WEALTH EXTRACTION 101

Remember this? (full view here; thanks Seven)

This chart explains who owns the title to one home in America. It was put together by a securities analyst who wanted to know who held the title to his home. It took him one year to figure this out. Here's the incredible part. It's the day job of this analyst to figure this stuff out on a daily basis.

Yeah, I know. Property rights in America shouldn't be this difficult. What a mess.

Anyways, I wrote about this and the legal maze that makes our financial and real estate markets such a mess earlier (here and here). Specifically I wrote that the very notion of property rights in America may be in trouble because of how Wall Street wanted access to income streams (to create securities), but didn't want to actually produce anything for the money. So they found a way to dump the actual title (plus the administrative and legal responsibility) of a home on to an obscure mega corporate entity called Mortgage Electronic Registration Systems (MERs). Then - in a demonstration of wealth extraction at its finest - they siphoned off the house payments into another legal maze (of securities) that benefited a few Wall Street market players.

And just like that, a small group of market players were able to make claims on millions of mortgage payments (through various "security" instruments) without having any responsibility for filing, registering, and tracking who owned the note on the house. (If you're looking for a metaphor it's kind of like handing the car keys, your wallet, and a keg of beer to your unemployed cousin and telling him to have fun.)

This is where it gets real good.

Rather than deal with homeowners after the mortgage bubble collapsed - and after their mortgage payment-security scheme went bust - Wall Street and other big market players said: "We can't negotiate with homeowners because we don't have the title to the home (MERs does). And besides, the loans have already been sold several times over ... oops."

Then, while threatening that system collapse was imminent if they didn't get bailed out, Wall Street and America's biggest financial players got the federal government to provide them with trillions in taxpayer backed guarantees. Why should big banks and Wall Street have to negotiate with homeowners (and learn from market justice) when Uncle Sam can foot the bill for their greed and arrogance?

Trillions of dollars in bailout money are now being used to purify and prop up an entire industry, while filling financial holes created when the income stream (i.e. mortgage payments) behind Wall Street's (pyramid) security schemes dried up.

Again, wealth extraction at its finest (if you're wondering why Wall Street isn't in jail, me too).

Anyways, I'm writing about all of this (again) because of how this Harper's Magazine article on MERs (hat tip to Barry Ritholtz) explains how Wall Street can make claims on money without actually producing anything of value. It also helps us all understand how our nation's biggest market players have undermined our nation's market integrity, while making a mockery of property rights in America.

If you care about the Constitution (hello, Tea Party) and the future of our nation this is one of the areas where you should be directing your attention.

- Mark

MORE CORPORATE BLAME GAMES

About eight months ago - in "Corporate America's Blame Game" - I discussed how our financial services sector is busy suing each other because no one wants to accept responsibility, for anything. Well, guess what? The finger pointing in corporate America continues.

First up, we're learning that Deutsche Bank has shoved at least a billion dollars in toxic loans on to the books of the U.S. government, in the process shifting responsibility and blame on to the government for bad loans that they originated (their argument works like this, "If the government insured it, it's their fault").

Then we hear about our taxpayer bailed out banks illegally evicting military families from their homes, in the process claiming that they were both a "painful aberration" and an oversight in bank practices - ignoring how the industry created the "aberration" environment by deliberately overworking and taking shortcuts on hiring people to properly assess troubled borrowers' home loans (earning $20 billion in savings in the process).

Now we see the banks raking in billions of dollars acting as bad neighbors and slumlords because of their claim that they aren't legally responsible for maintaining their properties, in the process shoving the responsibility on to hard-to-prosecute servicers of their loans.

Making matters worse, is that all of these taxpayer bailed out parasites are hiding behind lobbyist-driven negotiations, and taxpayer funded legal infrastructures to avoid responsibility for their questionable activities.

At the end of the day we end up with one simple truth: The banks are not responsible for anything.

And the big banks wonder why America has lost faith in corporate America and in the financial services sector (only 25% of Americans trust the banks to do the right thing, a drop of 46% points).

Simply put, the banks are demonstrating that they have no sense of responsibility, shame, or irony.

They just have our money.

- Mark

FORECLOSURE MILLS WIDESPREAD?

Check out nakedcapitalism.com's review of the "nastygram" sent by Representatives Barney Frank (D-MA), Alan Grayson (D-FL), and Corrine Brown (D-FL).

