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HomeSenate Approves Safe Harbor Mortgage Modification; Property Rights? What’s That?
Posted by Larry Doyle on May 6th, 2009 3:55 PM |
The assault on property rights continues as the Senate just passed the Safe Harbor Mortgage Modification legislation. Recall how I wrote the other day in Mortgage Magic or Mortgage Mayhem that this legislation would protect mortgage servicers from suit by mortgage investors.
Why would investors sue servicers? Servicers are charged with processing monthly principal and interest payments of mortgages and distributing the cash flow to investors. If they do not perform, then to this point they would and should be sued. Investors have the right to those payments for which they committed their funds.
The Safe Harbor Mortgage Modification legislation will protect servicers from lawsuits in the cases where mortgages have been modified and investors’ interests supposedly remain protected. One would think that covers all the bases. As I highlighted, however, the legislation may very well promote self-dealing amongst a number of the larger banks which both service mortgages and hold second mortgages.
From Bloomberg’s article, Senate Defeats TARP Measures To Move Safe-Harbor Bill:
The Mortgage Bankers Association and consumer advocates have endorsed the safe-harbor provision to protect mortgage servicing companies from being sued by mortgage-bond investors if they modify loans in accordance with President Barack Obama’s Making Home Affordable anti-foreclosure program.
“Safe harbor is something that you want as a servicer,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. “Without the safe harbor, you’re far more skittish about doing anything.”
Corker said in a speech on the floor that the measure is a boon to larger servicers including JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. An amendment Corker sponsored that would have required borrowers to seek other forms of aid before their loans could be modified failed.
Mortgage bond buyers including Clayton DeGiacinto of Tower Research Capital in New York said allowing the safe harbor provisions removes any accountability servicers have to minimize investor losses and may make the process more susceptible to political pressure and more costly for borrowers.
“It ultimately makes bond investors skeptical and adds an additional layer of risk that will need to be priced into the securities,” said DeGiacinto, who manages a distressed mortgage fund.
I am all for credible and equitable legislation which promotes decreasing foreclosures. In the process, however, the legislation should be airtight in making sure there is no self-dealing and conflicts of interest. That question regarding this legislation remains outstanding.
While this legislation may help limit foreclosures in the near term, the real cost may be borne in the years ahead in the form of higher mortgage rates. Why might that happen? If banks which service mortgages are influenced and incentivized not to protect the investors’ property rights and thus don’t, the investors will sell their holdings, and take their bat and ball to another field.
LD
Water Finds Its Own Level
Posted by Larry Doyle on May 6th, 2009 5:15 AM |
If housing led us into this mess and is going to lead us out, then bring an extra pair of boots because we still have a long way to go.
Could the government intervention in the housing market promote short term support but also long term pressure? What do I mean? As I wrote yesterday in Mortgage Magic or Mortgage Mayhem, the government is providing real subsidies in terms of mortgage rates, guarantees, closing costs, and points. These subsidies are generating support to segments of the housing market. That said, housing in general remains under severe pressure in many regions. The higher priced markets with very limited government intervention are virtually stagnant.
Pressure from the higher end is actually prompting some banks to allow for short sales in which the bank absorbs the loss from a home sold below the outstanding mortgage balance. Why would a bank do that? Very simply because the bank believes a sale now, even at a loss, is better than a foreclosure later generating an even greater loss.
I think we will see further downward pressure on prices and a delay in real improvement in housing due to the fact that more homeowners are now under water on their mortgages. The WSJ reports, House Price Drops Leave More Underwater. How many are underwater? Almost a third of American homeowners!!
Government intervention is simply attempting to apply sandbags to this problem. While I fully empathize with the families impacted, these sandbags are no remedy or foundation for a long term fix. In fact, I think these sandbags are potentially causing pools of private capital to refrain from entering the market. Why is that? A market that is being artificially supported will always cause real money to wait in the wings.
As the water finds its own level, the private capital will definitely enter. In so doing, it is very likely the private capital will ultimately push the market to levels even higher than current.
Any market participant knows, though, that a market that is manipulated may stay elevated for a short stretch but will move lower, find its natural clearing level, and then move higher. Housing is no different.
LD
We Still Have To Pay The Bill
Posted by Larry Doyle on May 5th, 2009 4:16 PM |
Equity markets have rallied back to unchanged on the year. Libor is back to 1%. Housing is showing signs of life. Other economic indicators are declining at a less rapid rate. Fed chair Bernanke provides a cautiously optimistic tone in his testimony today. So why am I as concerned as ever?
