NY Fed President Dudley Crosses Swords With GSEs and Board of Governors on Housing/Mortgage Mess

A speech by New York Fed president William Dudley is a bit of a surprise, in that it acknowledges the severity of the deepening mortgage crisis and sets forth some specific policy proposals. I still find these recommendations frustrating, in that they are insufficient given the severity of the problem and also fail to come to grips with widespread servicer abuses (not just servicer driven foreclosures, but also what amounts to theft from investors, via schemes such as double charging fees to borrowers and investors, inflating principal balances, reporting REO as sold months later than the transaction closed, and getting kickbacks on third party charges). But they are more serious than other ideas from senior financial officials. Specifically, the Dudley advocates principal relief via a program of “earned principal reduction” which would allow for put options for all severely underwater borrowers who stay current on their mortgages for three years. But as we will discuss, this proposal is less meaningful than it sounds.

It looks at if the NY Fed is trying to provide intellectual leadership in the debate around the housing mess, which given the level of denial and kick the can down the road strategies being offered as alternatives, means this effort stands out in part by virtue of the shoddy alternatives. And this posture put it squarely at odds with the Board of Governors, whose paper published earlier this week pooh-poohs principal writedowns and specifically opposes giving broad scale principal reductions to homeowners with negative equity. One has to wonder whether the Board of Governors paper was released prior to the Dudley speech with the specific aim of undermining it. Similarly, the NY Fed is also in opposition to the GSE’s resistance to offering principal mods, as evidenced by the leak from the mortgage settlement talks, in which the GSEs refused participate in the banks’ scheme to use mods on securitized loans (which would include GSE loans) as a way to reach the settlement target for principal mods.

One of the reasons this speech is nevertheless encouraging is that it acknowledges that regulatory/housing policy and macro-economic activity are linked:

Monetary policy and housing policy are much more complements than substitutes.

As I hope I have convinced you today, while the Fed has will do all it can to achieve our dual mandate of maximum sustainable employment in the context of price stability, we have to recognize that there is more to economic policy than just monetary policy. Low interest rates help housing, but cannot resolve the problems in that sector that are pressing on wider economic activity. With additional housing policy interventions, we could achieve a better set of economic outcomes than with just monetary policy alone.

Although the Board of Governors paper earlier this week implicitly admitted that monetary policy could not solve housing market problems, Dudley’s more forthright statement makes a case for more intervention.

Here is the principal relief trial balloon in the Dudley speech:

One option developed by my staff is for Fannie Mae and Freddie Mac to give underwater borrowers on loans that they have guaranteed the right to pay off the loan at below par in the future under certain circumstances, including that the borrowers have continued to make timely payments. For instance, the borrower could be given an open-ended option to pay off the loan at an LTV of 125 percent, and the right to pay off the loan at an LTV of 95 percent after three years of timely payments.

The borrower would be protected from further declines in home prices, but in return would give up a portion of any upside from future capital gains on the home via a shared appreciation agreement. Note that under this arrangement some of the reduction in the loan amount would be paid by the borrower as the outstanding balance was amortized by continued monthly payments….

Based on recent data on borrower behavior, my staff calculates that the taxpayer (through the effect on Fannie Mae and Freddie Mac) would be better off with earned principal reduction under a base case of roughly flat house prices and persistent weakness in the jobs market. Under a scenario of modest house price increases, the combination of fewer defaults and shared appreciation also produces a net benefit.

This result occurs before taking into account the positive externalities of nudging house prices onto a stronger path, which would reduce the magnitude of losses on loans that do default. On an expected value basis, such a program appears still more compelling, since Fannie Mae and Freddie Mac are currently exposed to the downside risk of further declines in home prices.

While it isn’t hard to imagine that any approach is better than “do nothing,” I wish I could see the assumptions being used in the model. One troubling bit is the apparent failure to consider that housing prices could deteriorate further, particularly since shadow inventory appears to be larger than most commentators recognize.

