I’m full of warm feelings today so let’s say nice things about the government and government-ish people who are trying to help the housing market. First, the national mortgage settlement people, who are a diffuse group of 49 state attorneys-general1 plus some federal regulatory people. A while back they got mad at some banks that serviced mortgages, because the “service” those banks provided included a whole lot of foreclosing on houses with shoddy paperwork and a certain amount of foreclosing on the wrong houses, etc. So they ended up signing a settlement with some of those banks in which the banks promised to (1) do somewhat less of that and (2) fling billions of dollars at homeowners in various forms of mortgage relief more or less unrelated to the shoddy foreclosure practices.
This was a good idea! The shoddy foreclosure practices were bad, but they were not like a massive macroeconomic problem. They were mostly a paperwork problem. If you fixed the paperwork problem then you’d still have the other problem, the one where millions of people are unable to pay their high-interest-rate underwater mortgages. Flinging billions of dollars at those people addresses that problem, which strikes many people as more important than the paperwork.
So the other day Bank of America, one of the banks that signed the settlement, announced that it is making good progress at flinging out that money, which is nice! Except there is an amusing / amusingly evil footnote to that, which is: they are mostly flinging out other people’s money. This is less nice! Here is the FT: Read more »
Mortgage-backed securities are sort of conceptually simple – put mortgages in a pot, stir, sell layers of resulting goop – but complex in execution; they have not only economic but also legal and accounting and bankruptcy purposes and so their offering documents are long and boring and filled with dotted and dashed lines and arrows and boxes and originators selling to sponsors selling to depositors selling to trustees selling to underwriters selling to investors. All those arrows serve as a finely calibrated series of one-way gates; each link in that chain is meant to shield the person before the link from something, some real or imaginary claim from the people coming after the link, allowing originators/sponsors/etc. to tell themselves “I never need to worry about those mortgages again!”
Hahahaha no they totally do. Today the Journal and the FT have stories about a possible JPMorgan SEC settlement on some Bear Stearns mortgage practices, specifically (per JPM’s filings) “potential claims against Bear Stearns entities, JPMorgan Chase & Co. and J.P. Morgan Securities LLC relating to settlements of claims against originators involving loans included in a number of Bear Stearns securitizations”. If you’re keeping score these are:
- not the thing where Bear maybe did a shoddy job underwriting mortgages, and
- not the New York state lawsuit involving, besides the shoddy underwriting, Bear Stearns’ settlements of claims against originators, but rather
- the SEC’s investigation of what seem to be those same settlements of claims against originators.1
This is how the FT describes it: Read more »
As you may have heard, because you’ve read the reports reports or picked up on the Morse code message he’s blinked out during every appearance on CNBC or he threw himself on the hood of your car and screamed “Get me outta here” the last time you drove up to the Treasury building, Tim Geithner is ready to say good-bye to Washington. Has been for some time, in fact, but previous requests to go home were all denied. Now that his bosses are supposedly going to allow him to leave in the event Obama is reelected, many are wondering what will be next for TG. Despite having spent the majority of his career in public service and giving the impression that he has no desire to work for Wall Street, Bloomberg is thinking that with the albatross that is his unsellable Larchmont house around his neck, a family, and college tuition to pay, Geithner may not have a choice. Read more »
Bank of America bought Countrywide Financial in 2008 and it’s fair to say that went poorly; the Wall Street Journal totted up total Countrywide losses at about $40 billion but that was in July so they’re probably, like, $80 billion by now. If you were trying to figure out the maximum past and future losses you might start with the fact that Countrywide Financial originated about $2.2 trillion of mortgages between 2003 and 2007; ignoring anything before that you might ballpark the upper bound at $2.2 trillion. Let me draw you a Venn diagram, because this is now that kind of blog:
Eventually that yellow circle can grow to the size of the blue circle, but no bigger: the absolute highest number of fraudulent mortgages that Countrywide could have written is “all of the mortgages it wrote.” Right? No, wrong, of course: Read more »
I guess if you read the jobs numbers today you’d say “huh, the economy is getting a little better,” though there are other avenues you could go down. But if you read that Petco Animal Supplies, where the pets go for their animal supplies,1 sold $550 million of Caa1/CCC+ holding-company covenant-lite PIK-toggle notes at an 8.62% yield2 yesterday to fund a dividend recap, you’d be all “HOLY CRAP I LOVE 2006!”
