Paulson "aggressively pursuing" Loan Modification Plan
Submitted by
CalculatedRisk on Mon, 12/03/2007 - 8:48am (190 comments)
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The problem is still the same, picking the fly specks out of them the pepper.
One question: How are pre-payment penalties factored into the MBS structure? Are they considered "gravy", or are they used to offset the loss of interest income that would have resulted?
If they're part of an offset, wouldn't even the waving of prepayment penalties require buy-offs from the MBS holder(s)?
Can you say: Inept.
Still no details. As soon as they get rolled out it'll be clear that this is nothing but a hoax and a way to cushion the declines in the equities markets, walking them down. MLEC-II
Add bald-faced liar to inept if municipal bonds become a source of refinancing.
Just how it read it. With 100s, 1000s (and beyond)being "laid off" who's left to sort the wheat from the chaff?
Paulson said 1) that the plan would not cost any taxpayer money; and then 2) that the plan would be funded by state and local bonds.
Even for the Bush administration, this level of contempt for the intelligence of the American public is remarkable.
For those who question the existence of the Plunge Protection Team, you just saw a speech from the Chief of Protection himself.
Next week his lacky, Helicopter Ben, will unleash 50 basis points to make sure Wall Street has a very happy holiday season indeed.
In other words, just more lies from a Bushy banker scumbag.
Wow -- Desperation!
Paulson is trying to talk calmly and project 'authority', though he has none, and reassure people that 'helping' a very limited number of buyers who would arguably be better off if they were not 'helped' and doing so without using any public funds or subsidies will have a major beneficial effect on collapsing credit markets.
This is complete nonsense.
This is called the "piss off everybody" plan. Piss off those who have to pay the higher rate while others get away without having to, piss off those who get foreclosed while their neighbors get off the hook.
It would be interesting to see what magical mechanism can be developed to perform this triage (quadage(?)) function.
Has any similar process on this large a scale with this number of parties ever been attempted?
Do you think that desperate people might want an appeals process? What party or government body wants to be in the position of saying, "... you can keep your home, but you can't..."
Sounds like the making of almost revolutionary conditions.
Paging Solomon, paging Judge Solomon!!
Next up: Bush asks Congress to repeal the laws of economics to help the American homeowner.
Film at 11:00.
This is the beginning of a new branch of the government.
Taxpayers, get out your wallets.
I really did not like the laugh in the assistance when he mentioned that people in the room were OF COURSE not concerned.
Yes they should be. At least in front of courts of justice for some of them. And in terms of brilliant career changes for most of them.
Disgusting
François from France
CR:
I wonder what will occur should home prices drop over night by 20%-30% ?
it will re start some home buying and home building activity. It will make giving new mortgagages safer ?
How many people will decide to stop paying their old mortgage forclsoe and live else where just because it is cheaper (transaction costs are 10% so does it make sense ?)
Well somebody has to pay for the subsidy this will give to certain mortgage holders. Question is who? And of course such a stupid plan is guaranteed to make those already foreclosed furious and furiouser. But the stock market immediately turned up after this was announced, like the trained bear (bull?) that it is. Re-arranging deck chairs on the Titanic in short.
Oh, thank GOD, the reassuring adjectives are beginning to roll in--"seriously considering"
"aggresively pursuing"
Look as if everything will be OK.
for those of u interested in the birth of the Fed and the motives behind it i would suggest "Creature from Jekyll Island" by G. Edward Griffin. basically created by bankers to ensure control over our financial system in the name of the gov't and ppl.
there are parts of the book where he goes off on what i assumed then were far fetched ideas about world socialism. i must say that after the several recent wild ass proposals by the US Treasury, Bush, and Fed these ideas don't sound so far fetched anymore. i may go back and read again.
By the way,
Goldman boasted they made money shorting the subprime market.
Didn't they make money selling the stuff just beforehand?
It would be highly immoral. But is it legal to both sell stuff and short them?
this can be called "Operation Subprime Freedom"
No, no. "pragmatic" is the one that wets me pants. Paulson needs a press secretary...like w, anybody would be an improvement in those cases where the public speaker is without public assets.
Take a look at the participants in the HOPE NOW program sometime. The foxes are guarding the hen house.
Until issues like Mortgage Servicing Fraud are addressed neither HOPE NOW nor FHASecure can have any kind of REAL impact. As long as servicers can manipulate and manufacture defaults in borrower's loans neither program can assist as many borrowers as they should.
Servicers have the upper hand in that they can see, on a month to month basis, a borrowers payment history and, as such, can see who is having trouble making their monthly payments. At that point, borrowers can be effectively locked into their loans simply by having a default recorded in their payment history - whether a borrower actually misses a payment or not. That thought sounds like it needs a lot of tin foil to process it but I've got proof of payments being made on time and recorded as late in my own case against Fairbanks/SPS. Payment was received within the grace period but was processed almost ten days AFTER the grace period expired (April 23). Fairbanks/SPS local legal counsel attempted to get me to say, on the stand in front of a Superior Court Judge, that the processing date was the date that the payment was received. The only problem with that statement was that the front of the check was stamped "received April 12."
U of Iowa Prof. Katherine Porter recently released "Misbehavior and Mistakes in Bankruptcy Mortgage Claims." The study can be found at Social Science Research Network (SSRN) Home Page and examines roughly 1700 bankruptcy cases and how the borrowers ended up seeking bankruptcy protection. While that study looks at the issue from a bankruptcy perspective, the thing that needs to be realized is that all Mortgage Servicing Fraud victims are being herded toward the bankruptcy process in order to save their home. This study is, effectively, a road map that can be used to examine the process that fraudulent mortgage servicers use in order to strip as much equity from a borrower's property and financially bleed a borrower as much as possible before the property in question is essentially "laundered" through the foreclosure process. If I had not been successful in obtaining the permanent injunctions in my own case my next step would have been to file for Chapter 13 protection.
If borrowers can eventually control who services their loans some of this problem can be alleviated. But until issues like Mortgage Servicing Fraud are acknowledged and eradicated from the securitization and servicing sides of the industry nothing is going to truly solve the current problems that homeowners/borrowers are facing.
I heard nothing about how they go about getting the actual mortgage owners in the shape of the MBS' to agree to this.
How can the servicers change the terms in any significant way without risking legal issues ?
I noticed that in Mozillo's interview on CNBC he excluded HIS option-ARMS from the deal.
A lot of the deal depends on Congress acting- how long is THAT going to take?
This looked really flakey to me.
-K
barely, some details are leaking out, and basically this plan will be DOA. (or have a minimal impact). They are apparently targeting homeowners with 40% to 50% DTI ratios - and who can prove their income with 1040s. That will be show stopper for many of these borrowers.
Yal, if prices fell 20% overnight, so many people would be underwater and stop paying their mortgages, it would be really ugly. I think it would become socially acceptable to walk away from your home and mail in the keys. People would have owning - I've seen it before on a smaller scale.
Best to all.
I don't understand how this plan would be funded by states and municipalities. Can they be compelled to bail out investors and banks?
do you still think they are not purposely buying mortages going to default or to fanny or freddy
I presume that if the deal is really any good, it would be better to stay at the teaser rate rather than refinance. So what's the government going to say to those who can refinance but would prefer to stay at the teaser rate: sorry, only your neighbour, who has spent all his money on a trip to Las Vegas, is allowed to do that? I agree that this would piss a lot of people off.
Innovation occurred while Hank was in charge at Goldman, so he has some credibilty issues of his own to address.
Somehow Paulson's nervous stutter and otherwise quivering voice does little to calm fears. Perhaps just the opposite. You would think the administration could have identified a more competent carnival entertainer as a spokesman.
Ben's worried look isn't helpful either. Interesting times for those already lacking confidence.
"Yal, if prices fell 20% overnight..." I think, in several if not many parts of the country, they have.
I think it would become socially acceptable to walk away from your home and mail in the keys.
We're already beginning to see that in Sacramento. The media outlets here have lead stories daily about "subprime victims." Just like two years ago when people became manic buyers, the foreclosure meme is reaching critical mass.
