| Monday,
Oct. 6
Posted 11 a.m.
EDT
COUNTRYWIDE PACT:
The owner of Countrywide promises to modify hundreds of thousands of mortgages
to settle a lawsuit. Bank of America, which acquired
Countrywide in July, says up to 400,000 people will get reductions in interest
rate or principal. The settlement affects borrowers in 11 states: Arizona, California,
Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and
Washington. A lot of borrowers got pay-option ARMs and made
the minimum payments -- payments that didn't even cover each month's interest.
Their loan balances went up each month, even after making payments. This freed
up money that they spent on vacations and cars. Meanwhile, the values of their
homes went down. Under this settlement, their loan balances will be reduced so
they won't owe more than their houses are worth. Some borrowers
who behaved responsibly, but whose home values went down, will have principal
balances reduced, too. Bank of America says mortgages will
be modified so that customers' monthly payments won't exceed 34 percent of gross
income. Prepayment and loan modification fees will be waived. But
there's a fly in the ointment. This settlement is for mortgages that Countrywide
services. But Countrywide and Bank of America don't necessarily own these mortgages
or the securities based upon them. In some instances, modifications will require
approval from investors. Approval won't necessarily be forthcoming.
Friday,
Oct. 3
Posted 4 p.m.
EDT
ANOTHER STEP:
Now that the $700 billion bailout of Wall Street and the wooden arrow industry
has passed, some say the federal government needs to save the banks. What?
You thought this bailout was supposed to save the banks? It's not. Not really.
The bailout is intended to get money moving among banks by restoring confidence.
But soon it will become clear that the banks need injections of money so they'll
have money to lend. I'm trying to think of an analogy here.
You know me -- big on analogies. Congress just replaced the oil pump. Now the
car needs oil. At least, that's the thinking of Dick Lepre,
a sage mortgage broker in San Francisco. "The thing that has to be addressed,
apart from liquidity, is capital," he says. "I think there needs to
be an injection of capital in the banking system." The
government can do that, he says, by investing money in financial institutions
in exchange for preferred stock. After (and if) the banks recover a few years
hence, the government can sell the preferred shares on the open market. The government
could possibly make capital gains on these deals. Brad DeLong,
economist at the University of California at Berkeley, advocates a form of this
idea, which he calls the Swedish
Plan. He explains it as a process "by which the government invests in
the major banks of New York and elsewhere and essentially takes them over and
runs them for a few years, and then when they become profitable again sells off
its stake to private investors," and adds that it "would be much more
effective and a much better use of the public's money." The
bailout bill that passed the House today fixes a different problem. Financial
institutions own distressed mortgage-backed (and other asset-backed) securities
of undetermined worth. "Nobody knows what they're worth because nobody knows
what the default rates will be and nobody knows what the loss severity will be,"
Lepre says. As a consequence, banks are reluctant to lend to one another. The
government will buy some of these securities of unknown worth. When a bank gets
these securities off its balance sheet, other banks will be willing to lend money
to it. That's how the thinking goes. But will the bank have money to lend? Lepre
doesn't think there's enough capital in the U.S. banking system for the healthy
institutions to buy all the moribund ones. He thinks the next administration will
have to tackle this issue by pumping money into banks in exchange for preferred
shares. Posted 2 p.m. EDT
JOBS GONE: The September
jobs report is brutal, reflecting a loss of 159,000 nonfarm payroll jobs. That's
the worst monthly decline in more than five years. The unemployment rate remains
6.1 percent. Economist Joel Naroff, of Naroff Economic
Advisors, says: "The credit crisis has moved into the mainstream economy.
