Moon of Alabama Brecht quote
December 01, 2007

The Mortgage Deal

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.


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?


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.

Posted by b on December 1, 2007 at 11:32 UTC | Permalink


I'm surprised Roubini has anything positive to say about this "plan".

In addition to all the other problems you list, why would a mortgage holder want to continue to make payments on a debt - frozen interest or not - for an asset worth less than the mortgage, that will not be able to be sold? Makes default look like a better option. And, wouldn't any forgiven debt be taxable? What would this "plan" do to contract law?

A feast of posts and threads, insights and links of late. Thanks b!

Posted by: Hamburger | Dec 1 2007 13:41 utc | 1

Quite right about privatized profits and socialized losses. Banks-or whatever holds the note-don't need anyone's permission (and have a strong incentive) to cut a deal with homeowners who might otherwise default. The white house is involved only to make up the difference with taxpayer money.

But the amount of money would probably be the price of another Iraq war. With the country in this much debt already, could it just issue another 2 trillion in bonds for the Chinese to buy? Or perhaps just print it?

Posted by: Lysander | Dec 1 2007 13:46 utc | 2

@Hamburger - In addition to all the other problems you list, why would a mortgage holder want to continue to make payments on a debt - frozen interest or not - for an asset worth less than the mortgage, that will not be able to be sold?

Hmm - to live in the place? It isn't easy to rent in all areas and in some places impossible. Also rents have increased quite a lot. Expect a wave of homelessness.

@Lysander - With the country in this much debt already, could it just issue another 2 trillion in bonds for the Chinese to buy? Or perhaps just print it?

The Chinese will not buy it unless the interest rate is significantly higher (12+% maybe). The 'solution' will be to inflate massively. 'Helicopter Bernanke' is already doing that. He will also lower rates because of risk of 'deflation'. 'Deflation' in Wall Street definition is a stock market going lower. In real live there is already quite big inflation, so rates should be put higher, not lower. Inflation favors people with big debts and the U.S. government. It impovers the poor and middle class even more.

Posted by: b | Dec 1 2007 14:08 utc | 3


Good analysis, as always. About 2 million mortgages reset to very high rates in the next 18 months, about 400,000 per quarter, in a general election year. Republicans will be tarred and feathered for the foreclosures and pain of unemployment in construction, retail, metal bashing ("white goods") etc.

The voluntary freeze on resets floated by Paulson was generally well received on Wall Street, because the alternative is horrible -- a Congressional investigation of mortgage lending and structured investment leverage. However, the voluntary freeze won't fly. It's impossible to administer, impossible to judge if it's working, relies on borrowers being truthful about their distress, etc. Nor will voluntary measures stop Congress from grandstanding and spooking the markets with threats of intervention by law.

How anyone could frame a law that breaks mortgage deals and recasts the obligation of borrowers is laughably and endlessly debatable.

I see nothing but trouble ahead. Probably global.


Posted by: Wolf DeVoon | Dec 1 2007 15:26 utc | 4

FT has a good summary of the quack cure.

Posted by: Wolf DeVoon | Dec 1 2007 15:46 utc | 5

@Wolf - It's impossible to administer, impossible to judge if it's working, relies on borrowers being truthful about their distress, etc. Nor will voluntary measures stop Congress from grandstanding and spooking the markets with threats of intervention by law.

right - one issue missing. The 'investors' will not agree. Calpers, the California teacher pension fund, owns some of the junk. Will the teachers agree to cut their pension to relief debt for those who bought overpriced houses without any money?

That fight hasn't started yet, but a lot of municipals and pension funds did buy the mortgages. I see NO way that these will agree to be robbed without - at least not when their members learn about the issue.

via Atrios an older piece at CalculatedRisk

June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.

At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO. . . .

The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.