Coming soon to a community near you.
The wheels of our financial vehicle left the roadway and beyond the edge of the cliff, on an upward trajectory, sometime ago. Now that our meteoric ascent has turned into a meteoric descent, people are starting to realize that the vehicle was not designed to fly or glide. Paulson can try to steer all he wants, but the forces of gravity, momentum, and mechanics have taken over.
Feel free to move about the cabin.
Quesion: anybody have a feeling for what proportion of the resetting ARMs fall in category 4 (ie the category targetted by the plan)?
When prices keep falling they can stop worrying about the subprime crisis because at some point the Prime borrowers are going to walk in mass. I saw this happen twice in Texas and whole neighborhoods were laid to waste. Your credit is only worth so much I think we are about to get a first hand look at its true market value next year.
Kiron,
Due to falling property values and slowing economic activity, states and municipalities face rapidly decreasing tax collections. That will soon be followed by budget shortfalls.
For them to soak up bonding power for such a thing is extremely unlikely.
Run out the clock and pass the buck because financial engineering is hard work.
On municipalities issuing bonds: I expect roughly 0 to do so. The places that are most in need of relief are also the most likely to face falling tax revenues. In the end only the Federal government has the werewithal to bail out a meaningful portion of problematic loans.
km4,
My thoughts exactly get this thing to 2009 and run like hell.
CR said:
.....some details are leaking out....They are apparently targeting homeowners with 40% to 50% DTI ratios - and who can prove their income with 1040s...
Oh, yeah. I think know that guy, the one guy who would qualify. He said he's not interested, sorry.
When prices keep falling they can stop worrying about the subprime crisis because at some point the Prime borrowers are going to walk in mass.
Exactly. Paulson is still addressing subprime, while all those folks (like me) who put 20% down in a conventional mortgage are headed to underwater territory. The temptation to default will be high rather be upside down.
Remember that this is all just a dress rehearsal for part two of the "bailout"- when option ARMs recast.
"if prices fell 20% overnight, so many people would be underwater and stop paying their mortgages"
I am not so sure.
So many people live where they want and pay an amount they can afford.
But let's say I am wrong and it is only 10% over night ?
what would occur at that point - will some housing activity resume ?
It depends on expectations for further house price decline.
This si why I think a sharp drop with few maonth of no further drop is mucg better the everyone.
km4,
I think you nailed it, this is 'stall ball' at its most basic, just keep the festering mess subcritical long enough to pass it to the next administration.
Mozilo on CNBC:
Video - CNBC.com
paulson: "as risk is being reassessed and re-priced"
Apparently the plan involves trying NOT to re-assess risk, and re-price it. If risk was re-assessed and repriced then foreclosures would be accelerated, not diminished.
It is so interesting watching advocates of the infinite and omnipotent free market struggle with trying to reconcile government intervention vs the consequences of letting the "perfect" free market go out and strangle both voters and the ground that it stands on. Quick, lets socialize the losses and privatize the profits!
Mike Dillon wrote:
"This study is, effectively, a road map that can be used to examine the process that fraudulent mortgage servicers use in order to strip as much equity from a borrower's property and financially bleed a borrower as much as possible before the property in question is essentially "laundered" through the foreclosure process."
And this exactly what Paulson proposed today, apparently to happen on the taxpayer's dime.
These revisions discussed in the NYT seem like a big deal to me.
Estimates May Have Overstated Job Growth
By FLOYD NORRIS
Published: December 1, 2007
The American economy appears to have created far fewer jobs this spring than has been reported so far, a new government report indicated yesterday. That could provide further impetus for the Federal Reserve to lower interest rates when it meets Dec. 11.
The report included a sharp downward revision of the governments estimate of personal income growth for the second quarter. Because the changes were made as soon as better employment figures were available, the revisions made it seem likely that figures on job creation are also likely to be revised downward in coming months.
The new report concluded that personal income from wages and salaries grew at an annual rate of 1.6 percent in the second quarter, far below the 4.5 percent that had previously been estimated.
The government did not explain why the revision was made, and it is possible that some of it came from reducing estimates of wages or of the profits that employees received from exercising stock options. But it was most likely, said Robert J. Barbera, the chief economist of ITG, that the largest part of the revision came from a change in employment estimates.
If so, he said, he expected the government would revise its estimate of the number of jobs created in the quarter, to as little as 50,000 a month from 126,000 a month. That would indicate that the economy was much weaker than had been thought.
Wow. Over 300 CR visitors. Impressive. Is something afoot?
Excellent incite CR.
They have identified who they can keep cash flowing out of the longest. It helps keep homes off the market and makes things look better than they are.
I am so disgusted with the actions of our goverment. I am a free market person, but what is going on in this country is anything but that.
Why does anyone believe that those who got us into this mess are going to lead us out of this mess is a complete mystery, let alone make sure their own interests aren't protect first. Utterly insane.
OT, Re: frozen funds in Florida
Here is the contact information of Hal Wilson in Florida. Maybe CR/Tanta can interview him on behalf of the blog to learn the inside story. Or would someone call him and ask whether he is still smiling as much as 2 weeks back?
Hal Wilson
Jefferson County School Board
1490 West Washington
Monticello, FL 32344
(850)342-0100
(850)342-0108 FAX
wilson_h@firn.edu
State & local bonds are going to fund this thing???? Do they think state and local administrators haven't read of the run-on-the-fund in Florida and are going to happily sink thier money into a brand new fund filled with (by definition) troubled assets just to get somebody else's hiney out of the fire???
Silly nonsense.
Would be a lot easier to simply abrogate all contract law and require all mortgage holders of ARM's to lock in the teaser rate for the life of the loan and be done with it. But then the SIV's would be passing the Titanic on the way down as the present value of their leveraged holdings slipped enough to wipe out their worth.
Oh this is going to be fun to watch!!!
Where are the lawyers? I want legal opinions about what these bailout balloons mean in terms of the rule of law, and the implications for credit markets.
whoa - just ticked over 300+ visitors - whazzup?
I think we should have a national do-over.
This plan is a taxpayer bailout of the banks who screwed the pooch making these loans - classic privatize the profits and socialize the losses - by proposing that state and municipal entities become the ultimate bagholders by refinancing out the current investors (i.e. Wall Street).
The financial press keeps saying things like "1/3 of subprime borrowers will benefit from this plan". Although there might be three groups, how the three groups split is the topic in question. The gov't is worried it will only help a small percentage and is trying to get that percentage higher, the bondholders is worried that they will freeze rates for a lot of homeowners and trying to get the percentage smaller.
This should play very well in Peoria, YOUR property taxes will go up to bail out the folks who got in over their heads...that after many locales are showing incipient signs of taxpayer revolt due to increased assessments from bubble fueled HPA.
I think that we already have a culture of people who are ready to walk away from their debt obligations, which is what makes all of the references to Japan meaningless (their sense of interdependency is much stronger than Americans'.) After the first round of foreclosures, the concept normalizes for the masses. Investors have shown themselves keen to walk away, and I don't see others who felt so proud of themselves for getting into the right home sticking around for too long once they get labeled as idiots. 2009 will reveal much more, but this current bailout seems like a desperate bandaid. I don't know how we'll avoid higher unemployment, which I see as the real kicker.
whoa - just ticked over 300+ visitors - whazzup?
energyecon | 12.03.07 - 12:17 pm | #
CR is where to go when you want to know what's really happening. People are waking up to the fact that you cant believe a word the Financial/Government Complex says.
I don't think there is an easy answer to the legal side of it.
From what I understand a blanket freeze would not have worked legally, but taking it case-by-case could work.
So the purpose of this plan is clear - since the industry lacks the infrastructure to handle the work load, this guideline helps decide which loans to foreclose on now, and which loans to foreclose on later.
In manufacturing we refer to this as 'managing the backlog'.
Bloomberg reports that Bush Cites War Funding, Spending Bills as Priorities.
I believe someone here was looking for Moe?
How about how this delay save MGIC and Radian from a tidal wave of insurance losses?
