Total home equity exposure at banks is pretty big. Amherst Securities has said commercial banks hold approximately $767 billion of the total $1.05 trillion of second mortgages outstanding, with the Big 4 holding over $400 billion alone.
But the key issue is what portion of these are at risk of writedowns. Most vulnerable are loans (or portions thereof) that are no longer backed by property. That is, the price of the underlying home has fallen below the balance on the loan. In banker shorthand: “loan-to-value” (LTV) is greater than 100%.
These are in peril because home equity loans are frequently structured with big principal payments on the back end, so even though many borrowers are currently making payments they’d need to stump up an awful lot of cash to pay off the balance. Unless housing miraculously recovers and they can sell or refinance at a price that will pay back all their debt, well, expect a spike in walk-aways…
CreditSights takes a stab at the potential writedown for the Big 4 banks and finds that Wells Fargo is particularly vulnerable.
http://www.structuredfinancenews.com/news/-204756-1.html?zkPrintable=true
"I'm also starting to hear rumblings among the number crunchers that the wave of foreclosures we keep hearing about is about to hit with a thunderous roar."
The federal $75 million Making Home Affordable program is supposed to keep some of the 5 million Americans on the verge of foreclosure from losing their homes.
That's if the loans they want to refinance are backed by the federal mortgage companies Fannie Mae and Freddie Mac. And if they don't have a second mortgage or private mortgage insurance that can hinder refinancing. And if the cost of refinancing is worth the lower interest rates. And if lenders have been able to update their computer systems to work with the program.
And, it turns out, if homeowners don't mind watching their credit scores drop by as much as 100 points.
...The government should make it clearer to interested homeowners that their credit scores could take a hit simply by applying, even if they never miss a payment.
http://hamptonroads.com/2010/03/mortgage-program-comes-catch
Ackman’s bet was spectacularly contrarian. He was wagering on the collapse of a company [MBIA] that the rating companies had awarded their highest AAA rating and that everyone else was counting on.
...Ackman told the receptionist [at MBIA] they were there for the meeting with [CEO] Jay Brown. She pointed Ackman toward a closed conference room door just behind the reception desk. Opening it, he found Brown seated at a conference table with a dozen other men. The conversation in the room came to an abrupt halt.
“I’m Bill Ackman. I’m here to--”
“Wrong meeting,” one man said as he jumped up to close the door. Ackman returned to the reception area, convinced he’d just interrupted a tired and frazzled-looking Brown in a meeting with his crisis-management team. The Gotham group was shown to another conference room and told to wait.
Fifteen minutes later, Brown joined them with MBIA’s general counsel, Ram Wertheim, whose first question to the Gotham group was whether it planned to record the meeting. Ackman told him no, then asked Wertheim whether he and Brown planned on recording. They did not, Wertheim said.
Brown got to the point. He had been in the insurance industry for years, and no one had ever questioned his reputation, Ackman remembers Brown saying.
‘Friends in High Places’
“No one has ever gone to my regulators without my permission.”
Ackman asked Brown whether he disputed any of the assertions Ackman had made about MBIA. Brown was aware of the issues in Ackman’s report from questions he had received from a Wall Street equity analyst with whom Ackman had shared his findings.
“This isn’t about the facts; it’s about process,” Ackman recalls Brown saying. “You’re a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we’re the largest guarantor of municipal debt in the country. Let’s put it this way: We have friends in high places.”
In a follow-up letter to Ackman after the meeting, Wertheim reminded Gotham what was at stake.
“MBIA is a regulated insurance company that operates in a regulated environment and acts in a fiduciary capacity for the benefit of our many constituencies. ... MBIA’s credibility and reputation in the market, and its AAA ratings, are critical to our continued ability to service these constituencies.”
In the meeting, Brown compared Gotham to Enron Corp., which had been accused of manipulating the California electricity market. Was Gotham seeking to manipulate perceptions about a regulated insurance company by taking positions in the unregulated CDS market? Brown also asked Ackman how long Gotham planned to hold its CDS position on MBIA.
