The Engine of Doom (or: How to Fleece a Generation)

If you thought that Mezzanine CDO's and other "structured finance" vehicles behind the Wall Street/mortgage mess involved some sort of sophisticated financial geometry conceived in the minds of rare genius incubated in places like MIT, and beyond the grasp of those with state university credentials, forget about it.

It was all just a con game, and not even a very sophisticated one at that.

From Michael Lewis' most recent, most excellent piece on the subprime mortgage securitization debacle:

“This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities.

Got that? Send a stack of mortgage bonds to a rating agency, and no matter how crappy and likely to fail they were, they'd be graded on a curve, the best of the worst would become AAA.

All of this. ALL OF IT, of course was built upon individual borrowers naive enough to fill out a loan application and sign the papers for a sub-prime loan that they had no hope of understanding or affording, the sketchball lenders who pushed this trash upon their customers, and the investors that bought what Wall Street was selling without the first clue of what they were buying.

And those of us who did not participate?  Those that bought a home they could afford, or never trucked in sub-prime garbage? 

We are the suckers at the table in a game we never knew we were playing. A game that was rigged from the beginning to do nothing other than suction money directly to Wall Street at the highest posible rate of flow, at all costs.

And now, they step aside, and we pick up the mess.  Welcome to the bailout folks.

11/12/08 at 08:55 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Sub-Prime

The Giant Pool of Money

We've been swamped with the demands of our business life the last week (a good thing) so posting has been sparse - we'll be back on the crest of the blogging wave by next week.

In the meantime, amuse yourselves with this excellent podcast from Chicago Public Radio on the housing/mortgage mess:

The Giant Pool of Money [this americanlife]
What does the housing crisis have to do with the collapse of the investment bank Bear Stearns? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

05/14/08 at 10:42 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Sub-Prime

Pawlenty May Veto Foreclosure Moratorium Bill

From the Star-Tribune, reporting that governor Pawlenty will "probably" veto the Foreclsoure Moratorium bill currently winding it's way through the State Legislature:

Pawlenty said he is concerned about the potential effect on credit for the entire Minnesota mortgage market.

"Even though the concept is well-intentioned, it could have some pretty significant unintended consequences for the 98 percent of the credit market that are not in foreclosure," the GOP governor said.

For those unable to read between the lines here, what the Governor is getting at is this:  If Minnesota is going to pass legislation that invalidates a lender's contractual right to foreclose, these same lenders might not be so eager to issue mortgages around here, or at the very least may charge some Minnesota borrowers a premium - call it a Legislative Risk Adjustment - in the future.

To be fair, the moratorium targets owner occupant, sub-prime borrowers, so it remains to be seen whether a bill like this will meaningfully impact the pricing and/or costs for the "other 98%" of borrowers, but it is a real risk.

Also, the proposed moratorium may have costs beyond "higher future rates."  That's because interest, penalties, and tax bills continue to accrue, and are not forgiven (only deferred) under this bill.  The borrowers are still on the hook after the moratorium expires - and precious few will be able to pay then what they can't pay now.

The end result is after the moratorium expires, the lender and/or the borrower will be stuck with an even larger loss.  That may well have costs for us all in the form of a direct taxpayer bailout, of some form or another, at the State or Federal level.

In that sense, what's being billed as a "solution," just isn't. All we are really doing is deciding who to foreclose on now, who to foreclose on later, and increasing the cost of the end game.
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Proposed Freeze on Foreclosures Runs Into Obstacle [Strib]
Previous Coverage of this topic at BTM:
MN May Pass Nations Strongest Foreclosure Moratorium [BTM]
More on Foreclosure Moratorium [BTM]

04/03/08 at 10:00 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Foreclosures, Housing Market Politics, Minneapolis, Sub-Prime

Hope Now: Not Much Help

It appears that our skepticism over the much ballyhooed Hope Now Alliance (the doomed from the start master plan to save millions from foreclosure) was well founded.  NYT reports on the results:

Kenneth Goodman, a homeowner in Fontana, Calif,. said he did not have a good experience trying to get help through Hope Now.

Mr. Goodman, 53, said he had called Hope Now three times in recent months because he was struggling to pay the mortgage on his two-story tract home. The first time he was referred to a mortgage escrow company. The second time, “I got someone oblivious to everything,” he said. The third time the counselor told Mr. Goodman that he had a choice: Sell his home for less than the value of his mortgage, or face immediate foreclosure.

“It was all unhelpful,” Mr. Goodman said. He worries that he will lose his home.

There are Hope Now success stories, but the group declined to point to any.