The Journal article on the latter point takes the view of “some managers are sort of skeptical of holdco PIK-toggle notes to pay dividends to the private-equity owners of pet supply stores,” and, I mean, you can’t blame them (the managers or the Journal), but of course the real story is not “some people didn’t buy some terrible bonds,” which is always and everywhere true, but rather “other people did,” which is less common.
Part of the purpose of the Fed bidding everything government-guaranteed and <=5 years down to a zero yield is to convince / force the investors of the world to start making reckless investment decisions, er, “move further out the risk curve,” because people making reckless investment decisions like “I want to fund a chain of big-box kibble stores” is how we create new productive ventures and Put Our Economy Back To Work™. That and juicing aggregate demand by handing people money, which in America takes the somewhat unintuitive form of (1) lending them money to buy houses and/or (2) convincing them that they have more money because their house price went up.
The Petco part of the strategy is working like a charm. First of all, buying these bonds is just a classically reckless investment decision. Really the recklessness decision checklist for fixed-income investments consists pretty much of: Read more »
So, subprime mortgage-backed securities. Here’s a schematic:
- Banks packaged subprime mortgages into bonds and sold them to people.
- The bonds were bad and the people lost money.
What’s the something? There are two main theories. Theory 1 says that everyone knew at some lizard-brain level that it was a bad idea to give lots of money to poor unemployed people with low credit scores to buy overpriced houses, but figured it would work out fine if house prices kept going up. This worked until it didn’t; when house prices went down, badness ensued.
Theory 2 says that, while mortgage originators and securitizers knew that they were giving mortgages to people who had no chance of paying them back, the buyers of those mortgages had no idea: they thought that the originators were holding them to rigorous underwriting standards, where “rigorous” is read to mean “other than requiring a job, or an income, or assets, or a credit score.” When that turned out to be false, badness ensued.
Theory 1 has the benefit of probably being right.1 Theory 2 is superior on every other metric. For one thing, it fits well with deep cultural desires to find villains for the subprime crisis, and punish them. For another, it better fits the explicit facts. No subprime offering document actually said “these guys are all just terrible reprobates and the only way you’ll get your money back is if they can find a greater fool to buy their overpriced house when their rate resets.” But there’s no shortage of internal emails that say – well:
In connection with the Bear Stearns Second Lien Trust 2007-1 (“BSSLT 2007-1”) securitization, for example, one Bear Stearns executive asked whether the securitization was a “going out of business sale” and expressed a desire to “close this dog.” In another internal email, the SACO 2006-8 securitization was referred to as a “SACK OF SHIT”2 and a “shit breather.”
Thanks Eric Schneiderman! Read more »
There’s a thing called socially responsible investing where
(1) you invest other people’s money,
(3) but it’s okay because you’re doing it not to make them money but to save the whales, er, penguins, and they like penguins, so they keep paying your fees. This is a good racket as rackets go but it turns out that people mostly don’t like penguins as much as they like money so it is sort of a limited racket. The trick if you can manage it is to appeal to people who like penguins to give you other people’s money, because people typically like penguins more than they like other people having money. This can be great for you and also for penguins, and for the right value of “you” and “penguins” can be a diabolical way to achieve real social good, which is my favorite.
Two great recent stories in that vein. One is a proposal to use eminent domain to seize underwater mortgages and refloat them. The idea, schematically, is (1) seize property,* (2) sell it back to homeowner at fair value, and (3) lend money to the homeowner to pay for the house, which the municipality then uses to pay fair value to the mortgage lender whose collateral was seized in step (1). Any dope of a municipality could presumably get their act together to do (1) and (2), but the problem is (3) coming up with the money for new mortgages to pay fair value to the old mortgagee. You could see why oh I don’t know BANKS would not like this scheme – it will cost them in servicing rights and refinancing fees and second-lien writedowns** – and so the money has to come from non-banks. Some folks think they can find the money, for a small fee of course, and so are roadshowing the idea to municipalities. It seems to be popular in California, go figure.