And a nice description of CDOs
You take a bunch of subprime loans, and make a pool with them. Then you tranche that pool up and create a security (this chart calls it ABS or asset-backed security; it's the same thing as MBS or REMIC for present purposes). Then you take those low-rated subordinate tranches and put them into a pool with a bunch of other stuff (commercial security tranches, corporate debt, junk bonds, heaven knows what), and then you tranche that up into a new thing called a Collateralized Debt Obligation, the "beauty" of which is that it's an actively traded, not static pool, so that while you might know what's in it the day you bought part of it, you may never know what's in it after that. Then you take the lowest possible tranche of the CDO--the "equity" portion or the very first part to take any losses, which is so high-risk it is referred to as "toxic waste," the stuff that is unrated by the rating agencies because it has no "credit support" whatsoever--and you put it in a pension plan managed by some goofball who thinks that it must be a good deal because a party who owns some of the higher rated tranches--the ones you "support" with your equity piece--tells you that if the planets align and the Messiah returns and everybody rolls a lucky seven, you'll make 20%!

Posted by: b | Dec 1 2007 16:14 utc | 6

Florida Schools Struggle to Pay Teachers Amid Freeze

School districts, counties and cities across Florida sought to raise cash after being denied access to their deposits in a $14 billion state-run investment fund.

The Jefferson County school district was forced to take out a short-term loan to cover payroll for the 220 teachers and other employees in the system after $2.7 million it held in the pool was frozen yesterday.
Florida's State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals yesterday at an emergency meeting after $13 billion was pulled out this month from participants. Governments from Orange County, home of Disney World, to Pompano Beach asked for their money back following disclosures that the fund held $1.5 billion of downgraded and defaulted debt.

Posted by: b | Dec 1 2007 16:18 utc | 7

Yikes - after 7 years teaching in the CSU system I opted for an early pension before jumping into the EU lifeboat. Always had the thought that the CALPers people were among the smarter class of investors in the US and their political muscle didn't hurt either.

CALPers Asset Allocation

Total market value: $253.7B

$143 million of $253.7 billion won't hurt, will it?

Will it?

Posted by: Hamburger | Dec 1 2007 17:04 utc | 8

$143 million of $253.7 billion won't hurt, will it?

Will it?

Not that part, but if the crazy administrators of Calpers bought such toxic waste junk for $143 million, how many billions did they invest in better rated stuff?

Think of Mortgage Backed Securities that include Alt-A rated mortgages. Those will go down too. Even MBS with perfect prime AAA mortgages will go down in value when house prices sink by 20-30-40+% and the collateral, i.e. the house, doesn't cover the mortgage anymore.

The CDO junk is just the tip of the iceberg. The real miss is still not out. By far not out.

We are only in mortgage territory now. What about Asset Backed Securities which are 'backed' by credit card debt. Will the debt be repaid? ABS backed by car loans - will the loans be repaid? What about company debt that can not be repaid when the company shuts down because consumers stop buying their stuff. How much of this debt is owned by Calpers?

This is far from over. The 'back to the 30s' line sounds hyperbole. It is not!

Posted by: b | Dec 1 2007 17:40 utc | 9

Rudy Guilliani, the candidate who supervised the 1990's dot-con corruption of Wall Street and looked the other way, the candidate who ran from the ashes of the "brought down" WTC7 which contained all the SEC and IRS records of that dot-con corruption, the candidate who prepared the groundwork for the mortgage-con resurrection of his beloved home in the Hamptons, has finally spoken out today on the US economy and Wall Street:

Posted by: Lash Laroo | Dec 1 2007 18:09 utc | 10

Paul Krugman

Oy - I somehow missed the fact that the proposal to help subprime borrowers avoid foreclosure is called the Hope Now Alliance.

Um, guys — hope is not a plan, and the name seems custom-designed to undermine your credibility.

Posted by: b | Dec 1 2007 18:21 utc | 11

Ironic, isn't it, the "democracy and freedom" party, the Grand Old Party of the
Republic, principled "up by your own bootstraps" fiscal conservative Goopers all,
should in full battle-rattle propose for US, when our neighbor's house is burning
down, we should all share the pain, by burning our life savings on construction of a
fire-proof wall around our local banker's house, and local fire-insurance broker's.