Kinda puts a lot of shorts underwater, as I stated would most likely occur before Xmas. The predictions are getting mighty easy these days, just do whatever possible to screw the folks who see clearly and reward the knifecatchers.
Someday this war's gonna end...
"Whenever the freeze ends, most of the homeowners in the defined group will still face foreclosure. So the purpose of this plan is clear - since the industry lacks the infrastructure to handle the work load, this guideline helps decide which loans to foreclose on now, and which loans to foreclose on later."
After reading this and Tanta's post on the San Diego couple's re-negotiation, I'm coming around to the idea that this workout plan is really just a way to spread the pain into a more manageable timeframe. These workouts only extend the time before the borrowers go into foreclosure while maintaining a partial revenue stream. It does the lender no good to foreclose into a declining, inventory flooded market. Better to keep some revenue coming in and hope you can foreclose into a better market in 5-7 years.
Really, does anyone believe that the couple in Tanta's post will be able to start paying off principal over a 22 year amortization in 5 years? Even at the reduced interest rate?
30 yr. fixed rates keep coming down, so that may help a lot of people who do qualify. My lender is down to 5.875 today. Not bad.
Markus Aurelius,
Surely you jest that Bush is Moe I always considered him to be the smartest of the Stooges.
"in the interest of simplicity, there are four categories of subprime borrowers."
It's classic emergency triage. You've got patients who are going to live even if they aren't treated right away ("who can afford their adjusted interest rate"), patients who are probably going to die no matter what ("some of these homeowners will become renters again") and patients who will probably live if they are treated right away ("putting them in a sustainable mortgage").
But Paulson has now added a fourth category: Patients who are almost certainly going to die, but who should be placed on artificial life support until the next ER team comes on duty, in order to keep the current team's death stats from looking so bad.
The whole trouble here is that in the traditional "case by case" way of doing mods, you weren't just looking to verify that the borrower couldn't carry the current (or soon to be current) payment. You were looking for some explanation of that: did income drop? Did non-discretionary exenses rise?
What is "different" here is not that these aren't case-by-case; that part is really just semantics. (It still seems to come down to verifying that the people can't afford the new payment, on a case-by-case basis).
What is different is that we don't care why they can't afford it. Or, to put it another way, we didn't care whether they could afford it when the loan was made, so now we're in no position to wonder why they can't afford it now.
So right off the bat, as several people have noted, this thing just got the worst kind of characterization in the press in terms of getting "buy in" from the voters: it treats the person who got laid off and the person who went to Vegas in the same way. The only way to sort those two kinds of borrowers out is to do the old-fashioned "cumbersome" underwriting work at the time of modification that the plan is supposed to substitute for.
HUD had an old program years ago that created exactly this kind of problem: some well-meaning but kind of muddled rules were written for workouts, in which all you had to show was that the borrower's expenses had increased. You didn't have to concern yourself with what those expenses were or why. Then the IG went through an audit and found people whose expenses had gone up because they bought a Mercedes. So HUD re-wrote the rules on workouts to make sure that kind of thing was ineligible.
The Hope Now plan is just history repeating itself.
On the legal side, I see on the WSJ web page that Hillary Clinton is going to propose legislation to make it illegal for investors to sue servicers for modifying mortgages pusuant to this type of plan. That seems pretty aggressive. I would think that foreign (and even domestic) investors in structured finance products would get a bit queasy about this kind of thing becoming a precedent.
On an unrelated note, I listened to Paulson's talk this morning. He stated emphatically that "Nothing is worse than doing nothing" Funny that a guy would become the head of GS then Sec. of the Treasury and would be able to make this kind of boneheaded generalization. I have seen many situations where doing nothing is better than doing "something"
I have a brother who lived in Texas during the oil patch bust. Forclosures soared. He rented a three bedroom townhouse with two others for about $300.00/mo. That's $100.00/mo/person. Numerous people he knew just walked away a la jingle mail (mailed the keys to the bank). I asked him if there was a stigma attached to foreclosure at the time. He said "hell no" people did what they had to do and moved on. Prices collapsed in the residential and commercial markets. I would look to Texas as a blueprint, not Japan, especially if we have a recession and job losses occur. To me this looks like credit destruction on a mass scale.
OT,
Here is the contact information of Hal Wilson in Florida.
He is probably a very busy man today. The Florida SBA has asked all the remaining LGIP investors to fill out a survey on how much they need (operationally speaking) on a day to day basis for the next 90 days. I'm guessing that the SBA is trying to figure out how to unwind the fund slowly and try not to have a fire-sale.
I'm still not clear how this is going to pan out with the state saying that they can't make up the shortfall, and the remaining investors saying they have to get out with at least par.
Could the remaining investors sue the ones that started the run, to try to equalize the haircut ?
Next week his lacky, Helicopter Ben, will unleash 50 basis points to make sure Wall Street has a very happy holiday season indeed.
That seems likely. 75-100 bps wouldn't surprise me.
I think they're getting to the point where they'll tolerate a stock market bubble for the time being and make housing a priorty. But it could backfire if the hot money coming out of this country ends up destroying foreign economies, igniting trade wars, etc.
ac,
The possible backfire to a 100 bps cut is foreign capital flight.
uncle festus
its only ok to do nothing when then banks are rollin in the dough.
I would think that foreign (and even domestic) investors in structured finance products would get a bit queasy about this kind of thing becoming a precedent.
Well, yes. One could possibly take the position that that's the best outcome. If investors had refused to buy securities backed by no-down no-doc exploding ARMs to start with, the whole evil little bubble couldn't have gotten off the ground.
Why are we so worried that future investment in such securities will cease?
Suggested reading....to see where things may be heading:
http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf
.
I mean, last post was about borrowers with odd fantasies about heads-I-win-tails-you-lose.
So let's make this post about investors with the same expectations. Why in heaven's name would a security backed by these loans have value as long as the investor can lose money on FCs, but not have value as long as the investor can lose money on mods? Did someone, somewhere, guarantee that investing in mortgages means your principal is never at risk? (Apparently so.)
(I'm not defending either this plan or the servicer liability legislation. I'm just wondering why we want to keep complex structured mortgage obligations attractive to investors.)
Tanta for FED chairwoman!
About time for a woman to head the FEC and
About time someone with some sense took charge of the mess
Following up on uncle festus's post about Hillary Clinton: what do you guys think about seeing Paulson's rate reset plan and raising it one 90 day foreclosure ban AND one lawsuit-blocker?
(From the WSJ) "In a sign that the housing crunch is increasingly resonating on the campaign trail, Sen. Hillary Clinton is expected to call today for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages, an idea the Bush administration is already considering."
" Why does anyone believe that those who got us into this mess are going to lead us out of this mess is a complete mystery."
As Will Rodgers said, Stupidity got us into this mess, why shouldn't we expect stupidity to get us out of it? Hat tip: Naked Capitalism.
The Answer to All YourProblems:
Convert them all to Option Arms with no Recast date.
Every Adjustable Rate mtg outstanding.
Stupid idea, yes, but better than what they will come up with.
Why are we so worried that future investment in such securities will cease?
Tanta | Homepage | 12.03.07 - 12:48 pm | #
I don't think we're worrying about these particular securities. We're worried about a once-burned-twice-shy reaction to our financial products as a whole. The underlying damage is to our credibility as financial partners.
As I said yesterday, if you take a dump in the world's punch bowl, it'll be a long time before you're invited to another party. I'll add this: If after being given the heave-ho for fouling the refreshments, the other partygoers find that you had rifled through their coats and pocket books and stolen their possessions, you might be the guest of honor at another type of party, entirely.
New problem who do we know who is dumb enough to invest in these MBS again? Because without willing fools how will we keep the music playing.
I sound sarcastic but I am just befuddled how we keep money available for the responsible people to still be able to get financing.
I feel this has huge implications in other areas like credit cards and car loans as well. If you can change the rules on housing everything else is up for grabs as well.
