Your tour guide through the housing, finance ‘misinformation’ maze.
NO MORE MORTGAGE PAYMENTS SOON - Get Ready to Default!

Posted on November 4th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage’s Personal

Oh my. Friends, get ready to default on your mortgage…on purpose. The first chatter about the government sponsored loan modification initiative has surfaced from Paul Jackson at Housing Wire and what a disaster it is.
I have been telling you guys for months that a homeowner bailout is coming. But this is unlike anything I expected - it actually encourages mortgage holders of all paper grades to default. This is better than a Pay Option ARM because the monthly payments are zero! Why not default when you get to skip three years of mortgage payments and pay the government back five years from now at FED FUNDS RATE!

The New Bailout- NO MORE MORTGAGE PAYMENTS!
The plan is to FULLY SUBSIDIZE millions of borrower’s mortgage payments for three years. The program is predicated upon the housing market improving within the next 5-years. This is a really bad assumption to make but also could shed some light on the Fed’s inflation expectations. This plan may help borrowers de-leverage temporarily but will not help the broader housing market. It just kicks the default can down the road several years.

“In five years’ time, participants would, in all likelihood, be able to sell their homes or refinance their mortgages at amounts that would allow them to repay the loan.”

This program does nothing about the leading cause of loan default across higher paper grades, which is negative equity. Those severely underwater borrowers that would chose to participate in something like this are the very ones that you want to foreclosure upon in order to clear the market in the first place. The primary reason one would enter a program like this is if you planned on walking anyway. After three years when their mortgage payments kick in again or five when the big balloon is due, do you really think the these underwater home owners will feel better about their situation or more passionate about saving the home in which they have lived for free for years knowing they are another $100k in debt? I think not.

The program will have the unintended consequences of encouraging Prime borrowers to default. What about the person with a lot of equity who can’t get a cash-out refinance due to lack of financing? Instead of selling at what he perceives to be a low, he can default and get a government loan. The plan will pay his mortgage payment, which he pockets at a rate of 1% or less for five years. This is the best cash-out refi plan I have ever seen. He can use the savings to buy a rental of second/vacation home. Or what about that family barely making their payment every month but who would have never defaulted. This gives them an easy way to ease the pain quickly by putting all of their payments on the back end like a Pay Option ARM.

However, when you think about it more closely it is ingenious. This could turn out to be the most direct, long-lasting stimulus plan ever concocted. When you give all those who are over-leveraged and are defaulting on their mortgage no monthly payment for three-years, what will they do with the money? Right - they will go spend every penny pumping the sectors of the economy that were so hot during the housing bubble years. They may also use some to pay down other debt, which of course helps the banks. The government is the strongest creditor out there so the banks are sure to get their payment every month. Hey, maybe the government can pay all three years up front so the banks can book it all at once and spike their earnings report.

The solons are banking on homeowners not saving a penny, which also means they will not be able to pay off the five-year balloon when it comes due. But that little issue is for a different group of regulators to figure out. The Fed’s know that the foreclosure crisis is so large and complicated that this hail-Mary pass may be the only possible ways to ’save’ consumers and revitalize the economy at the same time. Additionally, they are banking on massive inflation to carry home prices higher so in five years the borrowers can sell or refi making this all a gift. Now wouldn’t that be a perfect world!

One thing is for sure. This plan will not directly revitalize the housing market or ultimately save the home owner. This just keeps people spending and in more debt. When it comes to mortgage modifications and setting borrowers straight, unless a pre-emptive mortgage modification initiative involves the re-underwriting of all borrowers with ‘at-risk’ loan types and borrowers using strict full-doc guidelines with 28/36% debt to income ratios and market-rate 30-year fixed mortgages, it does not solve the problem. If you re-underwrite and reduce principal accordingly, the borrower is instantly de-leveraged.

Housing-Boom was a Ponzi-Fraud
They won’t address the consumer de-leveraging the right way because it will be too costly. After being at IndyMac for months and seeing first hand that 90% of the loans are not as originally portrayed on the loan application, Sheila Bair understands that the only way out is a payment subsidization a plan.

They now realize that the entire housing ‘boom’ was artificial brought upon by exotic mortgage loan programs and leverage that were only available for a brief number of years and that will never exist again. Most of the loan programs contained fraud because the way that the programs were structured, they endorsed it.

Ultimate affordability through creative financing made it so everyone in the nation earned a minimum of $150k a year and housing prices reacted accordingly. Unsuspecting buyers who really earned $150k bought homes under fraudulent conditions and are now 50% underwater in their homes, paying the price. They will be asking for a bailout as well. However, they should get one.

