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Archive for the ‘Moral Hazard’ Category

You’re Screwed by Wall Street Mortgage Settlement

Posted by Larry Doyle on March 20th, 2012 1:06 PM |

The American system of justice used to be predicated on the fact that those who committed transgressions paid the penalty. Regrettably, that system of justice is now a distant memory in regard to the adjudication of certain massive and egregious financial practices.

Has it become all too overwhelming for you to keep up with the violation of contracts and moral hazards in America today? I implore you not to give up the fight as future generations are counting on us to stand up for real justice. I addressed the injustice last week in writing, Mortgage Settlement Defines Racketeering:

If the Wall Street mortgage settlement is supposed to define justice, then crime certainly does pay. (more…)

Socialized Housing Manifesto

Posted by Larry Doyle on March 26th, 2010 10:36 AM |

Thank you to our friends at 12th Street Capital for sharing a sneak peek of Uncle Sam’s release of his new “Socialized Housing Manifesto.” (Click on the image to access pdf document.)

What is the one word that Uncle Sam is clearly trying to emphasize throughout the 4-page release? Responsible. Who the hell is Uncle Sam to define who and what is responsible or not? (more…)

Barack Really is Going to Pay Her Mortgage

Posted by Larry Doyle on March 26th, 2010 8:24 AM |

My blood is boiling. Why?

The assault on the principles of free market capitalism is escalating with news that banks are poised to start reducing principal balances on certain mortgages.

I empathize with those who are strapped, but I have never felt more strongly on a topic than this principal reduction. Despite any and all bulls*%# put forth by those in Washington, the principal reduction program is an enormous escalation of the violation of moral hazard which our country sadly continues to embrace. I have no doubt it will expedite the development of a socialized housing finance system.

Do not think for a second that banks will take the hit on these principal reductions. Who will take the hit? Me and you. Those who have worked hard, saved, played by the rules, and taught our children to do the same. (more…)

Obama Socialized Housing Policy: If At First You Don’t Succeed . . . Try, Try, Again

Posted by Larry Doyle on November 30th, 2009 4:13 PM |

The fact that the Obama administration is reticent to release data pertaining to completed mortgage modifications speaks volumes as to the lack of success of this initiative. With almost a third of American homeowners now ‘underwater’ on their mortgages, Obama and team are sticking to their game plan to modify mortgages. Details of Obama’s revised game plan can be accessed at

The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration’s Home Affordable Modification Program (HAMP) convert to permanent modifications. The modification program, which has helped over 650,000 borrowers, is part of the Administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year.

375,000? I will take the under on that. Why? As I highlighted on October 29th in my commentary “Mortgage Modifications: Statistically Insignificant”, up to that point a whopping 1,080 mortgages had been successfully and permanently modified. Policy makers believe 374,000 mortgages will be successfully and permanently modified in the last ten weeks of the year. Who’s zooming who? Would they like to place a wager on that? I’ll give odds. (more…)

Uncle Sam’s New Mousetrap to Stem Foreclosures

Posted by Larry Doyle on October 13th, 2009 2:40 PM |

Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth.  Last week, I wrote that Washington needed to address this issue in my post  “Washington Needs a New Housing Model.”

Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:

The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.

The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.

HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.

Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.

Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.

Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.

For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.

What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’

The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.

While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.

I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing.  What he will be doing, however,  is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’

This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.

Aside from that development, real integrity in this process would include:

>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.

>> Assess home prices along with rental rates to measure overall cost of housing.


More Socialized Housing Continues Assault on Capitalism

Posted by Larry Doyle on September 28th, 2009 8:43 AM |

Is there any doubt that the heart of our economic crisis centered on the mispricing of risk in a wide array of mortgage products? If that is in fact the case — and it is — then why does Uncle Sam continue to go down this road? In so doing, the ‘old man’ will only prolong the current housing crisis and likely promote another one as well. Why? A borrower’s ability to access funding at levels not correlated with that borrower’s ability to repay serves as an enormous incentive for the borrower to take undue risk. Inevitably, these greater risks will lead to greater losses. Who will absorb the losses? Ultimately, you and me. Where do we witness more of this socialized housing? Let’s navigate our way into the world of municipal housing finance.

