Links 2/19/09

Grizzlies reveal ‘fancy footwork’ BBC

The Agreeable Cat Anne Loucks. This is actually a geek post.

Fraternity In Danger Of Losing House Launches Harebrained Scheme To Fix Economy The Onion (hat tip reader Brad)

Helicopter crash: 18 rescued from North Sea Times Online

Against Maturity Eliezer Yudkowsky

Goldman warns on commodity returns Financial Times

Food makers try to hold prices as retailers push back Reuters. Deflation watch.

New York to Retrain Laid-Off Wall Streeters New York Times

U.S. Doubles Fannie, Freddie Backing to $400 Billion Washington Post. Clarifies previous commitments versus changes and additions by Team Obama

The Stimulus and the Auto Bailout: The Perils of Confusing American Companies With American Jobs Robert Reich

Ukraine must be rescued from tragi-comedy for Europe’s sake Ambrose Evans-Pritchard

Home loans in the US: the biggest racket since Al Capone? Willem Buiter. I feel I should say something about the housing plan that Obama announced today, but I am so put off by the general premise (that the US is propping up housing prices, both by the Fed’s spread interventions and these targeted measures) that it pains me to comment on the particulars. Housing prices need to fall. They need to correct to a reasonable relationship with income and rents. The problem that I believe is worth solving (but there seems to be no solution) is that there is a subset of borrowers who could and should get mods (as in, the bank would lose 40% on sale, the borrower would be viable if the principal was reduced 20%, both bank and borrower are better off) but the obstacles are too large. Even when the bank holds the mortgage, it’s been so long since they’ve done mods that they have forgotten how to do them (as in no human judgment left, and the models turned out to be no good) and the servicers have bad incentives and even less in the way of needed skills. So do read this rant by Butier instead.

Antidote du jour:

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30 comments

  1. ndk

    Under a program unveiled on Wednesday by Mayor Michael R. Bloomberg, the city wants to invest $45 million in government money to retrain investment bankers, traders and others who have lost jobs on Wall Street, as well as provide seed capital and office space for new businesses those laid-off bankers might create.

    Unleashing a flood of sociopaths on what little industry remains in New York is a recipe for disaster.

    Alternative proposal. This is plenty of capital for construction of a new blacking factory. An understanding of the true worth of labor would do some folks well.

  2. ndk

    Don’t miss the Onion article, either. It’s classic, particularly Bernanke with a bucket of Barbasol dumped over his head. The best antidote du jour I’ve seen through the entire crisis.

    Our new button-down Fed Chairman will appreciate it a lot more than his original incarnation. You go, Ben: we couldn’t be more lucky to have you.

  3. Anonymous

    On the subject of housing:

    It occurred to me today that if the housing crisis isn’t resolved to a reasonable degree in the next few years, the government here in America may have to get into the business of building homes for retirees. We would have our own pensioner apartments, just like in Europe.

    Why? I recently saw a very rough breakout of (non-rich) boomers by two or three tiers (if I could remember where, I would post the link). The gist is that as of 2008, one bracket typified older boomers whose aggregate wealth meant they owned their own home, but had little savings left over with which to live off of. The other bracket was even worse: younger boomers who had some amount of savings, but never enough to own their current home outright.

    Now we don’t want to be alarmist, or make grand predictions of the future based on the current economy. However, one can easily see a scenario where the economy only partially recovered…re-adjusting to a sustained slow-growth mode…and large numbers of boomers among the working class and poor would never have a chance to both pay off their home, and have enough savings/investments for retirement. I believe 2011 is the first year in which boomers will start retiring…which means for most boomers that phase of life is only a decade away, give or take a few years.

    We do have an overabundance of housing stock in the outer suburbs (read the Infrastructurist for a great blog post on that topic), but that housing is not conducive to the travails of old age.

    Will European-style pensioner apartments be a fact of life a decade or so from now? Who knows! But its something to think about…

  4. Glen

    No Sion, only appears complicated. It’s all rather simple really; it’s just our innate ability to complicate the most simplistic things to make ourselves look smart and learned when the reality is that the answer is always simple and mind numbingly f**king obvious.

  5. fresno dan

    “Home loans in the US: the biggest racket since Al Capone?”
    Pretty much. Everything we are doing is trying to maintain asset prices at bubble levels. Which is unfair until we manipulate…er, restore Amazon.com to its true value of 400$ per share…really, its worth that! There just in no market at the 400$ a share price. But once insanity…er, confidence is restored, we can return to prosperity.