They're "disturbed by the increasing reports of predatory ‘foreclosure mills’ in Florida working for Fannie Mae servicers." These foreclosure mills specialize in speeding up the foreclosure process which, as you can imagine, puts even greater pressure on homeowners trying to stay in their homes.

- Mark

OUR HOUSING MESS ... LIES GOING IN, LIES GOING OUT

It appears that President Obama's Home Affordable Modification Program (HAMP) has been an abject failure. Promising to modify 3-4 million home mortgages, to date the program has only modified a paltry 449,000 mortgage contracts (with Bank of America doing a particularly poor job). If you're wondering why, look no further than the many speed bumps that the private sector has been putting up, or is in the process of trying to cover up.  

The Washington Post is reporting that some of the "nation's largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork." It appears that 41-year-old Jeffrey Stephan - who was once head of Ally's (formerly GMAC) foreclosure document processing team - was required to review individual foreclosure cases to make sure the proceedings were legally justified, and that the information was accurate. He was also required to sign the documents in the presence of a notary.

In a sworn deposition, Stephan testified that he did neither.

Processing about 10,000 foreclosure documents a month, Stephan's volume means that for every eight-hour day he processed foreclosure documents he spent about 1 minute and 30 second reviewing and signing each one. That's a pretty quick pace to be sending someone elses American Dream down the toilet.

This is a significant development because we're learning (again) that ratings agencies charged with assessing risk levels in mortgage pools "dismissed conclusive evidence that many of the loans were dubious, according to testimony given last week to the Financial Crisis Inquiry Commission."

According to testimony from D. Keith Johnson, a former president of Clayton Holdings, "almost half the mortgages Clayton sampled from the beginning of 2006 through June 2007 failed to meet crucial quality benchmarks that banks had promised to investors." When he brought his information to officials at Standard & Poor’s, Fitch Ratings and to the executive team at Moody’s Investors Service he was brushed off because "it was against their [the ratings agencies] business interests to be too critical of Wall Street."

For those of you keeping score at home this means that (1) Wall Street insiders not only knew they were producing toxic loans but that (2) irregularities and possible fraud are now being ignored in the foreclosure process, in part because (3) the industry purchased insurance for the toxic loans they were signing off on, as I pointed out earlier this week.

Before the market collapsed in 2008 banks that held mortgages purchased insurance contracts in the event that they had to foreclose on a house (or had trouble with a mortgage backed security). We know this because Republic Mortgage Insurance Company (RMIC) sued Countrywide, Bank of America, and several other banks, claiming that either the borrowers or the banks lied during the mortgage origination process.

What's clear is that the mortgage fraud train doesn't begin with homeowners who never should have taken loans they couldn't afford (though this was a problem). It begins with an industry that could care less at the time if people could pay. All the industry was after were fees, up front bonuses, and to keep their money train chugging along.

- Mark

OUR CONTINUING HOUSING MESS

More solid information on the housing market from Michael David White ... and it's not good news. After all the price incentives, initial foreclosures, government guarantees, low % refis, HAMP modifications, etc. the supply of existing homes for sale is now larger than it was at the height of the market collapse.

While prices for residential real estate have been flat since August 2009 (they've fallen 34% from their peak in summer 2006), the number of foreclosures in progress are at a record level. About 14% of all mortgages are delinquent, which represents about 7.7 million borrowers (or one in seven mortgages).

As Michael David White points out, the key here is that no one's been talking about any of these trends at a level that they deserve ... which helps to illustrate the absurdity of spending media time focusing on Terror Babies, the pointless "mosque" fear-mongering, and Glenn Beck's tribute to himself this afternoon in front of the Lincoln Memorial. This probably explains why nothing's really being done to help the American mortgage holder. No one sees the mess, so the banks get to drive the process.

Check out White's review of our housing mess here. It's a good one.

- Mark

Addendum: For a solid and concise review of our impending housing market collapse, check this link out. It has the 15 signs that our housing market is in trouble (and, FYI, it has some of the same graphs from Michael David White that I've linked to here in the past).

WE'RE SCREWED, II ... THE HOUSING MARKET VERSION

Remember this graph from Chicago mortgage broker Michael David White?