The NYT goes on to suggest that the non-success of the program is the result of a combination of intractable lenders and/or servicers unwilling to take losses along with their borrowers, and a nearly non-functionial system to "triage" distressed borrowers.  Sounds about right.
Distressed Owners are Frustrated by Aid Group [NYT]

04/02/08 at 09:29 AM Permalink | Comments (6) | TrackBack (0)
Filed Under: Hope Now Deniallance, Sub-Prime

More on The Foreclosure Moratorium: What Happens After The Deferment is Up?

Answering our own question from yesterday on the proposed (this is not a done deal yet) foreclosure moratorium:

Questions, questions.  Chief among them: What happens when the 12 month deferment period is up?  Can the lender go after the borrower for unpaid principal and interest during the deferment period after it is over? What about unpaid amounts that pre-date the deferment?  If that's the case, aren't we just postponing the inevitable?

We traded emails on this with U of M law professor (and primary architect of Minnesota's Predatory Lending Law) Prentiss Cox, who confirmed our take - The outstanding mortgage debt will not be discharged, and past due principal, interest, and penalties not only carry over, but continue to accrue during the 12 month deferment period.

In other words, even if your subprime loan is not negatively amortizing now, it sure will be after signing up for the deferment. 

The cynical take on this is that all that's being accomplished is a delay of the inevitable - which will be the case for many if not most that qualify for the deferment - but a few folks should and will use this time to get their finances in order, we suppose.

And they better, because if they're underwater now, just wait until a years worth of payment shortfalls rack up.

03/06/08 at 02:39 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Foreclosures, Housing Market Politics, Sub-Prime, Twin Cities

Last Night: What You Missed While Googling "How to Hide Assets Before a Foreclosure"

"The whole thing was predicated on the idea that real estate prices would keep going up, and up, and up, and up."

House of Cards [60 Minutes]

01/28/08 at 10:01 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Foreclosures, Sub-Prime

Behind on The Mortgage: What is a Delinquent Borrower to Do?

We've posted this once before, but given the number or search queries, emails, and phone calls we are getting asking the question posed in the title, we thought it was worth re-posting a summary of David A. Smith's excellent advice on what to do if you are, or are in danger of, falling behind on your mortgage payment.

Read the whole thing, there is a lot of insight on WHY these steps are important, but here are the high points, quoted directly, from the piece:

1. Announce the problem — in writing. Don’t wait for the lender to come calling — once you know you’re going to miss a payment or two, tell your lender this.

2. Come clean on your financial resources. When queried about your circumstances, come clean....Most people who can’t pay hide assets, fib about their situation, or at the very least hem and haw. Few things create more credibility than owning up to the situation — and credibility is one of your most precious assets.

3. Figure out what you can pay. Even if you can’t make full payments, you can make some partial payment. Figure out what it is. Tell the lender that.

4. Make regular partial payments. Even if you can’t pay 100%, pay something — every month. And make it the same amount. That regularity is soothing to the lender, and establishes a baseline that adds to your credibility.

5. Keep detailed records of everything. Not only should you keep copies of all your correspondence to the lender, keep the lender’s back to you. Judges and others are very sympathetic if you come in waving a sheaf of communications where you show you were a responsible borrower, trying to get the lender’s attention, and the lender just kept sending you form notices.

6. Find a real person inside the lender. Companies are abstract entities; job titles are uniforms we put on each morning and doff each evening. In between, a company is represented by individuals...Your goal is to puncture the anonymity barriers...

7. Propose rescheduling your debt, including lowering your mandatory payments. You’re delinquent, you can’t pay everything you owe, but you’re paying something. You’re seeking a piece of paper, signed by you and your lender, that specifies a breathing interval.

8. Explore refinancing. Loan payments have two elements, interest and principal. Both of them can change — meaning lower — in a refinancing.

9. Offer to chip in new equity. A lender facing a bad loan assumes that (a) the property will be her only good collateral, and (b) before she can get to the collateral, she’ll have to spend a bunch of money getting the borrower out of the way. If a lender thinks there’s new equity capital that can come in — from family, friends, or government, in short, from anywhere — that’s an automatic differentiator in your favor.

10. Look for financial help. Fortunately for the United States, we have a widely distributed network of assistance providers, particularly for homeowners. Credit counselors are one starting point; so are federal, state or local housing finance agencies all over the country.

11. Sell the property. Eventually, and sometimes even when all the preceding things are going on, you may wish to list the property for sale. If you do this, only good things can happen: You may get an offer that covers your debt and allows you to recoup equity, If you are marketing the property and you can’t get anyone to take it off your hands, that too is great evidence you can use to persuade your lender to give you a workout respite.

12. Consider bankruptcy. Sometimes nothing works. Sometimes the right answer, financially ugly though it may be, is to let the property go. However, as I wrote 18 years ago in my second bout with workouts (my first was in 1976), there are some unusual times when bankruptcy is the best survival strategy.

