patrick.net

Widely varying estimates of the freeze legislation, and not much detail so far.

I understand regulators will accept FICOs above 660, but will look at them very closely for data supporting inability to pay. Otherwise it's for FICO less than 660. Instead of attempting to sort out the industry's inconsistent definition of 'subprime', they're using FICO score plus distressed loan as qualification.

Voluntary for the distressed borrower. Just to clarify 'mandatory' cited above.

Ability to pay under the new terms is required. Those who have the income to pay their overpriced mortgage don't qualify. Those who can't pay the 'frozen' figure don't qualify. Those willing and able to continue paying that subprime teaser rate (said by Tanta to be quite high) will be 'helped' by the freeze.

This looks like triage to me. An omnibus workout scheme to get around the understaffing/backlog crisis hitting conventional servicing ops. Of the potential pool of troubled borrowers, some are already dead, some will be left to go on living with their illness, and the freeze 'beneficiaries' will be medicated until space is available for them at the morgue.

The future of MBS - where government can intervene in contracts between private parties - looks DOA to me.

@DS,

You misunderstand me. I don't think M****M made any sort of general disclosure.

What they DID do, I believe, is promise one particular customer that the problem would be fixed in the next product release. This was because the customer had discovered the problem themselves during Y2K scanning.

I don't know if there was simply an internal communications problem at M****M, or something more sinister, but the promised fix never got done until, as you posted, time got close enough for them to demand money for emergency remediation.

I favour the internal stuff-up theory myself, because if they were pulling an intentional scam surely they would have treated the customer who found the problem differently to the rest of the user base. For self-preservation if nothing else.

(I also heard a rumour at one point that the "fix" that was applied has just pushed the critical date forward by a decade or so ...)

@Bruce,

Otherwise it's for FICO less than 660.

Now there's a perverse incentive if ever I saw one. Weren't there scams at one point to boost people's FICO scores to qualify them for cheaper loans?

Maybe one could work out how to set up a quick cottage industry to get a high FICO score down to 650 for just long enough to get a bailout, then back up again. (Might be the kind of scheme that would attract a Mortgage Broker suffering from a commissiondectomy, in fact. :twisted:)

ozajh,

Nice to see opportunity where others see only adversity! But wrecking your FICO alone won't get you in the door. And that's assuming this particular door is one anyone would willingly walk through. Well, people will have several choices, none of them very agreeable.

One thing I think has not been much remarked on so far is the effect of the freeze on financials: it will temporarily slow damage to the ABX and delay the failure of derivatives and their counterparties. So it's a delaying tactic for distressed markets as well as for distressed homeowners. But, at least as it looks so far, not a fix or a bailout.

So far, Wall St has had a muted response to the bailout. The market is up, including financial stock, but it hasn't been a slam dunk this morning.

EBGuy,

Great observations by Meredith Whitney. ( I suppose largely b/c they agree w/ mine!) I've been hammering on that w/ anyone that would listen. I can't wait until lenders consider FICO about as reliable as the "rhythm method" of contraception!

What is it that she said? The rudest awakening?

DennisN,

Maybe it was a little tongue in cheek but Michelle Malkin lives/covers the D.C area. She pondered why we cheer lower food, oil and clothing costs but all of a sudden, more affordable home prices are somehow unthinkable!? Since she has a cattle prod at-the-ready for the WaPo I doubt seriously they would cite her as a reference, no matter how much they were in agreement.

I am just now thinking about inflation and the 'delay.'

Lets suppose you bought a $1m home and if it were marked to market it would go for $700k today (using Krugman's 30%). As today's articles state, most people would walk away from a home instead of taking the $300k loss. However, if the governement could buy you time, how much time and in what manner could they fix this?

Well, if inflation was allowed to run up to 7.4%, it would take 5 years to go from a $700k home back to a $1m home. There would be no wage pressure as the 'freeze' means you can afford your home under current earnings. The trick would be everything else would be getting more expensive at that rate. Letting oil run up forces us to make energy independence choices. We also get manufactoring back as imports get expensive. US outstanding debt gets inflated away by 30%.
The biggest problem would usually be the cost of food - but the US is a world leader in agriculture. Mebber this isn't such a bad solution? Investors are asked to find their own 7.4% inflation hedge.

I have decided to try to give balance to this forum by at least examing the pro freeze option. WHaddya think?

SP Says:

> Can someone please explain why any mortgage-holder
> would not immediately sell the damn thing for a discount,
> rather than continue to hold it until Paulson’s ridiculous
> mortgage freeze takes effect?

The reason for the rate freeze is to allow the bond/mortgage holders (that give boat loads of money to politicians in both parties) to dump the stuff. Right now I would be lucky to get $0.20 on the $1.00 for a pool of subprime MBS.

The large campaign contributors holding the subprime MBS are hoping that the rate freeze will move the subprime meltdown and foreclosure spike stories off the front pages so they can slowly dump the billions of crap on their books at something close to par.

FAB, you may be right.

But my impression lately is that those markets have gone cold since August.

