them wherever they are, give 'em a debit card no strings attached, and ask them to shut up. They did.
Some details in the post by FFDIC are are not quite accurate, but the conclusion that banks are being propped up is dead-on.
NO LONGER required to re-price these assets...will allow institutions to hold securities of unknown value on their books...what the Japanese banks did in the 90s...will be a ticking time bomb in the banking...
Bank usually hold securities, loans, etc. in one of three buckets held-to-maturity (HTM), available-for-sale (AFS), or held-for-trading (HFT). Loans/securities in HTM are carried at amortized cost and a write-down (thru reserves or earnings)only happens when there is permanent impairment. Unrealized gains/losses in HTM assets are a footnote. Treatment for AFS is different, as gains/losses are part of comprehensive income (i.e., below the bottom line but capital is adjusted). However, a permanent impairment of an AFS asset will flow thru earnings. HFT assets are MTM and any gains/losses run thru earnings.(Please note that SFAS 159 and 157 will change accounting conventions if adopted.)
Most portfolio lenders carry their mortgage loans as HTM; hence, the discussion from the former FDIC employee about marketing these loans to market is not technically accurate. This is why banks have been described as a mutual fund with a blind pool of assets as the carrying value of their loans is very opaque. Further, this is the purported reason that there are bank regulators! In theory, bank regulators should be closely scrutinizing loan carrying values to ensure they are not overstated. If the overstatement is large enough, then the bank is insolvent. Coast Bank (CFHI) is a great example of how overstated capital can get and the current impotency of the FDIC.
The concern now is that bank regulators will not do their jobs since they have led the charge for this forbearance program. We have seen this movie before in 1991 under another POTUS named Bush. His Treasury Secretary Nicholas Brady called the regulators on the carpet and told them to ease up because they were hurting the re-election effort (if interested follow the links).
Since 1991, the banking regulators have been gun shy about forcing any realistic valuations for assets. Moreover, by attrition or by their own efforts in running-off seasoned examiners, they have very little talent left to make any realistic valuations even if they regained their political will and wanted to return to their true core mission.
So yes, earnings and capital for the banking industry are currently overstated. The overstatement will only grow as the housing market continues to slide and the banking regulators continue to forbear.
FFDIC,
"Owners of the debt (subprime mortgages or anything tainted by subprime such as mortgage backed securities)are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case."
As others have posted, this statement is highly suspect. Recognition of gain/loss is governed by the accounting standards of the FASB. I have not seen, nor can I believe, that the FASB has agreed to cancel its gain/loss recognition accounting standards.
Per Bair's statement it sounds like one of the main factors in favor of bulk modification is the fact that servicers don't have enough staff to service the loans. Bair says modification is in the best interest of the investors because the only other option is default - given the lack of servicer resources. If I am an investor, why should I agree with this premise. I would still sue and argue the the servicer's lack of resources has no bearing on their duty to determine whether a modification or default is in my best interest.
No matter what there will be lawsuits and unforseen consequences. I have no doubt servicers and borrowers will manufacture a way into qualifying for modification. Also, I doubt the example of starter rates of 8-9% is true- that is probably only for the second and the combined rate is lower. From the sidelines, none of this really matters to me.
What does matter to me, is if all this is simply streamlining the default/mod process, why was Paulson seeking authority to issue tax exempt bonds? How could state bonds have anything to do with streamlining the process? Is the money for nonprofits to educate borrowers of the program, or for something else? Anyone know?
I think this comment from Tanta is the most important thing said on this string:
"I really would, however, like those people who tend to get insulting about "those dumb borrowers" to reflect on how much time and space can be taken up on these comment threads just on clearing up misconceptions about how these ARMs work. I think that should, basically, suggest some humility and perhaps make folks think twice about calling these borrowers dumb."
Exactly. The panic and resentment exhibited over the past week about no-good former welfare recipients getting locked in at 1% has just been extraordinary, and against all of the facts.
Get a grip on reality. It is the Bush Administration. You can expect the following: 1) unfettered capitalism for robber barons, 2) govt contracts for cronies, oil companies, and mercenaries, and 3) shit out of luck for the rest of us.
Now the whole country will get a taste of what it was like to live in New orleans and have GWB declare his concern and commitment to rebuild . . .
At last we'll also have something in common with Iraqis, too.
Thank you for your very reasonable post and comments here. This helped me understand THE plan a lot better.
I agree that this is a sensible approach, if somewhat marginal. In the end I believe it will be helpful to smooth the current mid-cycle downturn and prevent it even more from becoming a recession. It's all about trust and confidence.
I think this is a big accomplishment if a struggling borrower gets to keep his house and does not have to foreclose. He may still have to struggle financially for years, but for his self-esteem it would be very beneficial.
They are allowed to post comments, 1st Amendment and all that.
They are also allowed to sign away all of their property, or bury gold on their property and buy shotguns, and (oh, this hurts me) they were even allowed to vote for GWB in 2004.
Thank god they are not allowed to vote for GWB again!
"Logic would follow that if a current subprime borrower cannot make the payment today in 2007 without fixing their rate what is to say they will be able to afford the payment in 2010 when the rate resets and the payment will be higher because of the higher cost of amortizing on a shorter schedule?"
...
Dr. Housing Bubble | Homepage | 12.06.07 - 8:55 pm |
Someone who calls themself "Dr. Housing Bubble" should try harder to understand how mortgages work.
An ARM such as is being discussed here is always fully amortizing, at every point in time, before and after every adjustment.
As Tanta pointed out above, maintaining the lower initial rate for a longer period actually results in more principle being paid earlier, so that payments after the first adjustment finally happens will be lower than if the initial rate had not been "frozen", everything else being equal.
What I find most amazing about "the Plan" is how it seems to have the whole counry whupped into a frenzy, when it's really not much of a plan at all. A set of non-binding "best practices" that seem to just restate the obvious: if they can pay, make 'em pay; if they are hopelessly incapable of paying even the current rate, it's pointless to freeze their rates; if they're in the middle, work it out, because it's probably more economic than foreclosure.
I saw Paulson on the PBS "Newshour" tonight. Man, that guy blinks his eyes a lot. Between that and the President giving the wrong phone number, it seems like the country is being run by white guys with good cufflinks who got gentleman's C's in the Ivy League 30 years ago. At least Chuck Prince is no longer dancing (just the idea of a guy like him "dancing" always gave me the heebee geebees (sp?)).
I'm going to go out on a pretty safe limb and predict this will be about as significant as Gerald Ford's Win Program. Without the buttons.
festus - I agree with you. This plan is not the monster we had nightmares about leading up to this. It is Caspar-the-frendly-loanmod template.
As I said a million comments ago, if the resulting media circus prompts a couple extra soon-to-be-distressed borrowers to contact their servicer just to have a little chit-chat, then it's probably helped, in a roundabout way.
I'm no great fan of Bill, except in comparison to GWB.
Weren't the seeds in the post 9/11 rate cuts and Greenspan's endorsement of innovative mortgage products and ARMs?
Granted we've been on a slippery slope of deregulation of the financial markets since Ronnie R was Prez, but the bubble developed under Bush. That is, the housing bubble.
A different bubble developed under the Clinton Admn.
The lines about Bush I believe do not need to be taken in a partisan way. I'm a big fan of Chuck Hagel, Repub Senator . . . But don't you think it is amazing that so many people panicked about what they thought (maybe still think) is to be a Bush sponsored give away, taking from Wall St or tax payers and giving to subprime borrowers? In that context, esp, the robber baron reference still makes a lot of sense to me.
Just trying to discuss with you on lower key.
We can disagree. That's covered by 1st amendment, too.
I'm going to go out on a pretty safe limb and predict this will be about as significant as Gerald Ford's Win Program. Without the buttons.
uncle festus
I agree the biggest impact may be psychological - but thatshould never be underestimated.
Let's also not forget mortgage rates are down almost one percent since June. This provides further cushion for borrowers among higher refi possibilities.
I just wanted to come back (had to run to my firm's holiday party) and thank you for taking the time to respond to my questions. I realized my point of confusion - I (and I think a few others here) was confusing a regular ARM with IO. The amortization problem would arise only if the reset was pushed back on an IO - I think I have that much right.
Since some people can't see what the outrage is about - which isn't just in the blogs - CNBC in general reports getting massive mail about it - let me try this:
The government organized it, encouraged it, put its "brand" behind this plan.
The government is supposed to be for ALL the people.
As people delve into the plan its actually stands out that within the class of people it seeks to help, it systematically discriminates against those who conventional puritan morality, character and ethics dictates would suggest are the "good guys" - Stuff like -
"made an effort and tried to have a goodish fico score, no bailout for you"
"made an effort and improved your fico score, no bailout for you"
"made an effort and tried to get some skin in the game in the form of equity, no bailout for you"
This is an INTRA-class issue - its not about "fat cats" like you know who who has a 10yr 4.7% mortgage with 50% equity etc - its about the fact that within the poorer sections of the population some make more of an effort than others and THOSE are the people who are going to be discriminated against by not getting "THE DEAL" ( We'll leave the irony aside that actually this is NOT such a good deal at all in many solution paths that plot a price decline of 30% and that they should thank whoever that they aren't getting the deal ).
Its the perception of a lack of fairness that's outrageous.
Tanta has described very precisely why this has come about - and there is a legal and contractual observance logic to it but to the man on the #10 Clapham omnibus and I ride that bus too, its
so this is the reason, as surferdude elquantly explained in (see greater detail above):
"Earnings and capital for the banking industry are currently overstated. The overstatement will only grow as the housing market continues to slide and the banking regulators continue to forbear."
i would fire Paulson, put Tanta in charge, and then go build a snowman. any positive effect on the number of mods that get done (that wouldn't have been done anyway) to the number of foreclosures is still going to be swamped by home price declines and maybe recession. there is also a high likelihood that i will accidentally burn down the white house.
Repoman: "Itstead of flushing out the system with 2-3 years of pain, it seems that this will be a much longer drawn out process with prices inching down for many years to come. "
Do you think they care ?
They only care about "Bush time in office".
If they can have the great depression of 2009 this is really no longer their problem. Who do they scrwe up : Rudi Giuliani or Clinton ?
It seems Clinton knows she is not going to be president this time since she too is not intersted in a quick solution.
The borrowers who are going to be "helped" by the Bush freeze are in fact going to get screwed. They are being invited to keep paying 7% to 8% or more for a house sinking in value, only to be in mortal danger of losing that house in five years at the end of the freeze. Many of them would be better off going through foreclosure now rather than paying through the nose for fice more years only to lose it all.
The people really getting helped by the Bush freeze are the people who are organizing the freeze: Angelo Mozilo and his ilk, not the borrowers.
Anyone who actually acted in a fiscally responsible way the past five years is going to get a pretty nice reward in about two years with low, low,low house prices . . . and all along they are going to enjoy the benefits of solvency, security, and and absence of fear that they are going to be kicked out of their homes.
The anger is misplaced.
Bush deserves anger. So do Greenspan, Angelo M, much of Wall Street, and some more.
Nice post Tanta, though I strongly suspect litigation will blosom as practical application runs into itself, with most parties involved becoming unsatisfied.
At the same time, as prices continue to fall and more borrowers are increasingly 'upside down' within a weakening economy, more keys find their way to the mailbox, plan or no plan.
So if the Pres's plan is just a reassertion of what was generally already in the PSAs, and loans need to be evaluated on a case-by-case basis and then mod'd or not, doesn't this plan amount to a Quad-stacker NothingBurger?
Thank you surferdude, --a compelling analysis. And so what amendments to 'Hop Skip Jump' would you like to see so that the banks are served a smaller slice and the borrowers, a little more generous share?
I think we'll all be relieved that this dance is mostly PR and that the efforts to save the banks is only starting. Hard to believe another 10% fall in house prices won't seriously impair bank statements, dance or no.
I am reminded of Kasriel's warning 2? years ago that the banks exposure to income streams tied to mortgages was at record levels and a serious liability...and we have arrived, yes?
I suspect that this plan is but the first salvo. Too much is being floated for there not to be areal bail out in a few months. We will see conforming raise 50% as well as tax free muni's. That's the real end game.
Tanta Thanks for the elucidation of a complex problem.
As a scientist, I happen to believe CDO is an efficient and reasonable way of raising capitals ( in contrast with most people here).
Today's housing mess is caused by fast evolution, abuse and the lack of a standard for myriads of CDOs.
Hopefully, the proposed rate freeze will give Wall Street some time to unravel each CDOs and identify a matrix that can help evaluate their true worth.
Regardless of emotion, the bank system can not be allowed to fail. At the rate of today's mark-to-market, the pendulum of irrationality is swinging to the opposite end.
In the end, The one who has the Gold makes the rule of the game.
'evaluating their true worth' is just what most hope to avoid, and since many CDOs are bespoke, i.e. customized to suit the demands of particular investors... the only way to determine their 'true worth' is placing them for sale.
somewhat the same, i have over and over heard that SFAS 157/159 would force a mark-to-market rather than mark-to-model and mark-to-myth.
Now while its true that guideline does emphasize 'fair value' accounting and placement of assets into one or another of three buckets so improved disclosure, it very certainly does not mandate actual mark-to-market other than for level 1. That is, it simply requires financial institutions to disclose by what inputs and method assets are priced, not that unobservables can no longer be used.
for someone who remembers p/e ratios as a sound metric what has developed over the last decades is so far beyond absurd as to overwhelm; we have mystifications of mystifications being treated as real. The levels of self-supporting illusions and delusions have become untenable -- the attempts to save the blatantly fictitious from its destined meeting with the real patently bizarre.
"owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case."
If true, why are the auditors forcing C, BAC et. al. to take huge writedowns? Besides being bad PR and a drag on the stock price, it eats into capital adequecy -> lower loan volume -> smaller future profits. What you describe sonds like the Brady Bond fiction invented 20 years ago. Don't think we're there (yet).
Still, even a relatively few, small modifications could have a chilling effect. Based on a passing comment in some blog, I pulled Fannie's last 10Q and back of the enveloped this:
Asset margin 5.67%
Liability Margin 5.34%
Spread 0.33%
NIM 0.52%
That includes an average 5.45% return on $397 bn in securities. If the return falls to 5.18%, then you get:
Spread -0.18%
NIM 0.00%
Nice, huh. And that's Fannie. What do you think is going to happen to risky, highly leveraged players that are longer lower quality paper?
Loss of home value in this time frame further reduces the attraction of this option.
Yes. So how many of these people whose rates will be frozen are negatively amortizing as I hunt and peck here? Will they be so absurdly stupid as to continue paying for a property (sic) when they 1) have no personal equity in it since they made no or only a scant down payment, and 2) already owe more than it is worth and both their negative amortizing and falling house prices means that this difference is growing every month?
Somewhere along the line, somebody said that one won't qualify if the mortgage is larger than the current value of the house. Obviously, they'll just have to government mandate housing prices to somehow stay high. I don't know this will work - maybe governemnt-owned appraisers? A "trading curbs" for housing prices that prevent more than a 5% decline per year, forever?
This bail-out only helps a small percentage of people. As the problems grow, so will the bail-outs until several goals are achieved: the bankers get richer, the people get poorer, fraud is well-rewarded, and honest people who refuse to become debt slaves are screwed.
I know I'm a bit late, but I just want to thank Tanta for this fantastically informative post. It's hands-down the best piece I've read on the subject.
Nicole Gelinas just wrote a devastating piece about one "feature" of the Bush bailout plan. Apparently, the Bush bailout allows state and local governments to issue tax free munis to fund replacement subprime mortgages.
The bottom line is that Wall Street gets paid in full using tax free munis (at the expense of the Federal taxpayer) and state/local governments get stuck with the bill when these subprime mortgages (re)default.
A wonderful version of "heads Wall Street wins, tails the public looses" thinking.
Note that this article is worth reading for other reasons as well. I quote
"By encouraging people to stay in homes they can't afford, the plan keeps the housing market artificially high. When a bank forecloses on a home, conversely, someone else can buy it at a much cheaper price.
Politicians in New York and elsewhere have been complaining about a lack of affordable housing for years now; you'd think they'd be happy to have the opposite problem. Yet the bailout plans use government money to keep the market from finding its true price. This, when first-time homebuyers benefit immensely from falling home prices"
So the public interest is served by (more) affordable housing. A remarkable idea.