More important, it isn’t clear how many people will really be helped. Borrowers won’t get any concrete benefit unless they sell the house. And if they have a home equity line of credit in addition to the first mortgage, they may still be under water, and the second lienholder may block a sale as brokers report they do now. So this plan may increase liquidity, but only for some borrowers, and would also provide a new fee source for Wall Street firms (you can bet they will securitize the shared appreciation rights). This scheme appears to be mainly a carrot to give underwater borrowers more incentive to stay current, in other words, to prevent strategic defaults. Given that we think the “strategic default” meme has been considerably overhyped, we are puzzled at Dudley giving so much attention to this aspect of the mortgage mess.

But the probable small tangible impact of this program may in fact be quite deliberate, a cheap gimmie to borrowers who were prudent but are upside down by virtue of buying near the peak in the markets than went into the biggest tailspins. Devising a low cost program that provides a benefit to homeowners who have remained current may be seen as a necessary sop to forestall objections to programs that provide more substantial relief to borrowers where deeper loan mods would be a win/win to both the homeowner and the investor/guarantor.

But the additional forms of relief that Dudley advocated would certainly be helpful, but again were narrow. One was a bridge loan program for the unemployed, which he estimated would cost $15 billion a year. Note that Dudley suggested that lenders be required to write down mortgages to allow for the bridge loan to be secured to avoid it serving as a bail out to the lender. That is nice in concept, but probably makes the program a non-starter . Logically, any seconds should be written down first (frankly, most should be written off, but that is another story), and it is hard to see banks going along with that, plus you have no ready mechanism for cramming down mortgages in private label securitizations.

Dudley also advocated a more borrower friendly Freddie and Fannie program (as in a more generous revision of HARP) and more aggressive moves to convert foreclosed properties owned by the GSEs, banks (as principals and on behalf of securitized trusts) moved into rentals, including having Fannie and Freddie lend to prospective landlords and accelerating depreciation schedules for residential rental property.

These are all good ideas, but they have a rearranging-the-deck-chairs-on-the-Titanic feel to them. They don’t come to grips with the central problem, that many people are in the process of losing their homes or will lose them if their finances come under further stress, and given how steep loss severities are (and they are only getting worse), a lot of them could be salvaged with deep principal mods. And the Fed fails to acknowledge the existence of a second large problem, the extent of servicer fraud, not just foreclosure-related abuses, but servicer driven foreclosures and out and out theft from investors (inflated and double charged fees, kickbacks from third party providers, overstated principal balances, delayed reporting of sales out of REO).

The Venezuelans have a saying I am fond of: “They have changed their minds, but they have not changed their hearts.” The good news is that the officialdom is beginning to come to recognize how bad the mortgage mess is. The bad news is that they don’t have the stomach for the sort of aggressive measures needed to remedy it.

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  1. josap

    There are plenty of plans and ideas out there. Looks like desperation. All in time, they hope, for the elections.

  2. Phil Perspective

    The good news is that the officialdom is beginning to come to recognize how bad the mortgage mess is. The bad news is that they don’t have the stomach for the sort of aggressive measures needed to remedy it.

    Of course they don’t. If they did, we’d have to do what Iceland and Sweden did. All this is is more extend and pretend. Hope and a prayer.

  3. LucyLulu

    Out of curiosity, what are the banks currently doing with second mortgages when there is a foreclosure sale? They should, I’d think, be written off at 100% unless the primary mortgage is paid off in full, since second mortgages are junior liens. Is this happening? And don’t the banks (servicers) themselves hold the second liens in the form of HELOC’s, or did they manage to securitize them as well?

  4. indio007

    Even if this plan was implemented chain of title is still broken. Are they going to throw in a guarantee that there will be marketable title after the sale?

    There is no fix without a wholesale sterilization of the public land records. I have seen several dozens of Linda Green Satisfactions of Mortgage from bankrupt companies. I don’t know exactly how you can cure that minus serious judicial intervention because of due process considerations.

    This really is worse than people think. The “debt” is only part of the problem.