Another scenario has the Paulson treasury pushing the inevitable onto the next administration.

would it be easy for one member of family to drop off the $8/hour workforce and be elligible for freeze?

FormerAptBroker Says:
The reason for the rate freeze is to allow the bond/mortgage holders (that give boat loads of money to politicians in both parties) to dump the stuff. Right now I would be lucky to get $0.20 on the $1.00 for a pool of subprime MBS.

Okay, I can see that. However, if I was a bagholder on one of these MBS', I just saw my returns slashed by arbitrary government fiat, after the collateral values already turned sour in a hurry. It is unlikely that I would get much more than 0.20 anytime soon on the market - since the borrower's finances look like they will either stay the same or get worse over time.

The only hope is to hold on to this toilet-paper and pray that the Kleptocrat-in-Chief (tm) would make arrangements for a taxpayer-funded organization to take it off my hands. While I am as cynical about the government, this would seem like a very slim hope.

It just puzzles me to no end that such a large-scale juggle is being held together on such shaky underpinnings - how come nobody has cut and run yet? WTF are they doing to keep all these guys in line?

ozajh Says:
Maybe one could work out how to set up a quick cottage industry to get a high FICO score down to 650 for just long enough to get a bailout, then back up again.

Hey, if the Paulson Put (tm) works, I see no reason for the free-market to supply the necessary enterprise to fill this demand.

Given the general quality of 'solutions' so far, I am sure nobody has given much thought to actually following up every six months to check if the FB still qualifies for the freeze. That kind of close-the-gap thinking is too much to expect.

As an aside, it is about time to dust off this old joke:
Q: What is the collective-noun for a group of Bankers?
A: A Wunch of Bankers.

Correction:
Hey, if the Paulson Put â„¢ works, I see no reason for the free-market NOT to supply the necessary enterprise to fill this demand.

FAB,

I'd actually read ETrade got $0.27 on the dollar but I think there were substantial Alt A holdings in the portfolio so your figure is... right on the money!

SP,

As you're aware, it is the Policy of the Administrator to discourage the frequent changing of screen names. Ahem, however, if you don't nail down Kleptocrat-in-Chief (TM) most assuredly someone else will.

DinOR

Asst. to the Administrator

SP Says:

> However, if I was a bagholder on one of these MBS’, I just
> saw my returns slashed by arbitrary government fiat, after
> the collateral values already turned sour in a hurry.

Their will not be any reduction (slashing) in cash flow under the plan, the bond holders just won’t see any increase in the cash flow for 5 years.

> It is unlikely that I would get much more than 0.20 anytime
> soon on the market - since the borrower’s finances look
> like they will either stay the same or get worse over time.

Remember just a few months ago people were paying above par for subprime MBS. If things stabilize the big banks should be able to create some CDOs and unload all of it by the end of the summer.

The banks (and the people that run them who are paid bonuses based on profits) don’t ever want to mark this crap to market since it will not only hurt bonuses but will trigger a lot of margin calls.

FormerAptBroker Says:
Their will not be any reduction (slashing) in cash flow under the plan, the bond holders just won’t see any increase in the cash flow for 5 years.

From expected- vs. actual- return viewpoint, it is the same difference, n'est ce pas?

I believe you're right about the intent of the plan and the reluctance to mark-to-market -- I am just a little skeptical whether it will actually hold tight, though.

The only thing left is to see WHO gets the contract to run this thing - Halliburton/KBR or Blackwater. :-)

BTW, speaking of SUV Bailouts...

I had my shortwave radio while I was slinging some code last night - an
interesting discussion with some guy from Deutsche Bank about "the American financial crisis" - European media is much more blunt and to the point than the rah-rah, happy-talking US media, and the commentator was freely using terms like katastrophe and schmelzen and zusammenbruch.

Anyways, the most startling piece of information I got from the show was that there has been an alarming spike in defaults in _ALL_ classes of credit in the American market. Housing, Auto, consumer credit-card, student loans, and even payroll delays in the small-business/contractor sector. And it has progressively got worse month-to-month since mid-2007.

Aside from the prognosis of a dismal shopping season, the other conclusion was that the American consumer is completely overdosed on credit and monetary profligacy from the Fed will do drown the economy in liquidity and contribute to rampant inflation, but won't help anyone.

My German is not very good, and my attention was mainly on the stuff I was working on, but the message seemed pretty unmistakable.

European media is much more blunt and to the point than the rah-rah, happy-talking US media, and the commentator was freely using terms like katastrophe and schmelzen and zusammenbruch.

But I have a feeling that European banks may fare worse in this "katastrophe."

Aside from the prognosis of a dismal shopping season,

I haven't heard as much negativity around that as I had expected. Could the shopping season actually be faring well??

Bruce Says:
December 6th, 2007 at 6:01 am
"Voluntary for the distressed borrower. Just to clarify ‘mandatory’ cited above."

Mandatory to the lender and the investors who are having the government force a revaluation on them.

Just to clarify.

