Posts Tagged ‘Mortgage Backed Securities’
by Matt Taibbi
August 24, 11:17 AM ET
A power play is underway in the foreclosure arena, according to the New York Times.
On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008.
On the other side is the Obama administration, the banks, and all the other state attorneys general.
This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.
The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.
This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline.
This deal will also submarine efforts by both defrauded investors in MBS and unfairly foreclosed-upon homeowners and borrowers to obtain any kind of relief in the civil court system. The AGs initially talked about $20 billion as a settlement number, money that would “toward loan modifications and possibly counseling for homeowners,” as Gretchen Morgenson reported the other day.
The banks, however, apparently “balked” at paying that sum, and no doubt it will end up being a lesser amount when the deal is finally done.
To give you an indication of how absurdly small a number even $20 billion is relative to the sums of money the banks made unloading worthless crap subprime assets on foreigners, pension funds and other unsuspecting suckers around the world, consider this: in 2008 alone, the state pension fund of Florida, all by itself, lost more than three times that amount ($62 billion) thanks in significant part to investments in these deadly MBS.
So this deal being cooked up is the ultimate Papal indulgence. By the time that $20 billion (if it even ends up being that high) gets divvied up between all the major players, the broadest and most destructive fraud scheme in American history, one that makes the S&L crisis look like a cheap liquor store holdup, will be safely reduced to a single painful but eminently survivable one-time line item for all the major perpetrators.
But Schneiderman, who earlier this year launched an investigation into the securitization practices of Goldman, Morgan Stanley, Bank of America and other companies, is screwing up this whole arrangement. Until he lies down, the banks don’t have a deal. They need the certainty of having all 50 states and the federal government on board, or else it’s not worth paying anybody off. To quote the immortal Tony Montana, “How do I know you’re the last cop I’m gonna have to grease?” They need all the dirty cops on board, or else the whole enterprise is FUBAR.
In addition to the global settlement, Schneiderman is also blocking an individual $8.5 billion settlement for Countrywide investors. He has sued to stop that deal, claiming it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses.”
If Schneiderman thinks $8.5 billion is an insufficient, fractional payoff just for defrauded Countrywide investors, then you can imagine how bad a $20 billion settlement for the entire industry would be for the victims.
In that particular Countrywide settlement deal, it looks like Bank of New York Mellon, the New York Fed, Pimco and other players negotiated on behalf of defrauded investors. They told the Times they were happy with the deal, but investors outside the talks told Gretchen they weren’t happy with the settlement.
Schneiderman apparently listened to those voices instead of the Mellon-Fed-BofA crowd, which infuriated the insiders who struck the actual deal. In a remarkable quote given to the Times, Kathryn Wylde, the Fed board member who ostensibly represents the public, said the following about Schneiderman:
It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.
This, again, is coming not from a Bank of America attorney, but from the person on the Fed board who is supposedly representing the public!
This quote leads one to wonder just what Wylde would consider “indefensible,” given that stealing is pretty much the worst thing that a bank can do — and these banks just finished the longest and most orgiastic campaign of stealing in the history of money. Is Wylde waiting for Goldman and Citi to blow up a skyscraper? Dump dioxin into an orphanage? It’s really an incredible quote.
The banks are going to claim that all they’re guilty of is bad paperwork. But while the banks are indeed being investigated for “paperwork” offenses like mass tax evasion (by failing to pay fees associated with mortgage registrations and deed transfers) and mass perjury (a la the “robo-signing” practices), their real crime, the one Schneiderman is interested in, is even more serious.
The issue goes beyond fraudulent paperwork to an intentional, far-reaching theft scheme designed to take junk subprime loans and disguise them as AAA-rated investments. The banks lent money to corrupt companies like Countrywide, who made masses of bad loans and immediately sold them back to the banks.
The banks in turn hid the crappiness of these loans via certain poorly-understood nuances in the securitization process – this is almost certainly where Scheniderman’s investigators are doing their digging – before hawking the resultant securities as AAA-rated gold to fools in places like the Florida state pension fund.
They did this for years, systematically, working hand in hand in a wink-nudge arrangement with clearly criminal enterprises like Countrywide and New Century. The victims were millions of investors worldwide (like the pensioners who saw their funds drop in value) and hundreds of thousands of individual homeowners, who were often sold trick loans and hustled into foreclosure when unexpected rate hikes kicked in.