Ackman explained that for the hedge fund to make money on its CDS position, it was going to have to be correct in its criticism of MBIA. Ackman told Brown that the CDS market was not liquid enough for Gotham to easily trade in and out of such a huge position.
Wertheim asked to see a copy of Gotham’s report before it was published so MBIA could check Gotham’s facts. Ackman countered that it was considered inappropriate for analysts to give advance copies of research reports to companies but again offered to discuss any findings at the meeting.
The meeting ended abruptly. As the men filed out of the room, Ackman reached out to shake Brown’s hand.
“I don’t think so,” Brown said, refusing to extend his hand.
When hedge fund manager David Einhorn told an audience of investors in 2002 that he recommended shorting Allied, the SEC investigated him before they bothered to probe the company. The lukewarm probe the SEC wound up doing didn’t even include a visit to Allied headquarters two blocks from the SEC. Ultimately, the SEC’s documents on Allied were mysteriously deleted from the agency’s computers, the new Kotz report says.
In a classic SEC farce, the agency has acknowledged the shorts’ important role in balancing the boundless swamp of financial hype by slapping new curbs on them on Feb. 24.
No less an expert on white-collar crime than onetime jailbird Sam Antar, whose Web page says he masterminded “one of the largest securities frauds of its time” when he was chief financial officer of Crazy Eddie Inc. in the 1980s, says the way to counter market hype is to make it easier to research short- sale ideas and sue fraudsters. And trust me, Antar should know.
“There is nothing worse for a criminal to deal with than an adversary with a profit motive,” he told me in a telephone interview.
Bloggers are doing their part to fill in where the regulators fail, too. Blogger Barry Ritholtz said on June 3, 2008, that it was time to sell Lehman Brothers at $30.61. Less than four months later, and after interminable carrying on by Lehman and others about short sellers telling unfair tales, the firm filed for bankruptcy.
Wachovia Bank NA, a unit of Wells Fargo & Co. (WFC), confirmed it will pay $160 million to settle a federal investigation into whether the bank's lax controls enabled Mexican exchange houses to launder drug money.
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I can no longer sit back and allow Communist infiltration, Communist indoctrination, Communist subversion and the international Communist conspiracy to sap and impurify all of our precious bodily fluids. (Col Ripper from the Stanley Kubrick film Dr. Strangelove)
The fall of the Soviet Union led to hundreds of millions of workers entering the global marketplace, he said in a paper to be presented to a Brookings Institution conference. This new market-based workforce, Mr. Greenspan said, helped push up growth in the developing world. This in turn fuelled a global savings glut that drove down long-term interest rates, leading to an "unsustainable boom" in house prices, he said.
A better approach, he said, would be higher capital buffers. "Capital and liquidity, in my experience, address almost all of the financial regulatory structure shortcomings exposed by the onset of crisis," Mr. Greenspan said. "Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning."
http://www.thetruthaboutmortgage.com/top-mortgage-lender-in-2009-is-wells-fargo/
...holders of second-lien mortgages are now a principal obstacle to many [loan] modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate attention from your institutions.
Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep borrowers in their homes.
A systemic program to modify second lien mortgages called 2MP does exist but Treasury has stalled on implementation because the banks that hold them can’t afford it, six buyside investors said. The sources all said implementation of the program, called 2MP, would result in “catastrophic” losses for the nation’s four largest banks
[earlier in the letter...] The four banks in question collectively own more than USD 400bn of the USD 1trn in second lien mortgages outstanding. BofA holds USD 149bn, Citi holds USD 54bn, JP Morgan holds USD 101bn and Wells Fargo holds USD 115bn, according to fourth quarter 2009 10Q filings with the Securities & Exchange Commission.
GMAC commingled cash flows from multiple bonds in a single custodial account, Moody's said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.
...This could give rise to competing claims in a bankruptcy proceeding, the rater said.
Voltron says: yes, we bailed them out.