Bruce Paradis served as the CEO of Residential Capital LLC (ResCap) until his retirement in June 2007. Prior to the formation of ResCap in May 2005, Paradis served as President and CEO of GMAC-RFC (now ResCap) from 1994 to 2005. He joined GMAC-RFC in 1983 as Vice President of Marketing and held several leadership positions within the GMAC-RFC family. Paradis will continue his work with several non-profit organizations, including HPF.
Sandor E. Samuels
Executive Managing Director, Chief Legal Officer and Assistant Secretary Countrywide Financial Corporation
Sandor E. Samuels is Executive Managing Director, Chief Legal Officer and Assistant Secretary for Countrywide Financial Corporation. He serves on Countrywide's Executive Committee and directs the Company's public affairs activities. Samuels joined Countrywide in 1990 after a successful legal career in private and corporate practice, including senior positions with First Interstate Bancorp, FIMSA, and Fox, Inc. Samuels serves as the Chairman of Bet Tzedek Legal Services and is the Chairman of the Advisory Board of the Ziegler School of Rabbinic Studies. He also serves as a member of the Board of Directors of the University of Judaism, Bet Tzedek, the Los Angeles Urban League and Adat Ari El synagogue. He also has served as Chair of the Legal Issues Committee of the Mortgage Bankers Association of America. Samuels has been honored with the Founders Award by Bet Tzedek and was named Outstanding Corporate Counsel of the Year in 2005 by the Los Angeles County Bar Association.
This was just posted on naked Capitalism; can someone walk through this and give an expert opinion?
Anonymous said...
Re: You must not have more than 3% equity in your home - You're solvent? How dare you, sir!
Must not have more than 3% equity in your home, which I guess implies that for every $100,000 you would have $3000 in equity
Re: Mortgage had to be issued between January 2005 and July 2007
So, within 2 years, a person would have to have put $6000 into equity on $100,000, which is 24 payments resulting in $250.00 per month.
That to me is not possible given the interest rate being paid out, i.e, I would be SHOCKED if these subprime borrowers across the scale had more than $30.00 per month go to equity!
Enright, president of Turnpike adviser NW Financial Group, said he prefers negotiated sales for the authority because they ``always give you the best price.'' While the date and terms of a competitive sale are fixed, Enright said, a negotiated sale can be timed to take advantage of falling interest rates and modified on the day of the sale to attract better offers, he said.
``You can change the structure of the deal and get better prices,'' said Enright, whose firm has offices in Jersey City and Trenton, New Jersey.
A 1994 order superseding Florio's edict by his successor, Christine Todd Whitman, made it easier for state borrowers to sell bonds on a negotiated basis by allowing a number of exceptions under which they could hire Wall Street firms to arrange an offering. These include large-sized issues, variable- rate debt and lower-rated bonds.
Negotiated
Of the $5.5 billion of debt issued by the Turnpike Authority in the past five years, none was done by competitive bid, Joseph Orlando, a Turnpike spokesman, said in an e-mail.
The Turnpike Authority prefers to hire banks to sell its bonds and arrange terms, said Jack Kraft, a New Jersey bond attorney who was the counsel on a $2 billion Turnpike negotiated bond issue that was the largest municipal debt sale ever when it was completed in 1985.
``Negotiated bond sales are the best way to handle large and complicated transactions,'' said Kraft, who in 1971 established the first nationally recognized bond counsel firm in New Jersey.
I hope you all see where this is going! The same people that brought you big-box walmart expansion, are going to be the same people that transfer bank bailouts to taxpayers!
Revealing more details about a national mortgage-rescue plan that's still in the works, Treasury Secretary Henry Paulson proposed Monday to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing and confirmed that he seeks to temporarily freeze the rates of tens of thousands of home loans that are about to adjust to higher rates.
Paulson told a national housing forum that Congress should authorize state and local governments to broaden their tax-exempt bond programs temporarily. Currently, states have authorization to issue tax-exempt bonds only to aid first-time homebuyers in designated distress zones. Paulson proposed to expand this to allow state and local governments to issue tax-free bonds to help in mortgage refinancing.
Dec 5 (Reuters) - The U.S. Treasury Department said Wednesday that it supported temporarily lifting the cap on the volume of tax-exempt bonds that state and local governments may use to buy troubled home loans.
"The Secretary's proposal would increase the volume cap by a total amount to be determined in consultation with Congress and the states. It would be for use in the three years from 2008 to 2010 for refinancing with qualified mortgage bonds," Treasury spokeswoman Jennifer Zuccarelli told Reuters.
In a speech addressing problems in the housing market on Monday, Treasury Secretary Henry Paulson said state and local governments should be permitted to issue tax-exempt bonds to fund refinance programs for struggling subprime homeowners. He did not provide many details.
The proposal to allow tax-exempt bonds to refinance troubled mortgages is just one part of a Treasury-brokered plan to help troubled borrowers to be unveiled on Thursday.
About 12 states have already launched or are in the process of launching mortgage refinancing programs but they have been financed through taxable bonds or other sources.
State and local agencies sold $30.5 billion in housing bonds in 2006, according to Thomson Financial, but only $6.4 billion were tax-exempt.
10/4/2007--Passed House amended.
Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and who are insolvent.
Extends through 2014 the tax deduction for mortgage insurance premiums.
Sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations. Qualifies a corporation if: (1) 80% or more of the total square footage of the corporation's property is used or available for use by its tenant-stockholders for residential purposes, or (2) 90% of the corporation's expenditures are for the acquisition, construction, management, maintenance, or care of its property for the benefit of the tenant-stockholders.
Limits the exclusion from gross income of gain from the sale of a principal residence by denying an exclusion of the gain that is allocable to a nonqualified use of such residence (i.e., use other than as a principal residence).
Amends the Tax Increase Prevention and Reconciliation Act of 2005 to increase to 116.75% the estimated tax rate in the third quarter of 2012 for corporations with assets of not less than $1 billion.
10/16/2007--Introduced.
Escrow, Appraisal, and Mortgage Servicing Improvements Act - Amends the Truth in Lending Act to require a creditor, in a consumer credit transaction secured by the consumer's principal dwelling, to establish an escrow or impound account to pay taxes and hazard insurance, and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums.
Requires written disclosures by the creditor to the consumer regarding: (1) such escrow or impound account; and (2) consumers who opt out of escrow services.
Amends the Real Estate Settlement Procedures Act of 1974 to proscribe specified practices by the servicer of a federally related mortgage, including obtaining force-placed hazard insurance coverage to protect the mortgagee's interest in the property.
Prohibits practices related to default, late fees, or foreclosure.
Requires prompt: (1) crediting of payments; (2) responses to payoff balances; and (3) refund of escrow accounts upon payoff.
Directs the Secretary of Housing and Urban Development to study and report to specified congressional committees on mortgage servicing fraud.
Amends the Truth in Lending Act to: (1) require repayment analyses to include escrow payments; (2) include a written property appraisal as a prerequisite to granting a mortgage; (3) prohibit unfair and deceptive practices and acts relating to consumer credit transactions secured by the principal dwelling, especially in property appraisals; and (4) require a mortgage originator to make available to the credit applicant all appraisal valuation reports no later than three days prior to the transaction closing date.
Amends the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to: (1) include among the functions of the Appraisal Subcommittee protection of the consumer from improper appraisal practices and the predations of unlicensed appraisers; and (2) expand state agency reporting requirements to include transmittal to the Appraisal Subcommittee of reports on claims, disciplinary actions, license and certification revocations, and suspensions.
Prohibits certain interested parties in a real estate transaction involving an appraisal from engaging in specified practices to improperly influence a real estate appraisal in connection with a mortgage loan.
Requires the Comptroller General to study and report to specified congressional committees on possible improvements in the appraisal process and in state compliance programs.
The core is this: loans made by banks as originators subject to bank regulation have not been the problem. The problem has come when loans were originated by unregulated people, not that they were morally deficient, but there was no regulation. Here is the core of this bill: we have tried talking to the bank regulators and others to take the principles that the bank regulators have applied to loans originated by regulated depository institutions and apply them to the unregulated originators, the brokers. And it is not the case that the brokers were morally deficient. In all of these professions, we have an overwhelming majority of honest people. But the problem is, in the absence of any regulation and the availability of a secondary market with no rules, that minority that was not scrupulous caused us problems. This bill fixes that.
Rep. David Scott [D-GA]: Mr. Speaker, I think it is very important because the assignee liability issue did come up, and I think as we move through this debate it would be clear to get a clear understanding of what we have in that so we will have a point of reference.
First of all, in this issue, if a consumer gets a loan that violates the minimum standards, in this bill are minimum standards, then the consumer has cause of action against assignees that have purchased that loan. The consumer may sue to rescind the loan and recoup other costs. There has to be an element of liability in the issue. We have worked to get a delicate balance that both protects the consumer while at the same time also saving some elements of liability so that we keep the market free of unnecessary suits.
Further, when the holder of a bad loan initiates a foreclosure, the consumer may exercise a rescission right under this to stop foreclosure. This is important. If the rescission right has expired, the consumer may seek actual damages plus costs against the creditor, the assignee or the securitizer. This provision gives real power to the consumer who can sue to stop a foreclosure of a bad loan or to rescind the bad loan.
Now, we also have some protections from liability for the loan originator. Number one, somebody may ask, why even give some protection from lawsuits to any entity that buys a loan? I believe that most consumers realize that the market provides the funding for loans and that the constant threat of legal action will indeed increase the cost of those loans for everybody. Somebody will have to pay that cost. And normally, that cost will fall on the consumer. So we have struck a delicate balance in the assignee liability.
Paulson, along with other retarded politicians are an embarrassment to America! This plan is being made up on the fly and has no basis in reality, unless of course, we reinvent all the rules and default on all contracts....this is retardation at the very highest level!
Sec. 143. - Mortgage revenue bonds: qualified mortgage bond and qualified
veterans' mortgage bond
(a) Qualified mortgage bond
(1) Qualified mortgage bond defined
(B) Good faith effort to comply with mortgage eligibility requirements
An issue which fails to meet 1 or more of the requirements of
subsections (c), (d), (e), (f), and (i) shall be treated as meeting such
requirements if -
(i) the issuer in good faith attempted to meet all such requirements
before the mortgages were executed,
(ii) 95 percent or more of the proceeds devoted to owner-financing
was devoted to residences with respect to which (at the time
the mortgages were executed) all such requirements were
met, and
(iii) any failure to meet the requirements of such subsections is
corrected within a reasonable period after such failure is first
discovered.
(II) no portion of the proceeds of the issue are used to make
or finance any loan (other than a loan which is a
nonpurpose investment within the meaning of section
148(f)(6)(A)) after the close of such period.
(ii) Exception
Clause (i) (and clause (iv) of subparagraph (A)) shall not be
construed to require amounts of less than $250,000 to be
used to redeem bonds. The Secretary may by regulation
treat related issues as 1 issue for purposes of the preceding
sentence.
(i) Other requirements
(1) Mortgages must be new mortgages
(A) In general
An issue meets the requirements of this subsection only if no part of
the proceeds of such issue is used to acquire or replace existing
mortgages.
(B) Exceptions
Under regulations prescribed by the Secretary, the replacement of -
(i) construction period loans,
(ii) bridge loans or similar temporary initial financing, and
(iii) in the case of a qualified rehabilitation, an existing mortgage,
shall not be treated as the acquisition or replacement of an
existing mortgage for purposes of subparagraph (A).
See Also: Congress restricts Mortgage Revenue Bond (MRB) mortgages to first-time home buyers who earn no more than the area median income (AMI). Larger families can earn up to 115 percent of AMI. The average income of an MRB borrower in 2005 was just $41,450just 58 percent of the national average of $ 72,585.
Congress limits the price of homes purchased with MRB mortgages to 90 percent of the average area purchase price. The average MRB purchase price in 2005 was $117,649only 54 percent of the national median price of $219,000
Good analysis. Enjoyed the links explaining the terms.
I am now left with the conclusion that this is more about loss protection / limitation to the lender / investor then helping the borrower. Thus, it looks like a bailout for the big boys.
I am still trying to figure out who is helped by the plan and why the plan was created. So much to consider and I am still trying to work it out.
Paulson is knee deep it this crud. He is part of the problem with the improvident investments from Wall Street that funneled money into the housing market for a fee and then securitizing and selling for a fee.
As a popular writer recently summarized the implicitpolicy of the 2006 Pension Reform Act: The message is loud and clear: Neither your government nor your employer will be responsible for your retirement. You will be.88
Julie Tripp, Retirement Plans Face a Major Upheaval Under New Law, OREGONIAN,Aug. 27, 2006
The Pension Protection Act, signed into law in August 2006, contains more than 900 pages of changes
and refinements to regulations regarding defined benefit plans, defined contribution plans, individual
retirement accounts and other issues related to retirement planning. The act is expected to generate
thousands of pages of tax code as the IRS begins implementation.
As indicated in Section 10.2.6.d. the Pension Protection Act of 2006 liberalized the "Significant Participation" text for funds with limited partner commitments from investors subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). For purposes of the 25% test, investors which had been counted in that census because they looked like ERISA funds i.e., State employee benefit plans and off-shore employee benefit plans are now no longer counted. The only investors counted towards the Significant Participation test are funds directly regulated by ERISA plus, and here is the rub: Obviously, to avoid the ability of parties so inclined to skate around the rule, there has been historically, and still remains, a 'look through' proscription which impacts, particularly, fund of funds investors. Under the old rule, assume a fund of funds investor included ERISA entities for more 25% or more of its own committed capital. When the fund of funds investor committed to a buyout or venture fund, the 'look through' rules counted the entire commitment of the fund of funds LP as an ERISA entity for purposes of the 25% test vis-à-vis the second tier fund.
Landmark Pension Reform Act Expands Ability of Investment Funds to Accept Benefit Plan InvestmentsLast week the U.S. Senate passed comprehensive pension reform legislation that will have wide-ranging impact on the structure and operation of hedge funds and other investment vehicles. The new Pension Protection Act of 2006 (PPA 2006) makes significant changes to the existing ERISA plan asset rules and expands the opportunities for investment funds to qualify for an exception from ERISA plan asset treatment. These changes will enable certain fund managers to increase the amount of benefit plan assets under management without becoming subject to ERISA fiduciary obligations and prohibited transaction rules.In particular, PPA 2006 changes the method of counting benefit plan investors in determining whether a fund satisfies the 25% significant equity participation test under ERISA. The 25% test generally provides that a funds underlying assets will not be considered to be ERISA plan assets (i.e., ERISA will not look through to the underlying assets of the fund) if benefit plan investors own less
After its final approval by the U.S. Senate on August 3, 2006, the Pension Protection Act of 2006 ("PPA") was signed by the President and became law on August 17th. While the PPA adopts many significant changes to the rules governing the operation of benefit plans,[1] there are several key provisions of particular note for the financial services and private equity industries as well as others involved in the investment and management of pension plan assets. Taken together, these provisions should offer meaningful relief for fund managers, underwriters, issuers and plan fiduciaries from the often-complex web of restrictions imposed on the investment of pension plan assets by the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the related regulations promulgated by the U.S. Department of Labor ("DOL").
To further this purpose, the Plan Assets Regulation treats a plans acquisition of an equity interest in another entity as plan assets and "looks through" that entity and deems its underlying assets to be plan assets as well unless an exception is available.[3] We refer to this rule as the "look-through rule" here. One of the most commonly relied-upon exceptions to the look-through rule relates to the "significance" of equity participation in an entity by "benefit plan investors."[4] We refer to this exception here as the "25% Test."
New Statutory Prohibited Transaction Exemption for Service Providers
Both ERISA and the Code prohibit many transactions between plans and "parties in interest".[5] These transactions involve potential conflict of interest and self-dealing situations where a party in interest might act in a manner contrary to the best interests of the plan and its participants. Section 611(d) of the PPA creates a new statutory exemption to these rules, allowing eligible parties in interest to more freely conduct business with plans without the administrative hassles that were frequently at issue under prior law.
ERISAs definition of "party in interest" is quite broad and sweeps up many persons and entities that are commonly involved in the operation of plans and the investment and management of their assets. Among the parties in interest subject to these prohibitions are persons or entities providing services to a plan. Plans often use multiple service providers ranging from investment advisors to trust companies to recordkeepers; many of these service providers are affiliates of much larger financial services companies, which are themselves often classified as parties in interest by virtue of these affiliate relationships. As a result of the factual complexity involved in many of these situations, avoiding inadvertent prohibited transactions with service providers has been costly and administratively cumbersome as plans and service providers attempt to conform their operations to one or more of the p
Participation by governmental, church, and foreign plans is no longer required to be taken into account under the 25% "plan assets" exception.
