Morning Report 7/10/12

Vital Statistics:

  Last Change Percent
S&P Futures  1351.5 2.3 0.17%
Eurostoxx Index 2253.9 26.0 1.17%
Oil (WTI) 85.39 -0.6 -0.70%
LIBOR 0.458 0.000 0.00%
US Dollar Index (DXY) 83.18 0.023 0.03%
10 Year Govt Bond Yield 1.52% 0.01%  
RPX Composite Real Estate Index 183.6 0.3  

Markets are slightly higher this morning on moves by European Finance Minsters to lend to Spanish banks and a positive surprise in UK factory output.  Alcoa reported better than expected sales and profits last night. Bonds are down a couple ticks. 

The National Federation of Independent Businesses reported a 3 point drop in their Small Business Optimism Index in June. The only bright spot in the report is that small businesses expect credit conditions to continue to improve, but all other components were down. On the employment front, 9% of firms added 2.6 workers, while 12% cut employment by 2.8 workers.  The rest were unchd.  Punch line:  The economy slowed, but so far it doesn’t appear that we are headed into a recession.  Political uncertainty remains at historic highs. Note the SC decision on obamacare was not reflected in this report. 

Fannie Mae’s National Housing Survey reports that consumer optimism in the housing sector continues to improve, even in the face of weakness in other areas. But is the optimism being artificially driven by tight inventories which is primarily due to negative equity?

The Consumer Financial Protection Bureau has put out a 2000 page phonebook on how to address high cost mortgages.  It plans to ban balloon payments and prepayment penalties. Of course, prepayment penalties merely make the cost of the embedded prepayment option explicit, as opposed to being hidden in the interest rate. This would be the equivalent of the SEC decreeing that all mutual funds must be no-load. They also cut the size of permissible late payments and an assortment of other things. By ending balloon payments, the CFPB is effectively ending the hard money mortgage market, leaving those that can’t qualify for a normal mortgage unable to borrow. 

14 Responses

  1. Joe Nocera disappointingly jumps on the crazy train:

    “Housing’s Last Chance?
    Published: July 9, 2012

    “Which is why Greg Devereaux, the county’s chief executive officer, found himself listening intently when the folks from Mortgage Resolution Partners came knocking on his door. They had spent the previous year kicking around an intriguing idea: have localities buy underwater mortgages using their power of eminent domain — and then write the homeowner a new, reduced mortgage. It’s principal reduction using a stick instead of a carrot.

    I know. When you first hear this idea, it sounds a little crazy. Eminent domain to take a mortgage? But the more closely you look at it, the more sense it starts to make. It would be a way to break the logjam that keeps mortgages in mortgage-backed bonds — securitizations — from being modified. It could prevent foreclosures. And it could finally stabilize housing prices.

    The core issue that Mortgage Resolution Partners is trying to solve is what might be called the securitization problem. Bundling mortgages into securities and selling them to investors was, initially, a wonderful idea because it greatly expanded the amount of capital available for homeownership. But the people who wound up owning the mortgages — investors — were diffuse, often with conflicting interests, while the mortgages were managed by servicers or trustees who didn’t actually own them. And the securitization contracts never anticipated that people might need to modify. So it has been nearly impossible to modify mortgages stuck in securitizations.

    It turns out, however, that there is nothing to prevent a government entity from using eminent domain to acquire a mortgage. “Eminent domain has existed for centuries,” said Robert Hockett, a law professor at Cornell who has served as an adviser to Mortgage Resolution Partners. “And it is applicable to any kind of property, including a mortgage.” What matters, Hockett continued, is two things: is the entity paying fair value for the property, and is it for a legitimate public purpose? ”

    This is what happens when you ignore root causes and let problems fester. Unanticipated consequences of Pretend and Extend. They should have done Federal bankruptcy cramdown when they had the chance.


  2. The politicians will soon find out that they are the investors who will be screwed because pension funds are the biggest buyers of mortgage backed securities. The pension funds are already operating in the worst of all possible worlds – high health care cost inflation combined with low interest rates.

    Don’t forget these mods have nothing to do with financial distress, foreclosures, blight, etc. The only people affected are those underwater borrowers who are currently making their mortgage payments.

    The unintended consequences of this be huge – Lenders invested in San Bernardino county in the first place mainly comply with CRA requirements. If this happens, the CRA “cost of doing business” requirement just increased and those additional costs will be passed on to everyone else. But, I guess it is racist to object to having to subsidize someone else’s mortgage.


  3. The real issue is eminent domain being used to advantage one private for profit enterprise at the expense of another. Crony capitalism at it’s finest, courtesy of Kelo v New London.

    The next step is campaign contributions from those who are the beneficiaries of the seizures to the politicians doing the seizing.

    The banks and the other players in the securitization industry may come to regret having opposed mortgage cramdown in Federal bankruptcy law. At least there they got their day in court before a Federal judge.


  4. ” Eminent domain to take a mortgage?”

    how the hell is that not just outright theft?


  5. “Can there be any doubt that keeping people in their homes constitutes a legitimate public purpose? ”

    we’re so screwed.


  6. “novahockey, on July 10, 2012 at 9:05 am said:

    ” Eminent domain to take a mortgage?”

    how the hell is that not just outright theft?”

    The “fair market” compensation paid.


    • jnc:

      The “fair market” compensation paid.