Thornton Melon: Oh, you left out a bunch of stuff.
Dr. Phillip Barbay: Oh really? Like what for instance?
Thornton Melon: First of all you're going to have to grease the local politicians for the sudden zoning problems that always come up. Then there's the kickbacks to the carpenters, and if you plan on using any cement in this building I'm sure the teamsters would like to have a little chat with ya, and that'll cost ya. Oh and don't forget a little something for the building inspectors. Then there's long term costs such as waste disposal. I don't know if you're familiar with who runs that business but I assure you it's not the boyscouts.
Dr. Phillip Barbay: That will be quite enough, Mr. Melon! Maybe bribes, kickbacks and Mafia payoffs are how YOU do business! But they are NOT part of the legitimate business world! And they are certainly not part of anything I am doing in this class. Do I make myself clear, Mr. Melon!
...now, not withstanding Mr. Mellon's input. The next question for us is where to build our factory?
Thornton Melon: how 'bout fantasyland?
| Country | Size of shadow economy in percent of GDP, average over 1990-93[24] |
|---|---|
| Developing economies | |
| Africa | |
| Nigeria and Egypt | 68-76% |
| Tunisia and Morocco | 39-45% |
| Central and South America | |
| Guatemala, Mexico, Peru and Panama | 40-60% |
| Chile, Costa Rica, Venezuela, Brazil, Paraguay and Colombia | 25-35% |
| Asia | |
| Thailand | 70% |
| Philippines, Sri Lanka and Malaysia | 38-50% |
| Hong Kong and Singapore | 13% |
| Transition economies | |
| Central Europe | |
| Hungary, Bulgaria and Poland | 20-28% |
| Romania, Slovakia and Czech Republic | 7-16% |
| Former Soviet Union | |
| Georgia, Azerbaijan, Ukraine and Belarus | 28-43% |
| Russia, Lithuania, Latvia and Estonia | 20-27% |
| Developed economies | |
| Greece, Italy, Spain, Portugal and Belgium | 24-30% |
| Sweden, Norway, Denmark, Ireland, France, The Netherlands, Germany and Great Britain | 13-23% |
| Japan, United States, Austria and Switzerland | 8-10% |
Excerpt:
I have a few simple questions for all the dim-bulb economists now blaming the weather:
- "Did you not know there was a snowstorm on the East coast?"
- "If you did, then why didn't you factor it in to your estimates?"
- "How can you be surprised by something you knew?"
http://globaleconomicanalysis.blogspot.com/2010/02/nacent-recovery-or-nacent-economic.html
More than 10% of people with mortgages owe 25% more than their home is worth.
...In Nevada, 70% of mortgages were underwater. In California, more than a third of mortgages were underwater.
..."The rise in negative equity is closely tied to increases in pre-foreclosure activity," CoreLogic said. Once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply.
Negative equity exceeded 25% in six states and topped 20% in six others.
http://www.marketwatch.com/story/113-million-homeowners-underwater-on-mortgage-2010-02-23
The "Volker Plan" is officially dead:
http://www.nypost.com/p/news/business/volcker_fooled_iso6WHImNJiV1Vmk9FYm6L
The White House PR machine is working overtime to rehabilitate Treasury Secretary Tim Geithner's image including an interview in Vogue and cheesy photo ops with the first lady.
http://www.nakedcapitalism.com/2010/02/administration-ratchets-up-pr-campaign-for-beleaguered-emanuel-and-geithner.html
Former Federal Reserve Chairman Paul Volcker said the nation's home mortgage market is in trouble and will have to be "reconstructed."
"It's totally dependent, heavily dependent on government participation," Volcker said Friday in an interview with Bloomberg Television. "It shouldn't be that way. That's going to have to be reconstructed."
The federal government was responsible for up to 95 percent of all new home mortgages in the fourth quarter of 2009, said Guy Cecala, publisher of Inside Mortgage Finance, a leading industry publication.
"Anyone who looks at the numbers says, 'My God, look what it's come to,'" Cecala said in an interview Friday.