This could get ugly in a hurry.
thinking through Bailout 2- when the option ARMs recast. Is there anything that can be done other than just increasing the max loan balance? It seems that any actually reduction of the interest owed or balance would cause havoc to lenders that already booked accrued interest as profit.
freezing the interest rate on an option arm would seem to do almost nothing since the main jump in payment size would come from the requirement to make a fully amortizing payment.
Those whacky Brits...Banks are pleading with their clients not to use their borrowing facilities.
CNNMoney.com: 404 Page Not Found
All of this goes to show why it's impossible to rebuild a pyramid from the top down.
ac - "That seems likely. 75-100 bps wouldn't surprise me.
I think they're getting to the point where they'll tolerate a stock market bubble for the time being and make housing a priorty"
I think 75-100 is more than just possible, but it's a measure to keep up appearances. To prop up the stock market which diverts attention from the housing crash -- "Look, see, my stocks are going UP. Everything's fine".
America loves a winner. We just need to manufacture one right now.
America loves a winner. We just need to manufacture one right now.
barely | 12.03.07 - 1:07 pm | #
But we've lost our manufacturing base. Maybe the Chinese will build one for us, cheap.
Bernanke:
"The modern economy makes much heavier use of credit, especially longer-term credit....
"Further, unlike the earlier period, rising prices are the norm....
....the evidence favors the view that deflation or even zero inflation is far more dangerous today than 100 years ago."
http://www.iie.com/publications/chapters_preview/319/7iie289X.pdf
No worries, things are normal.
.
Anybody else find the speach cringeworthy?
A colleague turned up the sound on CNBC for a minute to hear what he was saying and that's when Paulson read off a 1-(800) number for troubled borrowers. That was followed by the line, "hope is only a phonecall away".....at which point the TV went back on mute.
Paulson's voice and his delivery are anything but reassuring. If anything, he almost certainly makes people nervous.
The bail out is growing. Now it includes refinancing along with a rate freeze. Muni's will buy the mortgages? Who will buy their bonds? The federal government will.
They have identified who they can keep cash flowing out of the longest. It helps keep homes off the market and makes things look better than they are.
Ding ding ding! We have a winner!
One of the most oft-used phrases at this conference is "buy some time." They don't explain what that means. The folks in the buisness understand.
"While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance. There are also a substantial number of homeowners who haven't been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again. A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.
And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them."
CATAGORIES:
1. UN-ENLIGHTENED HOMEOWNERS
2. DEADBEATS
3. ENLIGHTENED HOMEOWNERS
4. LEECHES ON SOCIETY
On the 90-day foreclosure moratorium:
I find it amusing when the Wall Street crowd cries, "hurrah," at a sign the government is coming to help them.
Because of course, the next scene has the same crowd flattened by a steamroller of aggressive policy.
Memo to Wall Street: populism is not your friend.
For all you history buffs out there
YouTube - FDR Economic Recovery Plan, Fireside Chat #4 1933/10/23
Sounds like this foreclosure delay dance was danced before.
The best part of watching this theater is that we have concurrent elections. This can only get more entertaining as the contenders try to solve the problem with 'bold' initiatives.
I still can't figure out the answers to my questions on the earlier post.
There is a lot of stuff that needs doing but isn't happening.
First off, an end to hedge funds as purely private unregulated contracts. We need regulation to impose disclosure, and we need to have them traded on open exchanges, so everybody knows they'll be paid if they win their bet.
Tanta,
I know you are baiting me with this question, "Why are we so worried that future investment in such securities will cease?" So, I will bite.
Absent these securities, how else can the banks, investment banks, and various hedge funds make money in the future? Surely you are not suggesting that they learn to work for their money?
GADS, no more billion dollar fees and or earning for these guys?
I for one think that these securities should be regulated out of business. They smack of fraud and may bring down the economy before it is over.
If they throw a free pony for everyone into the deal count me in ...
State and local government funding. Umm how about matching funds funding from the folks that made the money selling these securities?
If they want people to get in this program just throw in some sweet rims.
Tanta --
(I'm not defending either this plan or the servicer liability legislation. I'm just wondering why we want to keep complex structured mortgage obligations attractive to investors.)
Strange, I could have thought I read something somewhere about a "credit crunch"...
Complex structured mortgage obligations are already unattractive to investors; that is kind of the whole basis of the turmoil. The investors who bought securities backed by no-doc no-job no-credit deadbeats are already getting crushed. We won't see anything like it again for a long, long time. This is the system actually working.
But what H. Clinton is talking about is changing the terms of existing contracts. That would not only harm the (already non-existent) future of "bad" securitization; it would harm the future of all securitization. Nobody will make loans to "the masses" through any mechanism whatsoever if those masses can simply use the ballot box to abscond with the principal.
As someone who has saved, invested, and rented an apartment for the past few years, I find the populist crap from Paulson/Clinton/etc. completely disgusting. I want absolutely everyone, from borrowers to banks to investors, to get precisely what they signed up for. You know, just like I always expect to get what I sign up for.
Tell me is this idea of Paulson's going to work any better then the Super SIV?
Or maybe better then the state plan currently in effect?
Low Participation in State Homeowner Rescue Programs « naked capitalism
The American Securitization Forum is replete with lawyers. Their current draft of the proposal states clearly and repeatedly that the related contracts (and accounting standards) will not be violated.
I think this is the right approach, both legally and for the credibility of all contracts. (The Federal government rewriting contracts would be a very bad precedent, to say the least, even if legal). But it does reduce the probability that this effort will have the desired effect.
"Why are we so worried that future investment in such securities will cease?"
I'm not particularly worried about the destruction of the secondary mortgage market. Everybody just needs to understand that all paper gains that were associated with bringing in hordes of unqualified buyers into the equation must now be given back. This is the harsh reality that must be dealt with to get prices back in line with incomes.
Also, we will have to queue the collateral damage (fat lady) to do its thing on the economy. Of course, these things were true before this inane plan was announced, so I guess it makes no difference either way.
As I said yesterday, if you take a dump in the world's punch bowl, it'll be a long time before you're invited to another party.
Marcus nailed it. Just ask Hugo Chavez, if he'd ever cierrar su boca and ask whatever happened to all of Venezuela's foreign investors.
Of course. Absent "cram down" in bankruptcy or some other order of a court, contacts can not be re-written with out the consent of all of the parties.
Paulson's scheme will only effect the banks that currently hold the paper absent a covenant otherwise in a sevicers agreement.
If A buys a tranch of a CDO that includes a few slices of a subprime, then it would follow that only A can agree to rewrite the terms of the contract.
Shouldn't the Supreme Court eventually be dragged into this?
You see Hank, there's this Greek myth, about Pandora, OK? And she was the first woman, kind of like EVE. So she's got this box, right...
Oh, never mind.
Do these folks that fit the bill for the teaser extension get to keep the Mercedes they bought with the original cashback ?
Also, seems like if their 1040s show they cannot afford the reset, doesn't this for the most part imply they lied on their initial docs (granted a few will have lost jobs). Seems like a strange system that so blatantly benefits the dishonest. How can this not be perceived as moral hazard ?
But what H. Clinton is talking about is changing the terms of existing contracts.
OK, I just did some searching on WSJ and the net, and I cannot find the report where Hillary Clinton is advocating "legislation to make it illegal for investors to sue servicers for modifying mortgages."
I need a link, please.
Seriously, can't an investor try and get a case to the Supreme Court and stop whatever government freeze program we may end up with?
What about the fifth category? The fifth category are those with steady incomes and relatively clean payment histories who thought house prices were outrageous and decided to continue renting. What about those folks, Mr. Paulson? How are you helping them?
State and local government funding.
Although I think this Hope Now is a non-starter, I'm going to say that if it does go through, we're going to see some pretty fancy financial engineering to take advantage of these strange new muni bonds. I can't think of a new way to perpetrate fraud with things yet, but I' m sure someone's got them lined up in the crosshairs. I mean, they're going to have to be weird with the Federal government telling states and local governments to issue them. Who would buy these things? Someone with a taste for gambling or financial crooks. Or maybe the banks would in some kind of new SIV scheme, again, gamblers and crooks.
Why are we so worried that future investment in such securities will cease?