  6. Anonymous

    Alex Dalmady, a Venezuelan financial analyst, who uncovered the Allen Stanford Fraud by doing a favor for a friend which was thinking of investing, is my personal hero. A mighty ahhhroooha and a 100 to the winds for this guy. Again someone must do the job for the SEC and Feds. He just went to the papers with his findings. If its this easy to work it out, what the, come on uberment do your job or should we call in some Junior collage econ 101 people to give you a hand. Ooh and now there are Questions of drug money being involved, oooh la la.

    skippy

  7. Sandi Rubinspan

    from John Hussman:

    “More than anything, we have two problems. First, we have a coordination failure that is preventing the losses already taken on these mortgage securities to be passed on to homeowners in a way that would allow those mortgages to be solvent. Second, we have a procedural constraint that prevents foreclosure judges from restructuring mortgage obligations by substituting principal for property appreciation rights.

    Our leaders, particularly those in charge of the financial and monetary policy of the U.S., have not learned anything. Our grandchildren will read in history and economics textbooks what our policy-makers should have done. They will read how the U.S. went on a binge of excessive debt creation in the belief that home prices, stock valuations, and profit margins could do nothing but increase indefinitely. They will read how “securitization” allowed loans to be cut into a million pieces and sold off as soon as they were made, removing all incentive for lenders to make sound loans. They will read how this securitization prevented anybody but the government or the courts from restructuring the debt, because government action was the only way to solve the “coordination failure” and put Humpty Dumpty back together. They will read how our policy makers focused nearly all of their efforts on protecting the bondholders of failing corporations, rather than focusing their efforts on restructuring debt and assisting distressed homeowners. They will read how the lessons of the Great Depression eluded us because we didn’t recognize that restructuring debt was the only way we could have avoided a long and difficult economic slump. “

    me:

    The solution needs to be KISS (keep it simple, stupid)and focused. I think the above statement by Hussman has the main problem summed in two paragraphs.

  8. Anonymous

    The Agreeable Cat Anne Loucks. This is actually a geek post.

    I’m surprised that you would print such stale news. This has already been done Big Time by the FIRE guys. The basic scam being: just get a warm, breathing body (CAT) to sign the security and then cash it in to some following institution, usually the Government. Of course, I must admit, the FIRE Folks were kinda stupid they could have just been using cats, dogs, salamanders, etc. and really increased their margins.

    (My deceased cat still receives mail from Credit Card and other predatory Corporations. Unfortunately, he had the very bad and cruel habit of filling out consumer questionnaires, usually checking the boxes randomly. I can remember one time when he claimed to be an Archeologist making over $200,000 per year, divorced, with nine kids and owned six automobiles, all BMWs. [They don’t check surveys either for validity just for checked boxes.] For some reason, my cat hated corporations and their endless marketing manipulations. He did die happy though knowing that long after he was gone the costly mailings and solicitations would continue draining the corps resources. Che, I miss you so.)

  9. Anonymous

    Your next cat should consider wrapping a brick in brown bag paper, and affixing the company’s bulk mail SASE to the front.

    From what I gather, it sends and its legal. If I’m wrong, the framed court summons with your cat’s name on it would probably be worth it.

  10. Anonymous

    Yves,

    Just read your comment alongside the link to Buiter. Will read everything on the blog later.

    Its seems to me a no-brainer that it is the job of the market to do this and the market will eventually prevail.

    Can’t the lawyers penetrate this plan?

    Are we going to continue without rule of law? This is the time for radical reform.

    If the note holder has to show up in court with the mortgage papers, the market would find a way to unravel these ‘dense’ [lawless] securities.

    I can’t help believing that the failure of the finance guys who now own our government are conveniently without free market solutions to cover up their own massive fraud.

    LeeAnne

  11. "DoctoRx"

    RE SANDI RUBINSPAN QUOTING JOHN HUSSMAN:

    Sensible analisys by Dr. Hussman. Given what schoolchildren are given to read today, I am not optimistic that this sort of serious analysis will be presented to them even in one-sentence form 20-50 years from now. Perhaps the focus will be on social inequality or wasteful economic activity destroying Mother Earth.

  12. charles

    The Buiter post has something in it that really makes my blood boil:

    This argument [about neighborhood blight] makes no sense. What is likely to have a stronger negative effect on the value of neighbouring properties: an owner-occupier who can no longer afford the mortgage he has taken on, or the forced sale of his property to someone who can afford it? The answer seems pretty clear.