* DENY - Those who can not repay their mortgages no matter how much the rate is lowered. That would be you and me, Mom and Pop with personal savings rate underwater

* APPROVE - Those who can pay if their ARM rates are not increased. That would be investor flippers, real estate developers and foreign CDO mortgage holders

* SLIP PAST THE VELVET ROPE - Those who can pay even when their ARM rates do increase, because nobody is looking, the same cons back shaking out the piggy bank.

The One-Eyed Pyramid(TM) of Mammon. Worked like a charm, since days of the Pharioh.
We crush their grapes, and bake their bread, and pleasure girl all their avarices.
Then when we're old, decrepit and homeless, the Sheriff comes with his golden hammer to stove in our skull, push US into the leach heap, and steal our shoes.

Thanks for the memories, Gotham!

Posted by: Parenthically Speaking | Dec 1 2007 18:37 utc | 12

Lash: More on Rudy Guiliani, and Mortgage Deals and the corruption of US property development (along with just about everything else under the rubric of "security"):

"The Sage alliance is just one part of the extensive overseas business network Mr. Giuliani assembled shortly after leaving the mayor's office in early 2002. Beyond his ties to Israel and Japan, Mr. Giuliani's firm has a contract to advise the government of the Persian Gulf country of Qatar on security. In February 2005, a Sage-related fund agreed to invest 10 billion yen in Tokyo-based Dynacity Corp., a condominium complex developer. The goal was to create a jointly-run fund management company that would allow Dynacity to start a global property development expansion, including into the U.S., according to a company press release."

February 2005 was the point where the credit-con started to unravel. Coincidence?
"Boundless creativity and unwaivering commitment .. to destroy the American Dream."

Posted by: Montclaire Underwood | Dec 1 2007 19:11 utc | 13

Follow the money! These are the folks Hope Alliance is bailing out with our taxes:

The major shareholders behind the $2.5-billion Guiliani:Sage alliance funds are Israelis Daniel and Raz Steinmetz, a father and son team who made a fortune in blood diamond-trading and investing. Daniel Steinmetz and his brother, Beny, own stakes in Steinmetz Diamond Group, has mined gems in Sierra Leone and the Democratic Republic of Congo.

Blood diamonds, Israeli:US defense contracting and mortgage SIV funds.
Republican Rudy Guiliani is in the Neo-Zi Cosa Nostra up to his eyeballs.

Israel’s Richest
#8 Benny Steinmetz
$1.6 bil

Industry Diamonds, Natural resources & more

His private company, BSG, invests in diamonds, natural resources, real estate and energy, both in Israel and overseas. Steinmetz also has a 37% stake in Nikanor, a holding company with copper and cobalt mining assets located in the Congo, which raised $400 million during an IPO on London’s Alternative Investment Market in July 2006. Steinmetz owns 70% of Bateman Engineering, which specializes in heavy engineering projects servicing the mineral and metals industries worldwide.

#30 Daniel & Raz Steinmetz
$500 mil

Brother and partner of diamond billionaire Benny Steinmetz, Daniel Steinmetz, with his son Raz, owns a stake in the Steinmetz Group, considered a leading player in the global diamond market and one of the largest customers of De Beers.

Posted by: Morton Sinclair | Dec 1 2007 19:26 utc | 14

Doug Noland (who was write all along onh this so should be taken serious) writes (scroll down)

The unfolding Credit Crisis has necessitated the sequel “Committee to Save the World Part Two.” Especially after the Credit system took a turn for the worst last week, I can understand Secretary Paulson’s urgency to have institutions renegotiate mortgage terms with troubled borrowers. But not only are we too far into the mortgage bust for such efforts to pay much in the way of dividends, I am skeptical that our securitization markets have the necessary infrastructure and legal structure to equitably adjust mortgage terms on millions of loans. And it is becoming increasingly clear that a large segment of troubled loans today involved some degree of fraud at origination. Besides, there is simply not much time to sort through all the various details. Examining the startling almost $92,000 two-month drop in California median prices, it's apparent that momentum generated by the The Great Housing Bust is not to be impeded by a program to check subprime mortgage resets.
This “system”, importantly, is especially indisposed to succumbing to boom-turned-bust dynamics. Or, stated another way, our Wall Street dominated financial apparatus is keen on “Inflate or Die” dynamics and has no intention of relinquishing the tremendous power it has gathered over the years. This is understandable, although it certainly creates a very serious problem when it comes to the stock market refusing to adjust to rapidly deteriorating underlying fundamentals. And if market dynamics preclude an orderly stock market revaluation, expect it to come at some point violently and with great hardship. This is one aspect of the great costs associated with the Fed moving aggressively again to “reflate.” It won’t work, its further subverts the market process, and only worsens an already perilous situation.

