Unstructured Finance

UF Weekend Reads

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it:  to fix the U.S. economy, you need to fix housing. The trouble is the Fed’s remedy of buying $40 billion worth of mortgage backed securities each month may  not do the trick.

Bernanke argues that buying MBS will push mortgage rates even lower–something that will spur loan refinancings and make it easier for people to buy a home. He believes a rush of new home buying will spur home construction and create job, jobs, jobs.

It sounds good. But the problem is the housing market is not suffering from high interest rates. With the 30-year mortgage rate already down to around 3.65 %, it’s not interest rates that’s keeping the housing market from taking off. Two years after the recession officially ended, far too many homeowners are still weighed down by debt–especially mortgage debt.

Even lower mortgage rates will not help people with a poor credit rating to buy a home. And low mortgages don’t help the millions of homeowners who are underwater on their mortgages to refinance. Similarly, low rates don’t encourage banks or the FHFA to engage in meaningful principal reductions for cash-strapped borrowers.

The Fed chairman could have used his Thursday press conference to jawbone opponents of principal reductions on Wall Street, Capitol Hill and at the FHFA–the regulator of Fannie and Freddie. While Bernanke has no power to force Wall Street or the FHFA to cut mortgage debt for cash-strapped homeowners, he could use his bull pulpit to lobby for it.

And memo to my friends in the press: when Bernanke holds one of his press availabilities, there’s nothing wrong with putting him on the spot by asking about issues like principal reductions or whether local governments should be allowed to use eminent domain to fix underwater mortgages.

Maybe someone can even ask Bernanke if there is a way the Fed can come up with a strategy for banks to sell underwater mortgages to an entity sponsored by the Fed–which could then rework them and reduce the sum owed by the homeowners. The Fed charter doesn’t allow it to buy whole loans but the financial crisis has allowed the Fed to a lot of things no one ever thought possible.

So it appears Uncle Ben a/k/a Fed Reserve Chairman Ben Bernanke finally gets it: to fix the U.S. economy, you need to fix housing. The trouble is the Fed's remedy of buying $40 billion worth of mortgage backed securities each month may not do the trick. Join Discussion

UF Weekend Reads

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really–but the conventions are over. And for all the talk, there is one issue that got short-shrift–a solution to the nation’s still unfolding housing crisis.

Oh sure, there was talk about foreclosures and people struggling to pay the mortgages on their homes, but not a lot time for potential solutions.  And that’s unfortunate because as has been noted many times before, it’s going to be hard for the U.S. economy to take off as long as too many consumers are being crushed by mortgage debts they can barely afford.

Indeed, the disappointing August jobs report is a sober reminder of just how much work remains to get the economy humming again.  As we’ve said many times before on U,F it all still comes down to fixing housing, housing housing.

And after a long time without it, we welcome back Sam Forgione and his weekend reads:

From AR:

Managing a tail-risk hedge fund is trickier now than it was in 2008, writes Jan Alexander.

From BusinessWeek:

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really--but the conventions are over. And for all the talk, there is one issue that got short-shrift--a solution to the nation's still unfolding housing crisis. Join Discussion

Will FHFA opposition to principal reductions boost eminent domain efforts?

By Matthew Goldstein and Jennifer Ablan

There’s nothing surprising about FHFA head Ed DeMarco’s decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. DeMarco, whose agency regulates Fannie and Freddie, has been a consistent opponent of principal reductions–something we pointed out last October in our story on the need for a “great haircut” on consumer loans and including student and mortgage debt to stimulate the economy.

But DeMarco’s renewed opposition comes at a time that there is a growing consensus that something needs to be done on the housing front to get the U.S. economy going, as opposed to simply churning along at the current anemic rate of growth. More and more economists are saying that reducing mortgage debt will not only reduce foreclosures, it will give ordinary Americans more money to spend on goods and services.

It doesn’t take an MBA from Harvard to know that when people have spending power it translates into more demand and that usually prompts employers to hire more people to fill that demand.

DeMarco’s opposition also comes at a time that some local government officials in communities hit hardest by the housing crisis are toying with ideas that once seemed too controversial to imagine. We’re, of course, talking about the idea of using eminent domain to seize and restructure underwater mortgages–something we first reported on in early June. (Sorry, Matt Taibbi, we had the story first).

Mortgage Resolution Partners, the investment firm that is pushing the idea of eminent domain as a mortgage fix, is only talking about seizing home loans held in private labeled mortgage-backed securities.  The firm is deliberately avoiding MBS issued by Fannie and Freddie possibly because of DeMarco’s opposition to principal reductions. MRP’s focus on private label MBS has earned the wrath of many mortgage bond investor trade groups.

Up until DeMarco’s renewed opposition to principal reductions, the opponents of eminent domain appeared to be gaining the upper-hand–as questions about the legality of condemning a mortgage rather than real property have grown. But we wonder whether local government’s will now feel empowered to push ahead with an eminent domain strategy, especially if they see no relief coming from the federal government.

