patrick.net

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.

RE: HF's actually hedging against losses in the MBS market, the irony is that the original HFs indeed strategized to hedge against bear market losses with derivatives, etc. Nowadays, hedge funds are all about leverage, maximizing returns, and risky bets.

On a slightly OT note, but relevant to the HF issue, an editorial in the NYT business section this Sunday re: is there a new Silly Valley bubble? (of course there is!):

http://www.nytimes.com/2007/06/03/weekinreview/03rivlin.html

(login required), has a little aside from one "entrepreneur":

Another difference: Those seeking little else but gold are not descending on Silicon Valley in great numbers as they did in the late 1990s.

“The same carpetbaggers who came to Silicon Valley to hit it rich last time are now looking for jobs with hedge funds,” said Mark J. Pincus, an entrepreneur working on his fifth start-up.

Comments like this do not bode well for the health of HFs in general. I'd be worried about a looming HF crisis in the near future.

That could be the "minefield" HARM spoke of. When banks wrote and funded their own loans, I guess it was their right to rengotiate as they saw fit. When the whole securitization process ramped up, did they surrender that right altogether? Wouldn't they really just be a middleman these days?

Harm, agree with your points to my ethical framework. I believe in holding people to their agreements personally. I also believe in the freedom of others to pursue their own business interests so even though I agree with you, it is not our place to approve or disapprove. Obviously they think it will lessen their losses.

Malcolm,

Do you know roughly how long it usually takes before a MBS loan batch becomes "seasoned" (beyond the repurchase agreement limit)?

DinOr, I'd say so if it were the bondholders who were not happy with renegotiating. We don't have X-ray vision so we can only use what we see. It is the side betting against the value of the bonds that are upset, therefore me personally, I can only conclude that the servicers are acting in the bondholder's best interest.

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?

HARM,
I know not what you speak of! Taking responsibility? learning from mistakes? What gobbledy-gook are you talking about? In this country, we do not, I repeat, DO NOT accept responsibility for our actions. It's the American way (TM) !

Harm, I think it was something like 6 months. From the prior readings I got the feeling it seemed like an awfully short amount of time.

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

Peter P,

Your "provocative" little post got lost in the shuffle - but I had read that link previously. Sounds plausible to me, and it affirms the theories of many here. One factor unaccounted for in that analysis is that lot size and neighborhood quality are not factored into the numbers - it seems it would be harder to do that analysis, unless the guy was willing to break down sales by zip code and to track down the lot sizes of each and every sale.

However, I would imagine adding those factors into the equation would only bolster the idea that the sales actually closing are skewing towards higher quality.

At some point though, the stalling of the entry market (under $800k in the BA) will probably affect the move-up market (up to $1.2M) to some extent as those looking to move up cannot sell to the willing and ready FB who now can't get a subprime loan. The high-end market (above $3M) will probably be immune to this.

I think we can expect more of that phenomenon. The tightening of credit has removed 21% of potential buyers from the market. These tend to be the lower price tier buyers so don't be surprised. It will all even out in the end with the foreclosure auctions.

With all the discussions about how mortgage servicers work, I went looking for more info on them.

Calculated Risk linky

servicers have a built-in incentive to keep the loan going, where the investor might like to see it foreclosed. The whole uproar over servicers doing “modifications” as if it were only a way to “hide” losses misses the point that the servicer’s financial incentive is to keep getting its quarter every month.

Malcom,

Yeah, I lost my X-ray glasses at the beach and I haven't been back there since!

I don't want to say I have no interest in seeing bondholders being treated ethically or FB's keep their homes. Even though I "hope" things work out for all parties involved if I were being honest I see about a zilch chance of that happening. Even if the banks can salvage 3 out of 5 work-outs that's still a huge number of repo's back on the market and even further downward pressure on pricing. Whether or not HF's suck up the losses or whatever it's not going to change the over all picture that much. That would be dark.... and fading.

Not sure what happened with the post. Probably didn't close the link properly. Here's the link again.

Dammit. Still not working. Probably forgot a " or something. Gonna try this one last time.

Dammit. Still not working. Probably forgot a " or something. Gonna try this one last time.

mortgage issuers would just bend over and take it without even trying to grease up? Wasn’t this factored into their models, or at least specifically protected in writing by their contracts?

SP,
LOL - Yet another great analogy from you! The imagery is just hilarious, yet disturbing. It might make the act less painful, but in the end, the reaming must go on. I'd like to see a "lube job" clause in one of these contracts...

Sorry about the double post. At least I got the link right this time.

Agree with SP 100%. Although hedgies need to be short-sighted, since their investors WILL leave en masse after a few months of bad performance.

They get the .25% annually paid monthly on the loan balances, that's correct.

For instance, I make my living in a mini version of the front end of this. Not the hedge side.

I participate with other investors through a broker. They find a deal, we fund it. They make money from the points, we get monthly interest checks. That broker has a servicing department who collects payments and acts on our behalf. They either take $7.50 per payment as their servicing fee, or they take .5% annually if involved in servicing the fund. So I am in the fund right now, I'm a shareholder (Bondholder for this actual example) out of a note at 12%, 1% is our fund manager's salary, the servicer takes .5% and .5% is set aside for other management costs. So from a 12% note, the fund gets 10% interest.

MtViewRenter,

Yes, they WILL leave, and post haste! They'll need "fresh meat" and I mean fast. What will they be able to do to attract assets?

Malcolm,

Wow, 12% interest.... Isn't that more toxic than subprime?

DinOR,

They'll probably come after small fish like us. Quick, run!

12% is the going rate on hard money constructions loans. I don't lend on individual home financing. These loans are more for bridge or quick rehabilitation loans normally on commercial or multi unit properties.

Malcom,

While I've yet to have any direct involvement with them, clients tell me that the loan servicing companies are well worth what you pay them. They basically do everything from an admin. standpoint. From issuing monthly statements (and late payments) to collections and tax preparation. From what I understand it's VERY labor intensive.