    1. Susan the other

      Indeed. And lots of people, including Fed people, know it clearly. Dudley could be the voice of a more sensible standoff than first meets the eye. But it really looks like a Mexican standoff. Apologies to my neighbor Francisco and all Mexicans. This Dudley plan is to gradually accumulate losses that can be written off without damaging the bottom line of the financial system. Three years? Really doesn’t sound long enough – but I’m sure Dudley knows some things. And this generosity seems like just a scrap tossed to the hapless homeowner who thought his house was a savings account.

      But when I float above it I see this: In the near future, many useful and sound buildings which were once commercial will be shut down and boarded up. There will be no use for them. It is a shame, because they are well built and they are in population and commercial centers. The City is where we should convene and live. There are so many economies and benefits to be achieved by living in cities.

      So why not pay the equivalent of rent by some arcane banker-calculation, and live in the homes once thought to be the American Dream until we all can move to a refurbished apartment in the city? With a community garden. And the home that became unaffordable and unsellable somewhere in the outskirts, or in the suburbs or a rural pointless town? Tear it down carefully and recycle every inch of it. Use those materials to remodel commercial into housing. And by the magic of financial bookkeeping, it is net net good for everyone.

      Too Bolshevik?

  5. ron

    Maybe these ideas have some merit in markets where the negative equity say is no more then 50K or 75K max and the mortgage holder has employment but here in Calif the numbers are extremely big insuring large oversize losses for investors and banks.For example I made an offer to buy a home last Sept listed as a “short Sale” that was purchased during the 2007 bubble for 579K. (very ordinary house not high end) I offered 250K and still in negotiations with the servicing bank that recently had the home appraised at 260K. The investors now will lose at least 220K no matter if I buy or the home goes into foreclosure. So the questions becomes do you give the current mortgage holders a 220K principle reduction with no strings attached because the home will never be worth the 579K price or Short Sale the home or foreclose.

    There are many families in coastal Calif who were Bubble buyers that made large down payments but are still underwater and continue making payments by renting out the property carrying a small negative monthly balance and hoping the RE market comes back so they can dump the property and get out from under the mortgage. This group is totally unaccounted for and represent a large potential future foreclosure.

    My current neighbor purchased in 2007 for 550K with a no down loan hoping to flip the house in a couple years. He hasn’t made a payment in a year and the only message he gets from the bank is a monthly statement telling him how much he owes along with late fee’s etc. This is very typical Calif coastal story, sooner or later the bank will have to move in on my neighbor and the many others that they now ignore.

    1. Abelenkpe

      Some good friends of ours are among those looking to rent their underwater home. We’ve been considering renting their place, and they really want us to rent from them, but we have a nice rent controlled apartment. Actually all of our friends and coworkers bought during the bubble years and whether they admit it or not are probably underwater. The only reason we didn’t buy is that we were still paying off our student loans and didn’t want a mortgage and student loan payments. Kinda glad we missed out. I think it would be terrible to uproot so many in foreclosure and short sales. Maybe it would be best to have principle write downs? But how does that effect those who are nearing retirement and were counting on the equity in their home?

  6. scraping_by

    “The borrower would be protected from further declines in home prices,…”

    Denial is not a river in Egypt.

    The fall in housing prices is directly related to the downward drift in middle class incomes, the fraud-driven height of the housing bubble, and the insolvency of the lenders, especially banks. A small reduction in principal won’t fix any of those.

    Inter-class scapegoating has been an effective tactic in the revolt of the elites. This puppet dance has the flavor of most anti-poverty and social help programs. It’s got the bureaucratic fire drill, arbitrary means testing, silly hoops for the undeserving benefitees to jump through, and more than a whiff of contempt for anyone who needs it.

    One thing: Reagan’s scarecrow of The Welfare Queen was designed to give blue collar wage earners a small jolt of pride feeling contempt for those one rung down the economic ladder. I wonder who’s the audience for this slander?

    1. AleksV

      Working with Distressed borrowers to help obtain a loan modification is a challenge.

      The ” servicer abuses “- should include under investing resources in loss mitigation departments.

      Servicers use 1980 technology (facsimile) to process 100 page documents to outdated (DOS) mainframe computers that are very unreliable.

