What’s the quickest way to assure that lenders will never ever buy another asset based on mortgage income streams? Make it clear that, at any time, the income stream of that mortgage could be modified by a regulator, a judge or the like. How would you value that asset now?
Still, foreclosure assistance puts a smile on the face of lots of voters. So, I suppose you had to expect they were going to push it. Especially this year. FDIC’s wiley Sheila Bair has an idea though.
“Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards,” she said. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”
If its going to work, it will have to be voluntary for the security holders, and a government guarantee goes a long way for that.
FDIC’s Bair Suggests Guarantees for Loans [The Wall Street Journal]
This is just too much for me to handle anymore…
“unaffordable loans could be converted into loans that are sustainable over the long term”
Um, HELLO?!? Perhaps they should not have taken out unaffordable loans in the first place!
Moral Hazard 101.
doubt she is thinking about securitization implications
@3,
of course not, why would she? why would any of these idiots think about ANY of the future implications of their knee-jerk reactions…
So, I can just stop paying my mortgage and then the govt will step in and forgive a shitload of principal and it will be more affordable for me?
Where do I sign up?!
doubt she understand what securitization means
@ 6
Isn’t that when you like, padlock something or install the Sloaman sheild?
The FDIC already has a system in place for “foreclosure assistance” on mortgages that is controls. Specifically mortgages from banks that is has, umm, acquired. I read about it in the context of mortgages held by Indymac. Expect more with the changes in the political landscape.
Also see:
Playing By the Rules is For Saps
http://paul.kedrosky.com/archives/2008/10/16/playing_by_the.html
“Throwing a lifeline to distressed homeowners, the Federal Deposit Insurance Corp. will offer delinquent IndyMac borrowers new mortgages with interest rates as low as 3 percent.”
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003258.html?hpid=sec-business
EP you make Ayn Rand look like a communist. Obviously these instruments were fucked from the beginning. Leaving them the way they are isn’t going to fix it.
@7 right…usage: “I securitized my bloomberg keyboard by cutting off my thumb”
EP is right.
“it will have to be voluntary for the security holders” is the key part.
I think most RMBS investors are idiots. Basic stress tests of the data tapes would have told them not to buy what was being offered.
A change in payment terms will actually help them by keeping home values higher than they should be and will make it harder on borrowers by making the “put” option of the mortgage more difficult to exercise.
Bad idea.
90% of these people don’t want a new loan. They don’t even want the F*cking house. It was an investment that went bad. $500,000 dollar home that is now worth $250,000 or less = you will be dead before it gets back to even and cost you sh!t loads between now and your burial.
Shiela Bair = people like me waiting to take advantage of the system. Sweeeet!! I will be first in line.
About time I get some of my tax money back. What comes around goes around biatches.
FLRE
We should listen to Bair. She’s the only one in government who can explain this stuff so a third grader can understand it.
http://dealbreaker.com/2008/10/who-is-running-the-show.php
From the comments it looks obvious that some of you didn’t bother to read the WSJ article.
About the whole issue of mortgage workouts:
it’s a labor intensive process. Mortgage servicers will need incentives to staff up those positions. On the other hand, there’s plenty of financial services people going to unemployment. When the green light is given, there should be no problems staffing up.
Finally, pay attention to Sheila Bair. She’s no dummy, and she may hang around after November.
http://www.nytimes.com/2007/12/18/business/18subprime.html?_r=1&oref=slogin&pagewanted=print
So, will government be buying houses for everyone in the future or just for the lucky folks who got in during the boom?
Will the home “owners” be sending thank you letters to taxpaying renters and responsible home buyers who aren’t eligible for a subsidy for subsidizing their McMansion?
I’m just curious.
Sorry, EP. Longtime fanboy here who knows a lot about mortgages and bankruptcy modifications. You’re as fabulous as ever, but on this one, you’re wrong. Commercial RE loans, all other secured loans except those secured by a principal residence can all get modified in bankruptcy and get securitized and funded by capital markets just fine. Principal residence mortgages don’t need the subsidy of a unique legal immunity from judicial modification of cash flows to be financed. We’re not talking about dumb regulators here subject to political pressure, but modification (not forgiveness) under the adult supervision of a judge, delivers by definition more value to the lender than foreclosure. Industry arguments this will raise interest rates are bunk, and Adam Levin of Georgetown has published data to the contrary. Make any relief retroactive-only to defer future moral hazard, and you’re done.
RMBS investors have other risks than bankruptcy modification risk to worry about like interest rate, prepayment and property value (ultimate security) risk, and suggesting that this will wreck the system is out of perspective. The real opposition to bankruptcy reform on this point is by lenders who don’t want to accounting-wise recognize the losses they’ve economically earned, and that’s a piss-poor reason to throw a guy out of a house where he can service a mortgage equal to the current market value, and perhaps even make payments on the unsecured remainder.
In general, home borrowers don’t have a moral right to low mortgage interest rates, lenders don’t have a moral claim on super-priority in bankrutpcy by letting everyone else take a haircut except them. And if private securitization markets drove mortgage interest rates too low in the past, well, the HF subprime shorts (you know who they are) showed up the dumb long investors who underpriced risk. That’s a good as well as admirable result.
pricing? discount the cash flows for 30years at 0 cpr at half the stated note rate…then divide by 3
If you like Alan Greenspan then are you a Green Span Backer?
The Bair Witch Project
Look at the big brain on 17…..
(nice post)
…and what’s the quickest way to get lenders interested in assets backed by mortgage income streams?
A government guarantee on said income stream of course!
Everyone wins but the taxpayer…and that guy’s a sucka!
#17 said “..delivers by definition more value to the lender than foreclosure…”
Incorrect. The Indymac plan states that they will only carry out the modification of individual loans IF the modified outcome has higher NPV than the current state. There are so many assumption that go into that calculation – redefault rates, gaming rates (normal borrowers going delinquent, people understating income) etc – that no one has any clue about, calculating comparative NPVs kind of seems presumptious. Also, impact for security holder depends upon what part of the capital structure they are at as well as the security structure. Something good for the super senior AAA’s may be horrible for the subs.
Also, the Indymac plan calls for reducing rates / forgiving principal / increasing term till a certain DTI is achieved. Even if it is immediately beneficial for the borrower and the lender do you understand the message it sends?
#17 here. I wasn’t talking about the IndyMac plan, I was talking about bankruptcy modification. Under Ch13, if the borrower can’t pay a mortgage with an NPV equal to the current value of the property (and perhaps pay more), then the lender gets foreclosure and the current value of the property.
I agree that “mortgage lottery” games of you-get-a-break, the-other-person-doesn’t are dumb and unfair, which is why if a person wants a break on their mortgage to stay in their principal residence, they should have to go through the financial equivalent of a root canal, i.e. bankruptcy.
@17 too long; didn’t read.
“What’s the quickest way to assure that lenders will never ever buy another asset based on mortgage income streams?”
Whatever it is, let’s do it fast! Trust me, if this “asset” class ever comes into favor with lenders and investors again, we’ll just see a rerun of the mess we’re seeing now. Take it off the table and they’d have to think about investing in, like, you know, actual mortgages, with actual buildings and actual homeowners with actual FICO scores. The neat thing about FICO scores is they have something to with reality, unlike those “pay us enough and we’ll give you whatever rating you want” ratings that Moody’s and S&P have been handing out for inscrutable (and unscrutinized) “assets based on mortgage income streams”.
idiots helping idiots. we’re letting these fools know that when they build up the next asset bubble (whatever it may be) they’ll get another bailout.
http://www.weeklyta.blogspot.com