Pre-emptive Mortgage Modifications & Wachovia
Many banks are all of a sudden coming out with pre-emptive loan modification plans. Wachovia was one of the first. But from early reports I am getting the program is failing miserably. Apparently Wachovia’s close ratio is less than 10%. This is because they did not estimate how many ‘liar loans’ were really out there or how far housing values have fallen.

Wachovia’s plan involves allotting a predetermined amount to each borrower they call a ’spend’. This is used to buy down the principal balance and/or interest rate to the level it takes for the borrower to qualify for another loan through FHA, Fannie or Freddie. The borrower then must sign a zero-interest silent second for the amount of the ’spend’ that has to be repaid in full in 30-years. However, only after one month into the program they are realizing that ‘nothing is at it seems’, which is what I have been telling you for a long time.

This is because so many loans were initially originated as limited doc (stated income/asset etc/liar loans) or using false paper work, borrowers just don’t qualify for new FHA, Fannie or Freddie loans with the amount of money allotted. Borrowers need much more help than they have provisioned. In the few circumstances in which the amount is enough, values are down too much for it to work. These will be continual problems when they try to fit a square borrower into a round hole. Click HERE for my Wachovia write-up. This is another reason why the ‘free mortgage payment bailout’ may be the only option.

All of this being said, after seeing what the government has in mind, I am convinced that the housing market collapse, price depreciation and foreclosure disaster will be with us for much longer than most think…at least five years!- Best Mr Mortgage

Feds May Be Considering Subsidy on Troubled Mortgages
By: Paul Jackson November 4, 2008
When it comes to the idea that Treasury’s TARP funds may be used to manage a bailout of troubled mortgages, all options are still on the table, and the only thing that most of us really know is that the plans under consideration have been stuck in the negotiating room for some time.

The Wall Street Journal suggested in coverage Monday that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush administration’s last attempt to forestall sliding home prices.”
One plan that may be garnering some consideration is the idea of a federal subsidy for troubled borrowers, perhaps tied to an effort to modify loans. A source near Democratic senator Robert Casey’s office in Pennsylvania forwarded us a copy of a memo on Sunday evening, said to have sparked some of the ongoing negotiations now taking place, although HousingWire could not obtain further details. The memo outlines a proposed bailout that would use three-year subsidies for some troubled borrowers.
The subsidy plan represents the thoughts of Assured Guaranty Ltd (AGO: 11.03 +5.15%) CEO and president Dominic Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier. A spokesperson at Assured confirmed the authenticity of the memo on Monday evening, but stressed that Frederico’s input wasn’t the only advice sought by legislators looking for a solution to the nation’s foreclosure mess.

“We assume others were being asked for their input related to this issue,” said Ashweeta Durani, vice president for global communications at the firm. Frederico “was asked for his personal opinion [on] how the government might improve its response to the problems caused by high mortgage delinquencies,” she said.

Sen. Casey’s office had not yet commented on the memo officially when this story was published. The Pennsylvania Democrat sits on the Senate Banking Committee chaired by Christopher Dodd (D-CT).

The proposal outlines the mechanics of a mortgage bailout that would cost as much as $441 billion, relying primarily on a three-year borrower subsidy that would be repaid in five years, with interest. “Upon receipt of a notice of default on an owner-occupied primary residence, a homeowner could apply to participate in a program under which the government would fully subsidize three years’ mortgage payments in exchange for a note, to be paid in a lump sum five years from receipt of the first payment subsidy, equal to the payment subsidies plus interest accrued at the federal funds rate,” reads the proposal, in part.

“In five years’ time, participants would, in all likelihood, be able to sell their homes or refinance their mortgages at amounts that would allow them to repay the loan.”

Only one of many options
A few of HW’s sources on Capitol Hill suggested the general idea of a borrower subsidy is only part of what is now being discussed among Administration officials and legislators; key Democrats are said by our sources to be pushing hard for such a measure as a way to push bailout dollars directly to borrowers, after what they see as a handout to Wall Street firms needing capital.

The plan is also just one of the options being tossed around by legislators, we were told by a lobbyist on Capitol Hill with knowledge of ongoing negotiations. The newest idea now being considered is one that would see the role of the U.S. Department of Housing and Urban Development further expanded by relaxing criteria for FHA’s newly-minted Hope for Homeowners refinance program.
A report at American Banker on Monday evening suggested that officials are considering a new proposal to reduce the haircut needed to participate in the Hope for Homeowners program; investors must currently take a minimum 13 percent loss relative to current LTV to put a loan into the H4H program (actual losses are likely to be much greater, given the current LTV requirement). The report suggested regulators may move that loss level down to as low as 3 percent in order to encourage greater participation.

