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Monday, November 30, 2009

Modify this 



There is a distinct challenge in writing for the New York Times about financial matters, especially stories regarding underwater mortgages. The Times makes its point of view clear in the way it positions key quotes and how the story is edited -- the "angle" is usually fairly obvious. Over the last two weekends, The Times has thread a very narrow needle -- that loan modifications are a good thing, but not if any financial institutions might actually make money by underwriting the effort and helping to restructure the mortgages one by one; and, the Obama administration is correct in bringing pressure to bear against mortgage companies to get them to reduce payments for upside down homeowners.

On November 22, this story by Louis Story ran, entitled "Wall St. Finds Profits by Reducing Mortgages."

As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.

The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
The key quote is a bit further down in the article:
“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” said Howard Glaser, a financial industry consultant and former official at the Department of Housing and Urban Development.

He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”
(Emphasis added)

There are a couple of problems with Glaser's comment. First, as I believe the article makes clear, the identity of the equity investors who are picking up distressed mortgage pools isn't really known, so perhaps these investors have nothing to do with the original parties "backing toxic loans." Second, no matter who they are (even if it is in fact the same investor groups), it is hard to criticize risk capital when everybody wants somebody to step up and catch a falling knife. Yes, the workout groups have a waiting customer for the new paper, thanks to F.H.A. and Ginnie Mae and their new marching orders; but, being able to purchase a pool for 40 cents on the dollar, go through each individual mortgage and modify it in a way that works for the new lender and the borrower (given the new reality of local market conditions), and then repackage the pool and sell it at 55 cents on the dollar, all of that actually takes some work, diligence and know-how, which might be in part motivated by (gasp!) the profit incentive. It is possible, even likely, that some of the pools acquired for 40 cents are actually worth 30 cents, once all of the modifications are plowed through. So if the investor groups lose a dime on each dollar and then flip the new pool to F.H.A., that would be OK with Glaser? Finally, some of the modifications will be granted to borrowers who must have had a rough idea of what they were doing when they signed up for the original mortgage, and presumably nobody had a gun to their head. This is a nice little win for the homeowner who could not reasonably be described as the target of a predatory lending scheme hooking unsophisticated borrowers. The "rube" paper is co-mingled with the "willing and knowledgeable participant" paper; indeed, if I'm doing the loan mod for the investor groups, I want somebody with a clue on the other side of the table from me, and I want to walk away feeling fairly certain that the revised monthly payments will come in like clockwork, otherwise my mortgage pool is still crap.

On November 29, a week after the piece above, Peter S. Goodman wrote a front page article entitled "U.S. Will Push Mortgage Firms to Reduce More Loan Payments."

The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering.

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”

Even as lenders have in recent months accelerated the pace at which they are reducing mortgage payments for borrowers, a vast majority of loans modified through the program remain in a trial stage lasting up to five months, and only a tiny fraction have been made permanent.

Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.

“They’re not getting a penny from the federal government until they move forward,” Mr. Barr said.
Right, "the government would try to use shame as a corrective," because, well, that always works. I know I respond really well to someone wagging a finger at me and saying, "Shame on you!" If I'm the president of one of those institutions, it's not like I want to have that paper on my books -- heck, show me a way I can make it go away and I can still keep my job, I'm in, just don't give me a moving target.

So, loan modifications are good, provided that nobody on Wall Street actually makes money in the process, and that the pain is borne slowly by the institution holding the original paper, since it ought to do the modifications itself (and not sell the mortgage at a discount, lest the new equity have a chance at making money), or be shamed by the government because of its lack of effort. That is quite a needle to thread.

4 Comments:

By Blogger randian, at Mon Nov 30, 09:11:00 PM:

Banks shouldn't be required to do loan mods at all. That's unconscionable interference in the right of contract. Banks should probably be doing more foreclosures, not loan mods, because loan mods are notoriously unsuccessful actions.  

By Blogger Georgfelis, at Mon Nov 30, 09:22:00 PM:

So we have banks putting together high and moderate risk mortgages lumped into the same packages, sold with taxpayer insurance to large megabanks who then use them as building blocks for their towers of money.

Hm, as a well known American once said, This is like deja vu all over again.

What's that noise?
tick...tick...tick...tick...  

By Anonymous Americans Individual Liberty Coalition, at Mon Nov 30, 10:04:00 PM:

Americans for Individual Liberty Coalition is a newly formed political action committee, our main cause is to ensure the indiviudal, not the community, is the foundation of our nation. Allow the individual to go about their daily lives without interference from the government and to ensure a child may always be able to achieve their dreams and aspirations by maintaining a free, capatilist society. Please join our page on face book and visit our site at www.individualpower.org  

By Anonymous Anonymous, at Tue Dec 01, 10:36:00 AM:

(1) Do we know how deeply the NYT and it's masters were involved in the real estate market?
(2) Don't we need to know the diversity of those now making money BEFORE passing judgment.
(3) Wouldn't the NYT be unhappy if those other than the FOBs ("Friends of Barack") were making money? Include also "those other than the friends of Dodd, Rangel, Paterson, etc."  

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