What's a Delinquent Borrower to Do? [AHI - David Smith]

01/04/08 at 11:48 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Foreclosures, How To, Personal Finance, Sub-Prime

Mortgage Banking and Cows, and Barn Doors and Stuff

First, from Today's NYT, which lays blame on Federal Regulators for letting the cows out of the Barn:

An examination of regulatory decisions shows that the Federal Reserve and other agencies waited until it was too late before trying to tame the industry’s excesses. Both the Fed and the Bush administration placed a higher priority on promoting “financial innovation” and what President Bush has called the “ownership society.”

Second, from the WSJ on the Fed's proposed method of shutting the barn door:

The Federal Reserve on Tuesday is set to consider a plan that would mark the central bank's biggest regulatory response to date of the country's mortgage turmoil.

The staff proposal under review would curb the types of subprime products lenders can offer, prohibit certain misleading disclosures, and limit the compensation of mortgage brokers.

The press release and details Fed proposal are here, for those so inclined. 
Fed Proposes New Mortgage Rules... [WSJ]
Fed Shrugged as Subprime Crisis Spread [NYT]

12/18/07 at 10:59 AM Permalink | Comments (3) | TrackBack (0)
Filed Under: Financing Options, Industry News, Sub-Prime, The Fed

One Man's Subprime Story

Todd Carpenter over at Lenderama is running a contest for the funniest post from the RE.net this year.  All we can say is: Game Over:

I've had a long time to think about it, and it's finally time to face up to the ugly truth: I'm a victim. A victim of a pernicious system that entices innocent borrowers with 5000 square foot homes and free money and Igloo coolers, only to bury their dreams under a bunch of APR-ARM-XYZ shyster bullshit gobbledygook.

Iowahawk via Paul Kedrosky [infectiousgreed]

12/17/07 at 01:33 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Random, Sub-Prime

Hope Now Deniallance: The Plan, Unpacked

So The Plan's details can be found over at the American Securitization Forum (PDF here).

Exactly as we expected: The Plan Captures a very small slice of Sub-Prime ARM borrowers for relief, and is front page news on every paper.

This obviously will be covered to death in the mainstream media, and a lot of the blog coverage will be inside baseball that only mortgage geeks will care to wade through.  That said, there are a couple of points worth understanding, even for the casual observer, that will help to illuminate the key underpinnings, and potential impact, of this plan.

First, who's eligible? Who's the thin slice? The requirements are a little obtuse, with FICO tests, Equity tests, and so on, but Felix Salmon has a nice three sentence summary:

If you have good credit and are current on your mortgage, you're not eligible for the freeze. If you have bad credit and you are behind on your mortgage, you're not eligible for the freeze. The only way that you can be eligible for the freeze is if you have bad credit and you're current on your mortgage, and it will reset to a higher rate after January 1, and your mortgage servicer determines that you won't be able to make your mortgage payments after they reset.

Further, in most cases, one needs to have less than 3% equity in their home to be eligible.

Which brings us to this, from Elizabeth Warren at Credit Slips, who points out that there is precious little incentive for those who are eligible to actually take the deal:

In a falling market, a huge proportion of subprime mortgages are now in the 125% LTV territory--"below water" in the foreclosure parlance.  The current "deal" will have homeowners paying off all the mortgage debt or facing foreclosure once again. 

Whether you think that homeowners ought to pay all of the debt or not, regardless of the value of the property, it doesn't make much sense from a families' point of view to do so.  Those who can, will walk away.

At some point, in some of the worst markets, it is going to become socially acceptable to just mail in the keys. You heard it here second (somebody else has said this, we've read it, but can't recall who.)

And no post on major mortgage market news would be complete without Tanta, at Calculated Risk, who sheds some light on why the plan was so narrowly targeted: It is as much about limiting servicer risk, as helping strapped borrowers:

None of that is about figuring out whether the borrower "needs" or "deserves" to be helped. It is about figuring out whether the borrower has any realistic option of refinancing, given current contraints in the mortgage market and the [Home Price Appreciation ] outlook. That, in turn, is crucial because to modify a loan that could have refinanced opens up the servicer to liability for contract violations...

...I'd say the contracts were the part of this that got the most thorough protection. In my reading of this, giving a deal to a borrower almost seems incidental.

At the end of the day, "something" had to be done about the foreclosure problem, and due to the constraints of the market, the structure of this plan represents the only something that could be accomplished.  Will it help some homeowners keep their homes?  Yes.  Will it make a significant dent in the foreclosure problems, and turn the real estate market around?  No.

12/07/07 at 09:23 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Foreclosures, Hope Now Deniallance, Industry News, Sub-Prime