As HW reported last week, investors are so far reluctant to participate in the program, and many mid-tier lenders are finding themselves locked out of H4H altogether based on requirements from warehouse funding sources.
No mortgage payments, monetary inflation paying my debts - sounds good?
Just stop paying your mortgage
By Peter Schiff
October 10, 2008

If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government’s landmark $700 billion bailout package has an important message for you: stop making your mortgage payments . . . immediately. Furthermore, if you believe that with some planning and sacrifice you may be able to meet your mortgage obligations, the government’s message is clear: relax, don’t bother.

While angry voters have labeled the package as a bailout for Wall Street, it is more akin to a “Get out of Jail Free” card for anyone who acted irresponsibly during the boom. Here’s why.

Nobody likes foreclosure, least of all politicians. The new law clearly indicates that the government will make major efforts to reduce foreclosures through “term extensions, rate reductions and principal write-downs” of the troubled mortgages that it buys from the private sector. In other words, your new landlord will bend over backward to keep you in your home. The legislation telegraphs this by including a provision that extends until 2013 the exclusion of loan reductions from taxable income.

When a financial institution holds a mortgage, homeowners must live with the fear of foreclosure. Private institutions only have obligations to shareholders. In the case of a defaulting borrower, they will look to recover as much of their principal as possible. If foreclosure is their best option, they will take it in a heartbeat.
The government has no such obligations. Its only goal is to keep voters happy. After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away. Why pay your mortgage if foreclosure is off the table, and if you know that lower payments, and possibly a reduced loan amount, would result? A tarnished a credit rating is a small price to pay for such a benefit.

Unfortunately, this boon will not extend to those foolish individuals who either made large down payments or resisted the temptation of cashing out equity. The large amount of home equity built up by these suckers, I mean homeowners, means that in the case of default foreclosure remains a financially attractive option. As a result, these loans will be much less likely to be turned over to the government.

If your mortgage does become the property of Uncle Sam, the growingly popular impulse to “just walk away” should be replaced by “just stay and stop paying.” No one will throw you out. After a few months, or years, of living payment free, you will get a call from a motivated government agent eager to adjust your loan into something affordable.

To bolster your bargaining position it will help to be able to claim poverty. As a result, if you have any savings, spend it soon, before they call. Buy a bigger TV, a new wardrobe, or better yet, take a vacation. After the hardship of spending all of your refi cash, you probably deserve it. If you have any guilt just remember, Washington argues that consumer spending is the best way to stimulate the economy. Living beyond your means is a patriotic duty.

If you do get the opportunity to live for a while with no mortgage payment, don’t make the tragic mistake of using your extra cash to pay down your credit cards. As the growing level of credit card defaults will soon push credit card companies into bankruptcy, we can expect a similar bailout plan for American Express and Discover Financial. When that happens, expect massive balance reductions for Americans who can demonstrate the inability to pay. The bigger your balance, the greater the benefit.

Taxpayers, however, will not be so lucky. The savvy investment strategists who see the government turning a tidy profit on its mortgage purchases have not factored in the incentives that will discourage nonpayment. The only way the government will be able to profit would be to buy the mortgages at deep discounts to actual loan values. However, if the purchase prices are too low, the plan will bankrupt the institutions it is trying to bail out. On the other hand, if it substantially overpays, which seems far more likely, it will bankrupt the nation.

In any event, as more and more borrowers succumb to the allure and safety of nonpayment, look for the number of troubled assets to swell. This will ensure that the $700 billion merely represents the first installment in what will be a multitrillion-dollar plan. Just as government policies provided the primary impetus in blowing up the housing bubble earlier in the decade, its latest attempt at market manipulation will only result in making a terrible problem far worse.

How will Uncle Sam pay? Create more fiat money, of course! Did I mention inflation lately?

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By Mark Pittman, Bob Ivry and Alison Fitzgerald

Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

“It’s your money; it’s not the Fed’s money,” said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. “Of course there should be transparency.”

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn’t respond to a phone call and an e-mail seeking comment.

$2 Trillion

The Fed’s lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan — without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

`We Need Transparency’

The plan to purchase distressed securities through TARP called for buying at the “lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,” according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn’t require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used “when appropriate.” In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

“We need oversight,” Paulson told lawmakers. “We need protection. We need transparency. I want it. We all want it.”

Banks Resist Disclosure

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. “Transparency is a big issue,” he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

The nation’s biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed’s disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

“I talk to Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market’

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

TARP’s $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks’ troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

The Fed has lent at least $81 billion to American International Group Inc., the world’s largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

“As a taxpayer, it is absolutely important that we know how they’re lending money and who they’re lending it to,” said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank’s rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Ratings Cuts

Moody’s Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed’s collateral “absolutely should be made public,” said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed’s moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

Odds that Wall Street will forgo the payouts are “slim to none,” said John Gutfreund, 79, president of New York-based Gutfreund & Co. and the former chief executive officer of Salomon Brothers Inc. “They’re going to have to be a little bit sensitive because politicians, whether they like it or not, are part of their lives now.”