It shows us (red line) that housing values have fallen. But what's also true is that the amount of debt (blue line) tied to those homes have not collapsed, even with write-offs and renegotiations. There are a number of reasons for this. Among those include not enough homeowners qualifying for renegotiations and the fact that the biggest banks haven't had to mark down failing mortgage loans. This means our nation's financial institutions are carrying bad loans but they haven't been forced to mark them down to their actual market value.

And why should they?

When the market meltdown started in 2008 President Bush and Congress gave Wall Street and the banking industry a magnificent "deregulation" gift when they said financial institutions wouldn't have to mark down their toxic financial assets (and the instruments that they spawned). In essence they regulated market prices out of the market (by suspending mark-to-market accounting methods) and said to the banks, "You can attach any value you want to your toxic assets ... but don't worry, consumers and homeowners still have to abide by their contracts. If they don't, go ahead and attach fees and/or foreclose. Be happy."

Then we have President Obama's gift to Wall Street. His $75 billion Home Affordable Modification Program (HAMP) has turned into a significant market subsidy for the banks and Wall Street. This Huffington Post piece by Shahien Nasirpipour and Arthur Delaney helps explain why.

Here a few key points about HAMP:

* REJECTIONS DOMINATE: Of the 1.2 million distressed homeowners who entered HAMP (through June) more than 529,000 have been kicked out (though 389,000 have benefitted from permanent modifications).

* FINANCIAL INSTITUTIONS FIRST: Banks are using a "Net Present Value" test. This allows financial institutions to determine whether a loan modification will make "investors"  more money than a foreclosure. Put another way, even after dumping trillions of taxpayer funded bailout dollars on to Wall Stree, the needs of banks and investors dominate a $75 billion program that was designed for homeowners.

* UNICORN MATH: Extending a loan modification process to distressed homeowners has only served to allow banks to carry bad loans on their books at full value, delaying loss recognition.

* HOMEOWNER FORECLOSURES, BUT NO PENALTIES FOR BANK NON-COMPLIANCE: Companies like Countrywide - the beneficiary of billions in taxpayer funded loans and guarantees - have told applicants that they aren't participating in HAMP. Foreclosures continue. Yet, the Treasury Department has yet to fine a single servicer for noncompliance with HAMP.

* BLOATED FINANCES: Delays have allowed banks to tack on tens of thousands of dollars in additional interest and other fees, which they use to inflate the value of the mortgage contracts they hold.

There's more, but you get the point.

While many market analysts will tell you that HAMP has helped achieve stability for the housing market, it has done little to nothing for the majority of distressed homeowners who've applied to the program. Worse, it shows that in spite of creating trillion dollar loans, transfers, and other guarantees for Wall Street - in the process, creating the biggest bailout in human history - individual homeowners were never supposed to be the primary beneficiaries. The biggest financial institutions on Wall Street were the targeted group.

But wait. It gets better (or is that worse?). Mortgage broker Michael David White explains why our housing problems pale in comparison to what's going on around the world. As bloated as our housing bubble economy got, it's not as bad as other parts of the western world ...

In a few words, many of the key western countries (except Germany and Japan) are looking down the barrel of gun when it comes to housing. Greece may have been the first salvo in a much wider market mess facing Europe, and the world.

Stay tuned. Things will be getting worse.

- Mark

MARKET DELUSIONS RUN DEEP, II

A couple of days ago a friend sent me this market analysis, written by two economists, who explain why Wall Street wanted to suspend market prices on certain products. This practice, which suspends the "market-to-market" (MTM) accounting method, essentially allows market players to reprice an asset that they hold if it's generating income, even if the underlying asset is under water (akin to a homeowner making payments on a house that is not worth what they owe on it).

The logic behind suspending market prices is to help keep those who "own" the product from having to provide more cash or collateral to backstop the asset. The idea is to prevent fire sales on Wall Street. All things being equal, this is a good idea.

But all things aren't equal.

I wrote about this on Friday, and made it clear that the suspension of MTM effectively allows the financial sector to suspend reality. Among the many concerns I have is that suspending MTM is being done for the wrong reasons, with virtually no strings attached, and with plenty of government guarantees. It virtually invites another market collapse.