      The mortgage industrial complex has all parrts of the origination platform in the 21st century with loan portals – mobile text updates – slick process and procedures while loss mitigation department are still working with (DOS Mainframe/black screen computers)(countrywide loans)

      Average time to process an equity positive refinance with BOFA is less than 30 days. Average time to process a loan mod with the same servicing lender 180 days if all stars align.

      So why does a process that is 5 times less complicated that a refinance take that much longer to process? You tell me.

      Underinvesting into business processes and departments that are not mission critical (make money) goes against financial company character.

      So it will be ignored and will inflict pain on local state and federal economy for a long time delevergaing the populace from credit and setting the world order off course.

      1. PL

        Those are interesting points about the differing technology AleksV. Are loss mitigation departments part of the same bank or are they outsourced?

        1. AleksV

          In-house systems at most mortgage servicing companies is outdated. We have just recently seen a move to email communication between bank and third party.

          Most servicing banks rely on phone and fax communication. Very inefficient.

          BofA has countrywide loans on a DOS system.

          When transferring or onboarding loans to other systems internally numerous BofA reps complain that most if not all internal notes disappear.

          Imagine this – no instructional DVD has been made for this process.

          BofA had less than 25% pull through rate on applications sent to homeowners. That means for all the loan modification packages sent to distressed homeowners only 25% actually are able to handle the logistical gymnastics of getting a “perfected” or a complete packet to the lender for review.

          All others get a decline letter for incomplete documents.

          Such a shame. It seems like the running of the bulls when calling in to the lender with a few lucky loan mods at the end of the road.

          Second servicer abuse not talked about is Loan Modification software automation. We found a big 4 lender that systematically denied a particular subprime mortgage loan product “Neg Am” in violation of HAMP Program Guidelines and internal loan modiication program guidelines.

          Min payments on Neg Amortized loans often fall below 31%

    2. leapfrog

      “This puppet dance has the flavor of most anti-poverty and social help programs. It’s got the bureaucratic fire drill, arbitrary means testing, silly hoops for the undeserving benefitees to jump through, and more than a whiff of contempt for anyone who needs it.”

      Wow! I love THIS.

  7. Conscience of a Conservative

    Of course the NY Fed is worried. As protector of the banks he’s seeing that with the inability to foreclose in too many cases, banks are being turned into REITS. The banks must want the problem loans off their books. The dream must be too offload more of the loans into a new program where they are no longer at risk. Now from a policy stand-point I disagree with the worry over declining home prices as lower prices solve the lack of affordability so many are faced with when wishing to purchase a home.

  8. Conscience of a Conservative

    I just read the FT article on the speech.
    1) Banks cannot take the hit
    1) First lien holders bear brunt of writedowns
    2) Second lien holders(banks are left alone)
    3) We rewrite contract law & make 2nd liens senior to 1st
    4) Dudley’s bosses are member banks of the Fe(JP Morgan,
    Bofa,Citi & Wells) hold the second liens

    As you would say Susan, Quelle Surprise!

  9. Jesper

    People forced out of homes they can afford is a problem.
    People forced out of homes they cannot afford is not a problem.

    Trying to change the affordability of homes by subsidising the costs does change something – what was not a problem will be converted into a problem (who should pay for this subsidy?).

    No matter what the solution will be there will be losses. The people that are now involved in resolving the crisis are doing everything they can to minimise the portion of losses that can be ascribed to them (it is bad for the career of employees/agents). One way of minimising the size of the portion of the losses is to minimise the size of the losses by refusing to recognise any losses. That strategy has led to extend and pretend.

    Subsidising people living in homes they cannot afford is not a primary or even secondary priority of a government. Fraud (servicer and originator) should be prosecuted, that is a primary responsibility and this responsibility appears to be shirked.

    1. F. Beard

      No matter what the solution will be there will be losses. Jesper

      Not necessarily. If restitution and reform are combined then the entire population can be bailed out with little price inflation risk.