In a larger sense, even the (often irresponsible) people who simply bought more house than they could afford were victims of this scam. That’s because in many of these cases, credit simply would not have been available to those people had the banks not first discovered a way to raise vast sums of money dumping crap loans on an unsuspecting market.
In other words: if Bank of America hadn’t found a way to sell worthless subprime loans as AAA paper to the Chinese and the Scandavians in May, you can be sure that it wouldn’t be going back to Countrywide in June to lend out more money for more subprime loans.
And Countrywide, in turn, wouldn’t then have been sending masses of reps out into the ghettoes to offer juicy home loans to undocumented immigrants and refis to confused old ladies on social security.
This is as bad as white-collar crime gets. But to Wylde, it doesn’t rise to the level of being “indefensible.” Until they do something worse than this, we apparently should support the banks, and make sure they don’t have to pay more than a fraction of what they made off of this kind of crime.
What is most amazing about Wylde’s quote is the clear implication that even a law enforcement official like Schneiderman should view it as his job to “do everything we can to support” Wall Street. That would be astonishing interpretation of what a prosecutor’s duties are, were it not for the fact that 49 other Attorneys General apparently agree with her.
In Schneiderman we have at least one honest investigator who doesn’t agree, which is to his great credit. But everyone else is on Wylde’s side now. The Times story claims that HUD Secretary Shaun Donovan and various Justice Department officials have been leaning on the New York AG to cave, which tells you that reining in this last rogue cop is now an urgent priority for Barack Obama.
Why? My theory is that the Obama administration is trying to secure its 2012 campaign war chest with this settlement deal. If Barry can make this foreclosure thing go away for the banks, you can bet he’ll win the contributions battle against the Republicans next summer.
Which is good for him, I guess. But it seems to me that it might be time to wonder if is this the most disappointing president we’ve ever had.
Read the entire article HERE.
By John Gittelsohn
May 8, 2011 9:01 PM PT
More than 28 percent of U.S. homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.
Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.
Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.
“We get tired of telling such a grim story, but unfortunately this is the story that needs to be told,” Humphries said in a telephone interview. “Demand is still quite anemic due to unemployment and the fact that home values are still falling. And that tends to make people more cautious about buying.”
The U.S. unemployment rate rose to 9 percent in April, up from 8.8 percent in March, the Department of Labor reported May 6. Home prices have fallen almost 30 percent from their June 2006 peak, wiping out more than $10 trillion in equity, including $667.5 billion in the first quarter, Humphries said.
Dropping Home Values
Other analysts also expect homes to continue losing value this year. Oliver Chang of Morgan Stanley expects prices to fall as much as 11 percent, according to an April 25 report. Prices may fall “another 5 or 10 percent,” Robert Shiller, an economics professor at Yale University, said April 26 on Fox Business News. Home prices were 33 percent below the July 2006 peak in February, according to the S&P/Case-Shiller Composite 20-City Home Price Index, co-created by Shiller.
Prices will continue falling as more houses are lost to foreclosure, flooding the market with distressed properties, Humphries said.
Foreclosures fell to the lowest level in three years in the first quarter as lenders worked through a backlog of flawed paperwork, according to RealtyTrac Inc., an Irvine, California- based real estate information service. Foreclosure filings are likely to jump 20 percent this year, reaching a peak for the housing crisis, RealtyTrac predicted in January.
Las Vegas Highest
In Las Vegas, 85 percent of homes with mortgages were underwater, the most of any city tracked by Zillow. Other metropolitan areas in the top five were Reno, Nevada, at 73 percent; Phoenix at 68 percent; and Modesto, California, and Tampa, Florida, both at 60 percent. Zillow has tracked negative equity since the first quarter of 2009, when more than 22 percent of homes were underwater.
Property values rose in only three of the 132 regions tracked by Zillow: Fort Myers, Florida, where they gained 2.4 percent; Champaign-Urbana, Illinois, up 0.8 percent; and Honolulu, up 0.3 percent. Fort Myers prices increased after falling more than 60 percent from their 2006 peak because they “over-corrected,” Humphries said.
The first quarter’s U.S. home price decline was the steepest since the fourth quarter of 2008, when prices fell 3.9 percent, according to Zillow data. Values dropped almost 13 percent over the course of that year.
“It’s not going to be as bad as 2008,” Humphries said. “But it’s going to be worse than we thought it was going to be.”
