MBS – The Fed (tax payer) Has to Bailout Foreign Central Banks

Posted on January 2nd, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

“….over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.”

I don’t think this recent move has to do as much about lower mortgage rates for you and me rather Foreign Central Banks and the likes of Bill Gross being in a panic over their holdings. Before this announcement in early December, MBS were not performing well with all-time historic wide spreads over longer dated Treasuries.

As a matter of fact, there is a good chance rates do not come down to the levels being forecast. After nearly a month of constant headlines about the Fed buying Agency MBS, a 30-year fixed today is still around 5.25% at 1 point vs 5.75% prior. A few days in the past month we saw sharp dips down under the 5% level, but that market action was fleeting lasting one or two days and rates quickly shot back up.

Foreign Central Banks have been in the US mortgage market for a long time and arguably did not know what a mess the GSE’s and their lending practices were. Bill Gross, the largest holder of Agency debt outside of the FCB’s, admittedly bought a large portion of his present position front running the Fed knowing full well the risks in owning mortgage-related debt. Until the Fed made its recent announcement, all Agency debt owners were feeling a tremendous amount of pain, as MBS’ had been kicked to the curb in favor of UST. Wars have been waged for much less than seeding an FCB’s balance sheet with hundreds of billions in toxic securities.

Drastic times call for drastic measures and printing, in order to buy MBS, was a real ‘Hail Mary’ move. But I suppose it had to be done given that at the end of November, the mortgage scene was looking bleak. 10-year Treasures were holding below 4%, the short had been bid to zero and mortgage rates were rising as the government refused (and still does) to issue that illusive ‘explicit’ guaranty. Currently, with the GSE’s in conservatorship Agency MBS have an ‘effective’ guaranty.

It is no doubt that the FCB’s, with the global crisis reaching deep into their balance sheet’s as well, were not too thrilled about owning relatively illiquid GSE mortgage debt without a ‘Full Faith and Credit’ backing. Especially considering how the sector worsens monthly as home prices tumble, defaults surge and the nation is in the midst of one of the nastiest recessions ever. To top it off the solons (ex-Ben) that created all of the ‘plans’ leave office and the fate of the GSE’s and the paper they back is anybody’s guess. Adding another $5 trillion in mortgage guarantees on top of the near $9 trillion in existing backing could do some real damage to the US sovereign debt rating.

GSE MBS used to be relatively liquid with predicable durations. But now with values down creating epidemic negative-equity across America, defaults surging and unemployment rising, nobody has any clue how long these loans/MBS will be on balance sheet. Very few home owners keep a loan for 30-years that’s for sure. If they don’t or can’t refi then death, disease, job-loss etc will get them over time. Very few MBS holders likely ever thought they would be in their positions as long as many presently even have. I can promise you that China and Russia do not want to be landlords of a bunch of over-leveraged, unemployed American’s.

Who would want a bunch of Agency MBS after everything that is now known about all of their Alt-A and Subprime holdings, terrible risk management and massive house price depreciation that results in significant losses every time a loan is foreclosed upon? ‘Face value’ surely doesn’t mean what it used to now that the collateral underlying the securities is down 25% to 75% over the past 18-months depending upon where the properties are located. Most Agency MBS in existence today are time bombs.

Foreign Central Banks Pare Agency Debt –Uncertainty May Cloud Fannie, Freddie Note Sales in First Week of New Year — By PRABHA NATARAJAN

In a sign of the uncertainty weighing on mortgage companies Fannie Mae and Freddie Mac, foreign central banks continued to trim holdings of U.S. mortgage-related debt.

This comes as the two nationalized firms, which together account for about half of the $12 trillion U.S. home-loan market, are slated to sell debt issues in the first week of 2009.

Data from the Federal Reserve Bank of New York published Monday show foreign-central-bank holdings of debt related to the mortgage companies, including debt sold by the Federal Home Loan Bank system, stood at about $819 billion on Dec. 24, down from $833 billion on Dec. 17.