MARK-TO-MARKET’S A RED HERRING
As Bloomberg’s David Reilly points out, MTM is little more than a diversion employed by America's biggest financial institutions “to dodge two big issues -- their reckless use of borrowed money to boost returns and their inability to make sound loans and investments.” According to Reilly, of the $8.46 trillion in assets held by the 12 biggest banks before the meltdown, only 29% of it was something that could be marked to market. In some cases it wasn't even that at that level. General Electric Capital - which is similar in size to the sixth-biggest U.S. bank - said that just 2 percent of it's assets could be marked to market.

What’s really dragging down the banks? According to Reilly, its loans made to consumers, businesses, and other institutions. Because loans for cars, credit cards, and other activities are held at their original cost, when they fail to pay out they act as a drag on the banks. When this happens they need to come up with more collateral, or loan loss reserves. The banks didn't have the money. This is what banks were up against.

Put another way, MTM is a red herring that diverted attention form the bad loans banks made.

Real investors know this. They’re worried about the loan portfolios and the bad investments of the biggest banks. Simply put, they didn’t trust what the biggest banks were doing, and where they were lending their money. As Reilly points out,

… the Big Four have a higher percentage of tough-to-value assets due to their investment- banking activities. In many cases, losses that stemmed from those holdings reflect banks’ decision to enter risky transactions or markets. In that case, mark-to-market simply recognizes the reality of those missteps.

The biggest banks were being dragged down by their short-sighted lending decisions and their own stupidity. Mark-to-Market helped expose this.

DUMPING THEIR STUPIDITY ON THE AMERICAN TAXPAYER
Apart from transparency, and exposing the short-sighted decisions of America's financial institutions, why should we continue to use market prices to gauge what a product is worth? Because suspending MTM effectively allows financial institutions to reprice toxic securities. This, in turn, allows them to tell their creditors, their customers, and the government “Look at how much our securities are worth now … we don’t need more collateral or loan reserves … And besides, based on our magically repriced asset, if we want we can get a government guarantee or a government backed loan (through Federal Reserve and Treasury Department sponsored programs).”

I won’t go into the details how this happens (take a look at TALF and Maiden Lane programs to get an idea). Still, it's says much that Bank of America is shoving more and more of it’s “nonconcurrent” (and probably most toxic) loans on to the backs of the American taxpayer.

Consider the following. Last year, only 2.7% of BofA’s failing loans were backstopped by the American taxpayer (student loan guarantees, etc). Today over 20.5% of BofA’s $61 billion bad loans are now the responsibility of the American taxpayer. Take a look at the numbers.

I can't tell (yet), but it seems to me that BofA is doing this because they’re now able to tell the government, “These loans aren’t really bad because the underlying asset is still worth $100 million. See, we just repriced the asset.”

Yeah, and watch me pull a rabbit out my hat … nothing up my sleeve. 

At the end of the day, MTM is not the real problem. The problem is how much banks borrowed against assets whose prices have collapsed. I'm not sure, but it seems to me that suspending MTM was just another way for America's biggest financial institutions to reprice assets so they could dump them on the government through taxpayer funded guarantees.

OK, SO WE SUSPENDED MARK-TO-MARKET
OK, so the Financial Services Accounting Board (FASB) suspended MTM last April (2009). This could be a good thing. Franklin D. Roosevelt did it, so it can't be all that bad, right?

What we've forgotten is that FDR backed away from MTM because he had other programs and regulations in place (or being put in place) to help insure that suspending MTM wouldn't get out of hand ... or lead to excessive borrowing, inflated books, or wild speculation in other areas. What this tells me is that if we're going to take market prices out of the market, as FDR did, we should also reinstate the 1933 Glass-Steagall Act, which kept commercial banks, investment banks, and insurance companies away from each other's business.

While we're at it we should also repeal the Federal Reserve's 3-2 decision in 1987 that allowed commercial banks back into the securities' market in a big way. We should also put some teeth into the Securities and Exchange Commission, pare back FDIC guarantees, limit brokered deposits, do something about credit default swaps, repeal FANNIE MAE's privatization, and put some teeth into limiting GSEs. And, for good measure, we should have brought back HOLC (instead of President Obama's disasterous, and bank-driven Making Home Affordable Program) and bolstered the hand of labor.

The point is, FDR suspended MTM only because there was a regulatory framework in place to help insure the stupidity we saw in the run up to meltdown in 1929 (and 2008) did not occur.

