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The politicians will have to choose between FBs who vote and Hedge Funds that make campaign contributions.

I guess the politically expediate method would be to add hedge funds to the bailout list, along with the FBs and banks. Finance it as follows:

Tax renters. A line should be added to the 1040 Form forcing these slugs to pay a percentage of the ASSESSED value of the abode they are actually living in. After all, society is sudsidizing these often well-to-do folk by allowing them to pay rent that is below below "true" market housing costs.

Tax credit card users who pay off the balance every month. These freeloaders are using for mere convenience a system balanced on the backs of merchants and those customers who actually pay interest.

A tax on savings. We need this kind of "wealth tax" to nab those who are not contributing through consumption. A percentage of one's average savings balance should be skimmed. Include any savings vehicles, whether they pay "shares" or "interest." Consider adding "home equity" so we don't allow anyone to "cheat" by paying off a home.

Who says politicians are going to get involved at all? This is a matter for the courts. If it is legally provable that the banks are weaseling out of their derivatives per the terms of the securities, then the hedge funds can collect.

Of course, it's probably not the banks that created second derivatives on the MBS notes. It was someone else who packaged off the risk and hedge.

Maybe the banks can argue "what is the true meaning of default?" angle. After all, aren't they the ones who control whether or not a note goes into default? They can always negotiate and mitigate a loss, right?

Now that's a hell of a topic.

I think the point is that politicians are trying to save the borrowers, and at the same time save the mortgage from defaulting. Like anything else in our economy, what benefits one group hurts another which is why I'd rather they(government) stayed out of this. Now government bailouts aside, the real issue here seems to be the loss on an investment because of the banks' actions. Here are a couple of thoughts:

First, why shouldn't a bank renegotiate with a debtor? It would seem like good business if they are servicing the loan and carrying it to try to salvage it.
I am sick and tired of people whining because something messes up their speculative investment. Why would this violate SEC when the bank in its normal course of business is not directly related? That would be like an oil speculator getting made at Pruis owners.

Uh Prius

After reading the CreditFlux summary, the issue certainly does seem to be market manipulation vs. just holding to certain contracts.

Jack, what do you mean by manipulate the derivatives market? You seem to be complicating a simple concept with a complicated term which basically just means the future value of the notes. Because the hedge funds are betting against the value of the notes through their 'speculation' that there will be high defaults; they are complaining that the bonds and loan instruments aren't falling in value because the banks out of desperation are renegotiating. Obviously they are delaying the inevitable, but it is a ridiculous complaint to say that banks have to just stand idle and not do anything to mitigate their losses.

Brand, I read it as: because the banks are being flexible with the contracts, that is rising to the level of market manipulation. It's just silly. It's like saying closing a plant down is market manipulation because I was shorting that stock and now the company isn't losing as much as I was hoping for.

Everyone losing money is looking for someone else to blame, even those vultures who were banking on others losing money for their gain.

It is like that thread a few months ago debating how easy the bondholders had it because they could just return newly funded defaulted loans. Investing nowadays seems to be a one way deal. When they make money people pat themselves on the back for being smart, and when it doesn't work out, then they cry market manipulation, or fraud, and then try to find someone else to blame.

Every few weeks I get an invitation to join a class action lawsuit against Accredited Home Lenders because their stock crashed. I guess I am on the list because I was a shareholder at the time. Well sort of, I was shorting them at the time, and actually did very well.

Never bet against the banks.

Person,

I'm not really an expert in securities litigation. Loan "work-outs" have been around I guess as long as there have been loans but in the past they were confined to "individual cases". Divorce, illness, job loss. In those cases I don't think anyone has real grounds for objection.

When it comes to across the board, blanket "mortgage amnesty" though the HF's may have a case. They..... actually DID their homework and just when those derivatives are delivering the bank wants to change the game? If the new re-jiggered loan is what they intended to underwrite all along why didn't they just go ahead and do that in the first place? Had the int. rates been lower and the term longer (slightly lower payment) the HF's probably wouldn't have thrown money at the contracts to begin with.

OT, we finally had some 80 degree weather in OR! I think the last time THAT happened was in late August '06.

Is it the same group of banks that are modifying the terms of the loans the same banks that are on the other side of the derivative bets?

That was basically my question too - if this is true, it would seem to be an inherent moral hazard, and I would have thought this would not be okay in the first place.