Perhaps I do not fully appreciate the benefits of the massive government injections of capital into our economy. Why? I view any short term benefit from the capital injections as merely covering for losses which are still embedded in the system. The bills associated with those losses, in terms of increased interest costs and principal writedowns, are yet to be paid.
Where are the losses? Well, the results of the Bank Stress Tests have been leaked and 10 of 19 banks will supposedly need more capital. The commercial real estate market is totally dependent on the government committing to 5 yr loans via the TALF. I view the rebound in the residential real estate market as mortgage mayhem, not mortgage magic. None other than the IMF continues to highlight that our economy has another $1 trillion plus in losses.
I will grant Obama and Bush and their respective administrations credit for succeeding to this point in what they were trying to accomplish. However, that success, in my opinion, only means that longer term costs will be steeper and longer term benefits will be further off as a result.
Nouriel Roubini and Matthew Richardson address these points in today’s WSJ, We Can’t Subsidize The Banks Forever.
From my perch, I view Obama and team as indiscriminately allocating capital across too many programs. I am becoming somewhat concerned that Bernanke is wondering if they have put too many chips on the table.
Roubini and Richardson offer:
. . . stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.
While the tone feels better, there is no doubt we still have challenges. Private enterprise’s interaction with Uncle Sam is one of the biggest challenges.
All this said, the government had a choice between immediate losses with excruciating pain or buying time with long term underperformance. They chose the latter.
We still have to pay the bill.
LD
Hedge Fund Manager Responds to Barack’s Bullying
Posted by Larry Doyle on May 5th, 2009 11:41 AM |
Kudos to Zero Hedge for posting this commentary written by hedge fund manager, Clifford S. Asness. Major kudos to Mr. Asness for having the heart and courage to stand up for capitalism and free market principles. Asness addresses the implications of President Obama’s browbeating hedge funds’ representation and management of client interests involved in the Chrysler bankruptcy.
Our country was founded on the principles of free speech, fair and equitable trade, property rights, and the ability to operate without intimidation. In writing and publishing this post, Mr. Asness has done our country a great service. I commend him!! I strongly encourage people to share this message with friends and colleagues. Please share your sentiments here as well!! ~LD
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLCThe President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear. (more…)
Mortgage Magic or Mortgage Mayhem?
Posted by Larry Doyle on May 5th, 2009 7:02 AM |
Are the largest banks in the land ready to defy the rule of law and self-deal with Uncle Sam’s blessing in the name of providing mortgage relief to homeowners currently strapped by first and second mortgages? The WSJ reports How Big Banks Want To Game The Mortgage Mess.
Is this another game of chance in which Uncle Sam wants to prime the pump in hopes of luring private capital into the economy? No, anything but. In fact, this is no game at all. Uncle Sam is proposing legislation which would protect mortgage servicers from being sued for not performing their duty to protect the property rights of mortgage investors (including pension funds, mutual funds, insurance companies). What does all this mean?
Investors in mortgage securities backed by first mortgages are entitled and expect protection of their capital by the performance of mortgage servicers handling the monthly payment of mortgage principal and interest. In fact, if the mortgage servicers do not perform the investors will and should sue.
The investors or holders of second mortgages will only receive a return if and when the first mortgage is current on its payment.
Will Congress pass legislation which would unintentionally incentivize large banks, which also happen to be large mortgage servicers, to game the mortgage modification process for their own benefit but at the expense of investors holding the first mortgages? The WSJ highlights:
Given the current housing crisis, there is wide support for measures to make it easier for homeowners to modify their mortgages. That is understandable. Nobody likes seeing the wave of foreclosures. Plus, mortgage modifications may help stabilize home values.
But in the rush to do something, Congress is showing a regrettable willingness to adopt constitutionally suspect legislation that runs roughshod over the Fifth Amendment of the Constitution, which prohibits the taking of private property without just compensation. (more…)
Chrysler’s Non-TARP Lenders and Uncle Sam: Mano a Mano
Posted by Larry Doyle on May 4th, 2009 1:25 PM |
The Chrysler bankruptcy drama escalates. Bloomberg reports, Chrysler Non-TARP Lenders Object To Auction Plan.
Uncle Sam would seemingly like to fast track the delivery of Chrysler into Fiat’s hands and run roughshod over the standard rules and regulations of bankruptcy proceedings. Will Judge Henry Gonzalez allow this to happen?
The lenders maintain:
. . . the U.S. government is violating federal law in order to preserve the automaker.
The group, calling itself Chrysler’s non-TARP lenders, in reference to the Troubled Assets Relief Program, seeks to block the proposed sale to an alliance led by Fiat SpA, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization. The group said secured lenders who agreed to the Fiat deal, such as JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., were conflicted because they had also accepted TARP funds.
