Loan Think

In a few weeks our tired, our hungry, our poor mortgage finance firms yearning to be free of their "troubled" assets will saddle up to the Treasury 'TARP Window' and lay down their burdens. I've read the entire bill, all 451 pages. The law says that two days after a bank sells something to Uncle Sam the government has to disclose the price. The bill also has an "anti-flipping" clause where companies cannot sell assets to the Treasury at a price higher than what they bought them. If an investor buys discounted MBS from a seller, it cannot turn around and then unload the bonds to Treasury at higher price. (I know of at least one investor who's itching to do this.) I'm not a lawyer but I believe there is a loophole in the law where if a seller of bad assets took control of mortgage bonds through a merger/acquisition or bought them out of a conservatorship that they are exempt from the Treasury's "unjust enrichment" clause. Which brings me to the case of Bank of America, which owns Countrywide and its scrap heap of payment option ARMs and HELOCs. When BoA bought Countrywide I assume it "marked to market" the lender's assets including the POAs. Let's just say it marked a CFC POA pool down 60 cents on the dollar. Because the bank bought CFC through a merger it can turn around and sell that same POA pool to Treasury at any price it wants even if it's above the "mark." In other words, the bill could allow buyers of ailing institutions to use Treasury to clean up some of the garbage they bought.

As I feared and published nine months ago, the double bottom encircling our industry has coagulated with a malevolent and recessionary punishment. The wicked nature of the accumulated FS sins is openly displayed within an unknown and unchartered “new world order.” Credit markets frozen, currencies trading in wide fluxes, while the mortgage market “deleveraging” is blamed as a root cause of it all. Yet, to assign blame is easy and we all have our personal “truths.”

In a week or so mortgage professionals and those who make their living from residential lending/servicing will begin making their way to San Francisco for the industry's annual convention. If anything, this will be the most important get together held by the Mortgage Bankers Association, bar none. The industry is grappling with not only the mortgage crisis, but plunging stock markets worldwide and the disappearance of huge swaths of household wealth. Two years ago the nation's housing stock was worth $16 trillion. If you apply a 20% haircut to that (my guess), that means consumers have lost $3.2 trillion in home equity, and counting. But let's look at the stock market losses over the past year: $8.4 trillion in wealth is gone. These are grim times for the industry and the nation at large. There's no way to whitewash the situation. Every time you think we've hit bottom, another shoe drops somewhere else - whether it's overseas or domestically. The word stock traders like to use is "capitulation." Are we there yet? Stay tuned. For updates read National Mortgage News or visit our website at http://www.nationalmortgagenews.com...

The daily news shows surely don’t lack for stories and controversy nowadays. Some advocate socialization of mortgages, others a common rate for everyone, and others an across-the-board write down of anyone deemed to be in a “troubled” mortgage. Foreclosures will affect at least one million homeowners and the government’s tab, depending on whose numbers you believe, ranges from two to seven trillion USD – and counting. Therefore, since everyone has a lot of comments, answers, and air time, let me ask some new and controversial questions – and let me introduce the concept of a constraint bound “Mortgage Molecule.”

Actually I’m happily married and have two beautiful boys. But I do think the mortgage industry can use a little togetherness. The news has been mostly bad and it doesn’t seem like it’s going to get better in the short term. Having said that, in my travels over the past month I’ve been pleasantly surprised about a few things that I’d like to share with you here.

Mike Covino has been making jumbo and "super-jumbo" loans for 27 years. Even though President Bush - as expected - signed the $700 billion capital/mortgage markets "rescue" plan Friday afternoon, Mr. Covino sees no upside for super-jumbos (loans that are north of $729,750). "If you cut off funding for anything," it tanks. Super-jumbos cannot be bought by Fannie Mae and Freddie Mac. The new bill, he said, offers no relief to super jumbo homeowners who must refinance their loans especially in Mr. Covino's backyard - the Greater New York metropolitan area. He predicts that over the next year values could slip by as much as 30% in areas likes Greenwich, Fairfield and Westchester. "New York City is the next shoe to drop," he said. "And not just for financial service jobs." Mr. Covino hopes that in the months ahead regulators turn their sights on the problem facing the high end of the market. He admits, however, that from a political standpoint, this could be difficult...

Another week has come and gone – more failed institutions, more lost jobs, and more botched policies. A circus-like atmosphere has been the backdrop to the largest bank failure in American history, as the perverse “fundamentals” of prior operations and judgment underscoring the folly of the industry “acceptable practices.” What strikes me as very peculiar is what was being measured? What were the risk-driven “levy stages” and when were they breached? Did innovation and technology provide a false sense of security, or did we completely miss what was important, their interdependencies, and the complexity of the “real markets?” It seems the only thing missing was Emperor Nero. It is past time to move forward with new ideas and leaders.

"There is a subset of your industry that is corrupt," Supervisory Special Agent Richard Jacobs of theFBI told members of the New York Association of Mortgage Brokers.

As one reader pointed out, it's starting to feel a bit like the movie "Groundhog Day." Each day we are presented with a new financial disaster. By day's end the disaster is cleaned up (so to speak), only for a new (but similar) disaster to start the next morning. If you have not seen the classic Bill Murray movie, rent it. It's a comedy. What we've been going through is not...

It has been said that to get noticed in the media and at events you need to make a spectacle of yourself and the ideas you are trying to communicate. For us “bow-tie guys,” that is an interesting notion given the risk dysfunctionalities that created the latest crisis in the history of financial interoperability. However, in that shock-jock vein, here’s what I have to say — taking a page from the 1976 movie Network, I wanted to say, “I’m as mad as h*** and I’m not going to take it anymore!” Has commonsense left the mortgage and FS markets or are we indeed facing a catastrophic series of events that will make the 1930’s seem like the servicing of “AAA” paper today? Is there a way out with innovative technology and processes and if so, what are they? Do we really think government nationalization of the leading free-world capital market financial system is good for business and innovation?