For funds with "significant" benefit plan participation, benefit plan investment is taken into consideration only to the extent of the investment.
Many benefit plan service providers can more freely conduct transactions involving plan assets under new statutory prohibited transaction exemption.
A new "quick fix" for inadvertent prohibited transactions is available.
As a result of the factual complexity involved in many of these situations, avoiding inadvertent prohibited transactions with service providers has been costly and administratively cumbersome as plans and service providers attempt to conform their operations to one or more of the prohibited transaction class exemptions issued by the DOL or else seek their own individual prohibited transaction exemptions.
Under the new statutory exemption created by the PPA, if a person or entity is not a fiduciary (or an affiliate of a fiduciary) possessing discretionary authority or control over the investment of plan assets or providing investment advice for a fee to the plan at issue and is only a party in interest as a result of providing services to the plan, several common transactions involving the plans assets will no longer be prohibited as long as the plan does not receive less or pay more than "adequate consideration." The PPA provides some useful clarification on the "adequate consideration" issue by allowing factors such as the size of the transaction and the marketability of the securities at issue to be taken into consideration. Further, the exemption makes clear that any plan fiduciary can make "adequate consideration" determinations for transactions involving assets for which no public market exists (subject, of course, to the usual prudence and exclusive benefit requirements imposed on fiduciaries by ERISA).
The types of transactions covered by the new exemption include sales, leasing, and exchanges; lending of money or extension of credit; and transfers to or use by or for the benefit of service provider/parties in interest of benefit plan assets.[6] This exemption permits many common transactions that were previously required to be conducted through a qualified professional asset manager under DOL class exemption 84-14.
It seems to me that judging whether modifications are in the investor's interest runs into the financial equivalent of the environmental "Tragedy of the Commons." A foreclosure that might otherwise be in the best interest of a particular set of REMIC investors might not be so if it was part of a flood of such foreclosures which caused a corresponding fall in value of the underlying collateral. The greatest beneficiaries to this collective agreement will be those who don't follow it because their foreclosures will be in a market that has been positively affected by limiting additional ones. I too thought this was mostly about protecting investors but I'm curious why acting together, i.e. colluding, to keep their collateral's value from crashing doesn't analogize to behavior that anti-trust laws are designed to prevent. It's just wrong to suggest that a foreclosure bloodbath hurts everybody. The eventual buyers of homes that would have paid less with greater foreclosures will be hurt if this agreement between servicers and investor successfully eliminates some of those foreclosures. The interests of millions of people who would like to own a home if prices fell to what they could afford are being ignored.
While I fully appeciate that this plan is a defer and hope plan -- designed to move this problem to the next administration and hope that the market comes back enough in 5 years that the beneficiaries don't default then -- my problem is that at its core it's social anti-darwinistic.
We're rewarding the stupid penalizing the fiscally responsible.
This plan should be accompanied with some sort of Special Federal Real Estate Tax (SpeFRET). The SpeFRET, payable upon the sale of the house would be a special real estate capital gains tax applicable to those bailed out. It would be payable upon sale, be the difference between the purchase price and sale price (provided the latter's higher), and appreciate (percentage-wise) annually eroding any future capital gains those bailed out might otherwise enjoy.
This program would induce those bailed out to sell their homes at the earliest point possible so they can exchange their SpeFRET subject properties for non-SpeFret subject properties.
Absent a tax on these bail out recipients, we are, potentially, unfairly enriching them for their risky and wreckless behavior.
Have Consumers Create a FREE Mortgage Recast Account.Myrecast Request Consumers Original Mortgage File.
To receive loan document via the MYRECAST Secure Barcode Fax System for Original Loan Documents.
Review Loan Files to determine if consumers are victims of Predatory Lending and or Deceptive Business Practices made by Lenders.
Allow the Consumers access to the Mortgage Recast Auditing 24/7 by Login into there Secure On-line Account.
Post and Review Updates of Mortgage Recast Status.
Cost:$300.00
Recast your Mortgage to your Original Interest Rate
My Recast is a web-based system allowing consumers, attorneys, auditors and credit counselors to request and monitor the status of a consumers loan file from a mortgage lender. Allowing the parties to better communicate the mortgage recast through out the file auditing process. MyRecast Loan Modification Software
That is your initial reaction? Hmm-m-m, I can't wait to read what you think after you have thought about it for awhile.
awgee,
That's why we love the Right Reverend T!
It appears that very few will qualify for "Hope". "Home must be worth more than mortgage". Not likely given the time period required for purchase (Jan '05-July '07) As time marches on, fewer will qualify.
Oh I'm sure we wouldn't give safe harbor to the lenders... no way. They will be held fully accountable to get it right this time.
If at any time the trust starts taking actions that can be interpreted as actively managing the underlying pool, the REMIC status is in jeopardy...
Yeah, the government stepping in and freezing teaser rates should in no way be construed as active management.
The woman is a genius.
The details of the ASF `guidelines' are available at ASF Issues Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans on December 6, 2007
Thanks Tanta. Here is FDIC Chair Bair's 12/6 statement:
FDIC: Error 404 - Page Not Found
Yeah, the government stepping in
Yes, but Robert, the government is not stepping and doing that. This is not a statute; it is not a legally binding mandate on the participants.
It is a bunch of industry participants being encouraged to take basically voluntary actions at the Treasury's behest. There is certainly government influence. But I've seen nothing that says a servicer or a security can't just ignore this if they want to.
Is it all kind of anemic after all the build-up? Yep.
double yep.
Hope is dead on arrival.
The ASF docs are crystal clear that a service must do nothing that would affect REMIC or Q status. There are quite a few pools where nearly every loan falls into the sub-660 FICO bucket.
"In my reading of this, giving a deal to a borrower almost seems incidental."
Truer words never spoken. That was not, is not and will not be the goal of this action. This is about financial institutions trying to pretend the stuff they own is marketable, truth be damned.
here's this from the ASF if anyone wants to read it:
Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans
Executive Summary
December 6, 2007
http://www.americansecuritization.com/uploadedFiles/FinalASFStatementonStreamlinedServicingProcedures.pdf
I would be surprised if there were over a couple hundred thousand people in a position to truly benefit from this.
Too many are struggling at the rate they pay now. They are just making it and the economic canditions are worsening.
Is there real hope in the coming years that income will rise ahead of living costs to be able to make it when the reset comes?
It is no real benefit to struggle along trying to make the low, low introductory rate to be stripped of the home when it finally resets.
Loss of home value in this time frame further reduces the attraction of this option.
I haven't read all the plan, but perhaps someone knows. If a person does "qualify" for a rate freeze, do they just get the freeze, or do they add the interest differential back into the principle amount for the five year freeze?
If so, bravo Wall Street, more debt slaves. If not then, go Mr. I can't afford my house guy five more years of cheap living.
We will just figure what happens in five years five years from now. In the meantime we will hope house prices turn around so the party can start again.
Yes, but Robert, the government is not stepping and doing that. This is not a statute; it is not a legally binding mandate on the participants.
I am not this smart but you are. Not binding, not a mandate but the President of The United States of America saw fit to announce and then have his subordinates follow up. Pleuuuze. You have a choice here. Nothing has changed or not. I'd like to hear which.
oops i missed steve's link, he beat me to it, sorry.
Another illusion?
Why am I surprised?
First time long time. I rely on your insights because of its clarity. But this new plan in your words is confusing. I just hope and pray everyone in control understands whats happening. Every action has a reaction. Seems like a more secure outcome. congress was asleep at the switch (im sure they profited) and now they are going to fix what they exploited. Let the markets decide. This sets a bad precedence. Perception is everything.
Any teeth we feared have been ground down to nubs on this plan. This doesn't resemble the scorched Earth approach that Bair advocated. It's just not worth anyone getting their panties in a twist over.
OTOH, the whole hoopla over it may have been helpful in one way - if the media attention spurs some borrowers-at-risk to pick up the phone and call their servicer who wouldn't have otherwise done so, that's worth something.
What was that website that offered to increase your FICO socre? Do you suppose they can do the reverse?
but the President of The United States of America saw fit to announce and then have his subordinates follow up.
Yeah, well, this is the same POTUS who makes announcements about "faith based initiatives" and not only has subordinates follow up, he gives money to outfits who want to explain to you exactly what kind of sex life you're allowed to have.
And we all ignore that.
Look, I share your frustration with the problems here. But suddenly pretending that the Bush administration has that kind of clout strikes me as a little ad hoc.
Who cares about this useless attempted bailout. Did you see the squeeze today? Wow, that was seriously the biggest pump of the worst stocks I've seen in 35 years.
Ouch!!!
I think many who are crying "foul" haven't read the qualifying criteria. What I've seen is quite restrictive. Now, the affect on buyer psychology can't be overlooked with this release. What I find interesting is that pols are willing to admit that RE has been a bad investment in return for a softening of the foreclosure blow for the securities market.
It's all in the implementation. I fear this becomes carte blanche for every servicer to let every Tom, Dick, or Harry coming into the office to get the fast-track mod.
I'm reminded of the 1986 illegal alien amnesty. Yes, there were rules for who was eligible. Yes, in the crush of Pedro, Juan, and Jose applying for amnesty they were completely ignored.
Further should this prove not enough, the precedent is set... if a little bit of Govt didn't fix the problem, then we'll just try a little bit more.
as a renter (that saves) i'm against holding home prices artificially high.
i'm going to complain in the worst imaginable way only the very daring attempt in this lovely country.
i'll consume a la walden from now on and save on anything but dollars.
Tanta you can be sure FDIC examiners will proceed on this mandate with their assigned banks and expect other financial institution examiners to do the same. There will be strong government oversight and reports of examination will note substantial compliance and non-compliance. I think they are expecting widespread compliance and have not yet developed 'banker' penalties (if any) for substantial non-compliance.
do they just get the freeze, or do they add the interest differential back into the principle amount for the five year freeze?
It's just a freeze.
Actually, technically, what it is is that the noteholder waives its right to increase the interest rate at the change date that was specified in the note. What these mods are doing is just moving that first change date out a few years.
We're predicting massive "Credit Score Suicide" by consumers whose credit is too good to qualify:
CreditBloggers: Credit.com Cautions Consumers against “Score Suicide”
Repoman- "Wow, that was seriously the biggest pump of the worst stocks I've seen in 35 years."
Yes, they look juicy, don't they?
Hey. Suppose I've maxed out my home-ATM for that last vacation and don't like the idea of paying a higher rate when my loan resets next year - even if I can afford it. If the going refi rate is higher than my current pre-reset ARM rate then I'll just default now!! Then I'm certain to qualify for the freeze.
So why would ANY ARM borrower , whose loan resets next year, send January's payment?? To stay current precludes oneself from the freeze!
Right or not?
Nice analysis. I've only just begun going through the ASF document, but it's already clear this has nothing to do with helping out borrowers for their sake, no matter what Bush and Paulson say. It's entirely about minimising the damage to the securitisation industry and arguably to the wider economy. And I say that as someone with a vested interest in the health of the securitisation industry.
Thank god the Bush administration is stepping in to help. They always set things right.
Tanta you can be sure FDIC examiners will proceed on this mandate with their assigned banks and expect other financial institution examiners to do the same.
Well, now, you know I firmly believe that banks are doing much better than this with their whole loan portfolios. Frankly that's why this is so anemic, in my view: those who don't have to mess with securitization rules are doing much more in the way of workouts.
That is actually an important fact. It gets to that "golden rule" thing these PSAs have in them (you can't service a loan in a pool in a way you wouldn't be willing to service your own loan). Portfolio lenders are modifying loans, more I suspect (much more) than securitized loans are being modified. So that kicks one of the legs out from under the "we can't modify securitized loans" excuses: if servicers are willing to modify their own portfolios, then servicers are saying that mods are in the investor's best interests.
I think we'll see more than a few attempting to game the system - based on some comments here and at patrick's blog. Good luck with that.
It's a bit of a face-saver for Paulson, though, and The Decoder has had/will have a few good moments out of it.
Forgive me, but I don't think "anemic" does justice to the plan. If the right to modify terms for loans reasonably expected to default was already in the PSA terms, then all the Plan amounts to is "setting up a phone bank."
I just hope it is staffed with folks numerate enough to figure out an LTV.
We're predicting massive "Credit Score Suicide" by consumers whose credit is too good to qualify
Oh, now there's a rational approach. Screw up your FICO and all your credit card rates shoot up to 29% and your auto insurance gets more expensive, but by jiminy you might be able to get a mod if you happen to be one of those high FICO subprime borrowers whose rate hasn't reset yet.
Whatever, folks.
This is SO not about helping borrowers, unless you mean helping borrowers continue to overpay for a depreciating asset.
Any time big money is eager to do the little guy a favor, the little guy would be wise to think long and hard.
Decoder, Decider, whatever. POTUS.
you can still get a mod without passing the FICO test, you just don't get fast tracked.
The really clever part of the plan was the part where Bush said 1-800 instead of 1-888 thus maximizing the political points, and minimizing actual effort required.
Who cares about this useless attempted bailout. Did you see the squeeze today? Wow, that was seriously the biggest pump of the worst stocks I've seen in 35 years.
Ouch!!!
We have a fantastic setup for the market tomorrow whether or not the ADP estimate pans out:
Payrolls Above Consensus = No Recession = Stockmarket Explosion
Payrolls Below Consensus = Rate Cut = Stockmarket Explosion
Tanta- "Oh, now there's a rational approach."
Tanta, who said any of the people involved in this shit were rational?
Forgive me for being so slow. But I'm still working on why they would verify income for those with FICOs above 660 but not those below 660. I think I may have finally got it.
Is it because they just figure those with FICO below 660 are financially strapped and are just assumed to be unable to handle the reset?
Tanta,
what does this do to the ABX prices and CDO prices? s&p says it could lead to downgrades. and, it certaily cant help with raising new MBS offerings because invetors will want higher rates, etc.
Elizabeth Warren's take on it at Economist's View is interesting:
"Slick Deal for Lenders [excerpt]
1) The lenders decide who gets the benefits and who doesn't. This seems to be the Goldilocks Game. If the borrower is too cold (not credit worthy even for the teaser rate), no deal. If the borrower is too hot (could pay on the reset), no deal. Only borrowers who are just right (can pay currently, but can't pay more) will get the deal. And the mortgage servicer decides who gets to be Goldilocks."
Economist's View: "Slick Deal for Lenders"
Were creating a way of segmenting the borrower class so that one class of borrowers can be presumed to meet all the requirements in the PSAs for modifications.
Welcome to the new American Caste System!(renters, now worries, you are still on the bottom).
"Sorry, young homeowner, hoping to time the market for a better interest rate when your housing value increased. Your one mistakes was that you didn't lie about your income on your loan docs. This day-laborer who earns $35K a year is clearly a better candidate for this class of modification."
Tanta,
If the note holder is waiving the increased interest payments during the freeze period then the total value of the loan (principle & interest) are now less for the borrower, no? And the value of the original investment will have to be marked down by the investor accordingly, no?
Regards,
ABX and CMBX have been tightening all week. ABX was largely unchanged by the end of the day.
ac,
conventional wisdom would say you are right re the market. i think, though, the reaction tomorrow, if the # is weak, will be down....and, big!
"Current Value of the home must exceed the mortgage" or words to that effect.
In the current market, it will be a challenge to determine the current value. HopeNow will also be known as the "Appraisers' Full Employment Program" and if you think they were under pressure to "meet the number" before just think what pressures there will be now.
Anemic. I'll give it a "yep" too.
Like I was predicting, a barely colorable fig leaf attempt that'll give them some good press and political credit. Essentially it sounds like they're brow beating the providers to try to co-ordinate work out attempts that they would probably be doing otherwise. I hate politicians as problem solvers.
In my opinion, Bush and Paulson are trying the old politician's dodge of trying to look like they're doing something all flashy out front and center so they can seem effective in john q. public's ADHD-like attention span and claim political credit for it, just like they are doing with the veto threat of the current war funding budget bills. Again, it's cynical, but the latest, flashiest, most sound-bite like news is the one more people remember, and perception is reality in politics.