>>>>European media is much more blunt and to the point than the rah-rah, happy-talking US media, and the commentator was freely using terms like katastrophe and schmelzen and zusammenbruch.

What else is new? US media is completely useless and is basically a propaganda machine. Tha's why we have web sites like patrick,net. The only thing the manage to be blunt about is Putin and Chavez, and in those cases they exaggerate wildly and make them out to be worse than they really are (see: propaganda).

For example Chavez: He just lost a big referendum, and guess what, he took it in stride and accepted the result. If it were Bush, he would have invented some crisis and instituted martial law.

The only thing the manage to be blunt about is Putin and Chavez, and in those cases they exaggerate wildly and make them out to be worse than they really are (see: propaganda).

Putin is great. Under him, Russia created many billionaires.

Chavez has a nice jet.

Mandatory to the lender and the investors who are having the government force a revaluation on them.

If this was done in Communist China there would be outcry from the US MSM.

Malcolm, yes. We both like clarity.

As to abrogating contract law, I do wonder how this will fare in the Congress. Someone's sure to twig. . .

I feel like shorting stocks again. Any good targets (or industries)?

Putin is a man. Russia regained some dignity and strength under him.

Peter P and I agree about something today :-) :-).

Well, it's out. No abrogation of contract law. In fact, I fail to see any significant difference between the proposed procedures and plain vanilla workouts - it restates a common set of rules-of-thumb, avoids IRS trouble, honors the investors' PSAs, maintains SEC standards for REMIC status.

Far as I can tell, it's what we have already. Big whoop.

Peter P and I agree about something today

Perhaps we agree on more things than you think. :)

Tanta's just put up detail at

http://calculatedrisk.blogspot.com/

Bruce Says:
December 6th, 2007 at 12:52 pm
"Malcolm, yes. We both like clarity.
As to abrogating contract law, I do wonder how this will fare in the Congress. Someone’s sure to twig. . ."

It is literally going to be done under federal coercion. Have you read or heard how part of the proposal is a law indemnifying the servicers from lawsuits from the bondholders? This is becoming a disturbing trend, I don't know if it passed or not but a similar type of indemnification protecting Verizon was proposed to prevent privacy lawsuits when they illegally transferred our phone records to the Dept of Homeland security. This administration is showing a disturbing trend of of getting private coconspirators to do their dirty laundry and then protecting them under law.

I suppose we could just circumvent the inconvenience of the political process. Maybe managers of the MBS funds could be kidnapped and sent to Pakistan where under waterboarding they 'voluntarily' sign loan modifications.

The freeze is a joke. What a relief.

If you have an 8% loan that resets to 12% they 'might' leave it at 8% 'if' you qualify. hahaha

And its voluntary? Why the H is government wasting money passing voluntary laws? It seems like a total waste of resources and everyones time. Like the 'absitinence' initiative or 'just say no'.

I watched Paulson's press conference. When asked how this solution will sit with renters who have been waiting for prices to come down, he said "the market will take care of that". No recognition that the government is actually interceding in normal market behavior (picture him with fingers in ears, singing La La La La, I can't hear you, La La La La, market will take care of that). He also repeatedly said this is not a "magic bullet" solution.

What I get out of Bush's move to help FBs, or certain FBs, is that the US economy depends utterly on housing prices staying high. How lame is that? Our economy depends on 900 sq ft. "homes" going for 1/2 a mil. That's the only bailing wire and bubble gum holding this economy together? Must be, or why else would an otherwise lame duck administration jump to the aid of a select class of investors?

All the while, Paulson had the nerve to say some very positive things about our economy.

I am interested in how Americans will feel about taking out mortgages in the future. The real estate industry, banking industry, and now the US Treasury are all participating in this scam. Who pray tell wants to take out a mortgage now? If it means your contract may be null and void thanks to Uncle Sam, even for private transactions, if it means that the rules change as we go along?

I'm as disgusted by this as Malcolm. Disgust aside, how do I gain in this new, broken, economy? If it is just a joke, please, somebody let me in on it.

Malcolm, it's not law, evidently. Voluntary for all parties.

MBS fund documents contain guidance for workouts. No fund will be required to change guidance, so this is intact. Servicers still weigh foreclosure against workout terms, and then do what nets out best for the fund.

If you have an 8% loan that resets to 12% they ‘might’ leave it at 8% ‘if’ you qualify. hahaha

Yeah, it doesn't make much sense to freeze rate at 8%. I would imagine sub prime folks would lose house even at 3% at this high home prices. At 8% it's a given. Good deal for servicers and investors.

HelloKitty posted my thoughts that I had while I was out today. All of this must beg the question, if it is normal business practices why on earth do we need a law passed? Being in the industry I can only go from my experience and I can tell you that loans that I invest in cannot be changed by the servicing company. Even for something as simple as a short extension, the majority of the parties on the trust deed have to vote. It would not surprise me if certain pools for convenience allow a servicer to waive a certain number of late fees or give autonomy for a foreclosure workout; I can guarantee that these provisions are written as to be in the sole interest of the bondholders, not the borrower.