CONCLUDING COMMENTS ON MARK-TO-MARKET
At the end of the day, the market analysis from the two economists got it wrong. Bringing MTM back in 2007 didn’t cause the market to collapse. It simply exposed the market stupidity that was going on after we deregulated the markets.

Look, I have no problem with suspending MTM, like FDR did. But if we're going to suspend MTM, and channel the legacy of FDR in the process, we should also bring back FDR-like programs which worked to insure that bubbles and other market stupidity didn't get out of hand in the post-war era.

We want to keep in mind that one of the reasons that market players were able to create such fabulous "wealth" over the past 20 years was because no one really knew how much some of the instruments they created were worth. But their computer models did. This helps explain why so much toxic, over-leveraged, debt was created. Market players were living in a market world governed by computer models rather than the logic of the market. MTM helped expose this fairytopia.

Simply suspending MTM, without calling for the regulatory infrastructures (especially related to over leveraging) that helped make our economy such a success in the post-war era, is like throwing a group of kids into a candy store and saying "Do what you want, but don't eat too much". Without rules, things will get out of hand.

What many ignore in all of this is that if our financial institutions hadn't borrowed and lent so much against shady assets - or if they had kept enough capital reserves - they wouldn't be worried about MTM valuations. Hyman Minsky has much to say about this (I'll leave Minsky alone for now; you can read about Minsky in my book, or in the labels below). But in a deregulated environment, where the biggest market players are borrowing and/or betting on assets of dubious value, well ...

Banks and other financial institutions have been making stupid decisions for years. The series of bailouts and subsidies for industry is long and sobering (for my money, much of it starts with the bank bailouts in 1982, and the S&L debacle). What happened in 2008 should have been a wake up call for the industry.

If market players don’t like what they saw once MTM exposed what was happening after 2007 they should act like real market players. They shouldn’t be getting so deep into products that create such a big mess for them, and the American taxpayer. That’s the way real market players deal with uncertainty.

Pretty simple if you ask me.

- Mark

HOUSE FLIPPERS & PRIVATE EQUITY FIRMS: WHAT'S THE DIFFERENCE?

Have you ever had a bunch of credit cards with zero balance and then thought about doing a cash withdrawal for the maximum amount on each one, and then walking away? If you have then you've got the heart of a private equity fund manager.

In this excellent video interactive "How Private Equity Dealmakers Can Win While Their Companies Lose" (which is divided up into 1-2 minute segments) the NY Times presents a nice introduction to private equity markets that could also be called The Roots of Debt & Wealth Extraction in America

In a few words, private equity fund managers are individuals who manage money provided by wealthy market players. They then purchase (invest in) a firm with the idea of improving the company's performance and/or market share. As the video points out, the idea is similar to someone who purchases a house, with the goal of selling (flipping) it within a year after they've made improvements.


For example, in the housing market we know that there are many house flippers who took out cash advances on their credit cards, or borrowed against the value of their primary residence, to make home improvements. The idea was to enhance the value of the homes they bought. On a general level, this mentality is not only good for the individuals involved, but for markets too. But then greed and stupidity raises it's ugly head.

In the housing market, house flippers are losing big time today because they got in over their heads. Simply put, most were under-capitalized borrowers betting they could make a killing and get out before the market collapsed. President Obama's $75 billion bailout for homeowners acknowledged this, and excluded debtor-speculators and Ponzi-like house flippers from gaining access to federally-backed bailout funds.

Their mistake was that they should have become private equity fund managers, rather than house flippers. Here's why.

Unlike individual house flippers private equity managers don't have to pay back what they borrow. Pivate equity fund managers not only get paid for making a purchase but they work out arrangements where they can receive "special dividends" before the company they purchased shows any improvements or new profits.

What makes special dividend payments (which run into the millions) especially odious is that they are usually paid out with money borrowed from banks who helped fund the purchase, or takeover, of a company. As a point of reference, think about what Danny DeVito's character did in the movie, "Other People's Money" (1991).

For you romantics out there think about Richard Gere's character in "Pretty Woman."


For a modern version of how Devito and Gere's characters operate see today's NY Times' article on the Simmons Mattress Company here. According to the NY Times article, "Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of 'Flip This House'." Over this period the various private equity owners of Simmons have made about $750 million in salaries, bonuses, dividends, and fees. You do the math.