I just hope we didn't just miss an opportunity to mitigate damage and fix things that we'll end up regretting later.
Oh Great Tanta - thank you for that wonderful, thorough and extensive analysis. Let me ask the next round of questions - will it be anywhere close to sufficient and is it workable ?
More specifically let me steal my own recent comment on BigPic where you are worshipfully referenced to make that point:
I'll start by noting my agreement with most of the points made above and then add a couple or three to think about that don't seem to be getting the attention they deserve:
1. Will this work ? With very narrow coverage it looks like it barely touches the problem.
2. Is it workable - the Great Tanta on CalculatedRisk has made the point that right now the number of skilled folks qual'd to help out is far below what's needed. Insufficient as this is it still doesn't begin to address the increased demand.
3. Even if it "works" a little it still leaves a big bunch on the table that will go to FC. OUCH.
4. What about the other structured debt instruments ? For example buyout based assets or corporate debt ? Why do we all discuss this as if it were only mortgages at risk. We're already seeing it spread to these other asset classes.
5. This ISN'T a failure of interest rate setting but a failure of due diligence brought about by a total lack of regulatory oversight as the hogs bellied up to the troughs. Where's the new mechanisms required to take the "shadow" finance system into the light as Gross keeps asking.
That's probably enough but one area to quibble w/BR about. Blame the FOMC all you want but what was your alternative at the time ? '03 was a war year and not a time to start raising rates. MUCH more importantly long-term rates didn't go up and the FOMC couldn't do anything about the conundrum. Which in terms of huge pools of leraged liquidities will still be with us ex post this mess. Then what ?
Tanta, one question: it is still not clear to me what happens when the interests of various investors in the same pool are very conflicting. For example, the super senior tranche investor may very well wish to foreclose on every last one of them, while the bottom tranche investor may be happy to freeze the rates to zero, rather than suffer a total wipe-out. Are the contracts clear in that respect? The servicer will have a mob of investors coming to them, each with his/her own agenda.
Hope is on the march!
OT,
Northern Rock likely to be nationalized...
Northern Rock nationalisation moves closer as Flowers pulls out - Telegraph
"Yeah, well, this is the same POTUS who makes announcements about "faith based initiatives" and not only has subordinates follow up, he gives money to outfits who want to explain to you exactly what kind of sex life you're allowed to have.
And we all ignore that."
Tanta |
Last year the US spent about $1.7 billion dollars on faith-based initiatives and government-sponsorship is now a lucrative part of religious services fundraising.
The people whose job it is to pay attention, pay attention.
Now, the market is buying 'hope.' As a bear, I like that. A lot.
But I'm still working on why they would verify income for those with FICOs above 660 but not those below 660. I think I may have finally got it.
Is it because they just figure those with FICO below 660 are financially strapped and are just assumed to be unable to handle the reset?
I don't think so, Cal. I think it is strictly about deciding who is likely to be eligible for a refi or not.
Anybody with a FICO under 660 right now is probably not eligible for a refi. So it doesn't matter what their income is.
Folks over 660 might be eligible for a refi, if they have the income to meet (newer tighter) DTI standards. So for those borrowers, you have one more check (income) to see if they're refinanceable.
OT,
Northern Rock likely to be nationalized...
I guess the whole world is "turning Japanese" now.
Thanks for clearing that up.
In it's way this is yet another faith based initiative courtesy of Bushco:
The servicer will determine the following for each Segment 2 borrower:
current owner occupancy status, current FICO score and the FICO score at
origination of the loan. Owner occupancy status will be determined solely
based on the borrowers representations at origination together with any
information known to or readily available to the servicer. For example,
the servicer may compare the current billing address with the property
address.
If that was true, it wouldn't be bad. The housing market doesn't need more intervention but less - it would return to the mean sooner.
I am glad that the plan or structure or scheme or whatever is out on paper, now, where we can see it for what it is.
Not a government "cram-down," for sure, but that leaves us to wonder how effective or wide-spread the impact will be.
How long before some of you number-crunchers can give us some kind of estimate on how many borrowers in trouble will actually fall into the Goldilocks zone?
(Is there really any way to tell, other than waiting to see what happens?)
And if LTV ratios are so important, won't the plan be less likely to have a significant impact in areas where the run-up in values was greatest?
Tanta,
I think without a safe harbor law, you are right: this is not coercion or government stepping in to break contracts.
I see this as the government providing a fig leaf for the servicers' attempt to keep their costs down.
No income verification, no re-appraisal, no estimating home prices when calculating cash flows from mods, no search for second liens on the property.
None of that. Just a tommy-gun approach to mods, sanctioned by the industry and the government for purposes of submitting "exhibit A: agreed-upon best practices" during the first class action suit.
Beyond the conflict of interest between servicers and investors, there is a separate issue: the mods will reward fraud, pure and simple. Maybe fraud is only prevalent in CA, FL, NV, AZ, NJ, MA and DC. Okay, that's two thirds of subprime.
Yes, Peter T. Exactly right.
it is still not clear to me what happens when the interests of various investors in the same pool are very conflicting.
That's why the ASF and the rating agencies (and the servicers I know) say that the standard should always be without reference to any specific tranche. You calculate a "net present value basis" of the modified loan or estimated recoveries in a foreclosure, and you take the one that is the best deal on that basis.
There's no particular reason to believe that even one specific tranche or class has the same interest over time, let alone the same interest as other classes. You just have to use the effect on the trust as a whole.
Frankly I was pretty amused by the S&P claim that this would result in downgrades. What doesn't result in downgrades these days? Jeebus, a borrower blows his nose and the seniors get hit three notches lately. In any event it's hard to say why anyone would care about that at this point.
Krugman cites Calculatedrisk: December 6, 2007, 12:46 pm
Evil Bush/Paulson plot
Id love to weigh in on the subprime plan for tomorrow, but the timing of the press conference late afternoon makes it logistically impossible to do it for tomorrows column. (I have to file a bit early because Im wearing my academic hat later today.)
So, go to Calculated Risk for informed reaction; Ill weigh in as soon as I can on this blog.
It smells like another terrible day for the Quant hedge funds that were short horrible stocks.
re FICO suicide.
Ok, so the people in group 2 that have a FICO that DQ's them would be ill-advised to try to adjust that.
What about those in group 1 that are being prudent by giving up stuff to remain current? What might they do to drop themselves into group 2? Dump the max into their 401K, thus drop their available income so the rate reset would hurt them? I'd hardly think that suggesting that a borrower "forego retirement savings" would go over well.
In case no one has said it yet:
MISSION ACCOMPLISHED
Heckuva Job, Hanky!
Retro-active underwriting is not likely to work. That is what we seem to have here if we cut to the chase regarding New Hope. Or should it be called New Dope...??? There is a better way. FHA would need to implement higher loan limits in "high cost areas" as they currently do by county. They would need to go to 125% LTV (they have done this in the past w/ Title I home improvement loans) and use underwriting guidelines similar to their current streamline refinance program already in existence.
With the promise of lower rates and/or better terms and more affordable payments, borrowers would pick up the phone themselves to call about getting one of these loans. The current proposal seems to put servicers in the position of having to contact borrowers for financial info that should have been asked for upfront. Borrowers will not likely be very cooperative in my opinion.
If the borrowers in question qualify for the FHA insured loans, the new FHA origination will pay off the subprime loan and therefore some of the investors will receive their money at par value or close to it and get out more or less whole. The borrowers will be given a fair shake at maintaining ownership with an affordable and stable rate. I foresee a combo of partial debt forgiveness by the investor and/or servicers and partially new FHA/govt loans picking up maybe 80-90 cents on the dollar.
The new FHA loans would be used to back GNMA bonds which are easily sold because they carry the "full faith and credit" pledge and will be highly liquid like US Treasuries.
This will not help everyone but let's face it. Some of these deals were doomed from the git'go and should not be allowed to continue on in their misery.
To help ease the bill to the taxpayers, the UFMIP and monthly MIP should be raised to at least 3% on all FHA loans, purchases as well as refi's. It should be encouraged to put the burden of the extra insurance on the sellers in a purchase transaction. The UFMIP is typically financed into the FHA loan by the borrower.
This is the government managing the herd as a whole and not trying figure out which animals are sick and which one aren't and which will be tended to and which won't. Open up the gates to better pastures via FHA and GNMA and let those in the herd (all borrowers) who are able, get to the better pastures. Those animals that can't make it are to be left to be foreclosed on. I should add that HUD should use reasonable underwriting philosophies geared toward helping the herd as much as possible. The are not presently doing that it seems but I know changes are coming.
This is the best way to handle the situation and will make for a healthy herd of borrowers and thus a healthy, balanced housing market.
There is no getting out of this without some loss and pain. I am sorry for those in the herd who don't make it but it is best for all this way.
Foreclosure is not the end of the world, it's a failure but not the end
Let me put it another way. You need a "best practice" criteria for selecting the cohort that is unable to refinance, but able to pay at the original rate. The best predictor of this is:
1) Fico
2) Documentation status; or
3) CLTV
If you answered 1), then how are you looking out for the interests of investors?
A former FDIC employee sent these comments out today. I try to place value in comments from people like this who actually worked to clean up the S&L Bank crisis we felt in 1980s Texas.
One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released). This is exactly what the Japanese banks did in the 90s when they did not quickly clean up their balance sheets and deal with the problem, and many of them still have bad debt from the late 80s on their books. SO, the result of this is that there will be a ticking time bomb in the banking / financial system AGAIN.
This action is too late to make any real impact on the housing problem. Real estate prices everywhere have already fallen and will continue to do so until there is something of a more normal relationship between real estate prices and their historic place in the proverbial basket of goods. Again, the last time real estate markets peaked in the middle of the decade was in the 1920s (1925 to be exact) and they did not begin to level out until 1934 and not rise until the early 1940s. Todays action only moves off the inevitable day of dealing with these underwater loans and thereby creates a longer-term problem than would otherwise be the case. This freeze requires homeowners to have 3% equity in their property in order to qualify, as prices continue to decline this will be fewer and fewer. Unfortunately, the ball has already gone over the edge of the building
This action is very similar to the actions taken in the early part of the S&L disaster when the sick institutions were allowed to keep goodwill on their balance sheets and classify it as core capital and we all remember where that mess ended up. Not dealing with real problems in the financial and banking systems always ends in disaster eventually. However, it allows those in power a quick fix and allow them to pass the problem on the next administration to deal with Regan did it to old Bush and now little Bush is doing it to whomever
Earnings at the financial institutions will appear to be significantly improved soon as they will not have to make any of those HUGE (billions of dollars) write-downs on their portfolios any time soon, but they will come.
Yahoo! 404 - Page Not Found
Bush Aims to Prolong Expansion With Subprime Freeze (Update6) - Bloomberg.com
Cactus Jack had it right: "It ain't worth a bucket of warm ****"
John Nance Garner - Wikipedia, the free encyclopedia
First 100 days club idea starting to sound better and better. Bush is cementing his reputation as Hoover as we speak.
If this is their idea of doing something short of invading a sovereign nation, I think invasion would work as a better prop.
As for the short squeeze of epic proportions, watching the homebuilders fly today was instructive after seeing their epitath discussed yesterday.
It was nice seeing all those jobs while they lasted.
Someday this war's gonna end...
"the mods will reward fraud"
That was my first reaction when I read the description.
They built a "formal process" for railroading a mod without verification required (ok minimal) so at that point investors can no longer sue for the PROCESS they will have to sue based on one by one loans that the process was not followed properly - hard to find and impossible to prove.
In a sense they are reducing interst rates to many so they don't have to continue wit rate cu and destroy the dollar. They just reduced intrest where it counts (including those who want to defraud - even their houses we don't want to loose price - do we not ?)
Tanta doesn't address (yet) two questions that may be more important that all this.
FFDIC,
That is the driver for the whole deal - the rest of this is window dressing - the number of borrowers and value of the securities affected will turn out to be so marginal many will be asking "Why bother?"
Now we know.
There are people who won't talk to their servicers when they get in trouble and the servicers have no choice but foreclose. It is possible all this attention might get thos people to call their servicers. This might be the greatest benefit to come from all this.
One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released).
Earnings at the financial institutions will appear to be significantly improved soon as they will not have to make any of those HUGE (billions of dollars) write-downs on their portfolios any time soon, but they will come.
ffdic, is this explicit or implied? this would be very, very big news,if it is true.
So, in effect, it is so complex that few of the intended recipients will know how to use it after all. After all the reason they are in the trouble they are in is that they didn't understand things in the first place. Will the government send out "helpers" to guide them through the process, or are they left to do it by themselves?
Tanta, don't dissagree with you much, but my perspective from outside, but am severly affected by this crash. . .
A lot (20-50%) of lying on loan applications.
A lot (20-50%) of looking the other way by lenders
A lot (50-80%) of poor modeling by wall street (I meant fraudulent modeling)
A lot of overbuilding
If only one of these things didn't occur, we wouldn't feel the pain so much.
FFDIC-
"One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value."
Anyone have anything more on this? That goes against everything we've been hearing lately regarding people having to market-to-market their portfolios.
As I said yesterday, this turkey will not fly.
This of course ignores the mind numbing size and actual complexity of the problem. Read this:
Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
From Lurker in the previous thread. Just as a refresher.
Cheers,
Isn't this announced effort simply better organizing and streamlining a process the servicer can pursue anyway?
Allen C | 12.06.07 - 2:40 pm | #
Is this too simplistic?
From FFDIC
"...NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case."
You hit the sweet spot!
Regards,
Nice job putting all that together, Tanta. If you would go out on a limb, do you think this plan will have a material impact on house prices going forword? Thanks again.
This testimony from the OCC'S John Dugan details regulatory oversight, penalties, laws, rules and regs to deal with some of these issues. It's a good read for those with oversight questions and concerns.
TESTIMONY OF JOHN C. DUGAN COMPTROLLER OF THE CURRENCY BEFORE THE COMMITTEE ON FINANCIAL SERVICES OF THE U.S. HOUSE OF REPRESENTATIVES DECEMBER 6, 2007
http://www.occ.treas.gov/ftp/release/2007-131b.pdf
On just the subject of the alleged violation of contract law. Any party to a contract can waive the performance by the other party to the contract of a duty that the other party is obligated to perform by the terms of the contract. A simplified version for this situation would be that the mortgage contract requires the borrower to pay interest to the lender at an initial interest rate, and then to pay the lender a higher reset rate beginning at the end of the initial period. Securitization of mortgages adds complexity and parties to the equation, but each party in the transaction can agree to waive another party's performance of a contractual obligation. Legally speaking, I'd view the Plan as the agreement by all the lenders/note holders to waive the borrower's payment of the rate reset.
Waiver can be very a useful tool in the contract tool box. One of the parties to a contract cannot perform one or more of the terms of the contract, but both parties nonetheless want to continue with the contract. What are their choices? The contract could be declared in default, but that would terminate the contract and, as I wrote, both parties want to continue it despite the performance issue. They could renegotiate, but that can be like starting from scratch, and it may not be in one or even both parties' interest. So, the party that's owed the performance agrees to waive (permanently or temporarily) the other party's failure to deliver performance of the contract requirement(s) which preserves their original contract and keeps everyone performing most of their mutual agreement.
If you answered 1), then how are you looking out for the interests of investors?
David, this is not about looking out for the interests of investors.
It is about coming up with a "rule of thumb" approach to defining a very technical class of borrowers ("refinanceable") in a way that is intentionally superficial so that servicers can go along being understaffed and muddle through somehow and not get sued.
You are horrified by using FICOs in this context? In a context in which the term "fast track modification" is used??? I'm sorry, but that's like sending a patient in cardiac arrest to the corner doc in the box instead of the trauma center, and then worrying that the doc in the box uses a stethoscope instead of an EKG.
This is about how to do something (or appear to be doing something) on the cheap. Fast. Streamlined. And the only interest in play is making sure that 1) the servicers don't get sued and 2) the issuers don't have to take these babies on balance sheet because of a Q boo-boo.
If that's the context, hell, let 'em use horoscopes. It makes FICOs seem almost respectable.
ffdic, is this explicit or implied? this would be very, very big news,if it is true.
gaius marius | 12.06.07 - 5:42 pm |
This would explain the entire intervention. Allow the Market to practice Fed Gov type accounting. Sort of like the SS lock box.