Foreign-central-bank holdings of this debt, which includes bonds sold directly by the firms and mortgage-backed securities they guarantee, reached a peak of nearly $986 billion in mid-July, after the Treasury first asked for the authority to extend its credit lines to these firms. Click link above for more…

So, what is the most efficient way to help our FCB buddies sell their trash MBS? Right…get the US taxpayer to buy it. Print money and put a bid under MBS for the next year with announcements and selective buying of $5 billion here and there whenever the market gets weak. Then the FCB’s and Gross can sell into artificial strength and buy US Treasuries with an explicit guaranty.

Purchases will be financed through the creation of additional bank reserves.”

“The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.”

“The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.”

Maybe PIMCO, as one of the four chosen investment manager and largest owners of GSE MBS, can start paying its dividend on all of its funds again soon. If this is not ‘the fox in charge of the hen house’ I do not know what is.

On a higher level, this approach could kill all sorts of birds with one stone unless the parties involved don’t follow through with the Treasury buying plan and decide to sell those into strength too. That could put the US in a position where the Fed is the lender of last resort printing money like crazy to buy everything — that would be bad news…Doh!

If this is indeed the plan, the big question going forward is if the buy pressure from the Fed and all of the lemmings chasing the Fed is enough to offset the sell pressure from the Foreign Central Banks. If buy and sell pressure are about equal, obviously MBS and rates tread water. If not and people smarten up to what is really happening and panic out of MBS, then rates go up quickly. That is of course unless the Fed cranks up the tax payer printing press and buys more they announced, which is a highly probably outcome.

After nearly two-years of misinformation and games why don’t they just be honest this time around…

To ensure the system stays together, wars are not waged and mortgage rates don’t shoot to 20%, the US taxpayer is being called upon to clear the balance sheets of Foreign Central Banks and investors.  These parties which did not understand that there was never an ‘explicit’ guaranty and trusted that what we were selling were not balance sheet nuclear bombs are needed this minute to fund our book.-Best Mr Mortgage

Another look at this from my buddy Rolfe at Option Armageddon: Self-Bailouts: Nice Work if you can get it

More Mr Mortgage

46 Responses to “MBS – The Fed (tax payer) Has to Bailout Foreign Central Banks”

  1. Foreign Central Banks should deal with their own poorly made decisions. U.S. taxpayers are in no position to do any bailing since we are already more than broke. Don’t you think this craziness will eventually negatively affect the credit rating of the U.S.?

  2. Of course we will have to make it right to the FCB’s. My argument that the housing bubble was in fact silently supported as additional monetary stimulus above and beyond what the Fed was able to do with dropping interest rates alone.

    The housing bubble moved economic support from government spending to foreign supplied stimulus via the purchase of MBS. Remove the MEW and jobs and fees created that was a result of the bubble and we had declining GDP.

    Hard to sell America as a place to invest if it is shown to be in decline. We also see that a lot of the Western world had these same housing bubbles and I will talk more on that later.

    In short, the housing bubble may not have been “just an accident”, but a means to mask our shortcomings in the new global marketplace.

  3. “In short, the housing bubble may not have been “just an accident”, but a means to mask our shortcomings in the new global marketplace.”

    Ding! Ding!

  4. “Maybe PIMCO, as one of the four chosen investment manager and largest owners of GSE MBS, can start paying its dividend on all of its funds again soon. If this is not ‘the fox in charge of the hen house’ I do not know what is. ”

    I think it’s hilarious that PIMCO offered to “manage” the bailout for no fee. What a bunch of civic-minded, generous souls! Methinks I smell a rat.

  5. of course IT WAS NO ACCIDENT and that has been my point ALL along !!

  6. Is there any WONDER that the FED and banks are refusing to say where this $350 BILLION in bailout money has gone???

    I think they are funneling TAXPAYER cash directly to the FCBs, who will drop us like a hot potato if we don’t!!

    Can you believe we have allowed ourselves to get so dependent on foreign financing to even EXIST??? This is such a collosal outrage, I don’t even know where to begin.

    WHY is half of our government and the FED not in JAIL right now?? They have failed us so completely, and sold out our beloved country.

    Why are the streets not filled with protesters in every city across AMERICA?!!!!!

  7. Did anyone happen to notice that New Year’s celebration was very subdued this year? The general noise level seemed to be about 25% of normal in my neighborhood. So I asked around and got reports from 4 other cities in my area. They all agreed that it was much quieter than normal. Anyone else observe the same?