Simmons' performance was improved so much during this period that it is now declaring bankruptcy.

If this seems a bit confusing think of it this way. Imagine that you purchase a house that you want to flip within a year. Then imagine that you max out the credit cards you have because you can legally tie the credit card debt into the house you are going to sell (legally, you can't do this, but play along here). You borrow more and pay yourself big "management" fees, but only make superficial (if any) repairs on the house. You then declare bankruptcy, or sell the house to someone else who might also declare bankruptcy (for the tax write-off). Under both scenarios you walk away richer, and debt free.

Now imagine that you can do this over and over again. In many respects, this is what the private equity market players have done over the years.

At the end of the day, when we bailed out the banks we were also bailing out the deals and bets that were made by private equity firms who destroyed firms like Simmons by dumping hundreds of millions in debt on the company. When President Bush and President Obama pushed for and guaranteed trillions of dollars for the financial and banking sector they propped up the debt creating deals of private equity firms. In effect they sanctioned the activities of a small group of financial parasites who do little more than extract rather than build wealth.

What a racket.

- Mark

THE SHADOW INVENTORY OF HOMES ...

It looks like a "shadow inventory" of foreclosed homes is building up, which could "wreak havoc with the already battered real estate sector, industry observers say."



Many banks are sitting on foreclosed homes rather than selling or even listing them. Here's what the SF Chronicle says about the situation:

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

Why is this important? Because there's a mountain of adjustable rate mortgages ready to blow through our collapsed (still collapsing?) real estate market over the next few months.
In a few words, the president's $75 billion home loan rennegotiation program is/was absolutely necessary. The problem we have is with the banks. Which brings us back to what I've been advocating for some time, nationalization

- Mark

THE MORTGAGE PROGRAM, FOR DUMMIES

For those of you close to someone whose home is under water (or is that upside down?) here’s an excellent Q & A article from the San Jose Mercury (thanks Mike). It answers some basic questions about the new federal legislation designed to stem the tide of looming home foreclosures. For some real life examples of how the program works out here’s a good NY Times article.

In a few words, any chance of getting a home loan renegotiated begins with the stipulation that you must be living in the home that's tied to the mortgage you're renegotiating. There are two type of programs, the Home Affordable Refinance (HAR) program and the Home Affordable Modification (HAM) program. Both involve either reducing interest rates and, in some cases, the principal.

Your chances of getting your home loan refinanced under the HAR are GOOD/EXCELLENT if:

• Fannie Mae or Freddie Mac hold your loan.
• You have no equity and/or owe up to 105% of your home's value.
• You are considered a “strong borrower” or a good risk (you have a good job).

If the above doesn’t work, you MIGHT be able to negotiate a refinance under HAM if:

• You are a “strong borrower” who owes less than $729,750.
• You’re payments (taxes, insurance, etc.) currently eats up more than 31% of your income.
• You've had, or anticipate, a change in your financial situation (divorce, job change, etc.) .
• You have a lender that’s willing to renegotiate, which may mean credit counseling. This will be a hard sell if you are seriously under water (or are working with Countrywide).

You WON’T be able to get your home refinanced if:

• Your current home loan is for more than $729,750.
• You’ve had a significant jolt to your income and/or finances.

While this post is designed to provide information, I feel obligated to say the following (it is my blog) . . .

The crime in all of this is that Countrywide – which was one of the earliest chump companies to stick out its hand for a bailout, after dumping their toxic debt products on the U.S. taxpayer – is increasingly saying “No” to homeowners in trouble. They’re doing this at the same time that it’s former president,Stanford Kurland, is making a killing purchasing delinquent home mortgages for his new company (as I noted here almost a year ago), some times for pennies on the dollar.

Kurland was forced out of Countrywide for helping run the company into the ground, but not before he cashed out hundreds of millions in stock right before Countrywide took a hit in the stock market. Now he’s going to get rich(er) picking up the pieces. I don’t know if Kurland has a conscience, but I have to think there’s a special place in Hell for him (if you believe in that kind of thing).