There's no guarantee that the investment flight will end with toxic ARMs and not spread to other portions of the bond market. When the government starts unilaterally rewriting debt contracts, investors don't know where it will stop which adds a tremendous amount of risk.
What if the there's a recession and foreclosure rates jump even on 6% 30 year fixed mortgages. What's to stop the politicians from deciding that the 6% should be cut 3% by an act of Congress.
Debt markets only function when investors have confidence that contracts will be enforced. Stupid government action is far more dangerous in this situation than the government doing nothing.
Shouldn't the Supreme Court eventually be dragged into this?
w | 12.03.07 - 1:45 pm | #
This isn't an election.
w - why does it have to be the SCOTUS? Any federal court could stop a federally mandated freeze, and probably would have good precidents for doing so. Besides, the SCOTUS very rarely takes cases that haven't gone through all of the lower courts at least once.
Someone, I think it was Paulson, said that the servicer is obligated to work in the best interests of the trust.
Not of the holders of the securities backed by the trust.
Coming soon to a Sirius commercial near you: "Bought too much house? Over your head and drowning in debt? Can't make your minimum monthly payments? Don't worry! The Smartest Guys in the Room (tm) are on the case!"
This entire disaster-waiting-to-happen reminds me of that quote from Gilda Radner:
"No matter how cynical I get, I can't keep up."
Paulson's voice and his delivery are anything but reassuring. If anything, he almost certainly makes people nervous.
Exactly. Paulson's irritating, searching-for-an-excuse stuttering like Porky freaking Pig is hardly confidence inspiring. "That-that-th-that-that....that--that....th-th-that..."
What leadership qualities? I wouldn't trust that dumbass to fold my clothes.
re:
OK, I just did some searching on WSJ and the net, and I cannot find the report where Hillary Clinton is advocating "legislation to make it illegal for investors to sue servicers for modifying mortgages."
I need a link, please.
Tanta |
Here you go HillaryClinton.com - Welcome
extract
"...
Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
* I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.
...
"
-K
Paulson, the King of Double-speak, couldn't even make it through a single sentence without contradicting himself.
"This fall, HUD initiated "FHASecure" to give the FHA the flexibility to help more families stay in their homes, even those who have good credit but may not have made all of their mortgage payments on time."
I always thought the idea of "good credit" was the idea that debts agreed to would be paid in full in a timely manner. Guess that's not true. Huh. DISCLAIMER: PREVIOUS PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. HOWEVER, IN THIS CASE, IT WILL BE.
David,
LOL oh the benefits of a classical education!
Why are US mortages non-recourse? This seems very short-sighted on the part of the banks. Surely it would not be hard to hide a recourse provision in the fine-print.
In Canada many mortages are recourse, although this is not something lower level mortage reps necessarily know (and the fine-print makes it difficult to figure out without a lawyer).
Stupid government action
No need for redundancy here.
...and buy time to get through the election year. The politics of the problem are now growing increasingly important, and there is some good evidence that Republicans should move left on economic policy (e.g. Nov. 14 post at 404 Not Found. With program names like "Hope Now" and targeting people with steady incomes (i.e. people more likely to vote), this appears to be the case. Future research: "Economic outcomes of election-year politics."
HRC no way. It would turn the law of contract on its ear. No likely to happen.
Why not have banks start a system of covered bonds like the German system.
Tanta --
OK, I just did some searching on WSJ and the net, and I cannot find the report where Hillary Clinton is advocating "legislation to make it illegal for investors to sue servicers for modifying mortgages."
I only know what I read on Calculated Risk... Seriously, if it turns out to be a bogus report, I'll feel a little better.
dotcommunist --
Exactly. Paulson's irritating, searching-for-an-excuse stuttering like Porky freaking Pig is hardly confidence inspiring. "That-that-th-that-that....that--that....th-th- that..."
"Be-de, be-de, be-de, that's all, folks!"
I think this whole Loony Toons analogy has potential:
Porky Pig - Paulson
Wile E. Coyote, Super Genius - Bernanke
Elmer J Fudd, millionaire ("I own a mansion and a yacht") - underwater homeowner with an IO-ARM
Need ideas for Daffy Duck, Yosemite Sam, etc.
The HRC plan would end with a filibuster.
Here's the article I see on the WSJ
The plan she is about to announce is striking on two levels. Calling as it does for a 90-day moratorium on foreclosures and a five-year freeze on interest rate adjustments for existing mortgages, the Clinton plan goes further than those of her colleagues. In addition, the centerpiece of her proposal -- a freeze on interest-rate increases for adjustable-rate mortgages -- is similar to a plan being concocted by President Bush's Treasury secretary, Henry Paulson.
The article does say anything about barring servicer suits. However, an act of Congress that froze rates would not allow investors sue anyone for the ir debt contracts being modified pursuant to the act.
Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
So it sounds like Hillary has her proposal, which she isn't going to budge on, regarding the 90-day moratorium and teaser freezer.
Then, she says to Paulson, if you can't get an agreement going that includes those two things, I, Hillary, will consider legislation that will protect servicers who do agree to do it from investor lawsuits.
That sounds like a threat to me, not like a proposal Hillary is all excited about.
I saw the statement regarding Clinton proposing to bar lawsuits against servicers for agreeing to modifications in an article on WSJ earlier this morning. The article had a picture of Clinton. I think the article has since changed and I don't see the reference to the liability bar. Maybe I was hallucinating (on coffee?). I sure didn't intend to start a false rumor. I have no idea of there is any way to check earlier versions of a story on WSJ.
I did find this on Reuters (published at 1:42 p.m. EST), which sounds similar:
"If the administration fails to secure an agreement that includes those provisions, Clinton said she would push for legislation that would allow lenders to convert subprime mortgages into more affordable loans without permission of investors."
Sen. Clinton proposes moratorium on foreclosures
| Reuters
Further the HRC plan points out one of the many flaws in the Paulson plan. She is pointing out that servicers are not likely to go along with Paulson, as they would be liable to the investors for damages if they rewrite the contracts without the owner's (investors) permission.
Contract law is a body of the law that the courts like to keep relatively certain and foreseeable. Thus, not interfering with commerce.
I think that the current make of SCOTUS would strike down any law that would allow the retroactive rewriting of contracts.
And yes I am a lawyer.
This is part of the text from Clinton's letter to Paulson:
"Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
* I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy."
I guess what I don't understand is how an "agreement" in the mortgage industry can bar the types of lawsuits Clinton is concerned about. If an investor can sue the servicer for agreeing to modify the interest rates, can the servicer answer the lawsuit with "Hey, we all agreed to do it, and Sec. Paulson asked us to?"
re: Tanta
Well, it reads like a threat to me too( perhaps the threat is really directed towards the investors at that ) - kinds gimme what I want or else I'll take it away from you anyway - but isn't that the way the criminals operate - a "make you an offer you can't refuse".
She's entitled to do this of course - subject to the Constitution - and if you reckon calling it a threat and not a proposal is better then, um... ok.
-K
--
Has anyone else heard about tax-free bonds to pay for HOPE NOW programs? There was a hint of this on CNBC but the reporter said that there are no details yet.
Jas
Now sure that the legal defense you are purposing would pass the bag test. If you have to put a bag over your head to make the argument, then it should not be made.
Nemo:
Yosemite Sam = GWB (who else?)
Elmer Fudd = Greenspan (we'll have to agree to disagree, as their resemblance is striking).
Foghorn Leghorn = Cramer
Pepe Le Pew = Kudlow
ACME Manufacturing Co. = Countrywide
I'm stumped on Daffy, and commend others to the task
Hillary's proposal has three parts: a 90-day foreclosure moratorium; a freeze of at least 5 years on ARM adjustments (unless the mortgages are "converted into affordable, fixed-rate loans"); and status reports on modifications. If she doesn't get that, she'll "consider" the legislation described earlier.