There's nothing surprising about FHFA head Ed DeMarco's decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. But we wonder whether his opposition will inspire proponents of eminent domain to power ahead. Join Discussion

Eminent Domain reader

Jenn Ablan and I have done a lot reporting on Mortgage Resolution Partners’ plan to get county governments and cities to use eminent domain to seize and restructure underwater mortgages. As we’ve reported, it’s an intriguing solution to the seemingly intractable problem of too much mortgage debt holding back the U.S. economy. But it’s also a controversial one that threatens to rewrite basic contractual rights and the whole notion of how we view mortgages in this country.

And then there’s the issue of just who are are the financiers behind Mortgage Resolution Partners and whether they’ve gone about selling their plan in the right way.

The debate over using eminent domain has sparked a lively debate on editorial pages, on blogs and in other media, and that debate is likely to continue now that Suffolk County, NY says it is looking at eminent domain just like San Bernardino County, Calif.  So here’s a bit of sampler of some of the differing views and coverage on this important topic:

Joe Nocera: Housing’s Last Chance?

Robert Shiller: Reviving housing requires collective action

WSJ: An eminently bad idea

Rep. Brad Miller: No wonder eminent domain mortgage seizures scare Wall Street

Jenn Ablan and I have done a lot reporting on Mortgage Resolution Partners' plan to get county governments and cities to use eminent domain to seize and restructure underwater mortgages. As we've reported, it's an intriguing solution to the seemingly intractable problem of too much mortgage debt holding back the U.S. economy. But it's also a controversial one that threatens to rewrite basic contractual rights and the whole notion of how we view mortgages in this country. Join Discussion

Eminent domain for underwater mortgages could have biggest impact on banks

By Matthew Goldstein

A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.

The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.

The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.

Who says? Some of the biggest proponents of the eminent domain plan being promoted by Mortgage Resolution Partners, a San Francisco firm with backing from a group of West Coast financiers.

Robert Hockett, a Cornell University law professor, who is advising MRP, says, ” what we are planning to do, is the second liens would be extinguished once the first loans are taken.” But Hockett, who has been researching the use of eminent domain to fix the nation’s housing woes for some time, said MRP is sensitive to the potential pain this can cause the nation’s banks and is willing to work with them.

The law professor went on to say that some pain is necessary because millions of average Americans are suffering under crushing debts and something needs to be down to jump start the economy. He wrote about the plan in an op-ed for Reuters.

A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation's biggest banks more than investors in mortgage-backed securities. Join Discussion

Mr. Geithner and the politics of condemnation

Matthew Goldstein and Jennifer Ablan

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.

Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.

In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of  buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”

But the biggest obstacle raised by Geithner was determining what would be fair value for taxpayers to pay for an underwater mortgage.

“If Treasury were to pay a a price higher than fair market value, taxpayers would be exposed to a high risk of loss and banks and investors would receive a windfall.”

Rep. Miller recently recalled the letter from Geithner when he read in Reuters about a plan by Mortgage Resolution Partners to use private dollars to work with local governments to condemn underwater mortgages through eminent domain. Miller said he is intrigued by the idea but would prefer it to be the government in charge rather than a group of financiers.

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn't necessarily a new one. Join Discussion

Phil Angelides gives up his “secret formula”

By Matthew Goldstein and Jennifer Ablan

Phil Angelides, the former chairman of the commission set up by Congress to look into the causes of the financial crisis, is no longer part of a group seeking to turn a profit by investing in distressed mortgages.

A representative for Angelides emailed a statement to Reuters saying the former California state treasurer stepped down as executive chairman of the upstart firm, Mortgage Resolution Partners, on Jan. 27. Angelides, as we reported today, stepped down about two weeks after our exclusive story about his role with the firm was published by Reuters.

Angelides’ role sparked controversy because the firm touted its political connections as part of its “secret formula” for negotiating deals to buy distressed mortgages.

We only found out that Angelides left Mortgage Resolution Partners when we asked him to comment on a recent letter from a U.S. Congressman criticizing the firm’s marketing strategy.

On Feb. 10, Rep. Patrick McHenry, chairman of a House Oversight and Government Reform subcommittee on TARP program, sent a letter to Shaun Donovan, the Obama administration’s secretary of Housing and Urban Development, asking him for details about steps that are being taken to guard against “cronyism or conflicts” in the recently announced $26 billion mortgage settlement with the nation’s big banks.

McHenry, a Republican from North Carolina, took note of our Reuters story and the firm’s claim that it would use  “legal and political leverage” to acquire the loans of distressed homeowners.