    It does indeed, if that’s the choice you have. The problem is that in cases where foreclosure-induced blight is occurring right now (say, here or here) that’s not the choice you have, because there are no buyers. The available alternatives are finding a way to keep the current owner-occupant in residence, at a reduced payment level, or kicking them out, and leaving the place to the mercy of squatters and druggies who will sell the pipes for scrap metal.

    So, it seems to me that this post serves mainly as an object lesson in one of the occupational hazards of being an economist: blindness to the possibility of outright market failure.

    (Under the circumstances, one option that would make a lot of sense is for the bank to take title, but rent to the former owner until the market recovers. A possibility that makes even more sense when the property was bought to let, and the tenants have been making their payments just fine. That doesn’t happen right now because banks and mortgage servicers reflexively evict, having learned in normal times that having a tenant in place gets in the way of a quick sale. But these are not normal times….

    I’d leave this as a comment on Buiter’s blog directly, but ft takes comments from registered users only, and I can’t get their signup system to work. Sigh…)

  13. farrar

    Love your blog Yves. For one thing, I love cats. For another, it leeps me from wasting my time: as soon as I type “naked” Safari suggests “capitalism” instead of taking me to my favorite porn site.

  14. Anonymous

    I think the Willem Buiter article is extremely weak on cause and effect and way off the mark. In fact it plays into the real intent of the Obama housing plan which is absolutely perfect for what it is really designed for and will indeed do;

    It will pit the prudent against the not so prudent, thereby dissipating their energies, so as to facilitate eliminating the middle class altogether and further the grand plan of the ruling elite to reduce global society to a two tier structure of ruler and ruled with the ruled in perpetual conflict with each other.

    So Buiter prattles on playing into the hands of the scam and spewing out nonsense complexity mixed with a few facts for believability. This paragraph is particularly irksome as it glosses over cause by misattributing it to the victims by painting them in with the perpetrators with the broad brush, “the US” …

    “Our leaders, particularly those in charge of the financial and monetary policy of the U.S., have not learned anything. Our grandchildren will read in history and economics textbooks what our policy-makers should have done. They will read how the U.S. went on a binge of excessive debt creation in the belief that home prices, stock valuations, and profit margins could do nothing but increase indefinitely. They will read how “securitization” allowed loans to be cut into a million pieces and sold off as soon as they were made, removing all incentive for lenders to make sound loans. They will read how this securitization prevented anybody but the government or the courts from restructuring the debt, because government action was the only way to solve the “coordination failure” and put Humpty Dumpty back together. They will read how our policy makers focused nearly all of their efforts on protecting the bondholders of failing corporations, rather than focusing their efforts on restructuring debt and assisting distressed homeowners. They will read how the lessons of the Great Depression eluded us because we didn’t recognize that restructuring debt was the only way we could have avoided a long and difficult economic slump. “

    The US did not go, “on a binge of excessive debt creation in the belief that home prices, stock valuations, and profit margins could do nothing but increase indefinitely.”

    The US, and in fact the entire world, were conned into an intentionally created debt bubble created by an extremely small group of secretive central bankers and sold to the public by there sell out political minions in a well orchestrated plan. Ditto the derivative “securitization”. Add to the preceding that many good Americans and regulators did protest and were intentionally and corruptly shunted aside. This is an intentional global financial coup meant to consolidate power.

    And they are not, “our leaders”. Referring to them as such presupposes that we have a fair and honest electoral process. We do not — and that is the real root problem — and why we do NOT have not leaders at the helm, but rather arrogant, deceptive gangsters.

    Is Buiter really this inept with the language? Or is it just that he is an integral part of the tenure chained academia owned by the wealthy ruling elite?

    And FT ——YUK!

    A lot more skepticism will be required to get out of the gullibility bubble.

    Deception is the strongest political force on the planet.

    i on the ball patriot

    ps: extra great du jour!!!

