There is a deal in the making between Wall Street and the White House regarding the mortgage crisis. It is marketed as helping homeowners who have problems with the rising rates of their Adjustable Rate Mortgages.
WaPo:
Mortgage rates for homeowners with spotty credit histories would be temporarily frozen under a nearly completed agreement between top Bush administration officials and a broad alliance of Wall Street’s biggest banks, mortgage investors, nonprofits and consumer groups.
[…]
Homeowners could apply to freeze their rates or refinance their loans quickly under the deal being worked out by Treasury officials; the Hope Now Alliance, a broad coalition of consumer counseling groups, investors, nonprofits such as Homeownership Preservation Foundation; and lenders such as Citigroup, Wells Fargo, and Countrywide Financial.
[…]
A potential sticking point is determining which homeowners would qualify for the help and how much they would have to pay to refinance or freeze their loans, several sources close to the discussion said.
There are still no details available about this deal. But something dealed out between this White House and Wall Street is naturally suspicious. Wall Street smells more fees and profits. In a sucker rally Countrywide, one of the biggest endangered lender, yesterday soared 16% on the news of the deal.
Nouriel Roubini muses about the proposal and is carefully optimistic:
[W]hile the Treasury proposal does not touch – for now – the face value of the mortgage claim it still represents a form of debt reduction – on a [Net Present Value] basis – for the borrower (unless the banks push for capitalizing the difference between the reset rate and the frozen initial rate).
We can expect that the parts I emphazised will be the real issue here. The banks may lower some rates or prevent ARM rates to increase as much as they would normally do, but they will try to put the difference into the principle sum owned, or have the taxpayer pay for it. That would help nobody but these banks and only prolong the pain for the overstreched homeowner.
There are other questions. Roubini sees three groups of borrowers:
- Those who can not repay their mortgages no matter how much the rate is lowered,
- Those who can pay if their ARM rates are not increased,
- Those who can pay even when their ARM rates do increase.
Only the second group should receive help. The first group must default. The last group does not need any help. But who will decide who belongs into which group?
WaPo:
Barry Glassman, a senior vice president at Cassaday and Co., a financial planner in McLean, said any plan that bails out only a segment of homeowners would raise questions of fairness.
"The big challenge will be figuring out who this affects and who gets this help," he said. "Where do we cut it off? Who’s the person next in line that doesn’t get the bail out? That’s the most difficult question."
Countrywide and other lenders have packed the mortgages into Mortgage Backed Securities. These were sliced and diced and repacked into Collateral Loan Obligations. Criminally rated as high quality investment papers, the CDO’s were sold to pension funds and other investors. Skim milk disguised as cream provided by a shadow banking system.
The owner of the mortgage, and the only one who legally can give debt relief or renegotiate the mortgage, is the owner of the CDO. That is neither the Treasury, nor Countrywide.
"This is the first time that the Bush administration is working toward a solution that meets the magnitude of the problem," Sen. Charles E. Schumer (D-N.Y.) said. "But there is a $64,000 question: Will investors go along with this plan? And if not, can they be compelled to?"
These investors are not the criminals that made the deals. These are pension fund and entities like the Florida Local Government Investment Pool, school districts and the like, which are in deep trouble. Should and can they be made to give up their trust money to save house speculators?
Then there is the question that nobody wants to ask or seems to be able to answer. Who really owns the mortgages?
Lately, judges are faulting law firms for what has become a common practice: filing a foreclosure suit, in states that require them, without showing proof that the plaintiff actually holds the mortgage and has the right to foreclose. (Such plaintiffs are often banks that act as trustees for investors of securities backed by mortgages.) The situation occurs in part because mortgage documents and the contracts between borrowers and lenders may change hands multiple times and may not be assigned to the plaintiffs at the time the suits are filed.
The deal now in the making avoids these questions. I suspect that it will turn out as nothing more than an attempt to socialize the losses that are made now, while avoiding to hold those responsible who made the profits.
But deal or not – this isn’t over.
Ken Silverstein at Harpers interviews a banking business insider:
As a nation, we’ve come full circle since the financial crises of a century ago. Today we have a financial system that has little personal financial discipline and massive moral hazard, where the taxpayer is picking up the messes created via private speculation.
…
The next president, whoever it is, may be dealing with a 1930s-style financial crisis from the first day in office.