    It reminded me of a story I read along time ago about a man who heard the laugh of a sailor coming across the water. A laugh not heard in years. He took that laugh as a sign that the economy had turned and used that as a signal to loan money again. This New Year’s was not that signal.

  8. This reeks of moneyMBS laundering. Bill Gross makes me want to puke. Too bad that these stinky assets are still smelling even worse with every passing month!

    @BertDilbert,

    I’m used to hearing firecrackers, roman candles, pots and pans, and people shouting at midnight on New Year’s Eve around my place. This year it was dead silent.

  9. I tend to agree with David Spurr in that US debt has become nothing more than a con game:

    The reason why the Treasury is supporting all these entities is that they cannot give any credence to the theory that the USA might let those major entities fail and create problems for the counterparties. Why? The perceived increase in default risk would bring into question the likelihood that the USA might actually default on its own debt. I think that most of the bailouts that we’re witnessing are being done to demonstrate to the rest of the world that we will not let default happen. Counterparties are being kept whole. If counterparties were forced to take actual losses as entities (AIG, BS, FNMA, FRE, MER) were allowed to fail, those same counterparties would become skeptical of the USA and the foreign appetite for US debt would start to shrink.

    The USA needs to continue to demonstrate to the world that they will not default at all costs. As soon as the world perceives increased risk of default, the game is over and we will not be able to sell our debt. We will not survive as a country at that point. It’s a terrible and scary situation.

  10. David said “WHY is half of our government and the FED not in JAIL right now?? They have failed us so completely, and sold out our beloved country.”
    The answer to your question is simple David. Because no one is forcing them to tell THE TRUTH! If that were to happen, the entire U.S. finacial system would be devistated. Although I believe this will be the only way out..Painful to many , but at least the slate would be clean and new beginnings could emerge. Instead the leaders will attempt to keep the plates spinning for as long as they can…very sad indeed. As the wealth of the U.S. is transferred, so will the standard of living be diminished. Argentina anyone??

  11. Welcome to the new year everyone. My preditions:

    1) Housing market will finally recover.

    2) Mr. M closes his website down becuase the “sky will no longer be falling.”

    It can’t last forever folks!

  12. “I’m used to hearing firecrackers, roman candles, pots and pans, and people shouting at midnight on New Year’s Eve around my place. This year it was dead silent.”

    – Did any of you wonder – back as far as the mid 90’s, that something in this economy wasn’t quite right?

    – Did you wonder about the level of ‘consumerism’ all around you? The cars, the bling, the ‘stuff’? And it seemed no one had to ‘wait’ for anything? And Heaven forbid, save for anything.

    – Did you look askance when you first heard the term ‘consumer spending’ as general metric of how the economy was measured – which shortly morphed into metric #1 for GDP…?

    – Did you marvel in awe (or get a sinking feeling) when you saw housing prices go geometric year after year, until you simply accepted the fact that you may never own a house, or probably wouldn’t want to anyway, for thought of having to face $3k every month for years on end?

    If you answered in the affirmative to any or all of the above inquiries, then you know why the pots were silent at midnight last New Years eve.

    Most understand that something is horribly amiss in the land of the Free. Worse, their senses are telling them that this is nothing like they have ever sensed before and they are ill prepared to weather it.

    It is important from a historical perspective to maintain a sense of direction during a time when the Sh!t is flying in all directions. What we are experiencing right now is not the result of a few years of ‘bad management’. This phony economy;
    Housing, credit cards, auto loans, bling, stuff, no savings, etc., is a mind set that has been solidified over many years.

    It is a mindset of spend now, save later (or never). The essence of which has been practiced in government, taught at universities and passed down from parent (by way of example) to children of almost 30 years. This is not the end of a ‘housing’ bubble. This is the end of a paradigm, and an empire. We will be fortunate in if in the course of the next 4 years, to even still have a ‘Republic’. And that, you can take to the vault with 100 oz. of gold…

    Peace –

    C.C.

  13. I have been saying it since day one, but nobody has been listening… Vote each and every incumbant OUT OF OFFICE next election. If you want REAL change and seriously want to be heard then “Just do it”!!! It is easy really… just tell everyone you know to do the same and based upon the actions of “Bailout” America by OUR Government AGAINST our will to the tune of $2 Trillion to date that our children will need to pay for, we have plenty of reasons, do we not?