  10. Caliban

    It’s an intractable situation. All solutions involve pain. It’s better to let the foreclsoures proceed, banks take their hits, investors take their hits, and everybody move on.

    We’ve been trying to prevent foreclsoures for year with virtually no measurable benefit.

    In states where foreclosures have been moving swiftly, like California, the housing market has taken the kind of hit that was coming its way and is thus in a better position for the future.

    People trapped in unsustainble mortgages are better off defaulting and starting all over in more modest housing where they can begin to save and rebuild their lives.

    In judicial states like New York, there is 10 to 11 years of shadow inventory, a staggering level of looming pain for investors in those securities that funded those mortgages and for taxpayers who are backing the losses at Fannie and Freddie.

    In many cases people are living in this properties without paying anything. In other cases, they have abadoned them and they are in a state of disrepair. That kind of delay with a hope and prayer may lead to a very bad end for housing in New York.

    Foreclosure has become the new inevitable fate for many peope, taking its place along side death and taxes.

    1. Conscience of a Conservative

      But what the Fed is proposing is that banks do not take the hit and that investor’s bear the losses instead under the theory that if banks are forced to write-down their unsecuritized 2nd lien positions the banks will require a bail-out(since there’s no way we expect holders of bank debt to take a hit). Many of these loans were not properly originated, and the banks are responsible for either under-writing the loan, or securitizing and not providing a true picture to the investor. The rules of capitalism are being subverted. This is not about helping out home owners but about removing a problem the banks have. The investors in these mortgages are middle america, they are public and private pensions , insurance companies and retirement plans who have future liabilities they will not be able to meet.

    2. dejavuagain

      California is also a state with non-recourse financing for a first mortgage on a primary residence.

      Though, borrowers can just give the keys to the lender and walk away with no pain.

      In New York and most states, the lenders can go after the borrowers for a deficiency.

      People like to ignore these minor issues.

      I hope New York continues to hold fast so that the title system is not destroyed. If you cannot prove you own the loan, you cannot foreclose. What is so wrong about that?

      Anyway, let’s get real. Unemployment may go down, but if the average worker receives lower wages than before, then the price of houses will go down as well. So every victory on union busting also busts the real estate market. Bravo? Did the Fed factor that into its “equations?”

  11. RSDallas

    I would suggest that your emphasis on the fraudulent elements of the mortgage mess is over done and secondary to the actual problems facing homeowners. Too many unqualified buyers took on debt that they had no business doing and too many ignorant lenders agreed to extend these unqualified buyers a loan. So who should pay and how?

    Well it just seems easy to me. The buyers who fraudulently represented their abilities to buy and the ignorant lenders should pay. Now what about the unlucky sole who could afford to buy that bought unfortunately bought at the wrong time?

    This one is the only one I ponder about until I remind myself of all those tech stocks I bought just prior to the tech bust in early 2000 and the nearly $200,000.00 that I lost. Why wasn’t anyone talking about re inflating all of those stocks that I owned? All of this talk of stepping in and writing down this and re-financing that is foolish and in fact is the reason we are still in this mess and digging a deeper hole. All because some politician felt like they need to “help” some poor, miserable, taken advantage of market participant.

    Our Nation will return to greatness when our leaders announce that we are going back to the winners and losers system of markets.

    1. Conscience of a Conservative

      Lender fraud and borrower fraud are actually quite different. When a borrower commits misrepresents himself he still has the intent of paying off the loan(as misguided as that may be). When the brokers/banks etc commit fraud it’s on a whole different level. FBI says 80% of the frauds are not borrower driven.

      But as far borrowers are concerned who purchased a home they can’t afford, removing them of that burden is probably the best gift they can have. Everyone’s so afraid of deflation in the real estate sector, yet this is what will make homes affordable again. And 25% down on a $300,000 home is a lot more manageable than 25% down on a $400,000 one.

      Only ones who are fretting about this problem are the banks.

      1. zadoofkaflorida

        The banks are scared. Believe me, its a situation where the emperor has “no clothes”. If borrowers received a write down to present market value the whole banking house of cards would fold.

