We are shocked, shocked to discover that mortgage servicers are not in any particular hurry to enact loan modifications.
Taking a page out of the pre-school handbook, the Treasury/White House have elected to shame the evil capitalist pigs into their proper charitable role in society. Hence, a list of the evil doers and the fraction of loan modifications offered and enacted are nailed up in the town square. No news yet on the status of the stocks being erected on L Street.
So, who’s going to be sitting in the corner of Barney Frank’s office? We’re not sure of the exact threshold required for a caning by Mr. Frank (assume the position!) but you can be sure these three are going to get it:
Bank (% of eligible offered modifications)
Home Loan Services (0%)
National City (<1%)
Wachovia (3%)
List of Banks’ Progress on Loan Modifications [The Wall Street Journal]
Mortgage Rescue
October job loss numbers were another dose of reality, and they included the revision of August figures as well. That brings the total to 15.9 metric asstons (15.6 imperial asstons) of negative payroll space. Fortunately, Richard DeKaser, chief economist for National City Corp. in Cleveland has been on-hand to walk us through the numbers. To wit:
“This is going to increase the urgency for another stimulus package to staunch the slide.”
Everything from confidence to the renewed sink in oil and natural gas seem to have some connection to the jobs data today. Pretty dramatic. About half of the jobs lost in the United States year to date have been in the last three months.
Now, put about a 30-60 day lag before the first mortgage payments become a challenge for these new additions to “the list.” Then, add another 90-120 days before defaults actually look like defaults. That might be a time period to pay attention.
Job losses soar, jobless rate at 14-year high [Reuters]
With all the finger pointing going on, and consistent with our concern that incentives contributed to the clusterfuck that is the mortgage industry today, we decided to take a quick look at fees to see what kind of cash was flowing around in the business. A small, back of the napkin guess has become quite a large (if somewhat simplistic) model so I thought we’d share it with you and see what you had to say.
In summary, our incomplete and work-in-progress calculations figure for something like $2 trillion in fees flowing to various parties in the real-estate, mortgage, securitization and securitization^2 businesses between 2003 and mid-2008. That’s some serious swag, and you don’t have to look very far to see why no one was in much of a hurray to shut any of it down or to rock the boat.
Of course, we’ve made some pretty thick assumptions, particularly where management and underwriting fees come in with respect to the securitization layers of the industry. As usual, we are enlisting the help of the savviest readers on the street (Main or Wall). Browse on through the model, particularly the assumptions sheet, and if you see something you know is off, and if you can pitch us a decent source for better figures, we’ll tweak it right up. Find something spectacular and we will buy you lunch from our newly minted Dealbreaker Swag Lunch Fund.
Or, if you are a Google Docs user yourself, take a copy for yourself and play with it. We’d love to see what you come up with. If you’d like to jump into a copy and do some collaborating, send me a request for an invitation at ep at dealbreaker dot com and I’ll add you as a collaborator.
Edits:
3:47 pm: MBS underwriting fee adjusted to 1.25% (need a better source here but this might be close).
Dealbreaker MBS Fees Model
Whatever your thoughts on the matter of the this little mortgage rescue are, you cannot ignore the toll it’s taking on Warren Buffett. CNBC had him on this morning in a phone interview with Becky Quick, who called in from her vacation down the shore, and not even the thought of the Quickster frolicking out on Beach Haven could cheer the old boy up. He sounded downright sad and was clearly not himself. The reason I know this is because while the Oracle of O praised Paulson for doing “exactly the right thing,” he failed to pepper any of his prose with trademarked out of nowhere analogies that marry aberrant sex fetish with folksy business wisdom. The pro couldn’t even get it up to say something along the lines of “I am 100 percent behind this plan,” instead simply noting that he “wouldn’t change anything,” and sighing audibly. To Buffett’s credit, at one point he did tell Quick, “The government was on the hook in this position many, many decades ago when they got in this half slave/half free position where they said we don’t guarantee Fannie and Freddie obligations, wink wink,” but it was obvious to all his heart wasn’t in it.
Buffett: Treasury ‘Did Exactly the Right Thing’ [CNBC]
The common stock of Fannie Mae and Freddie Mac is almost exclusively held by large financial institutions. The top ten largest institutional holders control over half of the stock of each companies.
Details on Fannie Mae’s ownership can be found here. Details of Freddie Mac are here. (Courtesy of MSN.)
Not only did the Treasury Department avoid a direct capital injection into Fannie Mae and Freddie Mac, it has also avoided making an explicit guarantee of the senior debt of the two mortgage companies. Many people expected that the government would explicitly back the senior debt issued by the two companies.
Instead of a direct promise to support the debt with the full faith and credit of the United States, the government has pledged to maintain a positive net worth at the companies, buy mortgage backed securities from them, continue meeting their business obligations, and provide a huge line of credit. The promise to maintain a positive net worth at the companies means that they will be able to maintain debt payments, and so it amounts to a back door promise on the debt. But nowhere has the government made a direct pledge to the bondholders. It’s still an implicit, “in effect” guarantee.
“I think that the stunner of what Paulson said this morning was not about the equity haircuts, but that they didn’t explicitly guarantee the GSE debt,” one DealBreaker reader writes. “This suggest that the fear of a flight from Treasuries and a consequent dollar run is real.”
Despite the new lending facilities and a commitment to maintain a positive net worth in Fannie Mae and Freddie Mac, the Treasury has avoided actually injecting capital into the two companies. The consideration for the $1 billion in preferred stock each company issued to the government is the commitment by the Treasury.
No doubt Fannie and Freddie would have preferred an actual handover of taxpayer protection. It’s a good sign that Treasury was able to resist what was almost certainly a demand by Fannie and Freddie for a more direct and immediate subsidy.
“The preferred stock comes with an annual dividend yield of 10% and warrants giving the Treasury the right to acquire 79.9% of the companies’ common stock ‘at a nominal price,’” the Wall Street Journal points out.
So while the Treasury has made a commitment to buy as much as $100 billion of preferred stock in each company, so far it hasn’t spent any of that.
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