    Enough already… please! We need to use our voting rights to FORCE CHANGE!!! There really is no other way to do it. The machine is too powerful to be affected any other way. We have gotten to weak as a nation and too fat and bloated to STAND UP for ourselves. Now that needs to change my friends!!! Stand and BE HEARD!!! Any way you can and every chance you get, you must SPEAK UP!!! I beg you too WAKE UP AMERICA!!!

    Vote Each and Every Incumbant Out of Office in 2010!!! PLEASE!!!

  14. M. Mortgage,

    Thanks for your hard working and happy new year.
    I have a question, given the fact that home equity loan at 3% interest rate, will a lot of above water people refinance and invest in current market?

  15. C.C.

    Well I always kind of thought it was odd that we were shipping 17,000 miles of empty containers from west coast ports every year. They come in at load line and sail with excessive freeboard.

    They shipped us stuff and then loaned us the money in which to buy it with. But that was not enough, they felt inclined to “invest in America”. What were they thinking? Didn’t they notice that full containers came in and empty containers came out? Didn’t it raise a red flag when Bush got elected for a second term?

    **********

    Hey we need an “Aloha” New Years report, south side valleys need to check in! (No Waikiki report lol) We know you are firecracker fiends over there. How did it compare to previous years?

    We need the Hong Kong report, London, Johannesburg, Madrid, Bombay, Shanghai, Queensland and Whangarei… Whatever

  16. The joys of globalism. Total and somewhat unified corruption. Decoupling is a joke. We’ve never been more coupled.

  17. Ring your DC Congressional Rep’s DC offices OFF THE HOOK!!!

    Demand accountability NOWWWWWWWW or your kids will pay dearly!!

    http://www.house.gov

  18. dick your name speaks for itself> you sould hook up with head you guys would be a great comedy team>>>>>>>>>

  19. Interesting research paper from the Boston Fed. Basically concluding that principal reductions don’t work (i.e., aren’t cost effective) except with subprime multi-family loans where likelyhood of foreclosure is extremely high (~66%).

    Excerpt:

    “We conclude by examining options for mitigating the crisis. We focus on proposals to
    reduce principal balances on mortgages as a way to reduce foreclosures. We argue, following
    Foote, Gerardi, and Willen (2008), that evaluation of such proposals must balance
    what we call Type I error, failing to assist people who need help, against Type II error,
    providing costly assistance to people who do not need help. In the data, for reasonable parameters,
    Type II error dramatically exceeds Type I error, making most principal reduction
    schemes economically infeasible.”

    Here’s the paper (PDF warning):

    http://www.bos.frb.org/economic/ppdp/2008/ppdp0806.pdf

  20. Coast is Toast, yeah but was it not the Boston Fed study that said that Neg Am would not walk lol.

    YO! Hot from Dr. Bubble, CME Housing futures showing 2009 at a hard year and flat to 2013…. The hot money says no rush…

    http://www.doctorhousingbubble.com/wp-content/uploads/2009/01/case-shiller-futures-data-california.png

  21. Wow, it really looks like principal reductions are NOT cost effective for the lender, at least in urban areas.

    Here it is in spiffy table form:

    Table 6: Benefits to a Lender of Principal Reduction. Type I error measures the cost of not
    assisting borrowers who need help. Type II error measures the cost of assisting borrowers
    who do not need help. The net gain to the lender, as shown in Section 6, equals the difference
    between Type I and Type II error. Benefits are measured as a percentage of the original
    loan balance.

    Before After Principal Reduction
    Property HUD Equity Prob. Equity Prob. Errors Net
    Type Status in % of Forc. in % of Forc. Type I Type II Gain
    ————- ——– —— ——– —— ——– —— ——- —-
    Single-Family Prime -20 4 10 2 0 26 -25.8
    Multi-Family Prime -20 17 10 3 3 23 -19.3
    Single-Family Subprime -20 33 10 9 5 18 -12.7
    Multi-Family Subprime -20 63 10 13 11 10 1.0

  22. oops, not-so-spiffy table with proportional spacing fonts!

  23. >> Coast is Toast, yeah but was it not the Boston Fed study that said that Neg Am would not walk lol.

    link please.