On the (potentially) bright side for those left out of HAR and HAM, the House is going to discuss a bill that could give bankruptcy judges the power to change mortgage terms on primary residences, while protecting loan-servicing companies from lawsuits by investors ... many of whom recklessly “invested” anticipating big and forced payouts on adjustable rate mortgages, CDO buyouts, and CDS guarantees.

Stay tuned.

- Mark

P.S. Here's an excellent interactive from the NY Times which also explains the mortgage programs (click on the piece to expand).

EXPLAINING OBAMA'S PLAN

If you’re wondering why President Obama has had to introduce a $75 billion plan to encourage loan holders to renegotiate with distressed homeowners here’s a primer.

We know that financial institutions got themselves into trouble by making incredibly stupid loans. If you had a pulse and could fog a mirror you got a home loan. Financial institutions have suddenly got religion, and are now reluctant to make new loans and are opposed to readjusting existing home loans. They contend that they don’t have any money. What they don’t have is a moral compass, or a collective conscience. The reality is financial institutions aren’t renegotiating home loans because it’s not in their financial interest to do so. Here’s why.

• Home loans were bundled together and sold to financial institutions.

• Bundled loans sold as a package – with a total value of, say, $100 million – created new income streams (from the loan payments you and I make).

• Financial insitutions know that if they renegotiate loans the value of each group of bundled loans could drop between 20-40% (or more).

• Financial institutions would rather keep a set of loans valued at $100 million rather than $60-80 million – even if it means burning down the house.

So, this is what we have ...

Financial institutions, who currently have their hand out, and are living off of the American taxpayer, don’t want the value of their bundled loan packages to go down. They want their $100 million, as it were. They are betting that homeowners and other debtors will be held to their contracts and/or that the American taxpayer will end up making up the difference through a bailout program (made possible by Section 132 of TARP).

Unless we nationalize financial institutions and force renegotiations, or offer incentives through legislation, they will not renegotiate with homeowners who are distressed.

This explains why President Obama has had to introduce a new program to induce financial institutions to renegotiate with home owners who are underwater, or have seen their income situation deteriorate. Unless they are nationalized, forced by legislation, or induced with financial incentives the financial institutions will not renegotiate (as FDIC chair, Sheila Bair, found out). If this situation continues we will move from a situation where 10 million homes are underwater today to having more than 15 million underwater within one year. People will continue to walk away from homes, and housing prices will collapse even further. It’s that simple.

This is really the first step of a broader program that is needed. Some may call it incrementalism. I call it a step forward – as long as President Obama does something about reducing expectations on the bundled loan payouts (called Collateralized Debt Obligations).

If President Obama’s program doesn’t do the trick, I say we nationalize the failed institutions and force home loan settlements. The financial industry is derisively calling this option a "cramdown." I like it already.

- Mark

THE FUTURE OF CAPITALISM IN PERIL?

It's been a week since I posted anything, so I might as well start back with what is sure to be Barack Obama's top priority throughout his presidency - the economy. An article from Newsmax.com is stating: "The generally gloomy economic news is dramatically raising the stakes for President-elect Barack Obama, and for the future of capitalism."

This is pretty ominous sounding, especially since the guys at Newsmax.com seem to believe "the market" is some kind of magical place that needs to be left alone. They are the last people you would think would be hyping the importance of Barack Obama to the nation's economic health. Here's what prompted the statement.

In the article on home mortgages the author makes it clear that deliquent payments are rising, even for modified home mortgages, where the lender renegotiates the terms of a homeowners loan in an effort to keep them in the house. Things look especially bad when we look at the dollar amount in adjustable rate mortgages that are set to readjust.


As the graph illustrates, we are now in the middle of a small reprieve (of sorts) for adjustable rate mortgages. Modified loans were supposed to help deal with the millions of adjustable rate mortgages coming around the corner. Rising deliquencies in modified home loans are troubling because it tells us that "consumers" and "workers" - rather than "homeowners" - are in real trouble. The housing market may be a red herring.

With unemployment projected to hit 9% by the end of next year, more people will no doubt be leaving their homes - even with creative modified loan programs. All of this tells us that what president-elect Obama faces is nothing short of an economic catastrophe.

So, how bad is it?

Newsmax.com quotes Fareed Zakaria, editor of Newsweek International:

"For Obama to be remembered as a great president, he has to do nothing less than rescue capitalism."

Is it really that bad? I think so. I'll explain why in my next post.

- Mark