  15. Anonymous

    A couple features from the Globe and Mail worth noting. First, a supplementary antidote du jour:

    Man 1, Polar Bear 0

    “I rushed over with the shovel and had a smack at him, I hit him in the head,” Mr. Dyson said yesterday. “He just looked at me, he looked at me very serious.”

    http://www.theglobeandmail.com/servlet/story/LAC.20090219.BEAR19/TPStory/?query=polar+bear+attack

    Second, a rare Mainstream Media story about Fairfax’s (FFH) developing battle against a short conspiracy.

    http://business.theglobeandmail.com/servlet/story/RTGAM.20090219.wrfairfax19/BNStory/Business/home

  16. lineup32

    re:Buiter:
    America has no plan B, the government is committed to re inflating the consumer consumption binge. The idea that its affordable in Calif for a family earning gross 65K a year to try and buy anything over 150K is simple happy talk unattached to reality. Obama like all politicians continues to blab about the American dream of home ownership which only points out how political corruption rules the day.
    Home building and auto have fueled the financial sector growth providing the necessary collateral base for lending..its over

  17. lineup32

    “While we remain long-term bullish on direct commodity investments, it is this large cost of holding the position [rolling] that drives our underweight recommendation on direct commodity investments,” Goldman Sachs said.

    The easy money is gone and those bag holders including pension funds, insurance companies and various hedge funds will take unimagined losses as the unwind continues. Oil was $11 barrel in 92 and $22 in 2002, everybody forgets the impact of the Iraq war combined with speculative leverage excess has been the key price drivers. Oil is probably heading for the mid $20 or less and rather then be a positive for the economy it will be a further shock to the financial sector.

  18. Waldo

    "I can't help believing that the failure of the finance guys who now own our government are conveniently without free market solutions to cover up their own massive fraud"

    Great point LeAnn. When you get massive fraud (oil "first mover" and finance "piggy backing" oil's con) free markets quit working. The laymen lambastes how free markets don't (or ever work) because he does not "see" the fraud (manipulation and capture "blood money").

    To make it worse you get very credible economicst (Gary S. Becker – University of Chicago) perpetrating the fraud (for big oil).

    We (us blogging on the website) must understand that we are economists, either trained or natural. This is so do to the political economy being espoused here. That is great. So with this it is not about economist being stupid or free markets not working properly but it is about criminality occurring. Plain and simple.

    "Oil was $11 barrel in 92 and $22 in 2002, everybody forgets the impact of the Iraq war combined with speculative leverage excess has been the key price drivers. Oil is probably heading for the mid $20 or less and rather then be a positive for the economy it will be a further shock to the financial sector."

    How can you rationally explain oil going from $147/barrel to $35/barrel in less than 3 months? Manipulation.

    If oil gets to $20/barrel real market forces (fear) will take hold again and we will be back to a place where Bush I & II did not use public power for private gain (corruption).

    It takes courage to defend and grow a free market. Courage today is in the form of justice. We will see.

  19. Richard

    There is one large factual error in Willem Buiter’s column, which is understandable for him as a European to make, but which I would expect the editors at FT to have caught. Bankruptcy cases are handled in the Federal courts in the United States, not the state courts. Cases are presided over by special term appointed bankruptcy judges working under the supervision of the local District Court, whose judges all have life time appointments. So they are insulated by politics. As for the politics of housing, the majority of American voters are homeowners and during the period from 1960-2005, we all got use to annual nominal increases in the price of our homes nationally (with certain rust belt exceptions). Even when the nominal increases were less than the rate of inflation, they also had the effect of reducing the real price term of the mortgage debt (my parent’s house, bought for $26,000 in 1962 and sold for $130,000 in 1988, with an original mortgage of $21,000 is an example.) How much of this was real is of course debatable, but it sure felt good to them. So I shocked, shocked, that democratic politicians are taking steps to protect the interets of a large and active constituency, along with the other usual suspects (the banks, the builders, and the realtors, etc.) Having said all of the above, I would kill the home mortgage tax deduction if I could (although it would personally hurt me as a home owner).

  20. lambert strether

    Yves:

    You write:

    The problem that I believe is worth solving (but there seems to be no solution) is that there is a subset of borrowers who could and should get mods (as in, the bank would lose 40% on sale, the borrower would be viable if the principal was reduced 20%, both bank and borrower are better off) but the obstacles are too large.

    Why is HOLC not the policy answer? Roubini, among others, supports it. (Serious question.)

  21. ruetheday

    I want to know how exactly the mortgage plan will achieve it’s goal of reducing peoples’ mortgage payment to a specified % of income?

    Deferring payments (while rolling them into the balance)? Extending loan terms to 40+ years? Reducing the interest rate? Reducing principal?

    How will the incentives to banks work with regard to the above? If a bank knocks off 1% from the interest rate, does the gov’t just make up the difference?