Both the 90-day foreclosure moratorium and, even more, the 5+-year freeze involve a rewriting of contracts by the Federal government. While the Constitution only literally prohibits the States from impairing contracts, I don't believe it empowers the Feds to intervene in matters ordinarily left to the States, which would mean that the Feds could only impair Federal contracts, rather than State ones (except, of course, for bankruptcy, which is a Federal domain). At the least, it would be an interesting constitutional issue; I agree with Ella that the Supreme Court would very likely to strike down such an explicit impairment of contracts.
In large part because it would be terrible for business, but also for the economy. Contracts only enforceable for as long as they don't hurt too many people too much?
I think Hillary and others would be better advised to stick to amending the Bankruptcy Code. That's legal, constitutional and even probably beneficial.
But I'm just a lawyer.
Bernanke's analysis hotkey-referenced above is that Japan should have tried everything rather than stay in the underproductive situation it was in at the time his paper was published.
Bernanke's policy is simple, "try everything, even if some things don't work."
So, MLEC I, and now MLEC II, are merely pebbles being thrown into a dam break. They will drop everything they can. That's the message.
What does this mean? Either the USG is successful in stopping the ebbing tide or the USG (and the the majority of the world's economic systems) bleed to death. Because the outcome is here recognized as a fatal bleeding now occuring, there is zero reason for the USG not to try everything.
And "that" is the insight needed to guide the investment decisions.
The only question is what are the odds that one of the everything will stop the bleeding?
IMO, under 10%.
Thus, the investment positions must be defensive, against decline in value of all fiat, against decline in availability of fiat credit, against implosion of demand by consumers in every arena save that of government.
The intellectual rigor to solve this defensive posture, to protect store of value, is excitingly demanding as the topic is de novo.
Without question, one portion of one's position is gold. Without question, another must be concurrent and proactive with the strategies being tried by the USG and all other governments.
Rather than say we're all screwed, the game is to watch the opportunities to prosper in this high probability depression scenario. There will be huge opportunities for those who protect their stores of value.
stream. We must expect many more rock
Ignore the last line as an undeveloped thought. (OK folks, this is not a straight line inviting a reply.)
"This third element does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners"
Then he indicates that states and localities will be able to float tax-free bonds to facilitate the bailout.
Maybe that's why I'm not rich. I can't say things like that with a straight face.
"I think Hillary and others would be better advised to stick to amending the Bankruptcy Code. That's legal, constitutional and even probably beneficial."
I agree with that. I think the resistance is that the likely revision to the Bankruptcy Code would be to allow cramdowns and "lien-stripping", i.e., the principal balance of the debt would be reduced to the value of the property. The Paulson proposal seems to keep the principal balance the same for the borrowers who are in the "workout" bucket.
and if you reckon calling it a threat and not a proposal is better then,
I am merely pointing out that Hillary must think the idea of lawsuit immunity will be wildly unpopular and full of drawbacks, or else she wouldn't be using it as a threat. I am not so wildly and reflexively anti-Hillary that I think she would "threaten" to do something she really would prefer to see happen in the first place. I think she'd go right ahead and propose it if that's what she wanted.
I'm not endorsing the tactic, particularly. But yes, I do notice that this was actually a real proposal by a Rebuplican, as reported in the WSJ three days ago.
A bill introduced by Rep. Mike Castle, a Delaware Republican, would temporarily free servicers from any liability for modifying loan terms. "Investors are still going to get a return and it's in their better interest to have those loans perform rather than fail," Mr. Castle said.
It's either a dumb idea or it isn't. I don't happen to think it's any worse just because Hillary might decide to back it.
Some Investors Fault Plan to Aid Home Borrowers - WSJ.com
Realty-based lawyer, concur. It would have to be through the Bankruptcy code.
Otherwise it would create utter chaos.
Tanta,
It would appear that members of Congress are more aware of the Paulson plan pit falls then Paulson is.
Threat or not, how can his plan work unless he has all contracting parties on board? Not I say.
We are talking about contacts here, whether it be a mortgage, a servicing contact, or a an investors bond.
Their would be zippo faith in the system if the government can rewrite private contacts.
Quite honestly, if the proposal were to provide "safe harbor" from investor lawsuits to servicers who modify loans when they have reasonable evidence that the cost to the trust as a whole is less than alternatives, I'd be in favor of it.
Look, I didn't create or advocate buying complex structured securities that create "class warfare." It isn't possible to measure gain/loss in a workout decision or anything else by reference to any one individual investor. That individual investor might be in first loss position or 7th loss position. It might own an IO or a PO or an amortizing class. It might be almost completely paid off by now, or it might be locked-out now. These securities are structured in such a way that nothing can make everybody happy.
But if you use a straightforward calculation of cost to the trust as a whole, that gives you a standard and consistent way to measure loss mit efforts.
So if that's what's being proposed, then I'm happy to cut the class-action idiots out of the process--the ones who made a bad investment decision and are just looking for some excuse to sue.
If it means that servicers cannot be sued for putting a political agenda ahead of the best interests of the trust? Then yes, it's a very lousy idea.
But we need to see the details before we have a cow over it.
Ok, let's say HRC gets the servicers blanket protection from investors lawsuits. So they just go ahead and modify every loan they service for others to fixed at zero percent. What a deal. Well, not zero zero, but they reduce the noterates to whatever their servicing fee is.
So, the borrowers are happy cuz their 7% rate just went to 0.375%.
The servicers are happy because nobody is prepaying.
And HRC is happy cuz everyone stays in their home and votes for her. Whatta populist.
The investors are pissed, since they have to sell their securities at a big loss. They retaliate by reinvesting zero in the secondary market, which in turn, shuts down the primary market. Nobody can get a new loan. At least everyone got their 40 acres and a McMansion.
Over in the mortgage origination market, nothing but empty cubicles and a few hard-money cockroaches.
I've had enough! We can't just accept this crap. We need to contact politicians and media and let our very strong objections and protests about all this rate freeze bailout b.s. be heard. I encourage all of us here to do so, and to spread the word and encourage others to voice their objections also. Those of you in positions of influence, please utilize that influence. Those of you with far more creative and effective ideas than mine, please share. Let's get off our asses and do something!
Mad As Hell...
Shnapster, as your comment shows, the idea that there is just no limitation here is clearly absurd.
Which is why I suspect that there is a bit more to it than that.
Tanta,
I concur. We need to see the details before having a cow over it.
Damn, I thought I was gonna have steak for dinner.
Geez, it isn't taking long for even the WSJ to start running nasty comments about Paulson's plan (note that they even misspell his name).
"The plan to help keep millions of borrowers in their homes, floated by Treasury Secretary Hank Mr. Freeze Paulsen, may ostensibly be about maintaining the status quo for borrowers who in some cases were led astray by lenders (or those that took stupid risks on their own), but some see ulterior motives.
Specifically, commenters are wondering whether the Treasurys plan isnt so much about those on the bottom rungs with subprime loans as those who are leveraged to those loans in the first place."
....
The Matrix Is Doomed - MarketBeat - WSJ
Look, what some servicers are afraid of right now is that they modify a loan on the grounds of "generally accepted servicing practices." The trust as a whole clearly gets a net benefit from that (as opposed to FC). (Another way to say that: if the loan had been in a portfolio instead of a security, the benefit to the noteholder would clearly have been to modify.) But some idiot who bought a subordinated IO strip (which is now worthless) sues, because the modification benefitted the senior PAC, but not the junior IO.
If the point of the "safe harbor" is to stop that kind of thing, then I for one don't have a huge problem with it.
Wonder how long it will take our neoBolshevik LA politicos to float their first issue of "bailout bonds"?
Yes, the devils in the details, alright.
I'd still like to get a headstart on my cow.
Tanta, personally I like your "safe harbor" analysis. I am just pointing out some of the legal issue regarding the law of contracts and how the courts might resolve the issues.
Gotta run. Enjoyed the conversation. Always a lot to learn on this site.
Thanks to Tanta and all.
But how does one define the trust's best interests in any calculation ?
Will the trust's best interests be defined as some weighted sum of the individual interests of the owners of the various tranches - and interest is in the eye of the owner - are the trusts going to poll the owners ? And weight them by, say, using the relative interest differential paid as a proxy for the weighting ? Or will it be size of tranche ?