The other is this gloriously cynical play from TCI to try to extract some value out of Lloyds Bank while also improving the stability of the British financial system, maybe. Read more »
August was kind of rough for Bank of America on the legal front, to the point that we once said in Write-Offs “Everybody who hadn’t yet sued BofA did today, or will soon.” But that turned out to be wrong! Or at least, it underestimated the continuing appeal of suing Bank of America, because now not only is everyone who is not Bank of America suing Bank of America, but so is Bank of America:
[I]n Florida’s Palm Beach County alone, Bank of America has sued itself for foreclosure 11 times since late March, according to foreclosure fraud activist Lynn Szymoniak, who forwarded one such foreclosure filing, dated March 29, 2012, to The Huffington Post. … In the March 29 filing, Bank of America is seeking to foreclose on a condominium and names the condo owner and Bank of America as defendants in the suit. The company is literally seeking damages from itself in order to foreclose on the condo owner.
Ha ha ha but why is Bank of America a delinquent condo owner? Because of course it’s not; it’s the second lien holder: Read more »
When people who hate banks and love homeowners are full of wild rage about this here mortgage settlement, and when people who love banks and hate homeowners are full of equal and opposite rage, that is pretty good evidence that the mortgage settlement is sort of meh and compromise-y and not that interesting, so let’s not talk about it. Oh, fine, let’s. You could go read all sorts of explanations and FAQs and diagrams and “top n things to know” (n = 3, 5) but I will give you a list of only one most important thing to know about it, which is that it will not reduce my mortgage so it’s all just noise. When will politicians start sticking up for me?
There is one sort of interesting thing that is probably most cogently explained here: Read more »
It’s always good fun to get upset about something of the form “X bet against Y,” and the financial markets offer a whole range of opportunities to do so. Everything is a bet against something, and if that something is sympathetic and/or you, you can go get enjoyably pissed at whoever is doing the betting. Today ProPublica reports on a nasty-sounding Freddie Mac bet against America and freedom and the 30-year fixed-rate mortgage with no prepayment penalty:
Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.
Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.
Now, a “bet that pays off if homeowners stay trapped in expensive mortgages with interest rates well above current rates” is called a … what’s the word? … oh, right. A “mortgage.” A feature of our life here on earth is that banks make money when people stay in their fixed-rate mortgages when rates go down, and lose money when people refinance those mortgages.*
Okay but in fairness those aren’t Freddie’s “bets,” not exactly. Their bets against not only the housing market but also specifically a couple named the Silversteins, who “live in an unfinished development of cul-de-sacs and yellow stucco houses about 20 miles north of Philadelphia, in a house decorated with Bonnie’s orchids and their Rose Bowl parade pin collection,” look like this: Read more »
If you like mortgages you should read this Fed white paper for Congress on the housing market though I sort of get the sense that Ben Bernanke’s heart isn’t in it. As he says, “Our goal is not to provide a detailed blueprint, but rather to outline issues and tradeoffs that policymakers might consider,” which is quite white-papery of him; the lack of enthusiasm for finding an actionable plan probably comes from the facts that (1) these issues are quite hard and (2) no one will do anything about it anyway because it’s Congress.
So the white paper does in fact mostly lay out tradeoffs that you can ponder quietly, like the one where nobody is lending (bad!) because nobody is confident that they can meet GSE underwriting standards (hmm, we want banks to not sell crap loans to Fannie and Freddie, right?). Or the suggestion, which has been kicked around for a while, to convert foreclosed homes into rentals, which on the one hand:
[Real estate owned] holders will likely get better pricing on these sales if the program is designed to be attractive to a wide variety of investors. Selling to third-party investors via competitive auction processes may also improve the loss recoveries.
But on the other hand: Read more »