  24. Coast is Toast, here is a blurb, you can google the title of the report….

    Here is a new research paper with some important conclusions about the percentage of foreclosures among homeowners with negative equity. From Christopher L. Foote, Kristopher Gerardi, and Paul S. Willen at the Boston Fed: Negative Equity and Foreclosure: Theory and Evidence

    As a consequence of the recent nationwide fall in house prices, many American families owe more on their home mortgages than their houses are worth—a situation known as “negative equity.” The effect of negative equity on the national foreclosure rate is of obvious interest to policymakers, but this effect is difficult to study with datasets that are commonly used in housing research. In this paper, we exploit unique data from the Massachusetts housing market to make three points. First, during a specific historical episode involving a downturn in housing prices—Massachusetts during the early 1990s—less than 10 percent of a group of homeowners likely to have had negative equity eventually defaulted on their mortgages. Thus, current fears that a large majority of today’s homeowners in negative equity positions will soon “walk away” from their mortgages are probably exaggerated. Second, we show that this failure to default en masse is entirely consistent with economic theory.

  25. What’s not so funny is that no other Nation is in any position to take over the reserve currency status while US taxpayers are made to cover (willful) mistakes as the dollar loses more and more value with every handout and US debt holders get the shaft no matter which way they turn.

    Derivatives’ projected gains will have to be covered with long term taxpayer’s debt obligations as the fantasy land printing press runs to avoid our worst nightmare.

  26. Thanks BertDilbert, I found it.

    http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf

    More or less says the same thing. Loan workouts applied en-masse (e.g., as a matter of public policy) are not cost effective. The problem (according to the paper) is that you end up helping people who weren’t gonna default in the first place.

    “Our empirical
    and theoretical results imply that the number of borrowers who would qualify for an
    assistance policy can be far greater than the number of borrowers who truly need
    help. In other words, the costs of forgone income from borrowers who would have
    made payments often exceeds the benefits of fewer foreclosures.”

  27. Cosat is toast… Now tell me something, Can you apply this to some kind of situation….?

    “The way the credit markets work through the banking system, I worry about asset price increases in a relative price sense–relative to goods prices–when those assets are financed in ways that make those price rises unsustainable. And though I know that a second derivative can be positive for a while, I also know that the second derivative for nothing in the universe is positive forever. It must always go to zero if not negative. So I worry about the second derivatives of asset prices being positive–financed by the banking industry or pension funds or life insurance companies–and the prices getting to unsustainable levels. When that inevitable point comes where the second derivative must go to zero or negative for asset prices, people will find out that they’ve made a mistake and then we will have a credit crunch. We will have a debt/deficit cycle that becomes a problem.”

    No shit. That is what I am saying, that this could not have been an accident. This is the kind of stuff they talk about every month when the Fed meets at the Board of Governors. This is exactly what we had happen….

    I just pulled this quote from a 1999 Oct 5th transcript of FOMC PDF page 60, document page 58. They talk like this all the time so how could they miss a housing bubble? Impossible IMO.

    http://www.federalreserve.gov/monetarypolicy/files/FOMC19991005meeting.pdf

  28. Coast is Toast,

    You forgot this blurb from your cited paper: “Many commentators have argued that this solution Removal of negative equity) is so obvious that one wonders why lenders do not implement it on a large
    scale. In the following discussion we show why lenders have not engaged in such a policy as a matter of course, but we also argue that for multi-family properties in the inner city, such a scheme might work.”

  29. “1990s—less than 10 percent of a group of homeowners likely to have had negative equity eventually defaulted on their mortgages. Thus, current fears that a large majority of today’s homeowners in negative equity positions will soon “walk away” from their mortgages are probably exaggerated.”

    1. Didn’t house prices increase in the 90’s (in the aggregate)?
    2. I’d argue that there are a helluva lot more people significantly deeper underwater than in the 90’s. Exotic mortgages were not nearly as prolific in the 90’s. Saying that the 2 markets are analogous is ridiculous.

  30. “In the third quarter of 2008, Freddie Mac performed approximately 8,500 loan modifications. The
    majority of the modifications did not include concessions, but rather involved adding past due amounts to
    the loan balance or extending the term of the loan.”