Phil Angelides, the former chairman of the commission set-up by Congress to look into the causes of the financial crisis, is no longer part of a group seeking to turn a profit by investing in distressed mortgages. Join Discussion

When (and where) the 1% talk about 99%

By Jennifer Ablan and Matthew Goldstein

The last place you’d think a group of Wall Street financiers and ex-politicians would convene to come up with a master plan for fixing the housing crisis is a luxury lodge overlooking the Golden Gate Bridge. But in November, during the height of the Occupy Wall Street protests, that’s where 30 rich and powerful people assembled to “do a good thing” for America.

The meeting at Cavallo Point in Sausalito, Calif., aimed to “hammer out a business plan and chart a course through 2012″ for an investment vehicle that intends to buy up troubled mortgages and help out the homeowners all the while making a 20 percent annual return. You can read the details here

The group is led by Phil Angelides, the California politician, land developer and most recently, the chairman of a federal commission who led investigations into why the financial markets collapsed. The Federal Crisis Inquiry Commission was criticized for failing to come up with any real proposals preventing another crisis. Yet it seems to have inspired Angelides (his tenure at the FCIC ended last February) and others to come up with a market-based solution to the housing debacle.

Now that may be part of the answer. But once again, it seems to be a case of the well-off and powerful talking to themselves. In a letter to potential investors of Angelides’s Gordian Sword LLC, there’s lots of talk about doing good for America and its disastrous housing market. What’s missing at times, however, is the focus on the people hurting the most: Millions of Americans are struggling to keep up on their mortgage payments.

Consider this self-congratulatory remark in the letter

This narrative ends with a restored community: home prices level off, labor is free to move, consumer confidence returns, and perhaps the recovery can commence. Everyone involved — local government agencies and politicians, Servicers and even Wall Street — can take credit for neighborhood recovery.

The last place you'd think a group of Wall Street financiers and ex-politicians would convene to come up with a master plan for fixing the housing crisis is a luxury lodge overlooking the Golden Gate Bridge. Join Discussion

Bad data II

By Matthew Goldstein

Bad data continues to confound the U.S. government in its measurement of the economy, with the Federal Reserve Bank of New York noting it too has been a victim.

In the Fed’s most recent report on outstanding consumer debt, the nation’s central bank said it recently discovered it had been underestimating the total dollar amount of student loan debt for a number of years. In the report, the NY Fed said some of the under-counting may have stemmed from the methodology used by one of its vendors.

The Fed said it has fixed the problem, which was a significant one. The Fed says it may have been under-estimating outstanding student loan debt by some $290 billion.

But don’t worry, the Fed indicates there’s nothing wrong with its other data collection. And on that front, the Fed said overall consumer debt at the end of the third-quarter declined by $60 billion to $11.66 trillion.

Let’s hope the Fed hasn’t been under-counting outstanding home loans and credit card debt either.

Here is the Fed’s student loan debt correction:

Bad data continues to confound the U.S. government in its measurement of the economy, with the Federal Reserve noting it too has been a victim. Join Discussion

At the intersection of Wall and Main

By Jennifer Ablan and Matthew Goldstein

Whether you agree with it or not, the Occupy Wall Street protests that began two months ago in New York have ignited a debate over income inequality and the political clout of the nation’s banks.

Before the protesters began camping out in Zuccotti Park in lower Manhattan, much of the conversation had  focused on the federal government’s debt and not the equally big debt run-up by U.S. consumers in the years before the financial crisis. Now it seems you can’t go a day without reading a story about the vast gulf between rich and poor and the shrinking middle class, or how the housing crisis won’t get fixed until something is done to alleviate the burden for millions of homeowners who are underwater on their mortgages.

Last month a group of graduate journalism students from Columbia University spent some time at the Occupy Wall Street encampment in Zuccotti where they did in-depth interviews with over 200 protesters. (This was before New York City moved to forbid people from sleeping out in the concrete plaza). And the students findings were surprising in that the OWS protesters weren’t just a bunch of unemployed hippies, who all vote Democratic. Rather, they found that the majority of protesters didn’t identify with either political party, 56 percent didn’t have private health insurance and just under 40 percent gave President Obame a grade of C for managing the economy.

We talked to two of the students, Lili Holzer-Glier and Mollie Bloudoff-Indelicato, and this video discusses some of their research.

The findings of the Columbia students are something that many who work on Wall Street might want to pay more attention to. In our story “The Wall Street Disconnect,” we found that many of the 1 percent of the finance world just don’t get why so many people in the U.S. and around the world are upset with their profession.

The disconnect between Wall Street and Main Street is a bit startling, given that three years after the worst of the financial crisis unemployment remains at 9 percent, 15 percent of the country is on food stamps and at least 20 million people live in extreme poverty in this country. And in many states, entire neighborhoods are ravaged by foreclosures.

Whether you agree with it or not, the Occupy Wall Street protests that began two months ago in New York have ignited a debate over income inequality and the political clout of the nation’s banks. Join Discussion