  22. Anonymous

    Waldo and LeAnn, great points — it is about “criminality, plain and simple”.
    The trick is to not get side tracked into the perpetual conflict detail morass and instead to keep the fraud in the forefront as you folks have done. And also to urge others to do the same in any way they can. Integrity is the wedge, persistence will drive it home …

    The Freedom Train
    [New road bed required.]

    Scamerican trains can’t leave the station,
    All the trains are up on jacks,
    The cars are full some are rusting,
    Scamerican gangsters stole the tracks …

    The passengers are bickering,
    And the trains are shaking
    If it gets any worse,
    The jacks will be breaking …

    If the jacks are broken,
    And the trains tumble down,
    The Statue of Liberty,
    Will lose her crown …

    Scamerican gangsters won’t build new tracks,
    They have evil in their veins,
    They want any passengers leaving the station,
    To be slaves and wearing chains …

    So stop the bickering and climb down from the trains,
    Together we can build new tracks,
    And lay the train of freedom’s new road bed,
    With justice that gives gangster’s the ax!

    i on the ball patriot

  23. Waldo

    i on the patriot. Top flight poem.

    This might not seam appropriate here to espouse on literature but that would be foolish thinking. New poetry is content (operations) and scholars are literary economists (finance). Modigliani-Miller theory applies to literature. Analyzed below:

    Quick note about corruption in poetic literature.

    Poetry has been corrupted ever since Marlowe and his “Doctor Faustus”. He popularized blank verse (poetic corruption). This cancer pervaded Shakespeare, Milton, and Goethe (to name the giants).

    That was not enough, American had to one-up Marlowe. Walt Whitman brought to us free verse (a load of shit). Today American poets just spout out junk. No real work (rhyme) involved. Shit material. Waste of time.

    i on the patriot. Read Carl Sandburg (free verse addict). The few poems you have created leap past his ability. Simply because our society allowed him to be lazy (free verse).

    Poetry requires directional thought (strength) and rhyme (beauty) to be of eternal value.

    This same thought applies to finance. Less sales and more discipline and respect.

  24. lineup32

    An E-mail from Mr. Mortgage since his site is not up and running yet. Also this was written just prior to Obama releasing the latest PLAN!

    The Plans (Buy Loans, Modify Loans, Refi Loans, 4% Rates) The ‘Kitchen-Sink’

    In this report I will attempt to confuse you further. Plans like this hit right at the heart of my research, which is addition to real-time aggregate and lender-specific mortgage default and foreclosure data, dives heavily into every aspect of the ‘new breed’ of high-leverage mortgage loans made primarily from 03-07 in addition to the behavior of those that took them out. This is sometimes daunting as even 30-year fixed, 20% down, full-doc loans during the bubble years were high-leverage loans.

    Perhaps all of the plan rumors circulating are one in the same being reported differently across the media. McConnell with his 4% proposal has been quiet for the past week and a half – maybe this is a ‘kitchen-sink’ plan that makes him happy as well. Or perhaps this only has to do with GSE-owned or FHA insured loans. The market would have a problem with that.

    I have never seen such excitement about $50 – $100 billion being spent – especially when the there has been $9.5 trillion committed, the mortgage market is $11 trillion and last month alone there were $30 billion in loans that went into default across the nation. If this is going to be painted as the ‘kitchen sink’, they had better throw a sizeable, targeted amount at it or the market will be disappointed.

    One of the plans is being reported as more of a pro-active loan modification. It targets payment using government subsidization while another has the government buying distressed mortgages at a discount and refinancing them through FHA or the GSE’s. Perhaps these two plans are one in the same. Either way none address negative-equity, which is the leading driver of loan default across grades higher than Subprime.

    Feb. 14 (Bloomberg) — The White House is willing to spend more than the $50 billion already pledged to stem home foreclosures and intends to focus its efforts on reducing monthly mortgage payments, rather than principal, said Lawrence Summers, the president’s top economic adviser.

    Unless negative equity is addressed, all that’s left are underwater, over-leveraged zombie-homeowners unable to sell, move-up, refi, save or shop. If the plan is just one big loan ‘mod in a box’ that assists the banks and investors with losses then I think we are being set up for another disappointment.

    Banks and servicers are already being very aggressive re-levering defaulted homeowners through teaser rates, extending terms, negative amortization and balloons etc. Presently, banks and investors are taking the hits on their own and from what they reported to the Senate last week are modifying millions of homeowners.

