Thursday, November 13, 2008

"thereby insuring that everyone gets hurt even more as foreclosures continue"

Joe Nocera asks whether bundled mortgages can be negotiated:

"You see, all of these programs deal only with “whole loans” — that is loans on the books of the institutions, unencumbered by securitizations. So far, the attitude of all involved when it comes to securitized mortgages is to throw up their hands and say — “it’s too hard to deal with!” And it may well be: mortgages that were sold to Wall Street and wound up in mortgage-backed securities have been sliced and diced and sold and resold to investors with varying risk tolerances. They are serviced by people who owe a fiduciary duty to all these investors, no matter what their place on the risk continuum.

James Grosfeld, the former chief executive of Pulte Homes, summed up the problem in a recent e-mail message:

There are well over $1,000,000,000,000-$1,500,000,000,000 of mortgages trapped within mortgage-backed securities. These are the most risky mortgages ever issued — mortgages poorly underwritten and often with unaffordable payment shock at the end of teaser rate periods. Pool losses will be unprecedented.

However, there has been no successful effort on a broad scale to reform these mortgages because of contractual obligations of trustees and servicers to bondholders. Simply put, these fiduciaries are scared of being sued by bondholders if they modify loans into affordable new mortgages. Every effort to jawbone trustees/servicers to reform these mortgages quickly and on a mass basis has failed and will fail. These fiduciaries fear financial liability, and servicers are overworked and have no meaningful financial incentive to provide this desperately needed refinancing.

Recently, certain hedge funds have threatened to sue fiduciaries of these securitizations if they refinance loans. Congressional hearings are taking place with respect to these threats. Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing. Jawboning bondholders and fiduciaries has not and will not work.

The situations borders on the absurd. Investors will not allow mortgage modifications that would hurt them more than some other investors — thereby insuring that everyone gets hurt even more as foreclosures continue. And as foreclosures continue, the financial crisis continues to deepen because foreclosures on Main Street mean billion-dollar write-offs on Wall Street. And struggling homeowners can only pray that their mortgage is still held by the bank and not sold to Wall Street — in which case they are out of luck. It is like flipping a coin to see if you can hold onto your home."

Here's my comment:

“Every effort to jawbone trustees/servicers to reform these mortgages quickly and on a mass basis has failed and will fail. These fiduciaries fear financial liability, and servicers are overworked and have no meaningful financial incentive to provide this desperately needed refinancing.

Recently, certain hedge funds have threatened to sue fiduciaries of these securitizations if they refinance loans. Congressional hearings are taking place with respect to these threats. Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing.”

This sounds like moral hazard blackmail. Other people have been bailed out, and we’re willing to risk a blowup against the better odds and terms of getting bailed out.

I see only two choices:
1) Free market: Let them blowup.
2) Government intervention: Force terms upon everyone involved.

The in-between route is just too bitter a pill to swallow in my opinion.

— Don the libertarian Democrat

2 comments:

Anonymous said...

I certainly am no expert on these securitzed mortgages, but from what I have read, they have been salami sliced such that most of these bond holders will take a 100% loss. Therefore, it isn't like you will take a 10, 20, 50, or even 90% loss - you take a 100% loss. Under such circumstances, why would you agree to any modifications? Also, a lot of these are held by pension and government entities, which have a fiduciary/legal duty to maximise return or minimise loss. Politically, how will it look for Calpers to take a big loss on a tranche while a higher rated tranche pays out very, very high yeild?

Donald Pretari said...

Fresno Dan, Yes. My point was that either you've got to stay out of it completely, or impose, impose, a deal on the parties.

What I'm suggesting is that the, let's call them lenders, have decided to either take the free market hit or are willing to bet on a bailout plan that will, in fact, pay them something.

"Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing. Jawboning bondholders and fiduciaries has not and will not work."

I'm saying that this would need to be imposed in order to justify taxpayer's money being spent. Otherwise, it will be too sweet a deal compared to the market hit they're going to take.

My point is really about conditions for government assistance.

Since we haven't seen these investments ourselves, there's no way to determine how to settle them. In that sense, this plan is trying to capture a wide array of different individual and group deals, without actually seeing them.

What I don't want to see is any more government overspending on so-called assets.

As to Calpers, I'd need to see exactly what they did. It sounds foolish, but I really shouldn't judge without seeing it.

Finally, I agree with you about fiduciary responsibility at Calpers. They should absolutely do what you suggest. Too bad they didn't do a better fiduciary job earlier though, as well.