      A “fair market” price requires two sides willing to deal at that price.  In the absence of that (which, of course, is precisely the problem) how is one to determine it?  Also, it make no sense to determine the required “just compensation” based on the value of the property since the mortgage is actually a function of the borrower’s credit quality.  Even if a homeowner owe’s more than his property is worth in the market, as long as he is current on his payments and is expected to remain so, the value of the mortgage is the loan principle amount, not the value of the underlying property.

      So it is hard for me to see how this “cram down” can be legitimately effected under the “just compensation” clause.


  7. and if i disagree on the “fair market” value? or decline the offer?


  8. Off to court you go. Good luck.


    • I did some successful jury trials representing condemnees in the 80s. Local folks knew when the County was trying to gobble private land on the cheap. Frankly, I got between 3 and ten times the “award” in jury trials in different counties.

      But claiming against the County for an amorphous “agent” who holds a mortgage when the best you can do is get a jury to go for the face amount of the note, not a multiple of the award by the County?

      Forget it.


  9. As a data point, non-performing whole loans trade around 70% of the underlying collateral value. Since these are by definition current loans, the banks will be marking them at par.

    These are performers, so they should be higher, but no one is paying more than the underlying collateral value. And the county’s partners have to buy at a discount to the underlying collateral value to earn a return.

    In other words, if a trade happens, it will be unfair, by definition, since the partner will only play if they can purchase the loan at a significant enough discount to the underlying property value.

    In whole loans, there are two “pars” to keep track of – UPB (unpaid principal balance) or BPO (Broker Price Opinion). Generally for distressed mortgages, BPO is considered par, and prices are quoted as a % of par.

    The buyer probably won’t bid more than 85 (since they have to split the P/L with the city and put up all the money).

    The only hope is that a judge recognizes what is going on and tells the city that a fair price is some reasonable discount to UPB, which will make the trade non-economic for the hedge fund.

    But if a trade happens, pretty much by definition the investor is screwed.

    ****Caveat: If the loan is a VA loan or FHA loan, the investor is guaranteed their principal by the government, so the losses would go to the Federal insurance agency – either FHA or the VA.


  10. Adventures in Keynesian Economics:

    “Medicaid’s stimulative effect
    Posted by Sarah Kliff on July 10, 2012 at 3:18 pm”

    “Here’s one factor governors may want to weigh as they consider participating in the health law’s Medicaid expansion: Study after study has found that federal Medicaid dollars spur economic activity beyond the initial investment.

    Researchers find that a dollar of Medicaid spending increases spending both in the health-care sector and in other industries.

    “For every dollar that a state spends, federal funding filters through the state economies,” says Robin Rudowitz, associate director for the Kaiser Commission on Medicaid and the Uninsured. “That tends to go both into health service vendors as well as other sectors.”

    Medicaid acts as a stimulus in two ways. First, increased federal spending on health care can, in tough budget times, free up state dollars for other spending. Medicaid spending can also ripple through the private sector, stimulating increased employment that leads to higher household spending.”

    “One recent study found that every $100,000 in stimulus dollars increased employment by 3.8 job years. Each stimulus dollar had a multiplier of 2, meaning that every $1 of Medicaid spending resulted in a $2 increase in gross domestic product.”


  11. “Brent Nyitray, on July 10, 2012 at 11:12 am said:”

    “****Caveat: If the loan is a VA loan or FHA loan, the investor is guaranteed their principal by the government, so the losses would go to the Federal insurance agency – either FHA or the VA.”

    I think the regulator for Fannie & Freddie has gone on record about this as well with regards to increasing the losses for those two entities if the proposal is implemented.


  12. Successful austerity of the past?

    “Donald D. Kummerfeld, Crisis Budgeter, Dies at 78

    Published: July 10, 2012

    Donald D. Kummerfeld, a budget director and first deputy mayor whose insistence on financial discipline and deft political touch helped steer New York City away from the brink of bankruptcy in the 1970s, died on Thursday in Jersey City. He was 78.

    He had become ill while gardening in intense heat and died in a hospital emergency room, his wife, Elizabeth, said.

    In 1975, financial markets slammed their doors on New York City after years of excessive borrowing, and New York State stepped in to issue bonds to keep the city running. In return, the state demanded financial stringency. Mr. Kummerfeld’s role was to attend to the details of cleaning up the city’s sloppy accounting practices, enforcing budget cuts and for the first time extending financial planning years into the future.

    Richard Ravitch, an aide to Gov. Hugh L. Carey during the crisis, said in a telephone interview on Tuesday that Mr. Kummerfeld’s job was to say, “If you want to have a balanced budget, this is what you have to do.”

    Mr. Kummerfeld brought to the task years of experience as a budget official in Washington and as an investment banker on Wall Street. But those who worked with him say his negotiating ability matched his expertise with numbers. The New York Times in 1977 quoted an official who had dealt with him as saying:

    “The thing I like about Don is that at least he doesn’t try to pretend. Even when he’s put in the position of having to act like 2 and 2 is 5, you can say, ‘Don, please,’ and he’ll look at you and shrug and say, ‘Yes, but this is our policy here.’ ”

    In an interview, Felix Rohatyn, who headed the agency in charge of restructuring the city’s debt during the crisis, said, “What he brought to the table was great knowledge of both the facts and the politics of the situation.”

    His firmness did not necessarily make him popular. News accounts at the time told of agency heads emerging in tears after meeting with Mr. Kummerfeld. At one public hearing he was accused of “heartlessness.”

    But the strong medicine worked, and by 1977 the city was beginning to turn a corner. “It’s not always obvious, but the city is managing itself now, largely due to Kummerfeld,” Peter C. Goldmark Jr., the state budget director, told The Times. ”


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