Firms are hunkering down and running as lean as possible." Joe
Sixpack says: "Oh, no -- I lost my job. What am I going to do?" Sixpack's
loss could be your gain -- the bad jobs report is yielding a small decline in
mortgage rates today. If a few million people lose their jobs, we might find ourselves
in a refi boom because of the accompanying lower rates. DEBATES:
At last night's vice-presidential debate, moderator Gwen Ifill asked a wrong-headed
question about the mortgage crisis. Ifill put it this way:
"The next question is to talk about the subprime lending meltdown." Stop
the tape. "Subprime lending meltdown?" It stopped being a subprime meltdown
14 months ago. The subprime mortgage industry fell apart in
February 2007. Back then, everyone, including the Treasury secretary and the chairman
of the Federal Reserve, said the crisis had been "contained" to subprime,
I guess like we contained the Soviets. I suppose they were trying to imply that
subprime lending would have a period of democracy, followed by rule by an ex-KGB
strongman. Instead of containment, we got falling dominoes.
A big one toppled in August 2007, when the jumbo mortgage market fell with a thud.
To switch metaphors in midstream, the jumbo credit market didn't quite freeze,
but it got very viscous, like cold maple syrup. Jumbo rates are still high today,
and jumbo loans are harder to qualify for. Now other mortgage
dominoes have fallen: low-documentation and pay-option ARMs especially. Behind
all of these toppling mortgages, you have declining house values. Calling it a
"subprime lending meltdown" is like taking a time machine to March 2007. Ifill
continued: "Who do you think was at fault? I start with you, Governor Palin.
Was it the greedy lenders? Was it the risky homebuyers who shouldn't have been
buying a home in the first place? And what should you be doing about it?" Palin's
reply was a mixture of common sense and naivete. She said: "Darn right it
was the predator lenders, who tried to talk Americans into thinking that it was
smart to buy a $300,000 house if we could only afford a $100,000 house. There
was deception there, and there was greed and there is corruption on Wall Street.
And we need to stop that. Again, John McCain and I, that commitment that we have
made, and we're going to follow through on that, getting rid of that corruption." Before
I nitpick about the "greed and corruption" line, I am surprised to say
that I view the situation the way Sarah Palin does. Too many people bought $300,000
houses when they could only afford $100,000 houses. Yes, they're at fault for
making dumb financial decisions. But they were talked into it by people who were
exploiting their superior knowledge of mortgages and real estate. "There
was deception there," Palin said. Exactly right. I don't agree with Palin
on many subjects, but on this, I do. There's plenty of blame to go around, and
borrowers and Wall Streeters are at the top of the list. About
"greed," though. Palin was echoing something John
McCain said in last week's presidential debate. McCain said: "But somehow
in Washington today -- and I'm afraid on Wall Street -- greed is rewarded, excess
is rewarded, and corruption -- or certainly failure to carry out our responsibility
is rewarded." McCain decried greed on Wall Street at least one more time,
which is remarkable, coming from a Republican. Wanting to get
rid of greed on Wall Street is like wanting to get rid of lust in Hollywood. Financial
services and movies thrive on their favorite cardinal sins. Ridding Wall Street
of greed is like ridding movies of pretty actresses. Good luck with that. Back
to the v-p debate. Palin's reply went downhill from there. She urged people to
take personal responsibility to never be taken advantage of again. That's pretty
weak, because people often aren't aware that they're being taken advantage of
until the damage is done. I don't want to knock Palin (and
McCain) too hard on the "Wall Street greed" meme, because they also
talk about corruption. There was plenty of corruption on Wall Street, as bankers
eagerly scooped up profits while pawning off the risk on others. Meanwhile, the
rating agencies earned money by ignoring the risks inherent in securities backed
by no-documentation, no-money-down mortgages in bubble housing markets. What
to do? The candidates are fuzzy on that. Palin verbosely says
we should "make sure that we demand from the federal government strict oversight
of those entities in charge of our investments and our savings and we need also
to not get ourselves in debt." McCain prescribes "stricter interpretation
and consolidation of the various regulatory agencies that weren't doing their
job." Joe Biden blamed excess deregulation and "the
belief that Wall Street could self-regulate itself." He self-said himself
that we need more regulation, but he didn't specify what kind. Barack Obama, in
his debate, was equally vague: "But we're also going to have to look at,
how is it that we shredded so many regulations? We did not set up a 21st-century
regulatory framework to deal with these problems. And that in part has to do with
an economic philosophy that says that regulation is always bad." OK,
need regulation. Any specifics, lady and gentlemen?
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