Things are suddenly getting very interesting…
Readers may have taken note that the Treasury has launched a son of HAMP, its ineffective program to get banks to provide undertake mortgage modifications, called 2MP.
As far as I can tell, 2MP is a farce. It is simply another back door way to recapitalize troubled banks. Mike Konzcal performed a simple analysis of the portfolios of the biggest second mortgage holders, Bank of America, Citi, JP Morgan, and Wells, and using conservative loss assumptions, estimated the gang of four had a total $150 billion hole on their balance sheet among them.
2MP appears to be designed to shovel $50 billion of TARP funds into this hole, with dubious benefits to borrowers. From the Treasury web site:
Under 2MP, with their investor’s guidance, a mortgage servicer may:
* Reduce the interest rate to 1% for second liens that pay both principal and interest (amortizing)
* Reduce the interest rate to 1% amortizing or 2% interest-only for interest-only second liens
* Extend the term of the second lien to 40 years
* If the principal was deferred (through forbearance) or forgiven on the first lien, a servicer must forbear the same proportion on the second lien; although a servicer may, in its discretion, forgive any portion or all of the second lien and receive incentives for doing so
Yves here. So second mortgages for troubled borrowers, which by any logic have little to no economic value, are going to be propped up in a peculiar effort to suck more blood out of consumers (as opposed to writing them down, as normal market practice would dictate). And in case you think I am exaggerating, when Barney Frank issued a stern letter in early March urging banks to write down seconds, the banks argued that they needed to have “accounting guidance” from regulators on how to deal with (as in lie about) the shortfall on their balance sheet. It isn’t hard to see this as a demand for either even greater “extend and pretend” or a subsidy, which Treasury has now provided.
These moves simply serve to pretend that paper which in many instances has little to no economic value is actually worth something. We’ve now moved from the banks using seconds as an excuse not to do mortgage mods to now using them as an excuse to extort yet more money from the taxpayer.
An interesting new element has moved into the dynamic, in the form of a salvo from BlackRock, the largest credit markets money manager in the world. Now that the Fed has officially exited the manipulate the mortgage markets business, BlackRock is making it loud and clear what it needs to have happen before it will buy non-government guaranteed mortgage paper. It stance is a direct attack on the second mortgage holders’ intransigence. From the Financial Times:
BlackRock, a leading US bond investor, says banks will have to take their share of losses on distressed mortgages before it resumes large-scale purchases of new “private-label” mortgage bonds, which are sold without government backing…
The return of private investors to the US mortgage market, now mostly financed through government-backed agencies, could have a big effect on mortgage rates and the speed of the housing recovery. Efforts to restore confidence among investors have so far failed.
Disputes between investors and banks have erupted over riskier second mortgages, also called home equity loans. Many US homeowners who are behind on their payments took out two or more home loans. First mortgages were typically packaged into securities and sold to investors, while second mortgages were often kept by banks.
These “second-lien” mortgages should take losses first, in theory. But the holders of such debts have not always agreed to absorb hits before “first-lien” mortgage holders. US government programmes to restructure such debts have been slowed by these complications.
Mr Arledge told the FT BlackRock, which is primarily a first-lien investor, had focused on the interaction with second-lien holders in the US mortgage modification programmes. “If [modifications] are done in such a way that is not fair . . . it will be a real challenge for the mortgage market to move forward.”
Yves here. While the message may be understated, the implications are clear. Unless the banks (and regulators who can pressure them) get banks to quit trying to extract more from seconds than they are worth, first mortgage buyers (folks like BlackRock) are not willing to be toyed with again. Seniority means something, and the banks in effect are undermining the rights of first mortgage investors.
In Japan, foreign pressure was often used as an excuse by the officialdom for them to do something they wanted to do but was politically difficult. It may take investor pressure to provided the needed backbone infusion to the the Treasury and other regulators to get them to take a more forceful stand on the second mortgage mess. Unfortunately, having just announced 2MP, we may need to see that policy officially fail (as in suck the TARP money out of Treasury, which may be the real objective anyhow) before any new measures are taken.