TN, Skibum, the article says some IBs do servicing as well. I think the keyword is some. The article also clearly states that it is disclosed that servicers have this option of renegotiating. I believe the article is written with a slant, trying to stir a frenzy with very loose implications. The real theme that I am concerned with is an independent party acting in its own interest now being scrutinized and accused of 'manipulating a market' just because once again speculators don't understand that there are always unkown variables.

Person Says:
June 4th, 2007 at 6:25 am
"Malcom: I’m not sure how that was proving your point, but tanking a company you control while shorting its stock would certainly be considered market manipulation. Because the SEC errs on the side of a broad defintiion of “market manipulation” (DinOR might could help here) it’s not unthinkable that they could construe a massive attempt to delay the precise moment of a wave of default, as “market manipulation”. "

Sorry, but this is just intellectually dishonest. It has nothing to do with anything I said, and is actually a false comparison to the topic.

What DinOR said.

O' to be a bankster or politician. To be able to just arbitrarily re-write the rules midstream whenever one of your Trillion-dollar bets goes south. Regulation & risk-free profits with fully socialized risks. Now THAT's the life, folks!

Illegal immigrant amnesty meet your new cousin: mortgage amnesty. But don't worry, we are *still* a "nation of laws". The only difference is, today, we the ruling class decides for us which laws/rules it chooses to enforce, depending on the best interests of... the ruling class. And they always reserve the right to rewrite those rules, depending on... their own best interests, of course.

Heads I win, tails you lose. What a country! :-)
(Psst... anyone know of any job openings for a bankster CEO? I'd like to get in on the action.)

once again speculators don’t understand that there are always unkown variables.

Not to mention that the hedge funds' selfish and myopic viewpoint aside, maybe, just maybe, the banks are actually trying to do the financially prudent thing by renegotiating loan terms. It's a great deal better to have a somewhat less profitable loan that continues to get paid off and serviced as opposed to a loan that goes into default and eventually foreclosure.

I'm sure that "small" point is completely lost on or ignored by the HFs.

DinOR,

You're not implying that banks intentionally wrote toxic loans to get hedge funds to bet against them. Are you?

BTW for the opposing view. Can someone explain to me how a servicer benefits one way or the other as to whether the hedge fund makes or loses money? They don't have an interest in the hedge fund so why manipulate the market even if they could? Banks aren't betting against themselves. Apart from having to take back certain loans, once the bonds are sold off, they don't even have a stake. The only relationship that exists is between the servicer and the IB. The IB lives or dies by how well the servicer can get the loans to perform because that's what maintains the bond value. That's the reason for the disclosure of potential modifications. The hedge funds clearly didn't expect this, and that's their own problem.

Obviously they are delaying the inevitable, but it is a ridiculous complaint to say that banks have to just stand idle and not do anything to mitigate their losses.

Malcolm,

As near as I can tell, he main complaint with these on-the-sly bank "work-outs" on securitized loans is they are failing to get the ok from the actual loan-owners (hedgies & pension funds that hold the MBSs), which violates the terms of the MBS contracts. If the work-outs were for 100% bank-owned loans, or if they got the ok from MBS owners up-front, there would have been no dispute. Or am I missing something?

Why is median price still going up in Santa Clara County?

http://viewfromsiliconvalley.com/id331.html

Re-working existing securitized loans on-the-sly without loan owners' consent = Enron style accounting, violation of MBS contract terms and possible securities fraud. Is that so hard?

Harm,
I may disagree with you on this case, but something in your post is very true IMO, and I've said it before. The only reason for all the 'bailout' talk is that the right people 'ruling class' stand to lose a significant amount of wealth. The fact that I believe it was a Republican who first brought it up was incredibly suspiscious at face value. I suspect you don't even realize how scary and close to the truth you actually are.

Skibum gets it. Of course the bank would rather take a less profitable loan than a loss. This happens to hurt a speculator, so what? When a hedge fund speculator is right that means a borrower got hurt, or a bank got hurt. It is a competitive, cruel world we live in.

Re-working existing securitized loans on-the-sly without loan owners’ consent = Enron style accounting, violation of MBS contract terms and possible securities fraud. Is that so hard?

That's interesting. If this principle is truly enforced or adhered to, the complex repackaging of loans into MBS's will have effectively removed any flexibility on the part of loan servicers and FBs from renegotiating loan terms. It seems unlikely that banks would go to each of the myriad of HFs, mutual fund managers, institutional investors, etc to ask "permission" to renegotiate loans, even if it were to ask for a generalized "ok" to renegotiate.