Bloomberg details growing developments on this topic in writing, State Housing Agencies in U.S. Said Slated for Treasury Help:

State housing agencies in the U.S. would get help in providing mortgages to low-income borrowers under a U.S. Treasury Department program to provide new liquidity and purchase mortgage bonds, Treasury officials said.

The program would provide as much as $15 billion in fresh liquidity for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public.

A few questions, answers, and comments:

1. Given the enormous rally in the equity and bond markets, where is the private capital to support this initiative? There is plenty of private capital along with excess capital sitting at banks, BUT that capital would only lend itself at rates commensurate with the risks embedded in the value of the real estate and the borrowers.

2. The housing finance agencies’ inclination to ask Uncle Sam for financing and Uncle Sam’s willingness to provide it is nothing more than a socialization of this segment of the domestic housing market. How do we know? What entities will purchase the debt backing these financings?

Bloomberg highlights:

The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person.

Oh what fun. Uncle Sam will continue to bury more mispriced debt in the books of the current wards of the state, Freddie and Fannie.

3. Why would private investors be reluctant to more aggressively provide financing to these municipal housing finance agencies? We only need to revisit the fact that virtually all of these agencies utilized a form of auction-rate security known as a VRD (variable rate debt note), which in layman’s terms is nothing short of a form of Ponzi-type financing. Investors remain stuck with a tremendous amount of this debt.

If a borrower burned you on a financing, wouldn’t you increase the rate for future borrowings?

One final comment. Socialized housing finance will certainly dissuade private enterprise from entering any part of this market for a protracted period.

Capitalism remains under assault.


Related Commentary

$35 Billion Slated for Local Housing
by Deborah Solomon
Wall Street Journal; September 28, 2009

Did Big Ben Bernanke and Heavy Hank Paulson Break The Law in Buying Ken Lewis’ Silence?

Posted by Larry Doyle on April 28th, 2009 12:15 PM |

The intrigue involved in Bank of America’s takeover of Merrill Lynch goes well beyond standard Wall Street negotiations. Did Fed chair Ben Bernanke and then Treasury Secretary Hank Paulson break the law in the process of pressuring BofA CEO Ken Lewis to complete this bank merger? Bloomberg’s Jonathan Weil has easily distinguished himself amongst all journalists in aggressively addressing this topic. Weil pulls no punches in writing One Nation, Under Banks With Justice For No One.

Lewis, as CEO of Bank of America, possessed material non-public information about Merrill Lynch and was obligated by law to release that information to his shareholders. Lewis unequivocally maintains Bernanke and Paulson pressured him not to release that information which would have potentially derailed the merger. Why didn’t Lewis get Bernanke’s and Paulson’s position in writing? Did Lewis ask for it in writing?  Did Paulson and Bernanke knowingly avoid  a legal quagmire by not contractually committing in writing to increased government support for Lewis’ acquiescence?

Weil provides a clear expose of this situation. I commend him! He writes:

The spectacle of Ben Bernanke and Henry Paulson running roughshod over Kenneth Lewis and his minions at Bank of America Corp. raises a pivotal question for all Americans: Is the U.S. a nation of laws, or a nation of banks?

Let’s start by examining the facts disclosed last week in a letter by New York Attorney General Andrew Cuomo while taking pains to present the actions of each player in this drama in the fairest possible light. (more…)

Board of Health Condemns Due to Moral Hazards

Posted by Larry Doyle on April 13th, 2009 11:05 AM |

danger-toxic-hazardThe best organizations are managed not only for today but for tomorrow. What do I mean by that?  Great organizations assess risks, develop talent, diversify products, and grow market share. Aside from those basic business tenets, the best organizations respond well in times of crisis. 

Every business and organization is ultimately a reflection of its people. To that end, the depth and quality of the people are the single greatest factors in the long term success of the organization. 

Any individual or organization would relish developing a system that generates untold success and then automates the process. Neither business nor life works that way. Change is constant. How organizations proactively stay ahead of change and respond to change is paramount in succeeding in business and life.

The best sports organizations have developed a deep bench of talent both on and off the field. When players or executives leave – as they always do – the general manager moves another body in and the team does not miss a beat. The same scenario occurs in the best companies. This transition process is part of the culture of the organization.  (more…)

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