Ultimately, every which way I look at it this is cutting out the end owner of the asset from decisions made about the asset - and none of the usual provisions for this apply here.
Like you said, any safe harbor provision has to be established by law, it can't just be decreed by Paulson - we come back to legislation again, so long as it stands up against the constitution.
I too like the use the Bankruptcy Code for this and not much else.
-K
The Real American Problem
We have criminals who have taken control of the economy and political institutions. HOPE NOW is part of criminals solution.
What to do when the debt pushing products created by criminals, for their profits, of course, start to have their intended consequences?
This problem will not go away until the fraudulent American system, rule of the moneybags under the guise democracy, collapses. Until then we can all have fun talking about it? What a bunch of dopes.
Yup, denial is an emotion that makes one feel good all the while bad things continue unabated.
Jas
If this isn't just ONE more reason to cash in your chips and leave the "Game", i don't know what is?
Buying more physical precious metals offshore and maybe will also purchase some Swiss Govt Treasuries.
As to the stock market, banks and banking system et al it is so apparent that the Fix is in and anybody that tries to "Play by the Rules" will be roasted on his own Petard.
But how does one define the trust's best interests in any calculation ?
The same way that you measure the gain/loss for a foreclosure. It's not different because it's a mod.
No, you don't average the tranches or something. You treat the trust exactly the same way you would, say, a thrift that owned a portfolio of loans. The thrift is entitled to all principal and interest earned on the loans. The trust is entitled to collect all P&I, but it then passes that through, in some fashion or another, to its capital investors. So you just use the trust's interest in your gain/loss model, and then let the trust divy up what you came up with (liquidation proceeds in a foreclosure or lowered interest rate in a mod) however it's supposed to.
It really doesn't have anything to do with the size of the tranche. It has to do with the fact that the tranches often have competing interests. A foreclosure (rather than mod) is not necessarily good for all the tranches. A mod (rather than FC) is not necessarily good for all the tranches. You'd never be able to make any decision if you had to base it on "something I could never be sued for."
And that's the situation we're in: servicers are just not doing anything because they're afraid of being sued.
Hey.. so a particular hard-done-by tranche holder then would look through the contract, see no provision for the trust to do this in there and sue the trust ?
If the trust has authority to do this already in the existing contract then buyer beware and tough titties for the hard-done-by tranche holder. I've looked at some of those MBS filings at the SEC and while I didn't look THAT deeply I'd be shocked, SHOCKED to find such contractual language in there. I'll have to read that stuff again.
Anybody know, top of the head ?
-K
Tanta,
Maybe her idea of a proposal would be construed as a threat by most people.
Tanta:
I think the fact pattern you describe, an investor hopelessly "out of the money" filing a lawsuit, isn't really the problem the safe harbor is trying to address. While "anyone can sue anyone" they have to show some damages, and someone holding an investment which is worthless under all scenarios wouldn't get there (other than a nuisance suit, I suppose). I don't know who exactly would get less actual $$ if the Paulson plan were implemented, but I would assume that whoever it is would be pretty grumpy about their ox being gored for the "greater good" of the trust, let alone for the social and political benefit.
On the other hand, this stuff is so convoluted and complex, it seems like it would take a lot of forensic work just to figure out whether you've been harmed and by how much. Which might mean the safe harbor makes sense, if it gives the servicers the absolute innoculation they need from lawsuits that might not have been filed in any event.
But I still think that modifying whole classes of contracts that are a central feature of an entire market makes investors nervous, and not just about the market at issue. Then again, I guess that type of risk is implicit in all contracts; as they say in Bankruptcy Court, the Bankruptcy Code is an implicit part of every contract.
Then again, I guess that type of risk is implicit in all contracts; as they say in Bankruptcy Court, the Bankruptcy Code is an implicit part of every contract.
Exactly.
To your point, and to K's--for starters, not all these contracts (PSAs for the deals) are uniform. As usual, it's hard to generalize.
That said, the ones that are "bunny in the headlights" right now are the ones that just say that the servicer will use "generally accepted servicing practices" to mitigate loss. For many years, what that meant wasn't very controversial. Now it is. The uncontroversial always becomes controversial when the shit is hitting the fan.
In my view, the suits are likely to come not from the capital investors, but from those shorting the ABX. Remember the dust-up this summer when the Paulson hedge fund (not Paulson the Treasury Sec'y) accused Bear Stearns of "market manipulation" for taking DQ loans out of securities? That all faded away, of course. But at the time, the ones most loudly screaming were not the actual investors, they were the ones who traded the credit swaps or shorted the indices.
Now I have to say I really don't give a fig about the "rights" of that level of financial parasite.
Tanta says:
Now I have to say I really don't give a fig about the "rights" of that level of financial parasite.
If my pension fund or insurance provider happens to be the entity that correctly evaluated the actual risk of default for these derivatives, and invested money as a result of their assessment, I don't care for a legal regime that retroactively confiscates that money for the benefit of people who willing signed a contract to repay money that they cannot repay.
The proposal establishes, IMHO, a rather horrible precedent. It's one small step down the road, from being a country with the rule of law towards being a 3rd world hellhole, where the laws are completely malleable to suit the current desires of the elite.
Well, I'd argue that the shortists are people too.
Certainly I make the case the since equity and bond ( but not commodity?) prices are really based on compounding then the way to get at its baseline value is by taking the log. And when you do that the short position is quite symmetric with a long position. They both extend from -infinity to +infinity.
IMO, There is no morality in being long OR short. In THIS market, for some assets I find being short the high probability evolution path. So I short(but not ABXs, my pay grade isn't that high). Its simply betting on the future direction.
But I'm glad the biases are clearly out there in the open.
-K
That's EXACTLY who complicates this. (those short ABX, or similar plays). If the financial alchemists hadn't created CDSes and whatnot, Operation KEEP HOPE NOW might actually have a snowballs chance in hell. Since it wouldn't be just a question of tranche AA getting disproportionate benefit relative to tranche B - that could be sorted out - it's the moment that whole pools start 'behaving badly' thanks to artifical freezes, that's when these synthetic-CDO-derivitive-investor d00ds get screwed. And they just might have as many lawyers as the American Securitization Forum.
Speaking of which, whatever happened to those fellas at Paulson&Co. in their dust-up with Bear? I know it faded off page one, but I'd be really curious to know the final resolution on that one.
incidentally, I'm with you riddler -
"Don't hate the player, hate the GAME."
"Nobody will make loans to "the masses" through any mechanism whatsoever if those masses can simply use the ballot box to abscond with the principal."
Nemo | Homepage | 12.03.07 - 1:39 pm |
I'm probably way late responding to this, but absconding with loan proceeds in this manner is called political risk. It should be familiar to people who invest in developing countries, sometimes called banana republics. You can now add the US to this category.
It doesn't mean the loans won't be made. It's just another risk (on top of credit risk, monetary risk, etc.) to charge a premium for.
But some idiot who bought a subordinated IO strip (which is now worthless) sues, because the modification benefitted the senior PAC, but not the junior IO.
Can't the senior PAC sue for not making the modifications if making such modifications as is part of the contracts?
I have a hard time believing that appropriate and contract satisfying modifications are not being done over fear of the lawsuits since a modified loan is in the servicer's best interests and there is the potential for law suits from holders who would benefit from the mods.
It's far easier for me to believe the servicer upfront costs are too high for the mod (versus the future servicing income) or they just are not capable of handling the volume.
But what I really have no faith in is Congress' ability to take constructive action. Stupid, pandering legislation is much more likely.
Even under the best of circumstances where Congress takes smart constructive action, the statue will still need to be interpreted by rule making agencies. But it won't be till those rules are litigated and court precedents set that anyone will really know where the safe harbor is which will be years down the road.
Well, I'd argue that the shortists are people too.
Yes, they're people, too.
But if they aren't a party to the contract in question, what kind of rights are you willing to give them?
The fact is, the shorts entered into derivative contracts. Not the underlying contract between investor and servicer, and not the underlying contract between lender and borrower.