If this issue really gets brought up to the limelight, it will be yet another handcuff on the FB trying to wriggle out of a bad loan.

Harm, IMO what you are missing is the hedge funds don't own the MBS, they are betting against them. The bondholders are actually ok with the renegotiations because it mitigates their losses. They are on the servicer's side. Yes, they own the loans, that's why they don't want them to fail.

Malcom,

Oh no, I wasn't implying that. Many of the loans now requiring modifications were probably funded in 2002-2005 when 'RE only went up'. The banks felt very comfortable and in this ever escalating environment the borrower's ability to repay the loan wasn't really an issue. They were lending against the property itself, so many of these folks in ways WERE "straw buyers"?

The "wall paper" that was underwritten in '06 probably isn't in default (yet). I'm sure the banks have looked at the "re-set timeline" as have we and they're trying to contend with it. If they intend on being the primary players when the REIC meltdown has hit rock bottom, they'll need their strength (and their liquidity!)

I think that is interesting as well. However the two articles discussing this say it is normal business for the banks to renegotiate when it is in the interest of the bondholders.

I do think there is a tendency to get stuck on the shock terms, which gets in the way of conceptually tearing into the real issues, and motivations.

Person, sorry I should have made that clearer.

Malcolm,

I see your point re: the irony of hedge funds trying to portray themselves as "victims". It's pretty hard to shed any tears for willing speculators seeking to profit from other's misfortune, any more than I can shed a tear for the banksters. That was the main theme of the CalculatedRisk post as well --two giant reptiles doing battle over who gets to eat Mr. FB for lunch, neither one deserving of a bailout or sympathy.

OTH, I have a problem with banks making scads of bad loans to unqualified borrowers then just arbitrarily re-writing the terms to avoid having to book a loss (God forbid). Where is *my* work-out? Are responsible borrowers who make their payments on time getting these below-market rates and forgiven interest and other work-out "goodies"? I don't think so. This is the problem.

Well, the truly Machievellian slant on this issue is that the banks almost certainly knew that many, many of these subprime loans would get into trouble once the resets kicked in, but they decided to "cash in" on the huge profits gained by reaping lots of high-yield interest payments for at least some period (remember, it's not that 100% of all subprime borrowers are tanking, there are still many who are keeping up with payments somehow). In fact, perhaps some, if not most, of these banks probably predicted this would happen and already had a "3-year plan" to renegotiate into more realistic terms when the time came. That time is now.

That’s interesting. If this principle is truly enforced or adhered to, the complex repackaging of loans into MBS’s will have effectively removed any flexibility on the part of loan servicers and FBs from renegotiating loan terms. It seems unlikely that banks would go to each of the myriad of HFs, mutual fund managers, institutional investors, etc to ask “permission” to renegotiate loans, even if it were to ask for a generalized “ok” to renegotiate.

skibum,

This is exactly the legal minefield the MBS/CMO market is currently facing. Technically, the originator cannot sell a basket of loans (MBS) and then just arbitrarily change the loan terms after the fact, unless this right is stipulated in the MBS sale contract. Not a securities lawyer, but I believe that the banks typically have the right to replace a certain percentage of the loans if they go bad (with good loans), but not to arbitrarily re-write the terms as they see fit. We're basically in uncharted waters this time, as there were far fewer securitized mortgages during the last downturn (early-mid 90's).

Malcolm,

Aren't the hedgies big-time MBS owners that are mainly using derivatives as a hedge against losses on their existing holdings? Basically a form of institutional "loss insurance"?

What typically happens to loanowners in arrears is if the PITI payment is.... $1,000 and they can only come up with $999 the lender usually sends the check back. I've always had my doubts about this approach but lenders will tell the borrower, "if we did it for YOU, we'd have to do it for EVERYBODY!" Which I can see.

Next month the poor fellow dealing with a divorce (or whatever) can only come up with $1998, he's now TWO months behind. In most states after 3 months they send out a N.O.D and the slide to foreclosure begins. Look, if the banks want to work with these people I'm fine w/ that. I've always felt the system was out of whack anyway. But early on it needs to be established that the borrower even intends to keep the property and is taking steps to secure his/her interest in it. It would be wrong to have left a dozen un-returned voice messages and report back that "we're working with the borrower".