    And we’ve seen just how effective these MODs have been, haven’t we? The empirical data suggests that absent principle reductions, previously MODed loan will re default.

  31. “We assume a borrower from the 2005 vintage with 20 percent negative equity, and we assume that prices will be flat indefinitely going forward.”

    An extremely flawed assumption. Mr Mortgage provided a chart just the other day that shows the above assumption to be ludicrous.

  32. “We assume that the cost of foreclosure, is 30 percent of the original balance of the loan, which implies that if the borrower has 20 percent negative equity, then the lender will recover 50 percent of the loan in foreclosure.”

    Orig Loan: 500K
    cost of for:150K
    Neg EQ (20%):100K
    Recovery = 25OK

    OR

    Reduce principle (eliminate neg eq): 4OOK and continue to service the debt! Take a 100K loss now instead of a 250K loss later (if you can even liquidate the property!)

    I don’t claim to be an economist, but it sure makes sense to me to NOT have to foreclose on the borrower based on the Boston FED’s example.

  33. The over-riding concerns seems to be, “we might help someone that doesn’t need it” (type 2 error). Worse, they draw their conclusions based on a host of flawed assumptions. So instead, it makes more sense to help no one. Brilliant.

  34. “Thus, we argue that negative equity does play a key role in the prevalence of foreclosures, but not because (as is commonly assumed) it is optimal for borrowers with negative equity to walk away from affordable mortgages.”

    The operative word here is “affordable mortgage” aka 28/36 DTI. Again NOT analogous to the current circumstances.

  35. Just a few points to the research:

    1- it refers to a favorable comparable of remaining homeowners while underwater waiting for the market to return versus renting an apartment, today it is definately cheaper to rent and the market will not return.

    2- it refers to liquid wealth of underwater homeowners to carry them thru, today most homeowners underwater does not have liquid wealth.

    3-it relies on the social stigma of defaulting to prevent homeowners from doing so. it was such a small percentage.

    4- it is comparing a time period of when foreclosures nationwide were less than 1 % when today they are over 6% and climbing.

    5- it is comparing that mortgages have to be both unaffordable and have negative equity to have a foreclosure, when in 1991 most mortgages in the research were affordable except for life situations (death, divorce) Today with all the adjustables, alt 1, subprime there is no comparision.

    6-it is comparing a temporary decline of having a mortgage under the value of the property for a limited amount of time versus more than half of the life expectancy of the mortgage to just equal the mortgage and value to be the same

    7- it only addresses the likelyhood of defaults on borrowers experiencing both problems in life of why they can’t afford the mortgage and having TEMPORARY negative equity and it has over 6% foreclosures.

    This does not take into account liberal underwriting nor any “programs”
    only past “normal” reasons for defaulting, job loss, divorce, death, illness etc.all of which accounted for less than 1% of mortgages issued.

    8- the main difference is temporary decline (of less than 10% according to Case-Shiller) versus permanent decline for the fiqures to work the decline must be temporary or appear mentality to be so.

    9-the point of the research was two fold, one to reinstate property values to its peak and two is to aid the holders of said mortgages to continue to earn their profits.

    10- look at their scenario’s involving a 10% decline in values versus a 5% decline with it appreciating immediately. It states that even after prices STOPPED declining foreclosures continued for a period of years.It took 6 years in a healthly economy to recoup the “loss”

    What would their research projections show:

    if they estimated over 20-25% of homeowners are underwater?
    there are over 2 Trillion dollars of outstanding adjustable mortgages waiting to reset?
    or home prices have already decreased over 25%? and estimated to decrease another 10-50%?

    Lets compare apples to apples, nuts to nuts, but we really can’t. Since there are NO previous housing situations in todays economy except for the Great Depression and Japan’s lost decade which are similiar not the same, for which over 90% of homeowners equity was lost.

  36. BertDilbert:

    Hello, could you please comment on my last post under “low mortgage rates”.

    I believe I found the “grease”, Admin responded with the “grease”.

    If cram-downs/principal reductions are allowed under bankruptcy judges, there will be a qualifying ratio used for homeowners whether underwater or not.(reasons for bankruptcy, underwater, adjustable rate mortgage, loss of income, over burdened with other debt, these are just a few I can think of besides for consumer protection against the actions of the deflationary cycle).

