Thursday, July 07, 2011

Banks Easing Terms or Debt on Some Option ARM Loans -

When I read this article last weekend, my head almost exploded. Take a look:

NYT points out that for some reason, some people have received unsolicited offers for loan modifications while others who are in default are losing their homes. This is beyond ridiculous. People who are in danger of losing their homes are the ones who should be first in line for loan modifications, especially if they had fully documented loans made on good credit and income.

When the crisis really hit the fan in 2008, I mused that perhaps a uniform write-down of mortgage principal would be one way to avoid mass meltdown of the mortgage market. After all, the stock market had experienced serious deflation. So did a lot of other types of retail and wholesale goods, commodities, and, of course, the real estate values that these mortgages were based on. It made sense to me at the time that we should adjust loan balances to reflect the deflation that had been occurring in most housing markets (NYC excluded) since 2005. This would allow people who took pay cuts to pay less or stay in their homes.

For whatever reason, this did not happen. I heard only one argument that rang somewhat true: that if institutions forgave part of the principal of their mortgage portfolios, they would reduce the paper value of their assets, and therefore cause a potential drop in their share price. That might open them up to shareholder lawsuits, as well as lawsuits from the investors who bought the derivative securities based on their loans.

This is one place that the government really could have stepped in. We were in a bubble. If we could have let some of the air out, then maybe we wouldn't have had the meltdown we did. After all, 95% or so of all mortgages kept current the whole time. The market meltdown was caused when the derivatives market seized up.

So here we are in 2011, with the market trying to push it's way up past 13,000 so that millions of baby boomers can get back to even, and we find that some mortgages were indeed modified in the past couple years. While others were allowed to go into foreclosure.

If this leaves you scratching your head, re-read the paragraphs which state that the two banks who were found to have done the adjustments were Chase and Bank of America, and that the loans that were modified all came from the portfolios of institutions that disappeared during the meltdown - specifically, Countrywide and Washington Mutual.

Suddenly this all makes sense. The toxic loans (or at-risk loans, as some of these loans apparently were never in default) were absorbed by Chase and Bank of America at a discount to actual value. So it's not a big deal - accounting wise - if they write down the principal, because they didn't pay for it.

However, the federal government is subsidizing the banks through HAMP and other programs to modify the loans they made - and they simply aren't doing it. Bank of America in particular has been pointed out as one of the most rigid to deal with.

This is where I think the government failed: instead of a mass forgiveness program (which yes, I would have benefitted from, but so would every person with a mortgage in the U.S.), the government printed out more money and gave it to the banks. The government could have passed a law, citing the same emergency situations through which they forced TARP, that would have indemnified all banks from investor and shareholder lawsuits. Would the banks' share values have gone down? Sure (maybe), but the chances are it wouldn't have been the bloodbath that it turned into. Baby boomers who now have to go back to work (to jobs that likely don't exist anymore) would have a lower standard of living in retirement, but at least they would have been able to retire!

So Chase and Bank of America are basically giving away what they knew they didn't have to begin with - loans that are less likely to get repaid. What do they get in return? Likely a higher rating of their own debt - after all with Fannie and Freddie likely to have a much lesser role in the mortgage market place, banks will have to do more bond offerings to be able to originate more loans.

And meantime, the stock market tries and tries to get back to even. Another bubble. The blame arm will likely swing around to the tech market - with amazing IPOs from Pandora, LinkedIn, Groupon and Zynga likely to be followed by the mother of them all - Facebook (don't be a follower, Mark Zuckerberg!). But let's face it, the real problem is still the fact that thousands of "regular" people - with no equity in their homes and decreasing purchasing power in their wages - search for capital somewhere - anywhere - to try and get back to even before the sands run out of the hourglass.

Not a happy thought.

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