The process is “tainted” because it was dominated by the government, the lenders argued in papers filed today in U.S. Bankruptcy Court in Manhattan. The group also said the short period of time given to evaluate the sale was improper and the hearing on bid procedures that began today should be delayed. The judge delayed the hearing until 2:30 p.m. tomorrow, ordering the members of the lender group to reveal their identities. (more…)
Uncle Sam and State Brethren Are Now Mortgage Brokers
Posted by Larry Doyle on May 4th, 2009 11:56 AM |
Hat tip to KD for highlighting a recent article in the L.A. Times, States Taking Steps To Turn $8,000 Home Purchase Tax Credit Into Cash. I am a proponent of providing tax incentives for purchasing homes. Have Uncle Sam and his state brethren morphed into mortgage brokers, though, in the process?
My concern with this program is the discipline provided by lenders working with borrowers under this program. Is the government so desperate to support housing that it will forward a down payment in the form of a short term bridge loan to prospective buyers? If the borrower can not repay the bridge loan when receiving the credit next year, the loan becomes a second lien.
This program will support home purchases. However, irresponsible lending on behalf of unscrupulous lenders did the same. As the L.A. Times reports,
In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.
In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.
If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate.
The idea that a prospective borrower may need a second mortgage within 12 months of a home purchase strikes me as an immediate red flag.
As we enter the brave new world of moral hazard and government control of industry, I guess I am going to have to get used to accepting that fiscal discipline and responsible lending aren’t what they used to be.
LD
All The King’s Horses and All The King’s Men . . .
Posted by Larry Doyle on May 6th, 2009 11:37 AM |
Humpty’s most severe injury is the breakdown of the securitization process in which Wall Street promoted a pure “originate to distribute” model. Obama himself offered in the May 3rd Sunday New York Times Magazine:
Time for the cement to harden and for Humpty to get back on his feet. Why will it take so much time? Very simply, Humpty was not an honest broker in the process of originating, securitizing, and distributing poorly written – if not fraudulently written – loans over the last 5 to 7 years. The Financial Times highlights this fact this morning in “Securitization Is Crucial for Revitalizing Lending.” The FT reports:
If we review those statistics, the government’s TALF (Term Asset-Backed Lending Facility) has facilitated $18.5 billion in sales since its launch in March. While the Fed views the demand as picking up, be mindful that the $18.5 billion figure represents approximately .008 of the total credit that has evaporated from the economy via the shadow banking system. In layman’s terms, we just gave Humpty a swab with a warm cloth while his limb is holding on by a thread.
My concern with the TALF is that the buyers will cherry pick bank assets and simply purchase those which have the most rigorous underwriting. The dregs will be left for the banks and taxpayers to absorb.
If Uncle Sam does get Humpty somewhat propped back up against the wall (note that I’m not even hinting at Humpty getting “on the wall”), how do we make sure Humpty does not once again fall down and take us all with him?
We need to make sure Humpty plays by strict rules and regulations, both in terms of underwriting and business engagement. The FT addresses proposed underwriting rules in “Watchdog Proposes Strict Rules.” The FT reports,
Wow, you mean Humpty actually has to display a measure of integrity in his operations? What a novel idea! Who may be keeping an eye on Humpty to make sure he plays by the rules going forward? The SEC and FINRA (Financial Industry Regulatory Authority).
Hey, wait a second. When Humpty fell off the wall, we have very credible evidence that FINRA was actually one of his playmates. None other than Harry Markopolos said that FINRA was on the wall (“in bed”) with Humpty. I have highlighted issues within FINRA that still need to be addressed: FINRA Is Supposed To Police The Market.
President Obama, what do you prescribe for Humpty given his relationship with FINRA? Obama told the Times,
Putting Humpty back together is going to be very challenging. Sense on Cents will be monitoring the operation very closely.
LD
For newer readers who may want to more fully understand how Humpty “had a great fall,” I strongly recommend The Wall Street Model Is Broken….and Won’t Soon Be Fixed.
Tags: can Wall Street be rebuilt?, FINRA's relationship with Wall Street, International Organization of Securities Commissions recommendations, Meredith Whitney comments on capital markets, Obama interview in Sunday New York Times, originate to distribute, originate to distribute model, progress of TALF, protecting investors, rebuilding the nonbanking sector, rebuilding Wall Street model, rebuilding Wall Street's business, reconstructing Wall Street, repackaging loans, restarting the securitization processm, restoring the nonbanking sector, what's up with FINRA, will TALF work?, will Wall Street recover
Posted in FINRA, General, Mary Schapiro, SEC, Sheila Bair, TALF, Tim Geithner, U.S. Treasury, Wall Street | 8 Comments »