    Perhaps the reason the plan is so small at $50 billion to the taxpayer is because it is redundant fluff that has no guaranty it will produce any results – other than sharing in $50 billion in losses with the note owners.

    “The government will subsidize interest-rate reductions by working with the servicers that handle mortgages, the person said. That way, servicers can lower monthly payments for households without shortchanging investors.”

    Going forward economists are going to have to discount homeowners with modified mortgages because they will not be part of the housing or mortgage markets or likely the macro US economic equation for years. Once they receive a mod, they are debt-slaves to the full amount of the mortgage for life. Most mods contain pro-lender language whereby the borrower waives all rights to future predatory lending claims against the original lender and acknowledges the full amount of the mortgage with full-recourse provisions. Welcome to the Hotel California! You can come if you want to — but you can never leave.

    Do people love their home that much they are willing to commit for life to a mortgage that is 50% above the present value of the home?

    I was there during the bubble years when all of this was happening around me. This gives me the borrower, lender, investor, bank, GSE, appraiser, insurer and Realtor insights few that weren’t there have. In 2003 everything changed. There is no way to replicate the period even through loan modifications. There is no way to get homeowners ‘rejuvenated’ about this investment that has caused them so much pain. When in default the home once again becomes a place to live — just like the rental down the street at half the cost and with no maintenance.

    With values down 20% – 70% across the nation, even if they were to find a way to successfully and permanently re-lever the borrower, it is too late for most due to house-price depreciation alone. To date all money thrown at this problem has been wasted. I am afraid the plans we are hearing trickle out now will end the same way.

    FDIC and GSE ‘Mods in a Box’ – Copycat with a Twist?

    We already have high-leverage FDIC and GSE ‘mods in a box’, which are now industry standard and have reported default recidivism rates of over 50%. Now it looks like we will now have one from the White House deemed ‘new’. The present mods already rely upon lowered interest rates to achieve their target results but many are temporary.

    Perhaps the primary difference between the present ‘mods in a box’ and the new White House program is that it makes the interest rate reduction permanent.

    “Like earlier efforts from the Federal Deposit Insurance Corp. and housing industry groups, the new plan will make use of interest-rate reductions, loan extensions and so-called principal forbearance, in which part of a mortgage’s principal is deferred to the end of the loan’s term.”

    If this is a permanent rate roll-down that targets borrower debt-to-income ratios they got it half right. But to permanently solve the default and foreclosure crisis and make these homeowners an active member of the economy once again the relief must come in the form of an income-targeted principal balance reduction. Anything short turns the homeowners into zombies and just kicks the can down the road.

    Bloomberg reports that the Gov’t will split the cost of a loan mod with the bank or mortgage bond holder to make it more palatable. But since FDIC and the GSE’s put out their ‘mods in the box’, most banks and servicers have already adopted that as a template for their own programs. ‘Mods in a Box’ workouts are very common and easy on the borrower. The primary problem is that ‘Mods in a Box’ leave the borrower an over-leveraged, underwater renter unable to ever sell or refinance which is why over half re-default.

    With an income-targeted principal balance reduction, even a 5.5%-6% market rate puts the borrower in a better position than with a re-levered loan that keeps them underwater. Why spend billions lowering rates when it could be targeted elsewhere and actually have a shot at working?

    Lower rates may put a few bucks in the consumer’s pocket but most will remain underwater, over-leveraged renters for life. They surely won’t spend any money on home improvement and likely use what little relief they receive to pay bills or replenish savings.

    Understanding Debt-to-Income Ratios as Part of the Plans

    When evaluating the plans as more information comes out remember there are TWO debt-to-income ratios i.e. 28/36. The first is total housing debt to income; the second it total debt including housing to income. All of the plans tout the housing-debt ratio because it is lower and makes the plan sound less risky. But total debt ratios are more important. As a matter of fact when it comes to getting a new mortgage loan the total ratio has always been more important than the housing ratio for obvious reasons.

    “All these measures will be used to help homeowners reach an affordable monthly payment, the person said. That monthly housing payment, compared with their income, will be the focus of the program, rather than achieving a target interest rate.”

    What good is it if a borrower is brought down to a 31% housing ratio but with their SUV, boat and credit cards they are at 65% total DTI? When the home is viewed as an investment and the majority of a homeowner’s monthly outgo is to that massively depreciating asset the best investment decision and quickest way of de-levering and maintaining lifestyle is to walk.