While Volcker hopes the nation's home mortgage finance system lessens its dependence on taxpayers, Cecala said it's going to be nearly impossible for a significant change to take place over the next year.
"We can't," Cecala said. "It certainly can't change in 2010. It's like saying we're going to make some improvements in the Titanic after it's hit the iceberg."
Voltron says: As I pointed out in the previous blog entry, there is no way anyone is going to lend money for houses at these low interest rates.
http://www.huffingtonpost.com/2010/02/19/paul-volcker-says-mortgag_n_469415.html
The WSJ reports today on a study that confirms what everyone has known for years: That many firms manage their earnings, pulling all manner of shenanigans to beat the street.
The way this form of fraud was detected was rather ingenious: The lower than mathematically expected incidences of the digit "4″ in corporate earnings releases. ("X.4″ to be precise) This simple statistical insight was due to an analysis of normal random distribution. "When the authors ran the earnings-per-share numbers down to a 10th of a cent, they found that the number "4″ appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance."
Why?
By finagling the 0.4 to a 0.5, accountants then get to round up to the next higher number. Hence, 12.4 cents is "managed" to 12.5, which then becomes rounded to 13 cents per share.
They dub the effect "quadrophobia" — fear of fours.
A "youth against the banks" Facebook party at a Mayfair mansion in London was broken up by officers in riot gear last night after revellers pelted police with bricks and bottles. The teenage organisers of the party conceded that the event "got out of hand" when thousands more people than expected attended the five-storey squat in Park Lane.
...
The [organizers] started a Facebook group last Sunday urging people to "come and live the high life in a mansion on Park Lane". The party was billed as a "youth against the banks" event as the organisers believed the home was partly owned by HSBC. The bank has yet to confirm this.
"We wanted to shake things up because the banks are kind of running the worldwhich isn't fair," said Fox, a sixth-former from north London.
"We didn't break in, we got in through an open window. It's not illegal, that's just how squatting works," he said.
Members of the Facebook group, which has since been deleted, grew rapidly. "The idea was to invite a large number of friends not the whole of London youth . . . we personally only invited about 200 each. We then watched the group grow, it didn't seem real."
...The police estimated that "in excess of 2,000 people" attended the party.
Traders noting that Standard and Poor's is attempting to remove the Too Big To Fail premium that has been enjoyed by these large banks, which has been a major help to their credit ratings.
They are concerned the government may not step in should another crisis occur
The strategy is straight from "Unrestricted Warfare"
$1.4 trillion in [corporate debt] needs to be repaid or refinanced by 2014.
Companies with the weakest credit and the heaviest debts will have to pick up $800 billion of that tab. The rating agency Moody's calls the maturing debt an "avalanche."
http://www.forbes.com/2010/02/08/debt-bonds-banks-loans-markets-bonds-finance.html
Voltron says: If you don't believe it, watch "money as debt":
http://video.google.com/videoplay?docid=-2550156453790090544#
When mortgage modifications like Hamp come into play, that traditional priority order is reversed. The borrower is paying the Hamp-modified (i.e. lower) first lien amount, and the full second lien amount, so the second lien effectively becomes senior to the first.
When principal reduction comes into play, the problem becomes even starker. Current rules say that first lien mortgages can't be written down before the second.
http://ftalphaville.ft.com/blog/2010/02/05/143036/the-second-lien-sticking-point/
http://finance.yahoo.com/focus-retirement/article/108747/next-in-line-for-a-bailout-social-security
If you thought all the bank bailouts were over, take a look at what is happening with lenders' large holdings of junior, or "second-lien," mortgages.
These loans stand behind the first mortgage and, in theory, should take a loss before first mortgages in any workout aimed at keeping a borrower in a house. However, government programs aimed at making first mortgages less burdensome have left the junior loans largely unmodified, meaning in some cases the junior lender is basically getting bailed out for free.
"The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other," Whalen wrote in a note to clients Tuesday.