I keep seeing posts that suggest no fast track for upside down loans. Sorry, but I can't find that in the description.
Someone please tell me if I'm blind.
Also, I don't see a loan limit. None. If you can't afford that increase on ANY ARM even $5MM, you are potentially included in a freeze.
Again, please correct me if I am even more blind.
Tanta,
Thanks, that was very helpful and I appreciate your time. It was so good that even a J6P Supermodel like myself could understand. Seriously.
Looks like the Rancher is publically warning the flock as to be able to say I warned you? He does that a lot.
I think the bearish conspiracy group needs to take a breather. This situation is bad and every little bit helps. It's bad! I HATE, I HATE, I HATE the idea that Benny is going to cut but the voices in my head are telling me that it's needed to stem some of these defaults. The oil bubble needs to pop NOW.
I still think housing prices will fall into line as fundamentals are not there. Inventories are still VERY high.
Stock market Stock market Stock market! Who cares about the stock market! It's been disconnected for months! Good Gravy Man!
Thanks again Tanta!!
"If that's the context, hell, let 'em use horoscopes."
Conjure and I prefer toad bones and ground-up dog balls. Both work equally well.
We are, by the way, always in favor of empty gestures that drive up stock prices.
This is about how to do something (or appear to be doing something) on the cheap. Fast. Streamlined.
haha, did you see that countrywide put out a press release of approval?
A basic question...
Assuming all the legal obstacles are cleared...
How many borrowers out there qualify for this freeze plan?
Anyone dare to give an guesstimate or a range?
gaius marius - I copied and sent the entire post from the former FDIC guy including his 2 links. The FDIC is not mandated to help consumers directly except in limited areas most visibly based on discrimination laws. It's entire mandate at least until now has been to maintain a healthy banking system with each 'insured' bank. All of the consumer issues relates to bank customers and not FDIC's customers. FDIC's customers are the banks. When banks fail and there is a direct payout to depositors and no assuming bank then those former bank customers do become customers of the FDIC. The FDIC damn sure doesn't want nor can its current staffing compliment handle more failed bank customers. Besides they are a pain in the ass.
Conjure and I prefer toad bones and ground-up dog balls. Both work equally well.
I'm sure the ground dog balls are easier to swallow.
What will the plan do in a truly macroeconomic sense? Save us all from a slowdown, merely nibble at the margins, or simply be the most hyped string to have ever been pushed?
I'm thinking the hype scenario is likeliest.
Am I missing something here? If they freeze the rates, don't the mortgages lose their self-amortizing feature? Are they extending the terms of the mortgages, or how is this getting dealt with, if at all? It seems to me that, if all these loan stop amortizing, we're not only just putting off the pain, but making it substantially worse. Yes?
OK, so this program won't do much.
That is probably a good thing given most of the options being bandied about.
It probably makes it easier to keep 100,000-200,000 or so people in their homes that would have otherwise met with foreclosure. Probably an equal number of folks have foreclosure delayed for a few years leading to a slightly more orderly decline in housing prices, which is inevitable.
The program has little in the way of taxpayer dollars going to it, respects contracts, and does not directly subsidize financial irresponsibility.
And, better the "freeze" than dropping the FFR to try to keep housing more affordable at the margin. (Not the the FFR and LIBOR are that well coupled these days).
-JLR
The most inept and incompetent group of feckless boobs ever assembled in a single organization has come up with a plan to save the day.
Calling Dr. Howard, calling Dr. Fine, calling Dr. Howard!
N'yuck, n'yuck.
"OK, so this program won't do much."
Wrong! It has created "Hope."
Hope is important. Hope is Viagra for the market.
js,
"It seems to me that, if all these loan stop amortizing, we're not only just putting off the pain, but making it substantially worse. Yes?"
I was wondering the same thing last night. Anyone got info on this?
Cheers,
Hope is important. Hope is Viagra for the market.
mp | 12.06.07 - 6:20 pm | #
Okay. So, they've had their woody for more than four hours - time to consult the Physician.
Thanks to Tanta, I now understand why this plan is structured the way it is, since as noted it not exactly intuitive. Though it appears to designed to allow some mods on the fast, cheap and easy plan, it looks like it still requires a whole lot of review work just to to sort into the initial three buckets and it is not clear there is the capacity to do even that. Lots of smoke.
Of course if FFDIC's info is correct -- yipes--gotta read that link.
I think that Barney Frank has a point when he notes that pushing refi's while ignoring prepayment penalties is a problem, but I suppose addressing that would get you back into contract modification territory. Though IMO those penalties are predatory.
MP-
If I understood how the stock market actually worked, I would be a lot wealthier than I am now.
-JLR
Case-Shiller-based estimated loss on the equity in my house for 2008: $30,000. Largest paper loss in my life. Good thing I'm not planning on moving soon.
If they freeze the rates, don't the mortgages lose their self-amortizing feature?
No.
"Freezing" a rate is the same thing as "fixing" a rate. As in a "fixed rate loan." (Although in this case the freezing or fixing might be just for five years, not for the entire length of the loan.) That's all. The loan still amortizes, it just amortizes at the initial rate.
Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years).
All the servicer is doing is moving the first rate adjustment date in the note out by a few years. So if you were originally scheduled to reset in January of 2008, you might get that date moved to January of 2011. Your loan continues on just as it is today, amortized (or IO if it's an IO loan) at the current (initial) rate.
New Hope Alliance. What was the Old Hope Alliance....
Oh yeah the M-bLECh Super Sewer. Well that worked out well, this should do about the same.
Cheers,
Drop meet bucket.
Anyone without a loan say hello to permanently 200 bp higher rates.
Thanks again boomers for screwing the rest of us.
Worst Generation Ever.
Mr Freeze my Fido score is 2. 1 lab and 1 shepard mix do I qualify?
I blame those 20-something whippersnappers, with their bad music and low-rise pants.
Bah!
I keep seeing posts that suggest no fast track for upside down loans. Sorry, but I can't find that in the description.
Since your earlier skepticism, I have been trying to reconfirm it myself. There are quite a few blog posts claiming this, but if you follow the links they all lead back to a single source: Atrios' reporting of what CNN was saying before the official announcement. As this appears to be the only source for all these posts, it is very possible they are in error.
"What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
Ah, okay; thanks. Though doesn't that necessarily mean that the new reset amount will be higher than the original reset would have been, in order to amortize properly?
Tanta,
Horoscopes! LOL!
Seriously, I don't you think the servicers played fast and loose with this one? They are the real winners in this whole scheme. I just wonder why those "Securitization Forum" stooges went along. Could be Rangel was in the background threatening bankruptcy reform. Still, if I were an ABS investor, and obviously, dear God, I'm glad I'm not, then I'd be pissed.
Thanks again boomers for screwing the rest of us.
Don't blame the boomers -- this mess was created by Alan Greenspan and his Randian Chicago School buddies giving the full Monica to the BushCo Gangstas -- they did everything in their power to cook the economy in order to prop up this failed regime.
Tanta,
Thank you. So, If it is fully amortized, then the value of that loan drops as well. This also would, seemingly help the borrower a bit. If FFDIC is correct (and I don't doubt him) then the investor doesn't need to mark this to market, which certainly makes their balance sheets look better.
However, if they are IO, then when the defrost button is pressed on the giant microwave in the sky, the debtor's payment must go higher than if the reset occurred today, because there are fewer years to pay the principle, right?
There's something interesting pinging around about this in my head right now. Can't put my finger on it though.
Thanks again Tanta,
Cheers,
This is not going to work. Why?
I have heard 4 stories this week about co-workers havng ARM's resetting. They either had no idea or as one said "so thats why the bank has been sending all that mail."
I will spare you the details but as mentioned above getting the staff and systems (correct paper flow procedure) is not going to work out well.
I would not even trust the numbers coming out in a year when xxx and yyy say the "saved the dream" of x amount of homeowners. The people who could do the number crunching, assuming they even find a way to tag them (refi's) is not there.
This is another Shrub foto op in front of the church in N.O.
bah!
BTW -- all the talk above about investors no longer having to mark to market: where is this coming from? Seems like a decision for FASB to make, not Paulson et all.
This plan might help a little bit but all hope is based on US consumers continuing consuming. Most of the subprime and ARM mortgage borrowers have jobs in retailing or in other consumer related sectors.
When US consumer has finally maxed out that last credit card, those jobs will simply disappear and fast. When you are unemployed and have no savings, it really does not matter whether the monthly mortgage payment is $500 or $1500. Foreclosure is just around the corner anyway
That tinging sound in my head is the perceived precedent created. I'm afraid we may have opened pandora's box.
Where is the financial box the lying, cheating and free loading lotto winners need to be put into so that they can no longer access credit above and beyond of what they already are stealing?
At a minimum they need to get black marks on their credit record and get taxed on the windfall profits of debt forgiveness.
Allowing them to preserve any semblance of a FICO score just encourages future massive defaults on other types of debt in addition to the secured debt.
"If FFDIC is correct (and I don't doubt him) then the investor doesn't need to mark this to market, which certainly makes their balance sheets look better"
May be FFDIC can explain his rational. But I disagree that onwer of the mortgage don't have to mark to market. The plan did not change any of the accounting treatment for the underlying mortgage or the securitization. All it does is changing how much interest the loan can collect. So why would all of a sudden that the mortgage doesn't have to mark to market?? That doesnot make any sense..
Forget about the plan itself, what are the consequences of the plan?
It seems that in restructuring the mortgage system, Alt A, no doc and subprime loans will be gone? If these loans are done, where are they going to find people who'll qualify for 15-30 year loans with 20% down? That was the problem the last 5 years. The industry had to lower standards to find buyers. Where are the people who are going to buy up the record high inventory? Downsizing boomers and increasing foreclosures will only add to the inventory. Itstead of flushing out the system with 2-3 years of pain, it seems that this will be a much longer drawn out process with prices inching down for many years to come.
Rate freeze yes, but these owners will come to see that their home was not a good investment.
Thus only folks who are so blinded by their free markets fundamentalism and opposition to any government intervention in market failures would be so obfuscated by their ideological blinders that they would realize that this plan however modest and partially faulty and incomplete implies a better market-oriented resolution and much lower losses to private investors than a disorderly and mission impossible case-by-case workout of millions of actual or threatened mortgage defaults. Systemic market failures and crises require systemic response where governement resolve the collective action problems of individual creditors rushing to the exits and causing a disorderly workout of severe debt problems. This mortgage disaster is a case where sound public intervention is necessary and desirable.
Death by firing squad or death by starvation. I guess if you choose starvation a miracle might occur that saves you. Now I see. That's what "Hope" means.
Though doesn't that necessarily mean that the new reset amount will be higher than the original reset would have been, in order to amortize properly?
No.
When an ARM's rate resets, it just means that a new payment is calculated over the remaining term at the current balance and the new interest rate. It doesn't matter what the old interest rate used to be. The rate could, theoretically, go down at an adjustment date.
The thing is, the lower the initial rate is, the faster the loan actually amortizes during that initial rate period. So by the time it gets to the (postponed) reset date, the balance to be recalculated is actually (marginally) lower than it would have been if the borrower had only had two years at the lower rate.
With Ben cutting rates to 1% who would want a freeze at 7-1/2%?
Tanta,
Quite the piece! I do not imagine you are going to have any time free, but I would direct your (and the boards) attention towards this article:
Straight Talk on the Mortgage Mess from an Insider - Herb Greenberg - MarketWatch
This is more what I have been talking about. It is the negative amoritization loans, pay option arms, and real teaser rate arms that I mistakenly thought were being targeted. The subprime mess is nowhere near the size of the Prime and Alt-A mess. And the freeze plan only targets a miniscule part of the subprime.
DOW JONES NEWSWIRES
Countrywide Financial Corp. (CFC) Thursday said it identified about 82,000 borrowers facing a rate-reset through 2008 that will be eligible for assistance through its $16 billion home-preservation program.
The Calabas, Calif., financial-services company said its program is aligned with the recently announced HOPE NOW initiative, which is intended to provide loan modification assistance to borrowers at risk of delinquency due to interest-rate resets
re: FFDIC and comments from former FDIC
owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case.
As others point out, this would be big news but I can find no confirmation - and the two links in that post from that person have nothing about this. Perhaps, FDIC you could go back to that person and tell him/her people are looking for confirmation ?
Also:
This freeze requires homeowners to have 3% equity in their property in order to qualify, as prices continue to decline this will be fewer and fewer.
Here the links WERE of help and they contradict that assertion. The bloomberg link states:
"To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property."
i.e you must be barely above water or worse to qualify and as time goes on and(|if) prices drop, more and more will be underwater and so will qualify.
It is all kinda weird though- you must be quite a deadbeat to qualify ( 660 or less ), and have little or no stake in the house ( 3% equity of less ). Tanta's explanation of course laid out THEIR logic well(thanks Tanta), but when logic leads you to daft behavior one should question one's assumptions and premises and really think outside the box, not follow the logic to its remorseless conclusion.
Idiots.
-K
Tanta said: "Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
A sincere "thank-you" for the detailed explanation, but this has got to be the most egregious case of "burying the lead" I've ever seen.
You couldn't have said this up-front?
S.
sk,
But it keeps you working if you have no equity. My best part is Bush's speech where he states:
Congress needs to reform Freddie and Fannie. They provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs and ensures they focus on their important housing mission.
STRENGHTENS INDEPENDENT REGULATION???
What that means is they are to be deregulated!
So the GSEs will be strenghtened by letting them answer to themselves. Wow that is a great way to get rid of government.
O yeah, another thought.
I thought the nice thing about ARMs was they can adjust DOWNWARDs in an environment where the reference interest rates ( LIBOR, cost of funds) are dropping.
Didn't these subprime ARMS have that feature ? Were they always to adjust upwards ? That's a bit unfair!
Assuming that these were what I call normal ARMS then what's going to happen if the reference rates go DOWN ? ( over 5 years anything can happen)
Will they be frozen in place ? Not THAT would be justice - rough justice, but justice !
-K
sk,
Um, when interest rates are the lowest they've been in forever. FFR 1%, chances are interest can only go up. Think about it.
Cheers,
Bloomberg's not quite right here.
According to the ASF document linked earlier, current loans with LTVs above 97% cannot be eligible for FHA refinancing and thus can be fast tracked without further reference to FHA guidelines. If a current loan has an LTV below 97% it must first be checked against FHA Secure guidelines on delinquency history, DTI at origination, and loan amount to confirm that it's not eligible for an FHA refinance before it can be fast tracked.
So in terms of the executive summary, I'm getting the much ado about nothing vibe. If this is liability proof, then nothing has really changed about the contracts and whatever could be done for the borrower could have been done anyway! LOL!!!!!!
But this Hope Now thingy does accomplish two ACTUAL things that I can see:
1.) provides political cover for GW and allows him to put some distance between himself and the "Ownership Society" nonsense. It shoes he cares and is doing SOMETHING, LOL!
2.) Juices the markets and allows GS and the rest of the "market participants" to offload fictitious capital ponzi units at the highest possible price and protect the Santa rally and Wall St. bonuses. Likely this bunch of conmen are looking for places to bury the bodies before they start stinking too much.
Other than that, this program does nothing.
Misean,
I get my LIBOR rates from
3 Month LIBOR - Rate, Definition & Historical Graph
and they show that the rates in July 2005, Jul 2006 and Jul 2007 were 3.7, 5.5, 5.4.
And their frozen rates will be based on those reference rates ( + quite a bit )
Now, under my understanding of standard ARMS, they reset kinda every 3/6 months ( this is what happened in the UK to me ) after the fixed period - and I'd be betting that LIBOR will be going down - for someone with a 2006 reference rate their bar is 5.5 over the next 5 years - Will LIBOR drop below that ? WIth the tizzy that the central Banks are in, as a betting man, I'd bet on it - and I'd get mad if I was frozen at a HIGHER rate than was prevailing at that future time - that's what I'm getting at.
-K
HI
Thanks again boomers for screwing the rest of us.
Don't blame the boomers -- this mess was created by Alan Greenspan and his Randian Chicago School buddies giving the full Monica to the BushCo Gangstas -- they did everything in their power to cook the economy in order to prop up this failed regime.
-ck- | 12.06.07 - 6:40 pm | #
Thanks from a boomer that only rents in Calif. Uncle Al come the Milton (screw the little people) Freidman school and have to say it been fun to watch and for just a moment I thought I might be able to by a home when I retire in 2010.