    It will definately cost more (loss) to the banks/investors if judges are allowed to re-underwrite the principal writedowns based on borrowers income regardless of the value of the property. Median income versus median house price, not taking into account the over-priced homes that loss only 20-50% of its value so far nor the borrowers that purchased over what they should have, they will be rewarded now.

    I hope your New Year was good.

  37. David Said:
    January 2nd, 2009 3:40 pm

    It’s called a circle jerk.

  38. The Fed does not understand today’s market, it is obvious.

  39. Do the Boston Fed seem to be a bunch of pinheads, corrupt, liars OR ALL OF THE ABOVE

  40. Two issues with foreclosures I would be interested in hearing more about:

    1) Mortgage service companies and their role in pushing for foreclosures.

    Even further removed from the origination company, MBS holders, and trustees are the mortgage servicing companies, which are hired to collect payments and perform the day-to-day operations necessary to administer the loan. These companies will also be compensated regardless of the success or failure of the loan, and so have little incentive to help homeowners apply for loan modifications or otherwise save their homes.

    2) Haven’t a lot of the losses already been written off by the big banks when they bought the failed banks? The big banks bought assets at pennies to the dollar and also, thanks to the Treasury dept. changing tax laws, were able to write off losses for their taxes on the losses of the failed companies that they were buying. I’m not sure it’s in the BofA’s, JP Morgan’s, etc. interest to spend the time and money to refinance or take a principal hit today rather than letting the houses fall into foreclosure, especially if there is a (good) chance that the US government will pay for the losses through bailouts, giving money to the homeowners, etc. I see no real incentive for the banks to make the effort to renegotiate any of the mortgages today.

  41. Not only can banks write off acquired bad debt (tax rule changes) they can travel back in time and get refunds using the acquired bad debt against previous profitable years.

    Principle write downs in mass will send the derivative world into a death spiral. Attaching a rider for a balloon payment for the difference between the original and new appraisal during a refi is the best that be hoped for even if the new mortgage is a 40yr term.

    Just stall techniques, waiting for the consumer to start spending and buying again. It’s gonna be a long wait.

  42. Wow, that got some responses.

    Regardless of the low opinions of the Boston Fed here, it’s papers like these that form the basis for public policy. Like it, or not.

    I personally hope that the Government does not adopt a policy of forcing banks to do principal reductions (or any loan modifications, for that matter). It rewards imprudent behaviour, punishes prudent behaviour, and creates an enormous moral hazard going forward.

    If private banks decide to do loan mods (with the approval of their investors, without coercion from Uncle Sam, and without the backstop of copious taxpayer dollars), then I have no problem with that. However, private banks and MBS investors — when free from Government intervention — don’t seem to like doing principal reductions. Maybe it really isn’t as cost effective as people here seem to think? To quote again from the Fed paper:

    “Type II error is precisely the reason that lenders rarely ever engage in principal reduction.
    One lender summed it up this way, “We are wary of the consequences of being known as
    a bank that forgives principal…we have not to date forgiven any principal.””

    Remember, 31% of the nation rents, 26% own their houses outright and a substantial percentage have LTVs less than 50% and thus are in no danger of being underwater. If you fall into one of these catagories (i.e., you’re in the vast majority), you might want to express your feelings about this matter to your representatives.

  43. The Coast is Toast & Innocent ByStander:

    You guys have it.

    The wild-card in the equation coming on strong this year is going to be unemployment. Wide-spread unemployment, as a result of both corporate & consumer belt-tightening (remember that GDP metric of 72% ‘consumer-spending’…?), will likely spread into geographic areas heretofore unaffected by the housing Fiasco.

    Now keep this next ‘metric’ in mind going forward, because you’re going to hear a lot about it in the future:

    In areas of the U.S. where there is sufficient industrial capacity to manufacture goods and export them, there will be vitality and home-price stabilization. Everywhere else, there is going to be wild volatility – with the trend arrow in a terminal downward position.

    Why?