    2. furiouscalves

      your post gives you away – first you mention fraud concerns being overdone, but immediately following you refer to buyers “fraudulently represented their abilities to buy” , but the lender only gets the tag of only being “ignorant” for giving money to unqualified people.

      also, you make the leap of assuming that all homes simply equate to investment in stocks. failing to acknowledge that a home is to be lived in for years, not constantly marked to market and traded like a security.

      So to review, fraud concern overdone. buyer fraudulent, lender ignorant. houses traded daily like stocks. Government and PTB should not intervene. law is overrated. losers you. winners me.

      well, unfortunately we all are losers. we both own homes and we own the GSE’s. So in current setting, banks can make losses end up on “me” no matter what.

    3. Hugh

      You do realize I suppose that everything you just wrote is totally divorced from reality. It is a great illustration though that no matter how many times something is debunked and shredded all we need to do is wait a few weeks and it will show up again as if none of those previous debunkings and shreddings ever occurred.

      First, we have the false equivalence of the expertise of the American homebuyer, who like virtually all Americans is completely financially illiterate and completely at the mercy of the banks, with the expertise of those banks with their panoply of professional loan officers, lawyers, and accountants. Sorry, with the controls the banks had at their disposal, only a tiny number of unqualified buyers could have slipped past them. That so many did happened because the banks willingly and knowingly ditched those controls in the quest for short term profits and fees.

      Second, unqualified buyer is often code for minority buyer with all the implied racism that entails. But it blatantly ignores that the big problems in the housing crisis now are not with the so-called unqualified buyers but with buyers who did qualify at the time but got caught by the general downturn following the bankers’ blowing up the economy in the meltdown.

      Third, what does any of this have to do with the loss and/or destruction of loan documents, the failure to follow clear black letter law in the securitization process in the formation of trusts and the creation of tax vehicles, and the rampant forgery of documents in the foreclosure process? Except I might point out to indicate that so much lawbreaking on the part of banks certainly suggests that lawbreaking did not miraculously spare the one area of home loan writing.

      Fourth, “going back to the winners and losers system of markets”. How can we go back to markets that never existed, except as an ideal in some economist’s, likely a libertarian’s, mind? Free markets have never existed. The only question worth asking is who controls them and for whose benefit. And no, it is not unworthy minorities. I mean I do hope you know that African Americans had virtually their whole wealth wiped out by the housing bust and recession. If they were running things, that would be an unlikely, even impossible, event. It isn’t the government as some autonomous autocratic player. It was, in fact, the rich, corporations, and the banks, and yes, the government but only in so far as they controlled it. And you know what is funny? Even in your idealized world of markets, this would be the case.

    4. rOn cOn cOMa

      Unlike your stock values, mortgage debt is underwriting 10 to 50 times its’ weight in Credit Default Swaps. This tottering temple of unregulated derivatives (thank you Phil Graham and Bill Clinton) will crush the financial system once the ISDA announces that a Credit Event has occurred. (The lenders were not ignorant of this temple. It was their desire to enlarge it that made liar’s loans possible.) These meager efforts to stabilize the housing market are only being made to avoid such an event. Homeowners are only pawns in this game.

  12. Brian

    It is telling that no discussion of the existence of the original documents and proper chain of title is never to be examined. They can not find their way to the court where the homeowner challenges the claim, ever. Yet the jurists never ask for proof, knowing that the documents can’t be produced, and take the word of the parties that were bailed out for all of these loans.
    Since that is a crime apart from the false claims, should we not be looking at the waste of judicial resources and the illegal acts of each attorney having brought action against a property when knowing the actions were without justification? Should we not consider even 1 such act perjury. What about dozens, or hundreds for each of these attorneys?
    Only the homeowner hasn’t committed crimes regarding their property.

    1. Conscience of a Conservative

      The banks through their sloppy procedures and use of MERS have created real issues over clouded title. At some point this chicken comes home to roost.