Posted by: b | Dec 1 2007 19:28 utc | 15

Asia Times: The Cold Comfort of Economic Collapse

Naturally, being a hateful and vindictive kind of guy, I figure that being a stinking, lying bastard was enough to indict Bernanke and send him to a horrible prison for a long stretch, but Mr Lee is not interested in revenge, and is more interested in other things, like, "Just how big is this subprime mess?"

I knew that he was not asking me, as I am really clueless about most things, and thus have no freaking idea at all. But he hints at it when he says that "subprime mortgages are changing hands at 25 cents on the dollar", and this means that the subprime loss alone "is not $150 billion, but more like $1.6 trillion", and "if all AAA and Alt-A mortgage portfolios were to be marked to market, the loss would amount to another $2 trillion." Yikes!

Now we are talking about $3.6 trillion in losses! My God! The entire gross domestic product of the United States, which is the sum total of all the goods and services produced in a year, is only about $14 trillion! So we are talking about losing, at a stroke, the equivalent of 26% of everything we make in an entire year? Yow!

Posted by: Bea | Dec 1 2007 20:15 utc | 16

For me trying to unfold the process by which this shearing of the rubes was effected, on the specious grounds that doing so will recover the ripped off money, is pointless. Every one will become lost in this process, argue about the best way to extract themselves out of the complicated mess (see thread above), and have no effect whatsoever on the outcome.

The outcome is best explained by that sucking sound you hear, which is a goodly chunk of wealth being shifted upwards into the hands of those who already have too much, and who abuse that power they already have.

Whatever process that a Bush presides over will have the same ultimate aim as their previous scams. The object isn't just to make themselves richer and therefore more powerful, it is also to make ordinary amerikans poorer and less powerful.

It seems pretty apparent to me that, given the protagonists are the same people who created the mess, that this overly complex solution will go the same way as every other 'recovery' from a situation created by crooks, that is, many amerikans are going to lose the only real asset they had left, their homes.

Just as the 'great Depression' effectively chased amerikan homesteaders off the land they had sweated blood for, while clearing the 'dead wood' (that is ordinary essentially powerless humans) out of the relatively simple share registers of the time, the Savings and Loans burn ripped off the money held in friendly co-operatives (remember them), this 'sub-Prime scam will tip amerikans out of their last two substantial assets, their family home and their pension plan.

This is especially true of pension plans which have been created for public servants such as teachers and nurses, cause every taxpayer dollar that is spent outside their magic circle of corporate welfare is regarded by these sociopathic scum as money stolen from them. hell they send their kids to private schools and go to top of the line private hospitals when they get sick. That is what everyone else should do, that or stay ignorant and die.

I look at the thread above where people are iunfighting about which shit kicker should be held to account, the one who believed the lies about an every appreciating market for cardboard and plastic boxes or the one who believed that you could invest for a return of n points over the prime rate and still be safe as houses. These people are all victims and the disgusting spectacle of them standing in a circle pointing the finger of blame at each other while the same pricks as always laugh up their sleeves isn't particularly edifying.

If amerikans want to get through this they must concentrate on outcomes not the process.

Their outcomes should be bottom lines reverted back to whenever the smooth talkers sleazed their jargon.

If someone owned 15% of a %700,000 dollar house now worth $450,000, a forced renegotiation must determine they now own 15% of their $450,000 house, interest to be paid at current rates for such mortgages.