Thanks to Tanta/CR and everyone else here with some great info.
jo6pac
What these mods are doing is just moving that first change date out a few years.
How does this affect the term of the loan (or does it) ?
I recognize that the primary impetus is to knock a few pct of the FC rate, but how does this mod action impact the loan parameters ?
The grerat decider gave the wrong number thsats why it's busy.
Think Progress » Bush gives out wrong mortgage hotline phone number.
jo6pac
Nothing but fu
Sheila Bair's testimony before Congress today: FDIC: Error 404 - Page Not Found
You'll especially love her "Correcting Misconceptions about Mortgage Restructuring" section.
The American Securitization Forum wrote the rate freeze presented to the public by the President of the United States of America.
It would appear that some of the firms that sold a lot of the bad debt, are members of the industry group for the lending and investment banking business, belong to the American Securitization Forum
Members include Countrywide Home Loans, Ameriquest Mortgage Company, Capital One, Citi Global Markets Inc., Fannie Mae, Freddie Mac, GMAC, JPMorgan Chase, Thornburg Mortgage, Inc., Washington Mutual Bank, MetLife
DBRS, Fitch Ratings, Moodys Investors Service, and Standard & Poors
ABN AMRO, Inc., Banc of America Securities LLC, Barclays Capital Inc., Bear, Stearns & Co. Inc., Countrywide Securities, Credit Suisse, Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc., Lehman Brothers Inc., Merrill Lynch & Co., Morgan Stanley, UBS Investment Bank, PIMCO,
Who is going to profit from the rate freeze modifications?
Who is going to look good if it works, but very bad if it doesn't?
In the executive summary of Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans,
it looks like theyre not going to check howmeowner income, and will be allowed to modify loans even if they don't make contact with the homeowner
wow
Whos stocks went up after the announcement?
Notables
CHAIR Greg MedcrafT, Managing Director, Global Head of Securitization,
Societe Generale Corporate & Investment Banking DEputy CHAIR DianE W old, Managing Director, HEAD OF Investment Banking, GMAC-ResCap
SECRETARY Sanjeev Handa, Head of global public markets, TIAA -CREF
TREASURER nelson soares, managing director, HEAD OF U.S. SECURITIZATION BANKIN G GROUP, LEHMAN BROTHERS
EXECUTIVE VICE PRESIDENT JASON H.P. KRAVITT , SENIOR PARTNER , SECURITIZATION PRACTICE , MAYER BROWN, ROWE & MAY LP
EXECUT IVE VICE PRESIDENT LAWRENCE RUBENSTEIN , GENERAL COUNSEL , WELLS FAR GO ASSET SECURITIES CORPORATION
and I'd get mad if I was frozen at a HIGHER rate than was prevailing at that future time
You are forgetting the margin.
Most subprime ARMs have a margin in the 5.50-6.00 range. That is added to the index, then subject to the caps, to get the adjusted rate.
If your margin is 6% and your current rate is 7.7% (my ballpark estimate of the average for subprime ARMs), then you go up at your next adjustment as long as 6 month LIBOR is more than 1.7%.
I have explained all this in past posts. I guess I could dig out the link.
I really would, however, like those people who tend to get insulting about "those dumb borrowers" to reflect on how much time and space can be taken up on these comment threads just on clearing up misconceptions about how these ARMs work. I think that should, basically, suggest some humility and perhaps make folks think twice about calling these borrowers dumb.
How does this affect the term of the loan (or does it) ?
maturities will remain the same as at origination, 30 to 100 yrs.
I think K makes some interesting points about rates.
Could this deal result in borrowers committing to a fixed rate during the very time that interest rates return to historically low levels and so they otherwise might have been able to refi out of this problem?
Or would lower future value of their RE and prepayment penalty clauses have made a move to lower rates impossible?
=======================
re Yalt
Bloomberg's not quite right here.
According to the ASF document linked earlier, current loans with LTVs above 97% cannot be eligible for FHA refinancing and thus can be fast tracked without further reference to FHA guidelines. I
There are come double negatives here - am I right in thinking that ASF is saying that 97% LTV or higher CAN be fast tracked(i.e. IS eligible) ?
I thought that's what bloomberg said - Am I getting these greater than, less than wrong ?
I'm assuming that "LTV above 97" means numbers like 98, 99, 100, 101, meaning 3% equity(value), 2%, 1, no equity, underwater by 1%.
Isn't that how they mean it ?
-K
Remember the promised "Shock and Awe" campaign that was supposed to end the 2nd Iraq war swiflty? After considering the big "Rate Freeze" plan that was supposed to help so many, I have to say if you have to ask, it isn't shock and awe! What a dud.
foolish interest rate question on my part...., Tanta explained the answer while i was sending he question.
Tanta,
I was including the margin by saying "reference rates ( + quite a bit )"
Your numbers of 6% margin may well make the likelihood of the situation arising low - I'm just checking on assumptions first ( that ARMS CAN go down as well as up even for these subprime loans ) and if that assumption holds then describing the scenarios that can occur. I'll have to look at some rate sheets now I suppose.
-K
I would like to get college credits for reading and understanding this material.
From news reports, it appears that
"1. Not in default and default not imminent
2. Not in default and default reasonably foreseeable"
Should be:
1 Hope nothing changes because the reset is pure profit.
2 Hope they keep paying, because cash flow is better than writing off the loan completely. And maybe the horse will learn to sing.
3# No Hope for you producing a profit, liquidate immediately.
I disagree. Death by firing squad is better because you get to see the 40 virgins a lot sooner.
The classic build up to nothing. It would be funny if its weren't so serious. Banks!!! and the treasury (!!!!) design a plan for end investors to take a hit. No govt money and no bank money, just end investor money! what a crock of sh*t. no wonder they are trying to make out that contracts are being honored.
Check out paper money and a panel on this issue. All are sell side bufoons that want both new money in the mortgage sec. market and for existing holders of sh*tty paper to accep a haircut. So take a loss now because otherwise you get nothing. Oh and by the way, we need new money too, because otherwise we are all f**k*d
Grand humor. The able to refinance category assumes second mortgages will subordinate to a refinanced first.
"If the borrower also has a second lien on the property, this Statement
contemplates that the borrower is able to refinance the first lien only,
on a no cash out basis. In order for the loan to fall into this segment,
the second lien does not have to be refinanced; however any second
lienholder will need to agree to subordinate their interest to the
refinanced first lien."
It is all kinda weird though- you must be quite a deadbeat to qualify ( 660 or less ), and have little or no stake in the house ( 3% equity of less ). Tanta's explanation of course laid out THEIR logic well(thanks Tanta), but when logic leads you to daft behavior one should question one's assumptions and premises and really think outside the box, not follow the logic to its remorseless conclusion.
They want to keep the F'd borrowers in their Mcshitboxes, don't want em back,savvy? ie....better to make em keep em than leave em. Alway's crunch the numbers.
Jingle Mail Bad, Bail out good Georgie!
Excellent summary Tanta. You said in one of the comments:
"Let's not make this harder than it is. What this is about is taking, say, a 2/28 ARM and turning it into a 5/25 ARM (rate fixed for five years instead of rate fixed for two years)."
Investment bank Barclays Capital reported that out of the 2 million subprime loans resetting through 2009, roughly 240,000 would be covered under the current plan.
If you are shifting the adjustment date of the loan reset and as you say, converting a 2/28 mortgage into a 5/25 mortgage, unless I'm missing something, isn't the current plan speculating that the current borrower will either have:
a) More income to cover a higher mortgage payment in the future since it will amortize fully on a shorter time frame
b) Betting the housing market will improve to allow more time for housing appreciation
c) Buying more time for more government help
Logic would follow that if a current subprime borrower cannot make the payment today in 2007 without fixing their rate what is to say they will be able to afford the payment in 2010 when the rate resets and the payment will be higher because of the higher cost of amortizing on a shorter schedule? The subtle implication is that the buyer will have a higher income in the future to cover the payment or housing will be booming again so he can simply sell it off.
Tanta - wow! Simply amazing work.
I have a question with regard to the 3% equity rule. Is the equity percentage calcuated based on the initial appraisal, or rather on a new appraised value of the property?
If the latter (i.e. new appraisal), since the appraisers (who used to have financial incentive to inflate appraisals) will now have an incentive to deflate (perhaps even below the market clearing prices in order to show < 3% equity), might this actually make it more difficult for buyers and refinancers and folks applying for HELOC to get their mortgages / LOCs?
Here are the ratios of household debt to GDP and disposable personal income. The ratios are still rising.
Year\tQ\tCMDEBT\tCMDEBT
/GDP /DPI
2000\t1\t67.9%\t92.7%
2001\t1\t71.4%\t96.8%
2002\t1\t75.9%\t101.1%
2003\t1\t81.2%\t109.0%
2004\t1\t85.1%\t114.5%
2005\t1\t89.0%\t121.5%
2006\t1\t92.7%\t126.9%
2007\t1\t95.6%\t131.4%
2007\t2\t96.8%\t131.7%
2007\t3\t97.7%\t133.1%
Man o man o man... I can't believe all the posters here who are following the fingers and not the little walnut shells.
Folks, this is not about helping homeowners or bailing people out.
The purpose of this action is to artificially impose 'stability' so that securities based on mortrgages can be priced. This is being done for all the major financial institutions who are being pulled through the knothole screaming in terror. This is being done so that our financial system does not completely lock up and so that private individuals can still fly in private planes to private islands owned by their pals in the Carib so that can have private weddings undisturbed by the unwashed masses, who will now be put to work for 5 more years making very high rent payments before they are tossed out into the streets.
Also pay attention to the other unannounced half of the deal: if rates are higher in 5 years this all still falls apart. But... who controls rates? Think about it.
cannot make the payment today in 2007 without fixing their rate what is to say they will be able to afford the payment in 2010
2007 . . . 2010 . . . can anyone think of anything important, politically speaking, happening in the interim?
Plenty subjective enough to mobilize class action attorneys and the ACLU. Just watch.
I liked the Bush plan for whining New Orleans Americans better. Find them wherever they are, give 'em a debit card no strings attached, and ask them to shut up. They did.
Bubblemania is alive and well.
In other words, all other possibilities considered, Bush gets it right, once again.
Some details in the post by FFDIC are are not quite accurate, but the conclusion that banks are being propped up is dead-on.
NO LONGER required to re-price these assets...will allow institutions to hold securities of unknown value on their books...what the Japanese banks did in the 90s...will be a ticking time bomb in the banking...
Bank usually hold securities, loans, etc. in one of three buckets held-to-maturity (HTM), available-for-sale (AFS), or held-for-trading (HFT). Loans/securities in HTM are carried at amortized cost and a write-down (thru reserves or earnings)only happens when there is permanent impairment. Unrealized gains/losses in HTM assets are a footnote. Treatment for AFS is different, as gains/losses are part of comprehensive income (i.e., below the bottom line but capital is adjusted). However, a permanent impairment of an AFS asset will flow thru earnings. HFT assets are MTM and any gains/losses run thru earnings.(Please note that SFAS 159 and 157 will change accounting conventions if adopted.)
Most portfolio lenders carry their mortgage loans as HTM; hence, the discussion from the former FDIC employee about marketing these loans to market is not technically accurate. This is why banks have been described as a mutual fund with a blind pool of assets as the carrying value of their loans is very opaque. Further, this is the purported reason that there are bank regulators! In theory, bank regulators should be closely scrutinizing loan carrying values to ensure they are not overstated. If the overstatement is large enough, then the bank is insolvent. Coast Bank (CFHI) is a great example of how overstated capital can get and the current impotency of the FDIC.
The concern now is that bank regulators will not do their jobs since they have led the charge for this forbearance program. We have seen this movie before in 1991 under another POTUS named Bush. His Treasury Secretary Nicholas Brady called the regulators on the carpet and told them to ease up because they were hurting the re-election effort (if interested follow the links).
SpringerLink - Journal Article
brady credit crunch baltimore - Google News Archive Search
Since 1991, the banking regulators have been gun shy about forcing any realistic valuations for assets. Moreover, by attrition or by their own efforts in running-off seasoned examiners, they have very little talent left to make any realistic valuations even if they regained their political will and wanted to return to their true core mission.
So yes, earnings and capital for the banking industry are currently overstated. The overstatement will only grow as the housing market continues to slide and the banking regulators continue to forbear.
FFDIC,
"Owners of the debt (subprime mortgages or anything tainted by subprime such as mortgage backed securities)are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case."
As others have posted, this statement is highly suspect. Recognition of gain/loss is governed by the accounting standards of the FASB. I have not seen, nor can I believe, that the FASB has agreed to cancel its gain/loss recognition accounting standards.
Per Bair's statement it sounds like one of the main factors in favor of bulk modification is the fact that servicers don't have enough staff to service the loans. Bair says modification is in the best interest of the investors because the only other option is default - given the lack of servicer resources. If I am an investor, why should I agree with this premise. I would still sue and argue the the servicer's lack of resources has no bearing on their duty to determine whether a modification or default is in my best interest.
No matter what there will be lawsuits and unforseen consequences. I have no doubt servicers and borrowers will manufacture a way into qualifying for modification. Also, I doubt the example of starter rates of 8-9% is true- that is probably only for the second and the combined rate is lower. From the sidelines, none of this really matters to me.
What does matter to me, is if all this is simply streamlining the default/mod process, why was Paulson seeking authority to issue tax exempt bonds? How could state bonds have anything to do with streamlining the process? Is the money for nonprofits to educate borrowers of the program, or for something else? Anyone know?
I think this comment from Tanta is the most important thing said on this string:
"I really would, however, like those people who tend to get insulting about "those dumb borrowers" to reflect on how much time and space can be taken up on these comment threads just on clearing up misconceptions about how these ARMs work. I think that should, basically, suggest some humility and perhaps make folks think twice about calling these borrowers dumb."
Exactly. The panic and resentment exhibited over the past week about no-good former welfare recipients getting locked in at 1% has just been extraordinary, and against all of the facts.
Get a grip on reality. It is the Bush Administration. You can expect the following: 1) unfettered capitalism for robber barons, 2) govt contracts for cronies, oil companies, and mercenaries, and 3) shit out of luck for the rest of us.
Now the whole country will get a taste of what it was like to live in New orleans and have GWB declare his concern and commitment to rebuild . . .
At last we'll also have something in common with Iraqis, too.
Joe
o sh*t, Joe Shmoe. Peeps should not be allowed to comment until they have RTFA.
btw, with their bad music and low-rise pants.
Why does that remind me of the ad where the Dad is describing his kid's music as "..its like..a paper cut...on your eardrum"
Tanta,
Thank you for your very reasonable post and comments here. This helped me understand THE plan a lot better.
I agree that this is a sensible approach, if somewhat marginal. In the end I believe it will be helpful to smooth the current mid-cycle downturn and prevent it even more from becoming a recession. It's all about trust and confidence.
I think this is a big accomplishment if a struggling borrower gets to keep his house and does not have to foreclose. He may still have to struggle financially for years, but for his self-esteem it would be very beneficial.
Thanks!
O-Joe
Shnaps
They are allowed to post comments, 1st Amendment and all that.
They are also allowed to sign away all of their property, or bury gold on their property and buy shotguns, and (oh, this hurts me) they were even allowed to vote for GWB in 2004.
Thank god they are not allowed to vote for GWB again!
Joe
"Logic would follow that if a current subprime borrower cannot make the payment today in 2007 without fixing their rate what is to say they will be able to afford the payment in 2010 when the rate resets and the payment will be higher because of the higher cost of amortizing on a shorter schedule?"
...
Dr. Housing Bubble | Homepage | 12.06.07 - 8:55 pm |
Someone who calls themself "Dr. Housing Bubble" should try harder to understand how mortgages work.
An ARM such as is being discussed here is always fully amortizing, at every point in time, before and after every adjustment.
As Tanta pointed out above, maintaining the lower initial rate for a longer period actually results in more principle being paid earlier, so that payments after the first adjustment finally happens will be lower than if the initial rate had not been "frozen", everything else being equal.
Joe - you had me "this comment from Tanta". But you lost me at "robber barons".
Try to bear in mind that the seeds that led to this situation were sown back in the Clinton administration.
Man, I hate it when these threads degrade in to partisan political BS.