I agree with both of you. I still question Harm on one thing though which is that I simply don't agree that it is arbitrary or part of a conspiracy. Most of these loans IMO aren't salvageable anyway, the articles mention that even resetting the clock is just putting off the inevitable, but I would make a couple of points.

1. If a bank can renegotiate a loan to save it, it probably should do so, if the FB can realistically qualify.
2. I think it is more socially acceptable for a bank to privately help an FB in its own interest verses a government bailout. To be quite honest, we are distracted by the private parties when I view a government bailout of FBs to be the biggest and clearest case of an illegal market manipulation. It is also morally wrong on many grounds of principle but mostly IMO because the government is chosing preferential groups of people over the others.

Harm asks
"Malcolm,
Aren’t the hedgies big-time MBS owners that are mainly using derivatives as a hedge against losses on their existing holdings? Basically a form of institutional “loss insurance”? "

I honestly don't know. I would probably cave in a little if it were a clear case of a straddling strategy like this. I don't believe it is though, I think it is as simple as a group with one interest pissed off at another group for acting unexpectedly. Also, if the bank through MBS is a stakeholder in the hedge fund then why save the loans? It's like a boxer betting against himself. He would just go down.

In fact, perhaps some, if not most, of these banks probably predicted this would happen and already had a “3-year plan” to renegotiate into more realistic terms when the time came.

Fortunately, exec pay and bonuses aren't linked to the future.

So, 3 years ago, an exec getting a $25 mil bonus for these fantastic revenue bookings certainly can't be bothered by the fact that these loans would implode 5 years later.

What's a shareholder?

DinOR Says:
June 4th, 2007 at 11:14 am
"What typically happens to loanowners in arrears is if the PITI payment is…. $1,000 and they can only come up with $999 the lender usually sends the check back. I’ve always had my doubts about this approach but lenders will tell the borrower, “if we did it for YOU, we’d have to do it for EVERYBODY!” Which I can see."

Funny how atitudes change. That actually happened to me years ago. I had auto bill pay so I didn't notice the bank changed my escrow amount upwards so my payment was a few dollars short. They put the whole thing in my escrow account and charged me a late fee. I not having a problem letting my feelings known ended up winning that little spat with the bank when I told them I was going to file a complaint with Dept of Corporations because they were in breach of my TD which only says the borrower is responsible to make at least the pinciple and interest payment or a late charge will be chaged. I pointed out to them that my payment was well in excess of the principle and interest and that it was an escrow deficit, not a shortage of my payment.

"3 year plan"

Oh I don't think that would be over the top to say that at all. Seems to me they were counting on it. The one thing though they didn't figure on is that their borrower would be under freaking water!

That's why it's been important to "will" an end to the slide and establish yet another "bottom". Now everyone that HAD been playing together so nicely is turning on one another! Builders are slashing prices and adding fresh bling to lure what few buyers ARE out there away from existing sales, the finance side is in "he said/she said" mode and NAR's 6% commission is against the ropes.

Malcolm,

RE:
#1: I agree, IF the bank either owns the loan or gets the consent of the MBS owner first.

#2. Sort of agree with one caveat: isn't giving preferential terms to a FB creating yet another moral hazard? As in, "We're willing to give a 2% fixed-rate work-out to Mr. FB in perpetuity because he can't afford a 'real' mortgage and we were too lazy and irresponsible to qualify him in the first place. Unfortunately, we won't extend this deal to YOU, because you made the unfortunate mistake of being responsible."

Whatever happened to taking your lumps, writing down the bad debt and moving on? Or (*gasp*) learning from past mistakes and trying not to repeat them? I realize the banks want to try to minimize losses, but how is keeping zillions of zombie loans on the books in perpetuity vs. a few painful quick write-downs in the best interest's of shareholders? I get the distinct impression most of these guys just want to hide the losses as long as possible, so they have enough time to divest their personal holding and bail out with golden parachutes.

Eburd, that's exactly how it worked. I said it earlier, once the loans are handed off the original underwriters don't care. They made their money from points, fees, and lender kickbacks for higher than market interest rates.

It's the ones that went sour early that put New Century and Accredited and those guys in the red because of the return clauses.

It's just like the movie 'Traffic.' As soon as the traffickers start losing money bodies start showing up. It is white collar gang wars literally. They just use the courts but it is the same thing. Rats eat eachother when they get hungry enough.