If you want it to be about the sanctity of contracts, then I question why the interests of non-contracting parties should matter.
You are, in your own terms, betting on the direction of an index. No one says you shouldn't. But my point was that I can't see how that would give you any right to insist that mortgage servicers should care about your interests when they make workout decisions.
It's one small step down the road, from being a country with the rule of law towards being a 3rd world hellhole, where the laws are completely malleable to suit the current desires of the elite.
I share your concern about that, I simply don't think the other side of this is so pristine. A lot of the securities class action lawsuits I've seen look to me like investors who wanted to be rewarded for risk suddenly trying to get out from under it when the investment didn't work out. That's a way of using the courts to bail out wealthy investors.
Little people whose only asset is their home just don't often have the kind of access to powerful lawyers who can use the courts to create "do-overs." Occasionally they get politicians and consumer activists wading in on their side. For better or worse. But the point is, it's not like the other side doesn't already have a big seat at the table.
I'm touched that everyone is so ready to defend the interests of investors in mortgage-backed securities. Lord knows they don't have any political clout . . .
Nemo's remark is stark; but JerryH's rejoinder is important in a global context regarding funding sources both domestic and international...people I associate with overseas are still just tut tutting, but the smart money has got to be factoring in a number of hypotheticals. Even if this is, as some have suspected, a political charade to get us to '09, it will not come cost free.
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Correct me if I'm wrong. I'm not sure we made any progress in loan modifications in teh past three months.
A Loan Mod is a good alternative to foreclosure. At MIZNA, we have had many cases of lenders reducing the loan amount to accommodate homeowners. More info about MIZNA loan modification programs are available at Loan Modification Professionals . MIZNA offers loan mod services for both homeowners and mortgage lenders. MIZNA is also looking to hire qualified and experienced loss mitigation reps.
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You are right. We have not made any progress with loan modifications. Most lenders don't seem to have the homeowners best interest and offer them a bogus deal. The new bailout gives federal government a right to your equity. This seems too weird.
I was Googling loan modification and wound up here. Truly enough insight and opinion to go around.
"Most lenders don't have the homeowners interest at heart" EXACTLY... That's how we got here!
Rape pillage and burn, then have the "suckers" pay higher taxes to bail you out. That is the lenders philosophy.
My experience is that the lenders LOVE the idea of a homeowner trying to do their own loan modification without the benefit of an education. It gives them the opportunity to offer a truly lackluster deal to the borrower and stick it to them.
Countrywide will modify a loan for a homeowner lickety split. They offer great rates on these for unsuspecting homeowners. Why, they will even let a homeowner roll the back payments into the new principal balance. How benevolent of the big bank!
Their customer service reps are trained to do this well. I have seen them send a loan modification agreement at 7.5% at the drop of a hat.
And the added bonus for the bank besides working with WC Fields "sucker" they get the homeowner to sign away all of thier rights to remedy any damage done on the prior loan.
No, I for one do not recomend a homeowner try this on their own without alot of research and education. Lest they be taken advantage of by the lender.
I would never accept the lenders 1st offer, and never accept anything that is not a realistic long term solution.
In full disclosure myself I own & operate a full service title and escrow settlement agency in NY, and we do negotiate loan mods for a fee.
I have also written a "Do it yourself" book on the subject.
There are many charlatans out there charging clients and not doing the job. They come in all shapes and sizes, there are former LO's, loan mod companies, and yes even attorneys.
If you choose to hire a professional ask for references, make them show you examples of successful loan mod agreements. Check with the BBB, consumer affairs, negotiate your fees and most of all call your lender at least once a week to keep track of what activity is going on on your account.
Your lender will tell you who has called, when, what the conversation was and what progress is being made. Even though you are not negotiating yoursefl you should still make sure the person you hire is in constant contact with the bank.
Loan modifications are really helping homeowners who are in bad financial situations.
Loan Modifications: Are The Best Loss Mitigation Tool
It seems to me that most banks will do as little as possible for a home owner unless they're sure the loan will default otherwise. Rationally this makes sense because they want to continue servicing the loan at as high of an interest rate as possible...that's why we have attorneys doing loan modifications and HAMMERING the banks for lower balances, LOW interests rates and extended terms. Just about anyone without equity can qualify, and MOST DEFINITELY anyone with even 1 30 day late on their mortgage. Find out more by calling us at 888-201-7278 for more information.
Don't go at it alone! DON'T DEAL DIRECTLY WITH YOUR LENDER, YOU'RE DANCING WITH THE DEVIL! This process can take up to 90 days! Don't be on hold for 90 days! You need someone on your side to underwrite, package, negotiate, process and manage your file to help lenders understand your current mortgage and financial situation. Our expert negotiators will work with your lender to create a new loan structure for you and your family so you can stay in your home with affordable payments that are realistic for your current income. Email me NOW for a FREE pre-qualification over the phone: beemwilliams@juno.com
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Homeowners should ask themselves if an attorney is actually working on their case and since its illegal for any attorney to guarantee the outcome of any case, how is it that everyone throws the word guarantee around? (Most likely NOT being said by attorneys, rather those who haven't a clue of what they're doing.) More likely they're NOT involved with an attorney and they use that word to falsely assure the homeowner that their hard earned money will be returned. TIP: Attorneys do not have "money back guarantees."
Why not deal with experienced professionals from the very start? An expert will know if the consumer even has a shot at success. Experienced mortgage bankers with underwriting backgrounds are the only way upfront, that you can ever know if your loan will be approved...the same if true for loan modification. Don't just believe that some intake interviewer will know this. All that persons job is is to gather data, your check and turn your file in to someone who is supposed to be able to determine your chances...the person you initially speak with should be highly qualified to do this and not raise your hope or delay your answer.
www.federalhomeloanmods.com
This is a great discussion, let me put in my 2 cents.
There is so many different parties with different stances on the topic of loan modifications.. As a practicing law attorney with over 17 years of experience, I can say that loan modifications are NOT for everyone.
However, for certain people, a loan modification is actually in the best interest of the home owner. I've personally witnessed many home owners walk away from a loan modification, completely satisfied and successful in avoiding a devastating foreclosure.
So keeping that in mind, I highly encourage any home owners that are possibly facing foreclosure to at least do some home work and investigate all the options before making a choice.
Here are some resources for those who are interested.
Parsa Law Group Helps Thousands Stay In Thier Homes
The Parsa Law Group Can Help You Save Your Home
craigslist | Page Not Found
craigslist | Page Not Found
James M. Parsa
Attorney at Law
Parsa Law Group / National Loan Modification Center
1-800-585-1179
http://www.NationalLoanModificationCenter.com
Better Business Bureau Rating:
Parsa Law Group, A Professional Law Corporation - Attorneys - Costa Mesa, CA | BBB Business Report
With the current economical condition, loan modification is a must.
Regarding housing debt, if there is a problem, there
is solution. For instance, if some one is having
problem in giving loan payments, he/she can take
assistance from a loan modification company. More
over websites like Loan Modification | Loan Modification Information Source | Self Loan Modification | Check Eligibility for Loan Modification |
come real handy in such situation.
I think the fact pattern you describe, an investor hopelessly "out of the money" filing a lawsuit, isn't really the problem the safe harbor is trying to address. While "anyone can sue anyone" they have to show some damages, and someone holding an investment which is worthless under all scenarios wouldn't get there (other than a nuisance suit, I suppose). I don't know who exactly would get less actual $$ if the Paulson plan were implemented, but I would assume that whoever it is would be pretty grumpy about their ox being gored for the "greater good" of the trust, let alone for the social and political benefit.
On the other hand, this stuff is so convoluted and complex, it seems like it would take a lot of forensic work just to figure out whether you've been harmed and by how much. Which might mean the safe harbor makes sense, if it gives the servicers the absolute innoculation they need from lawsuits that might not have been filed in any event.
But I still think that modifying whole classes of contracts that are a central feature of an entire market makes investors nervous, and not just about the market at issue. Then again, I guess that type of risk is implicit in all contracts; as they say in Bankruptcy Court, the Bankruptcy Code is an implicit part of every contract.