    New Plan is ‘Voluntary’ – Will Banks Actually Give it Away?

    Just like the Hope-For-Homeowners FHA refinance failure, the new program(s) is voluntary for lenders and investor meaning is may not fly simply due to that — especially if they target non-delinquent borrowers. Presently, most bank/servicers will not work with a borrower until they are late. If this is aimed at current borrowers, when was the last time you have seen a bank give something to someone that will incur a loss that didn’t have to?

    “The new plan, which isn’t final and could change, would be voluntary for lenders and investors, the person said. It is aimed at loan modifications that have a positive net present value, meaning that the cost of a foreclosure would be higher than that of adjusting the loan terms.”

    If they proactively go after non-delinquent home owners the total funding per home owner becomes very small. Additionally, there is a fairly significant moral hazard issue which I probably should not even

    be concerned about at this point in time. With 10% or 5.5 million mortgage loans presently delinquent or in the foreclosure process, $100 billion (50/50 gov’t/note owner) gives each $18k in assistance.

    $18k applied towards an interest rate reduction on a $225k loan could easily buy down a 5.5% – 6% market rate to 4%. Perhaps this is why you have not heard much about McConnell’s 4% rate plan as of late. But at least twice that many are likely ‘at risk’ therefore the amount of assistance per homeowner will be less – still $9k can do a good job of buying rates down considerably from present levels. On a $225k loan going from 6% to 4.5% saves a home owner $200 per month.

    If indeed this program is simply ‘another’ mod that keeps the borrower fully levered to the total mortgage debt and relies upon bubble-years lending ‘creativity’ it will not be the great ‘solution’ that most hope for. It will help some for sure, which I suppose is better than none. But with 5.5 million mortgages with over $1 trillion presently in trouble and 10 to 15 million mortgages worth approx $2.5 trillion in a negative equity position, $50 billion will not go far.

    With gov’t splitting the loss, perhaps the borrower will get a little more relief or a permanently bought-down mortgage rate of 4% in contrast to the trash they get now with the note owner eating it all. But the end result still leaves homeowners in the same zombie state. Additionally, with the default and foreclosure crisis now in full effect across higher grades that together dwarf Subprime, the note owners know that if they do not ‘volunteer’ for this that before too long the government will eat the entire enchilada. Already changes are being made to the Hope-for-Homeowners FHA program to make it easier on the note owners.

    Mods Done Right – Debt Forgiveness through Targeting Income

    The force-delevering of the home-owner or massive asset /income inflation the likes we have never seen before are the only way out of this. Take your pick.

    To date all plans just lower that rate, do not address the negative-equity levers them further. The housing market will ‘fix’ itself over time and constant meddling only prolongs the inevitable.

    The Subprime Implosion is on the mend all on its own. The problem is — like CNBC’s Dennis Kneale loved to say throughout 2007-08 – that ‘Subprime is such a small piece of the pie’. It is small and look at what it’s done. The impending Alt-A, Pay Option, Jumbo Prime and Prime implosions occurring in rapid succession in 2009-11 will make Subprime look like a walk in the park.

    The only way to ‘fix’ the housing and mortgage markets and consumer’s balance sheet is to undo 2003-2007. To ‘undo’ means to:

    · a) force de-lever the home owner/consumer through mortgage principal balance reductions based upon what the borrower really earns using market-rate financing

    · b) make it so home owners can freely refinance and sell their homes

    · c) make it so the vitally important move-up buyer comes back

    · d) significantly reduce defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present FDIC, Fannie/Freddie and bank mortgage modification plans do

    · e) allow home prices to fall to attractive multiples of rents and incomes without exotic loan programs or artificial, temporarily, government induced low mortgage rates

    This can all be accomplished quickly through a broad scale income-targeted mortgage debt relief program. With $7 trillion (31 million mortgages) in suspect loans originated from 03-07, 85% of which are owner-occupied primary residences ($6tt/26 million), the cost of getting America ’s housing crisis under control quickly would be around $2 trillion. This is $77k mortgage debt forgiveness per home owner and will make a difference.

    Add on a $500 billion tax break for those who did not do anything wrong and $2.5 trillion pales in comparison to what will be spent before they figure out this would work. Spending $2.5 trillion in the right place would eliminate several trillions for programs already in place. Immediately these home owners

    would be productive members of the economy once again and able to sell their homes or refinance. The debt backing these borrowers would actually rise in value.