The pension plans which tipped $148 Million into a silver tongued scammers 'investment' - promising a return of 12% or whatever should be paid out $148m + $148m X 12% by the number of years the money was in the plan. Same for all pension funds.

The money cannot come from increased taxes or cuts to HEW, it must come from the ludicrously large amounts tipped into corporate welfare by way of new 'weapons systems' or 'aid' to Israel along with all the other scams these guys have been pulling. Tracking down the exact amounts ripped by who, where would be a disasterous exercise in losing the wood for the trees, so tyhe best way forward is to hit the elites hard across the board.

Now we all know that the chances of getting that happening are zilch, but by insisting on sticking to outcomes ahead of processes, amerikans will alert their fellow suckers to the breadth of the scam, while avoiding stupid and destructive in-fighting. They may even get a slightly better outcome for all ordinary amerikans and will have constantly reinforced to the ordinary people, exactlywho the real villains are.

I end this safe in the kinowledge that any response is likely to be more arcane jargon about 'the market'.

That is how they get you, they pretend that some ordinary humans can be indoctrinated into the ridiculously and intentionally complex structure of 21st century capitalism.

That way vanity (I know more than you) does a heap of heavy lifting for them. Carries the gold out to the Massa's carriage.

Posted by: Debs is dead | Dec 1 2007 22:28 utc | 17

Excellent work, b! Very regularly these past months you have written informative and concise documents--much appreciated!

Posted by: Argh | Dec 1 2007 23:08 utc | 18

Thanks for the post & everyone's comments. But this is only one aspect of the situation. To me the MOST CRUCIAL is that OBVIOUSLY this came about 'cuz of deregulation. REREGULATION MUST BE NUMERO UNO on the priority list, but w/the predators running the show (front & center of course being Bobby Rubin, now running Citigroup, who also spearheaded removal of Glass-Stegall, & runs JackAss Party.) If anyone sees mention of this essential point, I do hope you post info. Am I missing something, or isn't this all CYA & restock the Predators Bank accounts to allow the continued rule of the Kleptocracy, until re-regulation is implemented?

Posted by: jj | Dec 1 2007 23:24 utc | 19

Don't forget the SIVs (structured investment vehicles) that are being rolled over now into M-LECs. The ponzi scheme is enormous.

It is amazing that we can't interrupt the free market for average citizens, but these banks sure run to the feed bag of the Feds. I knew we were in real trouble about four years ago when Greenspeak was before congress and talked about "investment instruments" as if there was some lab out there concocting these different formulations of free market investment medicine. What a turn that has taken. We have been poisoned.

Another thing that ironic is how "state" funds from the middle east are bailing out Citigroup. I was watching CNBC and the Wall Streeters just can't bring themselves to say investment by government because that would go against the free market dogma. So the fancy name "sovereign funds" to couch it direct investment by governments in more neutral language. Amazing.

Posted by: jdp | Dec 2 2007 2:17 utc | 20

International contagiation: U.S. Credit Crisis Adds to Gloom in Arctic Norway

Ms. Kuvaas is the mayor of Narvik, a remote seaport where the season’s perpetual gloom deepened even further in recent days after news that the town — along with three other Norwegian municipalities — had lost about $64 million, and potentially much more, in complex securities investments that went sour.
Those investments represent a quarter of Narvik’s annual budget of $163 million, and covering the losses would necessitate taking out a long-term loan, which the town could only pay off by cutting back on services.

“You can calculate this in terms of places for schoolchildren or help for the elderly,” said Mr. Hermansen, a soft-spoken man who sat in his office in near-darkness, the lights switched off.

Posted by: b | Dec 2 2007 6:55 utc | 21

Having several million distressed middle class ex-home owners in the street sounds like a horroshow for the US.

The point, I guess, is to keep them sitting home and paying what they can, all they can, to the last penny. They have to be bailed out to stay put. How to do that exactly is problematic. But others will stump up, for sure.

Posted by: Tangerine | Dec 3 2007 16:32 utc | 22

roads, psychic medium

Posted by: clairvoyant medium psychic | Jan 17 2008 9:24 utc | 23

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