    Because the ‘consumer’ is broke. And the trend towards savings and debt reduction has already started – i.e., there is not a high likelihood anytime soon, for the consumer to ‘re-ignite’ his fire for frivolous spending at the mall or car dealership…

    Our ‘creditors’ meanwhile, are sitting on $Trillions of our debt-dollars and have an itchy finger to start spending some of those dollars on their own domestic economies – i.e., their collective appetite to invest(?) in our T-bills will likely diminish – perhaps rapidly, in the near future leaving us with – what? Consumer spending…?

    This is reality. Mortgage finagling of any sort isn’t going to mean squat if you are unemployed. Is the picture of a ‘circuit’ starting to come into view?

    And lastly: Don’t you loath being referred to as a ‘consumer’? Like a Pac-man – who eats everything in his path, but produces nothing??

    Hey! That would be our (now Defunct) F.I.R.E. economy!!

    Express our thoughts to our ‘representatives’…? We have friend. We have. And will continue to do so. At the same time, realize that the result of the last election cycle was basically a demand for ‘change’ (The remedial translation of which means: More GOVERNMENT), unfortunately.

    It’s always has been and always will be, an uphill battle, but traction is being gained as we speak.

    Peace –

    C.C.

  44. The Coast is Toast, you said that a reason lenders do not forgive principle may be because they are not as cost effective as people here think.

    That is not the reason at all. It can be shown very easily, as many here have already done, that principle reductions allow for far lower losses to the lender and provide a far better chance of not incurring re-defaults down the road.

    The reasons are few but they are big ones including setting precedence being the biggest. They also fear a run on the bank kind of situation in terms of people who don’t need one will stop paying their mortgages and then ask for one anyway. These fears can be alleviated through legal cram downs because the public will except judges ordering them over lenders willfully giving them. This however proves to be more costly to the lenders in the long run, so lenders will in my opinion, eventually start to do them before it comes to that. Remember the lenders know full well which homeowners are candidates for bankruptcy long before they actually are. This gives them the opportunity to try everything else first before caving and doing a principle write down anyway in the end. It is the homeowners who will force this issue through walk aways and standing their ground on modifications that do not provide debt relief through principle reductions. We are already seeing this occur through the limited number of people signing up for modifications in their current form.

    I think the lenders worries are just that… worries. There is no data that suggest people will do what lenders fear. People on the whole simply do not act in this manner. I am underwater as are many others I know, but nobody I know would stop paying their mortgages in hopes of a principle write down. First of all many peoples credit is stellar so why risk ruining that. Secondly most can afford their home comfortably and are not looking to sell. Thirdly it would not be worth it to go through all of that trouble to most. Lastly when looking at the numbers many of these folks would not qualify anyway so it would all be a waste of time in the end with a lot of risk and no reward. I just don’t see it, and I think lenders are just stalling to get the most they can before taking losses in this manner.

  45. >> you said that a reason lenders do not forgive principle may be because they are not as cost effective as people here think.

    Well, actually I just questioned that assumption. I didn’t out-and-out refute it. That said, I do have a sneaking suspicion that it isn’t the big cost saver that its proponents think it is.

    >> They also fear a run on the bank kind of situation in terms of people who don’t need one will stop paying their mortgages and then ask for one anyway

    Doesn’t this effectively fall under the Type II error category? This is a HUGE issue as the paper points out.

    >> These fears can be alleviated through legal cram downs…

    Cramdowns have one advantage of at least SOME discrimination in the decision to grant principal writedowns. I’m guessing it’s similar to a judicial foreclosure in that any assets outside of the essentials (primary residence, car, and retirement accounts, etc.) will be tapped out before principal reduction is granted. So it will be harder to game the system. But… other than that, cramdowns are a disaster. If done on any real scale, they will cause private lending interest rates to go through the roof (lenders will need to assign a substantial premium to the new risk of future cramdowns). Essentially, the only mortgage lender will be Uncle Sam. Not something I want to see happen.

    >> I think the lenders worries are just that… worries. There is no data that suggest people will do what lenders fear.

    You obviously don’t live in Southern California. My La-La Land compatriots will game the system like there’s no tomorrow. And no, I’m not proud of that.

  46. Coast is Toast

    That was exactly my thought. If cram down’s take center stage then the risk of cram down has to be factored into all future loans which means rates are jacked or you will need to buy cram down insurance when you get the loan lol. Each right given to the borrower is made up on the other end in higher interest. There is no free lunch.

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