      1. indio007

        sloppy? lol. Hmm… what profession has expertise in negotiable instruments and the modes of proof when it comes to enforcing them? We all know something is rotten. The falsification of evidence was a necessity not a choice. The notes exist somewhere. The question who is the party whose possession can’t be revealed? It’s the FED. The notes were rehypothecated to the FED in exchange for the funds that paid the seller. Where did the FED get collateral to print the new notes that paid the seller? The buyer’s promissory note of course. So what was borrowed??? Or is it a house of mirrors?

  13. Hugh

    Every one of these help for homeowner programs I have seen really are targeted, not at helping homeowners, but protecting bank balance sheets. The object here is not really to do anything but only to appear to be doing something. None of these programs can support housing prices because they are all too small, available to too few, and too narrowly drawn. They all ignore the complete and systemic fraud that pervades and infests every aspect of the mortgage-securitization-foreclosure chain in the housing sector.

    This was not a trial balloon but a lead balloon, and intentionally so. It was not an opening salvo. It was not Dudley beginning to get it. That is, of course, one of the most worn memes out there. I mean how many times has some member of the elites “gotten it” and nothing has changed as a result. An Establishment liberal like Krugman “gets it” every few weeks without ever changing or affecting any of his basic thinking.

    This is like all of these exercises nothing more than some jockeying among our elites and a little distraction meant for the rubes.

    1. RSDallas

      I believe you are exactly right Hugh. The bankers have no desire to let the chips fall where they would had they not changed the accounting laws and been injected with billions of taxpayer dollars. That is precisely why we will limp along just like Japan has been doing for over 20 years.

      It seems to me though that we are entering a period wherein the market participants are beginning to recognize that the ponzi scheme may be in jeopardy of collapsing. Somebody is going to panic at some point. It only takes 1 big player to trigger the stampede.

      1. Hugh

        I do agree with you on this. We are in a territory where, despite the best laid plans of the bankers and the government officials they own, a single mistake, miscalculation, or unexpected event could take it all down. There are just so many schemes and scams built on each other andinterconnected, the proverbial house of cards, that the slightest movement could bring them all crashing down.

    2. Yves Smith Post author

      I had wanted to give Dudley the benefit of the doubt and posted this before I saw the FT interview, since at LEAST the Fed is finally admitting that the housing problem can’t be fixed by monetary policy (the worst is I think they, certainly Bernanke, thought it could be) and has also said Something Must Be Done. They are also opposing the GSE’s policy of “foreclose fast and hard” which has been a major contributor to the foreclosure crisis (in that the GSEs are big employers of foreclosure mills and have fired them only when they become utter public embarrassments. The Baum firm in New York got ditched as a result of the Joe Nocera article on its Halloween party, not due to its appalling conduct).

      But his FT interview made clear that his speech and related proposals are (as you noted) all about the banks, not about the real problems.

      1. RSDallas


        I would suggest that it is quite naive to think that the Fed “thought” they could solve the housing problem through monetary policy. The Fed has accomplished exactly what it has planned, despite what appears to be extremely stupid and misguided decisions. They have known from day 1 that the entire system would crumble beneath them if they allowed their banks to fail and billions of high powered money would go down the drain. So they changed the rules and made the decision to reduce the bleeding to a slow drawn out trickle that could take up to 20 years to rectify. Who does the Fed work for Yves? You, me and all the other US citizens? No, you very well know they work for their member banks.

  14. killben

    Everything BS that any of the officials come up with will have one thing in common– DO NOT LET THE HOUSE PRICE TO FIND ITS LEVEL– Allow the godamn prices to fall to a level where buyers will come in. That is the ONLY SOLUTION. But it is a solution which will find no takers as it will bankrupt the banks. The idea is to save the banks from going bankrupt! Let them try , the pilferers!

  15. Conscience of a Conservative

    If you read Dudley’s speech along with his interview in the F.T. the only take should be one of outrage.I’ll include a quote from Josh Rosner in the FT article which follows Dudley’s exerted remarks..

    To prevent a “bail-out” of lenders, Mr Dudley said that creditors should be required to reduce borrowers’ “excess debt” as a condition of taxpayer aid.