Prices were propped up in 2009 and early 2010 by federal stimulus programs, such as tax credits worth up to $8,000 for first-time homebuyers, Humphries said. That program “was stealing demand from the future,” weakening shoppers’ appetites now even as housing affordability is at its three-decade high, he said.
“In the past, people felt more bullish in a post-recession recovery,” he said. “They’d go out and spend more on homes and that would ignite hiring in construction and the mortgage industry. And they’d start to get the flywheel moving more quickly. Unfortunately, now, that flywheel is broken.”
Read the entire article HERE.
The Fed Does Not Need QE3 And Can Fund Debt Monetization Merely From Rolling Debt And MBS Prepayments? Wrong
Submitted by THE Tyler Durden
04/11/2011 14:02 -0400
Recently there has been a meme spreading in the internet that the Fed does not really need to do QE3 as the central bank can maintain bid interest at sufficiently high levels by merely rolling and extending maturing debt, a form of QE Lite Version 2, where the Fed’s balance sheet is kept constant even as MBS are prepaid and Treasuries mature. The argument goes that based on some “logic” and lots of estimates it is “reasonable” to assume that $750 billion in MBS prepays and Treasury maturities will depart the Fed’s balance sheet and need to be repurchased in the open market in keeping with a pro forma QE Lite V2.0 mandate. This is false. Here’s why.
First: one does not need to engage in complex calculations of what the maturity profile of the Fed’s holdings are – it is there available for anyone with an internet connection to see for themselves. In each and every H.4.1 update (go ahead, click) the Fed lists the maturity portfolio of its assets. The most interesting for the purposes of this analysis is the securities due in under one year. This includes in addition to Treasurys, MBS and Agencies, also the following items completely irrelevant for this exercise: Reverse Repos , Term Deposits, Liquidity Swaps and Other loans. As the chart below shows, and as anyone with a calculator can estimate, there is $141 billion in Treasury, Agency and MBS maturities in under one year (and just $108 billion in purely Treasury holdings). This number is one tenth of the ongoing monetization of $900 billion in USTs and MBSs in the November-June period, or $1,350 billion annualized. In other words: simply rolling MBS and Treasuries will have one tenth the impact of the ongoing quantitative easing program. Period. End of Story.
So what about MBS prepays? Well, as we had thought we had made abundantly clear, the level of Fed MBS prepays is directly correlated with prevailing mortgage rates: the lower the mortgage rate, the more willing the end consumer is to “put” an existing mortgage to the Fed and open a cheaper one. And vice versa: the higher rates go, the less prepays the Fed experiences. Lo and behold: actually looking at the data, confirms precisely this. As the chart below shows, while in H2 2010, when 10 Year, and thus Mortgage rates, were dropping fast, prepays to the Fed, and thus the rate of QE Lite activity was very high: peaking at $45 billion in December. Alas, since then, due to surging rates, the prepay rates has plunged, and the February and March total of $40 billion is less than all of December. Should rates continue to rise, which they will if fears of no QE3 accelerate, and Bill Gross ends up being right, this number will plummet and could potentially hit zero as nobody has an incentive to prepay a mortgage when the existing one is far more economic.
So putting it all together: assuming no QE3, and just continued rolling and transforming MBS in UST purchases, means that the Fed will have about $12 billion in average UST purchases per month from maturity extension, and about $20 billion from MBS prepays. This is at best one quarter of the amount the Fed monetizes per month currently and is largely inadequate to continue funding the US deficit. Also, should the 10 Year rate jump to over 5%, QE Lite will halt indefinitely, meaning the only source of dry powder for future monetization will be rolling maturity extensions, which are about one tenth of current monthly funding needs.
Lastly, and people tend to forget this, the primary reason why the Treasury needs the Fed to be the buyer of only resort is that no matter what happens to interest rates, and cash outlay to the Fed ends up being a revenue item for the Treasury! In fact, the higher the rate, the greater the purported revenue from Ben Bernanke, even though in reality it ends up being a wash transaction. For Tim Geithner the ideal situation would be one where the Fed owned all US interest paying instruments, as interest expense would be shortly reclassified as Treasury revenue. Should the Fed not be a key player in monetization, this is money that would ultimately leave the US. And if rates were to jump the annual interest outlays would actually be quite dramatic.
Read the original article HERE.