    I hate to say this because my macro-economic beliefs are totally the opposite — but a ‘trickle up’ solution for housing is far more effective because it gets to the heart of the problem. If you cram household debt down to 28% housing and 36% total debt the home because a place to live again and far fewer will default if values fall further. The 26 million at-risk bubble-years mortgagees would be free to sell their homes, refi, save and shop. They would do all of it. Taking care of this 26 million would put a floor under housing that would benefit the other 60 million homeowners.

    Cram-Downs – The Right Solution with Too Great of Unintended Consequences

    Part of Obama’s solution may include cram-down legislation where judges have the power to grant principal balance reductions. While this is half right allowing judges to re-write contracts is a big problem. The error and fraud will be tremendous. It could also force a mass liquidation of distressed assets at prices that are truly ‘fire sale’.

    At present the distressed note and housing market is not illiquid – there is just a price dislocation due to sellers holding out for higher prices than the buyers are willing to pay. With bailouts coming ever week and talks of bad banks buying this stuff at above market prices, why shouldn’t the sellers hold out for a higher price?

    But there are also other serious unintended consequences to this plan not many know about. Not every mortgage backed security deal is the same – language varies greatly. But most of them have language that say in the event of a bankruptcy the principal loss is taken from bottom up in the cap structure — Not rated, BBB, BB, B, AA, AAA. The same with a foreclosure, jingle mail etc.

    But with BK Cram-Downs where principal loss occurs, the loss can be spread across the cap structure evenly. The language that allows this is more prevalent in non-Agency deals such as Alt-A and Jumbo Prime.

    As soon as a hit occurs across all tranches, the ratings agencies terminology will assign a ‘D’ rating to that Bond. When that happens, the capital requirements will go from 25% to as much as 100%.

    Insurance companies, mutual bond funds, pension and hedgefunds are the largest owners of this stuff. Due to the downgrade, they would have to sell bond at massive loss and put pressure on market or raise capital.

    Residential Rents to Continue to Fall – Could Get Ugly

    I have been arguing with folks for a long time over why rents will fall as defaults/foreclosures — that put people out of their homes and in need of a rental — increase. The latest report out of Forbes citing Las Vegas and the ‘emptiest city in the nation’ shows exactly why this will happen.

    In addition, as home sales in the bubble states increasingly go to investors and prices fall – in CA 60% of all sales were from the foreclosure stock and 60% of those sold to investors – they will be able to rent them for less to achieve their target cap rates. This could actually start a mini-default wave on its own from inventors who jumped too early, which was any month since summer 2007. The investors who bought the property closest to the peak have to charge the greatest rent and are getting squeezed by those who bought more recently.

    America’s Emptiest Cities – Forbes

    …empty neighborhoods are becoming an increasingly daunting problem across the country. The national rental vacancy rate now stands at 10.1%, up from 9.6% a year ago; homeowner vacancy has edged up from 2.8% to 2.9%. Richmond, Va.’s rental vacancy rate of 23.7% is the worst in America, while Orlando ‘s 7.4% rate is lousiest on the homeowner side. Detroit and Las Vegas are among the worst offenders by both measures–the Motor City sports vacancy rates of 19.9% for rentals and 4% for homes; Sin City has rates of 16% and 4.7%, respectively.
    America’s Emptiest Cities

    1. Las Vegas
    2. Detroit
    3. Atlanta
    4. Greensboro, N.C.
    5. Dayton, Ohio
    6. Phoenix
    7. Orlando
    8. Kansas City
    9. Jacksonville, Fla. ; Indianapolis (tied)

    Best Regards,

    Mr Mortgage

  25. Cathryn Mataga

    The contract won’t be binding on your cat unless you give it the option to disagree. Also luring the cat ties this decision back to its owner. Better if the cat can either accept or reject on its own initiative, after allowing it to read the agreement, of course.

    This might take some time.

  26. Gordon

    Lineup32:

    Your post from Mr. Mortgage sheds a flood of light on the new Obama plan (even though it was written before the plan was released), and why it will not, cannot, work. Thanks for sharing it.

    Yves:

    Great blog.

  27. Anonymous

    I think that the real problem behind the curtin is the derivatives that are out there hovering over the mortage market situation. I suspect that they were written with the assumption that prices would not drop so there is hell to pay for every percentage drop.

    Why else make such stupid policy decisions?

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