How to Resolve the Mortgage Crisis

Chris Whalen, The Institutional Risk Analyst, is making more sense on a rational way of resolving the subprime mortgage crisis than Tim Geithner, Ben Bernanke, and Larry Summers rolled together.

This is a bit of a read. We're looking for a video of his interviews on Bloomberg the past few days, and today in particular. But his common sense approach makes more sense than anything we have heard from the Washington Whiz Kids.

On top of his recommendation, Obama needs to target the stimulus more precisely and concentrate on driving employment and the median wage in the short term with both money and policy changes.

In fact, it is from the policy changes that the greatest gains would be achieved. Obama and crew need to stop putting out fires ad hoc in the manner of Bush and start working on a serious and well thought plan that the market can understand, whether they may like it or not.

Much of the stimulus package looks like payoffs to constituents and special interests, a perennial problem in the Federal government. The Democrats have to stop playing 'Let's Make a Deal' and strike a vision, share it, and then go for it. That is what FDR did in his first hundred days. His crew made errors in implementation, but the vision was coherent.

Obama needs to find his footing and start thinking out of the box. And it is not likely he will obtain that from Geithner or Summers, and does not have time to wait for the Volcker Committee to weigh in with a compromised solution.

Its a tough spot for any manager. Crisis management shows the weakness of his managerial experience. Bush was dying on the vine on his own watch. It tests a person like nothing else.

Its also an opportunity for growth, and Obama has about three months of goodwill capital to spend, and some bright people on deck. Time to stop making deals, and listening to the vested interests of everyone, and get to work striking a vision that his team can implement towards. A good start would be to strike the note of reform and level with the people, and do something about it other than symbolic gestures and fine rhetoric. Its time to tell the truth.

Can We Fix the Banks, Help Homeowners, and Rebuild the Mortgage Markets? Can Do.

"Here's the basic approach:

* The US Treasury would tender for all of the private label CDO/MBS extending between a range of dates, say 2004 forward to year-end 2007, representing trillions of dollars in assets held by investors and banks globally. The pricing on this paper will reflect current market prices, but say the average price was 50% of face value. Only issues that actually have an enforceable legal claim to collateral will be eligible. Derivative structures without collateral will not be eligible.

* Treasury then transfers all of the purchased toxic paper to the FDIC Deposit Insurance Fund, which acting as receiver under 12 USC restructures the trusts that are the legal issuers of the bonds and recovers legal ownership of the underlying collateral. The FDIC arguably has the power to call in all bonds and related investment contracts, and extinguish the claims of those parties which do not respond to the Treasury tender. The legal finality of an FDIC-managed receivership under 12 USC is what is required to end the toxic asset issue once and for all. The bankruptcy courts could be used in a similar fashion, but the unique legal authority of the FDIC suggests to us that this agency should run the process as part of its larger asset sale operations.

* This now "clean" whole loan collateral will then be re-sold to solvent banks in the localities where the property is located, using zip codes and other means to identify eligible buyers, priced at say 90 cents on the dollar, with a full recourse guarantee from the FDIC and financing from the Federal Reserve Bank in the relevant district. The banks will initially be guaranteed a minimum net interest margin and servicing income, and immediately begin to service the loan and manage the credit locally. Indeed, the participating bank must agree to retain and service the loan so long as government financing is used. The bank has the option to repay the financing from Treasury and take full, non-recourse possession of the loan.

We don't pretend that this simple outline is sufficient treatment of this proposal, but we have heard several permutations of this approach from veteran bankers in the loan origination channel all over the US. We see several advantages to this "community bank" approach to the crisis, which might be combined with modest additional capital infusions to solvent community and regional banks like WABC, if they even need it.

* First, it puts the trillions of dollars in now illiquid mortgage loan collateral trapped inside thousands of securitization deals back into strong local hands, who are responsible and incentivized to both manage and service the loan.

* Second, it re-liquefies the balance sheets of the US banking industry and it will vastly improve the prospects for home owners and housing markets around the country. If we are going to further lever the balance sheets of the Treasury and Fed, let's do it for a real reason and with a clear purpose.

* Third, the approach outlined above provides the Obama Administration and the US Treasury with maximum bang for the buck in terms of both addressing the solvency problems facing the banks and also helping the economy and the housing industry.

One downside: This new market paradigm suggests that loan servicing as a standalone business may be at risk. Once community banks begin to accumulate significant local servicing portfolios, they may rediscover the benefits of keeping the credits that they originate. Sorry Wilbur!

And what about valuation? Well, as our friend Kyle Bass of Hayman Capital likes to remind us, all of these assets are valued and traded every day. It's just a matter of organizing the purchase process in a transparent and competent fashion. Starting with our friends at shops like Hayman, Black Rock and RW Pressprich, we know people who know how to trade illiquid assets."