What I find most amazing about "the Plan" is how it seems to have the whole counry whupped into a frenzy, when it's really not much of a plan at all. A set of non-binding "best practices" that seem to just restate the obvious: if they can pay, make 'em pay; if they are hopelessly incapable of paying even the current rate, it's pointless to freeze their rates; if they're in the middle, work it out, because it's probably more economic than foreclosure.
I saw Paulson on the PBS "Newshour" tonight. Man, that guy blinks his eyes a lot. Between that and the President giving the wrong phone number, it seems like the country is being run by white guys with good cufflinks who got gentleman's C's in the Ivy League 30 years ago. At least Chuck Prince is no longer dancing (just the idea of a guy like him "dancing" always gave me the heebee geebees (sp?)).
I'm going to go out on a pretty safe limb and predict this will be about as significant as Gerald Ford's Win Program. Without the buttons.
festus - I agree with you. This plan is not the monster we had nightmares about leading up to this. It is Caspar-the-frendly-loanmod template.
As I said a million comments ago, if the resulting media circus prompts a couple extra soon-to-be-distressed borrowers to contact their servicer just to have a little chit-chat, then it's probably helped, in a roundabout way.
Shnaps
I'm no great fan of Bill, except in comparison to GWB.
Weren't the seeds in the post 9/11 rate cuts and Greenspan's endorsement of innovative mortgage products and ARMs?
Granted we've been on a slippery slope of deregulation of the financial markets since Ronnie R was Prez, but the bubble developed under Bush. That is, the housing bubble.
A different bubble developed under the Clinton Admn.
The lines about Bush I believe do not need to be taken in a partisan way. I'm a big fan of Chuck Hagel, Repub Senator . . . But don't you think it is amazing that so many people panicked about what they thought (maybe still think) is to be a Bush sponsored give away, taking from Wall St or tax payers and giving to subprime borrowers? In that context, esp, the robber baron reference still makes a lot of sense to me.
Just trying to discuss with you on lower key.
We can disagree. That's covered by 1st amendment, too.
Joe
I'm going to go out on a pretty safe limb and predict this will be about as significant as Gerald Ford's Win Program. Without the buttons.
uncle festus
I agree the biggest impact may be psychological - but thatshould never be underestimated.
Let's also not forget mortgage rates are down almost one percent since June. This provides further cushion for borrowers among higher refi possibilities.
O-Joe
Tanta,
I just wanted to come back (had to run to my firm's holiday party) and thank you for taking the time to respond to my questions. I realized my point of confusion - I (and I think a few others here) was confusing a regular ARM with IO. The amortization problem would arise only if the reset was pushed back on an IO - I think I have that much right.
just the idea of a guy like him "dancing" always gave me the heebee geebees (sp?)
heeby jeebies. time to dust off the louis armstrong...
um, whoops i mean "heebie jeebies".
IDK, my BFF henry?
Bacon - you're a helpful lad, but I'd love to hear your actual thoughts on this.
What would 'President Bacon' Do?
Inquiring minds want to know...
Since some people can't see what the outrage is about - which isn't just in the blogs - CNBC in general reports getting massive mail about it - let me try this:
"made an effort and tried to have a goodish fico score, no bailout for you"
"made an effort and improved your fico score, no bailout for you"
"made an effort and tried to get some skin in the game in the form of equity, no bailout for you"
This is an INTRA-class issue - its not about "fat cats" like you know who who has a 10yr 4.7% mortgage with 50% equity etc - its about the fact that within the poorer sections of the population some make more of an effort than others and THOSE are the people who are going to be discriminated against by not getting "THE DEAL" ( We'll leave the irony aside that actually this is NOT such a good deal at all in many solution paths that plot a price decline of 30% and that they should thank whoever that they aren't getting the deal ).
Its the perception of a lack of fairness that's outrageous.
Tanta has described very precisely why this has come about - and there is a legal and contractual observance logic to it but to the man on the #10 Clapham omnibus and I ride that bus too, its
NUTS !
-K
so this is the reason, as surferdude elquantly explained in (see greater detail above):
"Earnings and capital for the banking industry are currently overstated. The overstatement will only grow as the housing market continues to slide and the banking regulators continue to forbear."
surferdude | 12.06.07 - 10:16 pm | #
i would fire Paulson, put Tanta in charge, and then go build a snowman. any positive effect on the number of mods that get done (that wouldn't have been done anyway) to the number of foreclosures is still going to be swamped by home price declines and maybe recession. there is also a high likelihood that i will accidentally burn down the white house.
Repoman: "Itstead of flushing out the system with 2-3 years of pain, it seems that this will be a much longer drawn out process with prices inching down for many years to come. "
Do you think they care ?
They only care about "Bush time in office".
If they can have the great depression of 2009 this is really no longer their problem. Who do they scrwe up : Rudi Giuliani or Clinton ?
It seems Clinton knows she is not going to be president this time since she too is not intersted in a quick solution.
K (or is it SK?)
The borrowers who are going to be "helped" by the Bush freeze are in fact going to get screwed. They are being invited to keep paying 7% to 8% or more for a house sinking in value, only to be in mortal danger of losing that house in five years at the end of the freeze. Many of them would be better off going through foreclosure now rather than paying through the nose for fice more years only to lose it all.
The people really getting helped by the Bush freeze are the people who are organizing the freeze: Angelo Mozilo and his ilk, not the borrowers.
Anyone who actually acted in a fiscally responsible way the past five years is going to get a pretty nice reward in about two years with low, low,low house prices . . . and all along they are going to enjoy the benefits of solvency, security, and and absence of fear that they are going to be kicked out of their homes.
The anger is misplaced.
Bush deserves anger. So do Greenspan, Angelo M, much of Wall Street, and some more.
Joe
Thanks for sharing, bacon.
Wuz your office party tonight as well?
'hiccup'
I'm off to bed. Speaking of snow, I gotta snow-blow early mannana.
merry christmas my fellow debt-slaves and dollar-bag holders...
Nice post Tanta, though I strongly suspect litigation will blosom as practical application runs into itself, with most parties involved becoming unsatisfied.
At the same time, as prices continue to fall and more borrowers are increasingly 'upside down' within a weakening economy, more keys find their way to the mailbox, plan or no plan.
So if the Pres's plan is just a reassertion of what was generally already in the PSAs, and loans need to be evaluated on a case-by-case basis and then mod'd or not, doesn't this plan amount to a Quad-stacker NothingBurger?
Thank you surferdude, --a compelling analysis. And so what amendments to 'Hop Skip Jump' would you like to see so that the banks are served a smaller slice and the borrowers, a little more generous share?
I think we'll all be relieved that this dance is mostly PR and that the efforts to save the banks is only starting. Hard to believe another 10% fall in house prices won't seriously impair bank statements, dance or no.
I am reminded of Kasriel's warning 2? years ago that the banks exposure to income streams tied to mortgages was at record levels and a serious liability...and we have arrived, yes?
I suspect that this plan is but the first salvo. Too much is being floated for there not to be areal bail out in a few months. We will see conforming raise 50% as well as tax free muni's. That's the real end game.
Tanta Thanks for the elucidation of a complex problem.
As a scientist, I happen to believe CDO is an efficient and reasonable way of raising capitals ( in contrast with most people here).
Today's housing mess is caused by fast evolution, abuse and the lack of a standard for myriads of CDOs.
Hopefully, the proposed rate freeze will give Wall Street some time to unravel each CDOs and identify a matrix that can help evaluate their true worth.
Regardless of emotion, the bank system can not be allowed to fail. At the rate of today's mark-to-market, the pendulum of irrationality is swinging to the opposite end.
In the end, The one who has the Gold makes the rule of the game.
amatuer,
'evaluating their true worth' is just what most hope to avoid, and since many CDOs are bespoke, i.e. customized to suit the demands of particular investors... the only way to determine their 'true worth' is placing them for sale.
somewhat the same, i have over and over heard that SFAS 157/159 would force a mark-to-market rather than mark-to-model and mark-to-myth.
Now while its true that guideline does emphasize 'fair value' accounting and placement of assets into one or another of three buckets so improved disclosure, it very certainly does not mandate actual mark-to-market other than for level 1. That is, it simply requires financial institutions to disclose by what inputs and method assets are priced, not that unobservables can no longer be used.
for someone who remembers p/e ratios as a sound metric what has developed over the last decades is so far beyond absurd as to overwhelm; we have mystifications of mystifications being treated as real. The levels of self-supporting illusions and delusions have become untenable -- the attempts to save the blatantly fictitious from its destined meeting with the real patently bizarre.
"owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case."
If true, why are the auditors forcing C, BAC et. al. to take huge writedowns? Besides being bad PR and a drag on the stock price, it eats into capital adequecy -> lower loan volume -> smaller future profits. What you describe sonds like the Brady Bond fiction invented 20 years ago. Don't think we're there (yet).
Still, even a relatively few, small modifications could have a chilling effect. Based on a passing comment in some blog, I pulled Fannie's last 10Q and back of the enveloped this:
Asset margin 5.67%
Liability Margin 5.34%
Spread 0.33%
NIM 0.52%
That includes an average 5.45% return on $397 bn in securities. If the return falls to 5.18%, then you get:
Spread -0.18%
NIM 0.00%
Nice, huh. And that's Fannie. What do you think is going to happen to risky, highly leveraged players that are longer lower quality paper?
Loss of home value in this time frame further reduces the attraction of this option.
Yes. So how many of these people whose rates will be frozen are negatively amortizing as I hunt and peck here? Will they be so absurdly stupid as to continue paying for a property (sic) when they 1) have no personal equity in it since they made no or only a scant down payment, and 2) already owe more than it is worth and both their negative amortizing and falling house prices means that this difference is growing every month?
A few points:
I know I'm a bit late, but I just want to thank Tanta for this fantastically informative post. It's hands-down the best piece I've read on the subject.
All,
Nicole Gelinas just wrote a devastating piece about one "feature" of the Bush bailout plan. Apparently, the Bush bailout allows state and local governments to issue tax free munis to fund replacement subprime mortgages.
See "W'S DISASTROUS MORTGAGE 'FIX'" (http://www.nypost.com/seven/12072007/postopinion/opedcolumnists/ws_disastrous_mortgage_fix_767611.htm?page=0)
The bottom line is that Wall Street gets paid in full using tax free munis (at the expense of the Federal taxpayer) and state/local governments get stuck with the bill when these subprime mortgages (re)default.
A wonderful version of "heads Wall Street wins, tails the public looses" thinking.
Note that this article is worth reading for other reasons as well. I quote
"By encouraging people to stay in homes they can't afford, the plan keeps the housing market artificially high. When a bank forecloses on a home, conversely, someone else can buy it at a much cheaper price.
Politicians in New York and elsewhere have been complaining about a lack of affordable housing for years now; you'd think they'd be happy to have the opposite problem. Yet the bailout plans use government money to keep the market from finding its true price. This, when first-time homebuyers benefit immensely from falling home prices"
So the public interest is served by (more) affordable housing. A remarkable idea.
Board of Directors - Avoid Foreclosure- Foreclosure Help- Refinance Mortgage- Foreclosure Prevention-Homeownership Preservation Foundation-HPF
Bruce Paradis
Former CEO, Residential Capital LLC
Bruce Paradis served as the CEO of Residential Capital LLC (ResCap) until his retirement in June 2007. Prior to the formation of ResCap in May 2005, Paradis served as President and CEO of GMAC-RFC (now ResCap) from 1994 to 2005. He joined GMAC-RFC in 1983 as Vice President of Marketing and held several leadership positions within the GMAC-RFC family. Paradis will continue his work with several non-profit organizations, including HPF.
Sandor E. Samuels
Executive Managing Director, Chief Legal Officer and Assistant Secretary Countrywide Financial Corporation
Sandor E. Samuels is Executive Managing Director, Chief Legal Officer and Assistant Secretary for Countrywide Financial Corporation. He serves on Countrywide's Executive Committee and directs the Company's public affairs activities. Samuels joined Countrywide in 1990 after a successful legal career in private and corporate practice, including senior positions with First Interstate Bancorp, FIMSA, and Fox, Inc. Samuels serves as the Chairman of Bet Tzedek Legal Services and is the Chairman of the Advisory Board of the Ziegler School of Rabbinic Studies. He also serves as a member of the Board of Directors of the University of Judaism, Bet Tzedek, the Los Angeles Urban League and Adat Ari El synagogue. He also has served as Chair of the Legal Issues Committee of the Mortgage Bankers Association of America. Samuels has been honored with the Founders Award by Bet Tzedek and was named Outstanding Corporate Counsel of the Year in 2005 by the Los Angeles County Bar Association.
This was just posted on naked Capitalism; can someone walk through this and give an expert opinion?
Anonymous said...
Re: You must not have more than 3% equity in your home - You're solvent? How dare you, sir!
Must not have more than 3% equity in your home, which I guess implies that for every $100,000 you would have $3000 in equity
Re: Mortgage had to be issued between January 2005 and July 2007
So, within 2 years, a person would have to have put $6000 into equity on $100,000, which is 24 payments resulting in $250.00 per month.
That to me is not possible given the interest rate being paid out, i.e, I would be SHOCKED if these subprime borrowers across the scale had more than $30.00 per month go to equity!
Do we have an expert in here to help with this??
December 7, 2007 1:09 PM
Subprime Episode IV - A New Hope
Preceded by... Episode I - The Phantom Deflation Menace... Episode II - Attack of the Mortgage Brokers... Episode III - Revenge of the Permabears
To be followed by... The Fed Strikes Back... and The Return of the Gold Standard
Flexibility
Enright, president of Turnpike adviser NW Financial Group, said he prefers negotiated sales for the authority because they ``always give you the best price.'' While the date and terms of a competitive sale are fixed, Enright said, a negotiated sale can be timed to take advantage of falling interest rates and modified on the day of the sale to attract better offers, he said.
``You can change the structure of the deal and get better prices,'' said Enright, whose firm has offices in Jersey City and Trenton, New Jersey.
A 1994 order superseding Florio's edict by his successor, Christine Todd Whitman, made it easier for state borrowers to sell bonds on a negotiated basis by allowing a number of exceptions under which they could hire Wall Street firms to arrange an offering. These include large-sized issues, variable- rate debt and lower-rated bonds.
Negotiated
Of the $5.5 billion of debt issued by the Turnpike Authority in the past five years, none was done by competitive bid, Joseph Orlando, a Turnpike spokesman, said in an e-mail.
The Turnpike Authority prefers to hire banks to sell its bonds and arrange terms, said Jack Kraft, a New Jersey bond attorney who was the counsel on a $2 billion Turnpike negotiated bond issue that was the largest municipal debt sale ever when it was completed in 1985.
``Negotiated bond sales are the best way to handle large and complicated transactions,'' said Kraft, who in 1971 established the first nationally recognized bond counsel firm in New Jersey.
I hope you all see where this is going! The same people that brought you big-box walmart expansion, are going to be the same people that transfer bank bailouts to taxpayers!
Revealing more details about a national mortgage-rescue plan that's still in the works, Treasury Secretary Henry Paulson proposed Monday to help state and local governments issue tax-exempt bonds to pay for mortgage refinancing and confirmed that he seeks to temporarily freeze the rates of tens of thousands of home loans that are about to adjust to higher rates.
Paulson told a national housing forum that Congress should authorize state and local governments to broaden their tax-exempt bond programs temporarily. Currently, states have authorization to issue tax-exempt bonds only to aid first-time homebuyers in designated distress zones. Paulson proposed to expand this to allow state and local governments to issue tax-free bonds to help in mortgage refinancing.
Dec 5 (Reuters) - The U.S. Treasury Department said Wednesday that it supported temporarily lifting the cap on the volume of tax-exempt bonds that state and local governments may use to buy troubled home loans.
"The Secretary's proposal would increase the volume cap by a total amount to be determined in consultation with Congress and the states. It would be for use in the three years from 2008 to 2010 for refinancing with qualified mortgage bonds," Treasury spokeswoman Jennifer Zuccarelli told Reuters.
In a speech addressing problems in the housing market on Monday, Treasury Secretary Henry Paulson said state and local governments should be permitted to issue tax-exempt bonds to fund refinance programs for struggling subprime homeowners. He did not provide many details.
The proposal to allow tax-exempt bonds to refinance troubled mortgages is just one part of a Treasury-brokered plan to help troubled borrowers to be unveiled on Thursday.
About 12 states have already launched or are in the process of launching mortgage refinancing programs but they have been financed through taxable bonds or other sources.