    However, in a comment likely to displease investors in US mortgage bonds, the owners of borrowers’ first-lien debts should front the cost of reducing borrowers’ loan balances – rather than unsecured creditors such as second-lien holders and the owners of borrowers’ credit card debt, Mr Dudley said.

    “Mortgage contracts, servicing agreements and commercial code all recognise the priority of secured liens over unsecured liens,” said Joshua Rosner, a housing finance expert and managing director at independent research firm Graham Fisher & Co. “To recommend ignoring legal contracts, and give investor money to banks that own second liens because servicers have under-invested and can’t meet their obligations, is outrageous.”

    1. AleksV

      To make principal reduction fair for all lien holders a match system modeled after the 2MP program would work good.

      All principal reduction granted by the first lien position should be matched percentage wise by the second lien position.

      If you want to go way out there then follow up with all secured and unsecured debt. (credit cards and auto loans)

      That would be a meaningful middle class bail out.

      By the way – little know fact – principal reduction( mortgage ) is the equivalent of foreclosure on a credit report.

      1. Conscience of a Conservative

        In hind sight, the Obama administration’s proposal from two years ago to use bankruptcy judges would have been better. Judges are trained in contract law and would have forced the 2nd lien holder’s write-down. Then if it’s both in the interest of the borrower and first lien holder a principal reduction could be done.

      2. F. Beard

        Who the heck needs principal reduction? Just forbid the banks from any more counterfeiting (so-called “credit-creation) and send bailout checks to the entire population metered to just replace existing credit as it is paid off. It’s only fiat; it’s not like it has to be dug out of the ground like the gold bugs want.

        1. AleksV

          Principal Reduction is not an outrageous idea.

          In fact according to the Center for Responsible Lending the MBS investor recovers more money in a principal reduction modification compared to foreclosure in 90% of the cases studied.

          IMHO The idea of principal reduction is at the end of the day a propert rights issue. It should be a voluntary process.

          You can’t force somebody to retroactively amend a contract. ( unless those contracts hold the down growth prospects of the #1 in the world )

          Bond holders should make a standard process for principal reduction criteria in NPV positive situations with the guidance of regulators and officials in exchange for a global settlement.

          – California Dreaming.

          1. F. Beard

            You can’t force somebody to retroactively amend a contract. AleksV

            That’s the beauty of a universal bailout (including non-debtors); no ammending of contracts is required. Instead, the victims of the banks (everyone) are given the means to payoff their debts or are compensated for years of banker caused price inflation.

  16. D Lavalle

    William Dudley it seems has some conflicts of interest which may shed more light on his recent statements. These conflicts are asserted in an GAO report mentioned in “First Federal Reserve Audit Revests Trillions in Secret Bailouts”
    an article by Matthew Cardinale writing in Global Research.com, August 28, 2011.

    Concluding paragraphs of article:

    “The GAO also found existing Federal Reserve policies do not prevent significant conflicts of interest. For example, “the FRBNY’s existing restrictions on its employees’ financial interests did not specifically prohibit investments in certain non-bank institutions that received emergency assistance,” the report stated.

    The GAO report noted on Sep. 19, 2008, William Dudley, who is now the President of the FRBNY, was granted a waiver to let him keep investments in AIG and General Electric, while at the same time the Federal Reserve granted bailout funds to the same two companies.

    “No one who works for a firm receiving direct financial assistance from the Fed should be allowed to sit on the Fed’s board of directors or be employed by the Fed,” Sanders said.

    The GAO is currently working on a more detailed report regarding Federal Reserve conflicts of interest, which is due on Oct. 18, 2011. “

    Hum..erasing his tracks?

  17. D Lavalle

    Error: “Revests Trillions…” is now corrected to “Reveals Trillions…” Guess I was too hurried getting in my two-cents.

  18. Lambert Strether

    “give underwater borrowers on loans that they have guaranteed”…

    Hmm. Will this include borrowers for whom the chain of title is not clear, due to MERS? And could a free pass on MERS be what this trial balloon is really about?

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