One in Ten US Mortgages Are in Trouble

This problem will not be resolved by making more credit (debt) available.

The sustainable resolution will come with an increased in median hourly wages, and a rising payroll number.

Programs that do not contribute to this end are temporary patches at best, designed to forestall default.

We need to carefully consider those things that must be reduced in size, and those things that are infrastructure necessary to the generation of jobs and real wages.


Bloomberg
Mortgage Delinquencies, Foreclosures Rise to Record
By Kathleen M. Howley

Dec. 5 (Bloomberg) -- One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.

The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.

“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”

The U.S. economy has shed 1.91 million jobs this year, while falling home prices have made it difficult for people who can’t pay their mortgages to sell their property. Payrolls declined in each month of 2008 through November, the Labor Department said today in Washington.

New foreclosures fell to 1.07 percent from 1.08 percent in the second quarter as some states enacted laws to temporarily stop home repossessions and lenders increased efforts to modify the terms of loans, Brinkmann said...

The Non-Farm Payrolls November Boogie Woogie

It has become popular of late to pay attention to the Birth Death Model from the Bureau of Labor Statistics. Also known as the imaginary jobs number, it is the plug which BLS uses to account for jobs created by new businesses that are not captured by the normal reporting system. There is a method to this madness, but we'll leave that for another day. The good news is that the number has become fairly predictable, as shown by our first chart, which tracks the numbers over the past four years. This month the number willl be a manageable 20,000 jobs added, or so. This is a smallish number, and since it falls in a month where a huge number of jobs are added and seasonally adjusted lower, and since the number is added BEFORE the seasonal adjustment, we can safely ignore it.

(By the way you can click on the charts if you wish to read them, or just for fun if you don't care about details as you are on a managerial or government career path.)

The second chart is a comparison of the actual net jobs in red, and the seasonally-adjusted or headline number in blue. Please note that there may be a HUGE difference between the two. This itself is not surprising because employment is subject to significant seasonal variations, especially in some employment positions. The BLS statisticians use seasonal adjustment formulas to take the raw number as reported to them by industry, and develop the adjusted, headline number to which Wall Street overreacts. These numbers are further adjusted and revised, sometimes signficantly, a year or more after the original headline, although the first three months see the largest adjustments. The latest BLS trick seems to be to come in with an outlier number in the current month, but adjust the prior months higher or lower. Its a statistics thing. Statisticians can make accountants look intractable when it comes to pleasing the boss, especially with this kind of revisionist latitude.

Yes, you say, but what's your CALL there partner? Because we all don't care what's happening, we just want the over under, the hook, the net-net, y'know what we mean?

Having had some experience with trending large, seasonally variable data in private industry, and often having to look behind the forecasts in order to do the hairy knuckle work of providing capacity, we would like to stress that the punchline from the above is that acting on a single month's data is pretty much reckless and irresponsible, and only encouraged by marketing types, including those that work for government and Wall Street. The headline November Jobs number can easily be justified at 200,000 jobs added, with no help whatsoever from the Birth Death model, simply because the huge latitude in the seasonal adjustment, and the sloppiness of the current month data. On the other hand, (economic codeword for shit happens) that's bush league data massaging. A much more elegant approach would be to come in with the current number of about 90,000, but to adjust the prior month number higher. This is called planning ahead for the next time around. No one cares after two months anyway. Stock speculators have the memory span of a goldfish, which is why they never seems to be bored as they swirl around the bowl.

As all practical people understand, the real story is in the trend. Its the averaged trend that provides the most realistic picture, and helps you decide whether to spend your time polishing that provisioning plan, or to start polishing that resume and making calls to executive search firms. In this case, this chart of the Twelve Month Moving Average is the money chart, and the message is clear as crystal. The economy is in a slump, not a recovery, and the jobs trend is not only not good, technically its pretty damn scary (time to polish up the resume and get 'er done in private industry, which seems to be a trend in the Bush Administration). We won't bother with a forecast for the unemployment statistic, the percent of motivated workers actively seeking jobs, because its a slightly different set of useless data in which the unemployed workers get ghosted after they become inconvenient for reporting purposes.

A good analogy here is when tech companies write down inventories, or take reserves from current sales. You just know the respective realities are going to get resurrected on some future income statement and beat-by-a-penny earnings release. At some point the US is going to have hell to pay for how we have run this business called our country, but the goal is to set that day well into the future, at least until after the next election.

P.S. Kudos to Hank and his crew for the finely executed rally-for-no-reason today. It made our confidence swell like Bill Clinton's willy at a Girl Scout convention. The spokesmodels on the Orwell Channel got the message that Wall Street Likes the Hope Now Pay Later Mortgage Plan. On a happier note, there is a consensus among those that have actually examined the plan that it does less than a presidential visit to New Orleans during the Hurricane Katrina aftermath, thanking the Lord for small favours received.