State and local agencies sold $30.5 billion in housing bonds in 2006, according to Thomson Financial, but only $6.4 billion were tax-exempt.
10/4/2007--Passed House amended.
Mortgage Forgiveness Debt Relief Act of 2007 - Amends the Internal Revenue Code to exclude from gross income amounts attributable to a discharge of indebtedness incurred to acquire a principal residence. Limits to $2 million the excludable amount of such indebtedness. Reduces the basis of a principal residence by the amount of discharged indebtedness excluded from gross income. Disallows an exclusion for a discharge of indebtedness on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer. Sets forth rules for determining the allowable amount of the exclusion for taxpayers with nonqualifying indebtedness and who are insolvent.
Extends through 2014 the tax deduction for mortgage insurance premiums.
Sets forth alternative tests for qualifying as a cooperative housing corporation for purposes of the tax deduction for payments to such corporations. Qualifies a corporation if: (1) 80% or more of the total square footage of the corporation's property is used or available for use by its tenant-stockholders for residential purposes, or (2) 90% of the corporation's expenditures are for the acquisition, construction, management, maintenance, or care of its property for the benefit of the tenant-stockholders.
Limits the exclusion from gross income of gain from the sale of a principal residence by denying an exclusion of the gain that is allocable to a nonqualified use of such residence (i.e., use other than as a principal residence).
Amends the Tax Increase Prevention and Reconciliation Act of 2005 to increase to 116.75% the estimated tax rate in the third quarter of 2012 for corporations with assets of not less than $1 billion.
10/16/2007--Introduced.
Escrow, Appraisal, and Mortgage Servicing Improvements Act - Amends the Truth in Lending Act to require a creditor, in a consumer credit transaction secured by the consumer's principal dwelling, to establish an escrow or impound account to pay taxes and hazard insurance, and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums.
Requires written disclosures by the creditor to the consumer regarding: (1) such escrow or impound account; and (2) consumers who opt out of escrow services.
Amends the Real Estate Settlement Procedures Act of 1974 to proscribe specified practices by the servicer of a federally related mortgage, including obtaining force-placed hazard insurance coverage to protect the mortgagee's interest in the property.
Prohibits practices related to default, late fees, or foreclosure.
Requires prompt: (1) crediting of payments; (2) responses to payoff balances; and (3) refund of escrow accounts upon payoff.
Directs the Secretary of Housing and Urban Development to study and report to specified congressional committees on mortgage servicing fraud.
Amends the Truth in Lending Act to: (1) require repayment analyses to include escrow payments; (2) include a written property appraisal as a prerequisite to granting a mortgage; (3) prohibit unfair and deceptive practices and acts relating to consumer credit transactions secured by the principal dwelling, especially in property appraisals; and (4) require a mortgage originator to make available to the credit applicant all appraisal valuation reports no later than three days prior to the transaction closing date.
Amends the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to: (1) include among the functions of the Appraisal Subcommittee protection of the consumer from improper appraisal practices and the predations of unlicensed appraisers; and (2) expand state agency reporting requirements to include transmittal to the Appraisal Subcommittee of reports on claims, disciplinary actions, license and certification revocations, and suspensions.
Prohibits certain interested parties in a real estate transaction involving an appraisal from engaging in specified practices to improperly influence a real estate appraisal in connection with a mortgage loan.
Requires the Comptroller General to study and report to specified congressional committees on possible improvements in the appraisal process and in state compliance programs.
The core is this: loans made by banks as originators subject to bank regulation have not been the problem. The problem has come when loans were originated by unregulated people, not that they were morally deficient, but there was no regulation. Here is the core of this bill: we have tried talking to the bank regulators and others to take the principles that the bank regulators have applied to loans originated by regulated depository institutions and apply them to the unregulated originators, the brokers. And it is not the case that the brokers were morally deficient. In all of these professions, we have an overwhelming majority of honest people. But the problem is, in the absence of any regulation and the availability of a secondary market with no rules, that minority that was not scrupulous caused us problems. This bill fixes that.
Rep. David Scott [D-GA]: Mr. Speaker, I think it is very important because the assignee liability issue did come up, and I think as we move through this debate it would be clear to get a clear understanding of what we have in that so we will have a point of reference.
First of all, in this issue, if a consumer gets a loan that violates the minimum standards, in this bill are minimum standards, then the consumer has cause of action against assignees that have purchased that loan. The consumer may sue to rescind the loan and recoup other costs. There has to be an element of liability in the issue. We have worked to get a delicate balance that both protects the consumer while at the same time also saving some elements of liability so that we keep the market free of unnecessary suits.
Further, when the holder of a bad loan initiates a foreclosure, the consumer may exercise a rescission right under this to stop foreclosure. This is important. If the rescission right has expired, the consumer may seek actual damages plus costs against the creditor, the assignee or the securitizer. This provision gives real power to the consumer who can sue to stop a foreclosure of a bad loan or to rescind the bad loan.
Now, we also have some protections from liability for the loan originator. Number one, somebody may ask, why even give some protection from lawsuits to any entity that buys a loan? I believe that most consumers realize that the market provides the funding for loans and that the constant threat of legal action will indeed increase the cost of those loans for everybody. Somebody will have to pay that cost. And normally, that cost will fall on the consumer. So we have struck a delicate balance in the assignee liability.
Paulson, along with other retarded politicians are an embarrassment to America! This plan is being made up on the fly and has no basis in reality, unless of course, we reinvent all the rules and default on all contracts....this is retardation at the very highest level!
Page not found | NCSHA - National Council of State Housing Agencies
Sec. 143. - Mortgage revenue bonds: qualified mortgage bond and qualified
veterans' mortgage bond
(a) Qualified mortgage bond
(1) Qualified mortgage bond defined
(B) Good faith effort to comply with mortgage eligibility requirements
An issue which fails to meet 1 or more of the requirements of
subsections (c), (d), (e), (f), and (i) shall be treated as meeting such
requirements if -
(i) the issuer in good faith attempted to meet all such requirements
before the mortgages were executed,
(ii) 95 percent or more of the proceeds devoted to owner-financing
was devoted to residences with respect to which (at the time
the mortgages were executed) all such requirements were
met, and
(iii) any failure to meet the requirements of such subsections is
corrected within a reasonable period after such failure is first
discovered.
(II) no portion of the proceeds of the issue are used to make
or finance any loan (other than a loan which is a
nonpurpose investment within the meaning of section
148(f)(6)(A)) after the close of such period.
(ii) Exception
Clause (i) (and clause (iv) of subparagraph (A)) shall not be
construed to require amounts of less than $250,000 to be
used to redeem bonds. The Secretary may by regulation
treat related issues as 1 issue for purposes of the preceding
sentence.
(i) Other requirements
(1) Mortgages must be new mortgages
(A) In general
An issue meets the requirements of this subsection only if no part of
the proceeds of such issue is used to acquire or replace existing
mortgages.
(B) Exceptions
Under regulations prescribed by the Secretary, the replacement of -
(i) construction period loans,
(ii) bridge loans or similar temporary initial financing, and
(iii) in the case of a qualified rehabilitation, an existing mortgage,
shall not be treated as the acquisition or replacement of an
existing mortgage for purposes of subparagraph (A).
See Also: Congress restricts Mortgage Revenue Bond (MRB) mortgages to first-time home buyers who earn no more than the area median income (AMI). Larger families can earn up to 115 percent of AMI. The average income of an MRB borrower in 2005 was just $41,450just 58 percent of the national average of $ 72,585.
Congress limits the price of homes purchased with MRB mortgages to 90 percent of the average area purchase price. The average MRB purchase price in 2005 was $117,649only 54 percent of the national median price of $219,000
Tanta,
Good analysis. Enjoyed the links explaining the terms.
I am now left with the conclusion that this is more about loss protection / limitation to the lender / investor then helping the borrower. Thus, it looks like a bailout for the big boys.
I am still trying to figure out who is helped by the plan and why the plan was created. So much to consider and I am still trying to work it out.
Paulson is knee deep it this crud. He is part of the problem with the improvident investments from Wall Street that funneled money into the housing market for a fee and then securitizing and selling for a fee.
As a popular writer recently summarized the implicitpolicy of the 2006 Pension Reform Act: The message is loud and clear: Neither your government nor your employer will be responsible for your retirement. You will be.88
Julie Tripp, Retirement Plans Face a Major Upheaval Under New Law, OREGONIAN,Aug. 27, 2006
The Pension Protection Act, signed into law in August 2006, contains more than 900 pages of changes
and refinements to regulations regarding defined benefit plans, defined contribution plans, individual
retirement accounts and other issues related to retirement planning. The act is expected to generate
thousands of pages of tax code as the IRS begins implementation.
As indicated in Section 10.2.6.d. the Pension Protection Act of 2006 liberalized the "Significant Participation" text for funds with limited partner commitments from investors subject to the Employee Retirement Income Security Act of 1974 ("ERISA"). For purposes of the 25% test, investors which had been counted in that census because they looked like ERISA funds i.e., State employee benefit plans and off-shore employee benefit plans are now no longer counted. The only investors counted towards the Significant Participation test are funds directly regulated by ERISA plus, and here is the rub: Obviously, to avoid the ability of parties so inclined to skate around the rule, there has been historically, and still remains, a 'look through' proscription which impacts, particularly, fund of funds investors. Under the old rule, assume a fund of funds investor included ERISA entities for more 25% or more of its own committed capital. When the fund of funds investor committed to a buyout or venture fund, the 'look through' rules counted the entire commitment of the fund of funds LP as an ERISA entity for purposes of the 25% test vis-à-vis the second tier fund.
Landmark Pension Reform Act Expands Ability of Investment Funds to Accept Benefit Plan InvestmentsLast week the U.S. Senate passed comprehensive pension reform legislation that will have wide-ranging impact on the structure and operation of hedge funds and other investment vehicles. The new Pension Protection Act of 2006 (PPA 2006) makes significant changes to the existing ERISA plan asset rules and expands the opportunities for investment funds to qualify for an exception from ERISA plan asset treatment. These changes will enable certain fund managers to increase the amount of benefit plan assets under management without becoming subject to ERISA fiduciary obligations and prohibited transaction rules.In particular, PPA 2006 changes the method of counting benefit plan investors in determining whether a fund satisfies the 25% significant equity participation test under ERISA. The 25% test generally provides that a funds underlying assets will not be considered to be ERISA plan assets (i.e., ERISA will not look through to the underlying assets of the fund) if benefit plan investors own less
Morrison & Foerster : Legal Updates & News : Legal Updates : Pension Protection Act of 2006 Adopts Key Changes to ERISA Plan
Asset and Prohibited Transaction Rules
After its final approval by the U.S. Senate on August 3, 2006, the Pension Protection Act of 2006 ("PPA") was signed by the President and became law on August 17th. While the PPA adopts many significant changes to the rules governing the operation of benefit plans,[1] there are several key provisions of particular note for the financial services and private equity industries as well as others involved in the investment and management of pension plan assets. Taken together, these provisions should offer meaningful relief for fund managers, underwriters, issuers and plan fiduciaries from the often-complex web of restrictions imposed on the investment of pension plan assets by the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the related regulations promulgated by the U.S. Department of Labor ("DOL").
To further this purpose, the Plan Assets Regulation treats a plans acquisition of an equity interest in another entity as plan assets and "looks through" that entity and deems its underlying assets to be plan assets as well unless an exception is available.[3] We refer to this rule as the "look-through rule" here. One of the most commonly relied-upon exceptions to the look-through rule relates to the "significance" of equity participation in an entity by "benefit plan investors."[4] We refer to this exception here as the "25% Test."
Both ERISA and the Code prohibit many transactions between plans and "parties in interest".[5] These transactions involve potential conflict of interest and self-dealing situations where a party in interest might act in a manner contrary to the best interests of the plan and its participants. Section 611(d) of the PPA creates a new statutory exemption to these rules, allowing eligible parties in interest to more freely conduct business with plans without the administrative hassles that were frequently at issue under prior law.
ERISAs definition of "party in interest" is quite broad and sweeps up many persons and entities that are commonly involved in the operation of plans and the investment and management of their assets. Among the parties in interest subject to these prohibitions are persons or entities providing services to a plan. Plans often use multiple service providers ranging from investment advisors to trust companies to recordkeepers; many of these service providers are affiliates of much larger financial services companies, which are themselves often classified as parties in interest by virtue of these affiliate relationships. As a result of the factual complexity involved in many of these situations, avoiding inadvertent prohibited transactions with service providers has been costly and administratively cumbersome as plans and service providers attempt to conform their operations to one or more of the p
sugar coated version:
Key Points Morrison & Foerster : Legal Updates & News : Legal Updates : Pension Protection Act of 2006 Adopts Key Changes to ERISA Plan
Asset and Prohibited Transaction Rules
Participation by governmental, church, and foreign plans is no longer required to be taken into account under the 25% "plan assets" exception.
For funds with "significant" benefit plan participation, benefit plan investment is taken into consideration only to the extent of the investment.
Many benefit plan service providers can more freely conduct transactions involving plan assets under new statutory prohibited transaction exemption.
A new "quick fix" for inadvertent prohibited transactions is available.
As a result of the factual complexity involved in many of these situations, avoiding inadvertent prohibited transactions with service providers has been costly and administratively cumbersome as plans and service providers attempt to conform their operations to one or more of the prohibited transaction class exemptions issued by the DOL or else seek their own individual prohibited transaction exemptions.
Under the new statutory exemption created by the PPA, if a person or entity is not a fiduciary (or an affiliate of a fiduciary) possessing discretionary authority or control over the investment of plan assets or providing investment advice for a fee to the plan at issue and is only a party in interest as a result of providing services to the plan, several common transactions involving the plans assets will no longer be prohibited as long as the plan does not receive less or pay more than "adequate consideration." The PPA provides some useful clarification on the "adequate consideration" issue by allowing factors such as the size of the transaction and the marketability of the securities at issue to be taken into consideration. Further, the exemption makes clear that any plan fiduciary can make "adequate consideration" determinations for transactions involving assets for which no public market exists (subject, of course, to the usual prudence and exclusive benefit requirements imposed on fiduciaries by ERISA).
The types of transactions covered by the new exemption include sales, leasing, and exchanges; lending of money or extension of credit; and transfers to or use by or for the benefit of service provider/parties in interest of benefit plan assets.[6] This exemption permits many common transactions that were previously required to be conducted through a qualified professional asset manager under DOL class exemption 84-14.
It seems to me that judging whether modifications are in the investor's interest runs into the financial equivalent of the environmental "Tragedy of the Commons." A foreclosure that might otherwise be in the best interest of a particular set of REMIC investors might not be so if it was part of a flood of such foreclosures which caused a corresponding fall in value of the underlying collateral. The greatest beneficiaries to this collective agreement will be those who don't follow it because their foreclosures will be in a market that has been positively affected by limiting additional ones. I too thought this was mostly about protecting investors but I'm curious why acting together, i.e. colluding, to keep their collateral's value from crashing doesn't analogize to behavior that anti-trust laws are designed to prevent. It's just wrong to suggest that a foreclosure bloodbath hurts everybody. The eventual buyers of homes that would have paid less with greater foreclosures will be hurt if this agreement between servicers and investor successfully eliminates some of those foreclosures. The interests of millions of people who would like to own a home if prices fell to what they could afford are being ignored.
While I fully appeciate that this plan is a defer and hope plan -- designed to move this problem to the next administration and hope that the market comes back enough in 5 years that the beneficiaries don't default then -- my problem is that at its core it's social anti-darwinistic.
We're rewarding the stupid penalizing the fiscally responsible.
This plan should be accompanied with some sort of Special Federal Real Estate Tax (SpeFRET). The SpeFRET, payable upon the sale of the house would be a special real estate capital gains tax applicable to those bailed out. It would be payable upon sale, be the difference between the purchase price and sale price (provided the latter's higher), and appreciate (percentage-wise) annually eroding any future capital gains those bailed out might otherwise enjoy.
This program would induce those bailed out to sell their homes at the earliest point possible so they can exchange their SpeFRET subject properties for non-SpeFret subject properties.
Absent a tax on these bail out recipients, we are, potentially, unfairly enriching them for their risky and wreckless behavior.
Tanta rules. Rocks. Blows the others off the map. Interview Tanta on CNN and Bloomberg. Get the straight story out there.
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