Year-end payments at the nine banks that received $125 billion from the U.S. Treasury are under investigation by U.S. Representative Henry Waxman and New York Attorney General Andrew Cuomo, who are demanding details on the companies’ compensation plans. Three of the firms, Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., have already set aside $20 billion to pay bonuses this year.

The payouts typically account for about two-thirds of compensation at the biggest Wall Street firms. The bonuses are accrued throughout the year in line with revenue.

“Financial institutions that have accepted federal assistance should be required to face consequences from their earlier bad decisions and cancel those bonuses,” Senator Olympia Snowe, a Maine Republican, said in a statement on Oct. 28.

Poor Performers

Few of the nine companies receiving money from the U.S. Treasury are performing well this year. Only Wells Fargo & Co. has a higher share price, up 6 percent this year, with the rest showing declines ranging from 18 percent at JPMorgan Chase & Co. to 72 percent at Morgan Stanley. State Street Corp. is the only firm to report increased profits. Merrill Lynch has reported five straight quarterly losses.

“The public pressure might mitigate against bonuses at the levels we’ve seen recently, and that’s in sync with the economic issues,” said Fred Joseph, 71, co-head of Morgan Joseph & Co. in New York and the former CEO of Drexel Burnham Lambert Inc. “There will be bonuses this year, but I think they may be reduced by a larger percentage.”

For some bankers, a smaller payout would come as a surprise. More than one-third of Wall Street employees surveyed by a recruitment Web site between Oct. 13 and Oct. 21 said they expect a bigger bonus this year. Two-thirds of the 1,300 people surveyed said they still expect some year-end award, according to eFinancialCareers.com, owned by New York-based Dice Holdings Inc.

`Bonus Season’

Waxman, a California Democrat and chairman of the House Committee on Oversight and Government Reform, sent letters on Oct. 28 to the nine banks that are receiving money in the U.S. Treasury’s capital purchase program requesting details of their compensation plans.

Cuomo sent letters yesterday to the nine companies requesting detailed accounting of expected payments to top executives in the “upcoming bonus season,” including information on the expected bonus pool for this year.

House Speaker Nancy Pelosi of California and Senate Majority Leader Harry Reid of Nevada, both Democrats, urged Treasury Secretary Henry Paulson to put restrictions on severance pay for executives that participate in the bailout.

The nine companies receiving the initial $125 billion from the Troubled Asset Relief Program, or TARP, are Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup Inc., JPMorgan, Wells Fargo, Bank of America Corp., Bank of New York Mellon Corp. and State Street.

Outrage

“Wall Street bank executives are set to walk away with billions of bonuses at the end of this year,” Barack Obama, the Democratic presidential candidate, said in a campaign speech on Oct. 28. “We call that an outrage.”

Citigroup, in an e-mailed statement, said it will cooperate with “federal and state inquiries about our global expenditures for wages, health insurance and other benefits, which we believe reflect compensation best practices.”

The New York-based bank said it will also adhere to constraints on executive pay imposed under TARP. Spokespeople for the other firms targeted by Waxman and Cuomo either declined to comment yesterday or said they will cooperate with the inquiries.

John McCain, Obama’s Republican opponent, told supporters in Miami yesterday that “I’m going to make sure we take care of the working people who were devastated by the excesses, greed and corruption of Wall Street and Washington.”

Joseph, the former Drexel CEO, said companies that don’t pay bonuses risk losing employees who are unwilling to settle for salaries. Salaries in the industry range from about $80,000 to $600,000 a year.

`Serious Exodus’

“A lot of guys wouldn’t want to work this hard just for salaries,” he said. “You’d have a serious exodus from the business by a lot of really talented people — they’d become CFOs of companies, go to firms that didn’t participate in the TARP program, go to hedge funds, or start hedge funds.”

Hedge funds, which have lured top traders from securities firms in the past, may cut as many as 10,000 jobs this year as the industry suffers the steepest losses in more than two decades, according to Options Group, a financial services recruitment and consulting firm in New York. More than 149,000 finance jobs have been eliminated worldwide since the middle of last year, according to data compiled by Bloomberg.

Gutfreund, the former Salomon CEO, said Wall Street executives are likely to find ways to pay bonuses and manage the political uproar.

“I’m sure there are creative ways,” he said. “There are all kinds of devices to cover yourself in terms of paying people.”

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