patrick.net

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.

Not if they can't recover all of the original principal sa. As Patrick says, it is a great gamble for homeonwers, if the price had gone up, big money, if the price drops, oh well too bad for the bank.

Countrywide is asking $1 for a few houses in Michigan.
http://norris.blogs.nytimes.com/2007/12/06/would-you-like-a-1-house/

http://www.msnbc.msn.com/id/22132648/

"But George Miller, executive director of the American Securitization Forum, which represents companies that package mortgages into mortgage-backed securities, told reporters he expected the industry would face suits from investors unhappy that the original terms of the mortgages have been modified."

Malcolm, I see your point vividly.

It's my understanding where the trust's PSA prohibits workouts, none are made. According to sources other than Mr. Miller, however, it isn't at all uncommon for trust documents to include language permitting mods provided they don't run afoul of SFAS rules or jeopardize Q status.

If you'd like to take a look, plan details are here:

http://www.americanbanker.com/article.html?id=20071205XN6AZN3U

(requires registration - free week, so no fee)

Additional thought. The industry will undoubtedly hear from investors unhappy that original mortgage terms get modified. They should read what they are signing.

And some will file suits and enrich their attorneys.

I don't see how this plan can pass constitutional muster. First, these contracts with investors did not contain any clauses for modifications. Second, although the plan mentions that it's voluntary, it makes no difference. No party was representing the investors when the plan was made.

This seems like an abrogation of private contracts by the government, which violates the Contract Clause. It wouldn't surprise me if these investors demand a preliminary injunction to prevent the plan from going forward until the courts can determine what is fair under the law.

Either way, the plan is beyond ridiculous and will fail. Nothing but political posturing.

Thanks Bruce, RaiderJeff just did a nice job summing up my concerns though I do conceed that it is possible some agreements with servicers may allow them some autonomy. In any case it is moot because my concern is that the government will impose the freezes whether or not the terms exist. Furthermore I do agree with Raider's conclusions. My concerns are purely on principle, I think this is dangerous territory to venture into but, I do think it will be irrelevent in the long run but I caution everyone that these stringent tiers of borrower candidates will become more laxly interpreted.

And some will file suits and enrich their attorneys.

Ah, warms the cockles of my alleged heart. :)

Art. I section 10 [1] No State shall....pass any....Law imparing the Obligation of Contracts.

First of all it's the Feds, not the states. Second, it's been government's perogative to mess with contrats for decades. For example, if you signed a contract with a hit-man to take out your daughter's boyfriend, believe me the government would step in. Similarly with real estate law - most contracts up until a few years ago forbid re-selling to blacks or orientals. :( Try selling a slave to someone. Or selling dope to someone.

My question is, apart from tax-payer-funded "GSE"s, WHO, WHO, WHO will buy any mortgage MBS/CDO/CWPs right now? Any more fools out there?

Dennis,
10th amendment "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

Also, the legal theories you quote are when the government determines that contracts are or contain illegal provisions. No such allegations have been made, and if fraud is involved the courts are very sympathetic to the injured parties.

OO, that's why it is a really slippery slope, it destroys all credibility for such a trivial result. If we are going to compromise basic rights of commerce we shouldn't tap dance around it, let's just declare all of the subprime ARMs void because more voters would be better off.

OO and Malcom :

I will repost the link I did many posts ago.

http://blownmortgage.com/2007/09/16/do-you-think-chinas-gonna-forget/

(The only important piece in that post is views of some insider - of course all this is being written anonymously, so usual dosage of grains of salt is needed.)

The post talk about China (as investor) specifically. But it applies to all. The risk of government action is always factored into bond prices, although till now it's effect may have been negligible. From now on, it will not be so negligible.

That's the real point.

For all those disgusted (and to be clear, I am disgusted as well) about this situation, there is a positive side.

What is heartening to see is the reaction to this purely political plan. This is NOT being viewed as "Oh, our benevolent government is doing justice and helping the downtrodden". There is enough skepticism, strong criticism in media as well. The real spirit of free market lives in the mentality of people, although admittedly, this is hard to see while listening to politicians on either side.

This plan is wrong from a pure theoretical point of view and will fail in practical tests as well.

This is a NO HOPE TM plan.

ozajh Says:
@DS, you misunderstand me. I don’t think M****M made any sort of general disclosure.

(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 …)

M****m *claim* to have notified their customers of the problem in their 1998 or so Y2K disclosure document. I haven't seen that document, it predates my time and the purchase here was post 2000. However, they have removed the problem in their next release because of significant architecture changes -- I won't name the new product or the version numbers. The certain Defence Force is going to upgrade as part of their new logistics program, also unnamed -- which is essentially just a rebadged bundle of the upgraded ERP and a few add-ons.

M****m had at least 80 customers still on the Y2K7 problem version, and visited them all to gouge them separately for the 1 trivial fix they had to make, price based on the number of licenses they had, for a single central server fix. The fix essentially winds the clock back some 5 years, just subtracts 5 years worth of days from every Julian date in the system, and the date processing module has been recompiled to adjust and add 5 years in processing. So the clock's ticking again... Time to upgrade versions for a mere $200K (this for a 'lifetime free license and upgrades' product)

The 'single customer' story sounds more like a co-incidental finding of the problem and subsequent experience turned into folklore, but they may have made the discovery, who knows.

I've had enough of this vendor, basically our co is switching to SAP soon...

StuckInBA Says:
For all those disgusted (and to be clear, I am disgusted as well) about this situation, there is a positive side.

This is a NO HOPE TM plan.

In short, it's capitalise your gains, socia1ise your losses...

Put simply, tho, the Clinton plan to boost home ownership backfired *because* they dreamt up a 'market-based' solution of promoting sub-prime products to get people into housing, rather than doing something more interventionist. In fact, housing costs in the US have been historically low by international standards, so the fact that lots of people *still* couldn't afford to buy points to me to problems in wage-earning stability in the labour market due to an 'easy hire-fire' system, low minimum wages, low pay in general, etc... i.e. low levels of employee protection, security and remuneration for many workers in the present IR regime...

>> so the fact that lots of people *still* couldn’t afford to buy points to me to problems in wage-earning stability in the labour market due to an ‘easy hire-fire’ system, low minimum wages, low pay in general, etc… i.e. low levels of employee protection, security and remuneration for many workers in the present IR regime…

And through the house ownership SCAM, these low protected people gave away their life savings to rich bankers ....

Thanks StuckinBA, I read it and it is a very interesting account.

Malcolm, if you and RaiderJeff will indulge me to the extent of reading Tanta's initial reactions to the freeze proposal over at CR, I think most or all of your concerns are addressed there.

http://calculatedrisk.blogspot.com/

Among other things, the post explores what modifications - and what restrictions on modifications - are commonly contained in PSAs. Jeff, your assertion that contracts contain no provision for mods is interesting. Citation?