Thursday, August 25, 2011

If You Listened to Sheila Bair, You Wouldn't Be In This Mess: Born-Again Keynesians Fiddle as Foreclosures Burn

According to today's New York Times, the Obama Administration and other powerful forces are circulating a plan to allow homeowners with government backed mortgages (all mortgages issued by Fannie and Freddie are de facto government backed) to refinance their mortgages at current interest rates, about 4%.

Don't use the "S" word, please (as in "stimulus").

The plan glossed over who would administer the plan and who would be eligible.

The Great Recession of 2008 which most of us are still enjoying is at bottom both a collapse of the housing bubble feeding frenzy and a gigantic, criminal enterprise known as securitization. A major part of the economy was supported by the inflating the asset known as housing: not only construction and construction-related activities, but building new neighborhoods which required schools, police, firemen, hospitals, stores, etc. When housing prices fell, so did ancillary businesses.

In her end run around the obstructionists in the Obama Administration, especially Treasury Secretary Timothy Geithner, Sheila Bair, former Chair of the FDIC proposed renegotiating mortgage rates in a New York Times op-ed piece back in October 2007.

In case you forget, the article reminds you of how criminal underwriting and obfuscation led the country into its current mess. Bair offered a solution to the inevitable failure of a popular form of home lending, the 2/28 and 3/27 subprime hybrid mortgage. The way it worked, a homeowner would pay the initial "teaser" rate, generally around 7%, for 2-3 years. Then it would reset to a much higher rate, say 12%, which would increase monthly mortgage payments by as much as 30%.

Bair's plan wasn't a bailout like the Troubled Asset Relief Program (TARP), where $700 billion of taxpayer money flowed into bank coffers BECAUSE the banks overstepped themselves in their greed. Homeowners would have been required to make monthly payments and at a higher rate (7%) than what was currently available.

Try as she did, she could not get anyone in the Obama administration to take the foreclosure situation seriously. Finally someone put together a Rube Goldbergian plan known as Home Affordable Modification Program (HAMP), where mortgages are modified on a loan-by-loan basis and mortgage servicers, operating on a voluntary basis, make more money in foreclosure and other fees than in HAMP subsidies.

The $50 billion TARP money allocated for distressed homeowners remains untapped for the most part. And because Obama allowed the political narrative to shift to deficit reduction rather than job creation, the entire $50 billion will probably never be used for the purpose for which it was intended.

Despite many warnings of perils to come, the Administration and the banks had nothing but disdain for borrowers. Geithner saved all his sympathy for the banks.

Surprise! Doing nothing worsens problems, it doesn't make them go away. Something had to be done to get blood (money) flowing into the starved economy as the election year clock ticks. Things is bad:

On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9% in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices.

If massive refinancing isn't a Keynesian plan, then I don't know what else is. Amazing that havoc, disintegration and catastrophe have to occur before demand is created. This is how it works: the government will help homeowners renegotiate lower mortgage rates, thereby (theoretically) freeing up $85 billion to lubricate the wheels of commerce.

Depending only on the top 1% to raise leaky boats doesn't cut it. There are only so many Jimmy Choo shoes or Tiffany Sweet-16 bracelets one can buy. It's simple arithmetic. The rich take their tax cuts, buy some luxury items and invest the rest. Everyone else (99% of the population) runs out to buy food, medical supplies, shelter and other sundries. In other words, they spend what they get. Buying goods from businesses creates profits, which is how capitalism grows.

Unfortunately, the refinance plan doesn't address two major factors driving the foreclosure crisis:

[H]omes worth less than their mortgages and a sudden loss of income, such as unemployment. American homeowners currently owe some $700 billion more than their homes are worth.

Isn't that the TARP price tag?

Tuesday, August 9, 2011

Standard and Poor's Lacks All Credibility

On Friday, August 5, 2011, Standard & Poor’s downgraded U.S. sovereign currency from AAA to AA+. This despite a $2 trillion error it made when submitting its decision to the White House and the reason it gave for the downgrade:

In its announcement Friday night, S.& P. cited the political gridlock in Washington during the debt limit debate as a main reason for its decision. “The gulf between the political parties,” S.& P. said, had reduced its confidence in the government’s ability to manage its finances.

The other two major credit rating agencies, Fitch and Moody’s, did not downgrade the currency.

Not only did S & P’s move appear to be basically political as opposed to a determination made on sound financial ground, it also seems to have leaked information to selected hedge funds before it made its downgrade public in order to curry favor and possibly offer a chance to the funds to make insider bets on the dollar.

It’s amazing that anyone takes the credit ratings agencies seriously in the wake of securitization. Back in 2008, their triple-A ratings of subprime mortgage-backed securities and collateralized debt obligations were downgraded very quickly from triple-A to triple-C, sometimes within a few weeks. Lehman Brothers was rated triple-A a month before it went bankrupt.

The credit rating agencies were a huge part of the 2008 collapse. The reason was obvious: they were paid by the bond issuers. That’s where their loyalty was, not with investors. If an issuer (like Goldman Sachs) didn’t like Moody’s ratings on a RMBS stuffed with lousy mortgages, it’d walk across the street to S & P’s to get a better one.

But Standard & Poor’s, just like every entity in the daisy chain of securitization, wasn’t held accountable for its conflicts of interest. Despite its selfish, politicized motives, the mistakes it made with simple arithmetic, its obscure methodology which has proven so damaging to investors in the past, it’s still taken seriously by the marketplace.