Tuesday, August 28, 2007

Mortgage Bailout Unlikely as Media Outlets Unable to Find Sympathetic Victim

As the mortgage meltdown continues to get worse, Wall Street and politicians have started testing the waters to gauge just how much public support there is for some sort of bailout. Many bailout plans have been proposed which include hysterical calls for the Federals Reserve to drastically cut interest rates, the lifting of restrictions on GSE lending and legislation to fund some type of emergency fund with taxpayer dollars.

Here is one such amalgamation of interests calling for some sort of bailout:

Since the Congress and the President are at, or near, historic lows in the polls, neither Democrats nor Republicans can be seen to be bailing out Wall Street billionaires without risking another American revolution. So, strategies to create support for a bailout plan are focusing on the prospect of unfortunate families or children who may be subjected to the indignity of renting after a foreclosure. None of these bailout plans are likely to come to fruition, and here is why: There is not yet, and will not be, a "poster child" victim who elicits any public sympathy whatsoever.

Potential victims generally fall into one of the three following groups:

1. The unemployed are pretty much off the list of "poster children" right away, because they would be unable to make any payment and so, would be subject to foreclosure in any case.

2. Any employed family, able to make some "teaser" payment on an ARM, but facing a much larger reset payment, is also quickly crossed off the list for at least one of the following reasons:

  • The house they are living in is HUGE! Did you see the size of that house? Why should they get help to live in a house bigger than mine? And they have granite countertops and two brand new SUVs in the driveway!
  • Oh, look the teaser rate they can afford is more than I pay in rent. They should have no problem renting.
  • They weren't very good neighbors anyhow, I will be happy to see them go.
3. The elderly victim on a fixed income who somehow accumulated an unpayable $50,000.00 HELOC against an otherwise unmortgaged property: This victim isn't going to elicit much sympathy, aren't we already paying their Social Security and medicare? And if they got flummoxed by tricky mortgage lenders and finances, maybe they are too confused to be maintaining a house. A rental would be entirely appropriate, and they may be able to salvage some equity from a quick sale.

So with 99.999% of the population likely to be judged by the public as unworthy of a taxpayer bailout, the only remaining strategy for those supporting a bailout is to whip up economic fears in the general population. This is also unlikely to work because on Wall Street, fear and greed are often in a stalemate. Members of the financial community on the winning side of a bail out are likely to be stalemated by other members of the financial community holding the opposite position.

For every dollar of political contributions supporting a bailout, there will be another dollar supporting doing nothing. Gridlock at its finest.

Saturday, August 11, 2007

Bonds and Illegal Steroids

Perhaps I should start with an SAT type question:

Illegal Steroids : Barry Bonds :: _____ : Mortgage Backed Bonds

A. Investment Bankers
B. Ingorant Investors
C. Great Salesmanship!
D. Complete failure of governmental and private oversight
E. Bubble economy
F. Easy Credit

Whatever the answer, it appears that both Barry Bonds and Mortgage Backed Bonds have both acheived extreme levels of "pumpitude" and hit recent records.

Where the two types of "Bonds" diverge is in their public profile. One recent poll shows that 72% of people think Barry Bonds used illegal steroids. Pretty darned informed public if you ask me.

On the other hand, most people still have no idea of the impact of illegal steroids on their invesment returns, and this includes the professionals. I expect any type of poll on MBSs or CDOs to get responses from 72% of people such as "There's a problem with the what now?"

The Fed recently advocated for greater levels of financial education for all Americans. Let's hope it's not a "crash" course.

Friday, August 10, 2007

SecondLife.com to Fill Virtual Reality with Unsellable Houses

As the CNN Money link at the bottom of this article shows, there is no escape from the market's current real estate and credit woes. With a 3-D rendition of an unsellable $3.1 Million house appearing in Second Life, it appears credit market and real estate problems have not been contained, even to the physical universe. Virtual reality has now been invaded by monuments to market excess.

This is definitely an expanding market for Second Life. Second Life's next offering will be volume discounting for multiple properties owned by Banks. Rumor has it that they have teams of graphic designers working on 3-D images for uncut grass, and boards that can optionally be placed over windows to mirror the real life state of disrepair of bank owned properties.

The price of second life CDOs and Mortgage Backed Securities have not been set at this time.


Sunday, August 5, 2007

Wall Street Scolds Homeowners for 0% Home Equity - Says 0.4% Equity is Fine

As the mortgage and real estate meltdown continues, Wall Street insiders have increasingly pointed to greedy, irresponsible homeowners as the source of the problem. This is because many homeowners have loans which have financed 100% of the purchase price of their homes. "The problem here is that the unsophisticated homeowners are taking huge, greed motivated, risks when they have 0% equity in their own homes." said one investment banker.

"We, on Wall Street, are much more intelligent and take a longer view. We have taken great pains to insure our portfolios in order to mitigate our risk. One example is that many firms on Wall Street have insured $61 Billion in CDOs through a company called ACA Capital Holdings. We make prudent decisions, unlike the typical American homeowner who is, quite frankly, contemptible at times."

ACA's assets, however, are only $260 Million to insure $61 Billion of CDOs, which is 0.4% (see link at bottom). When asked if homeowners would be considered responsible if they had 0.4% equity in their homes, the investment banker responded: "We are talking about two completely unrelated lines of business, different standards apply. In ACAs case 0.4% will be more than adequate. They are insuring very smart people, not dumb homeowners."


Thursday, August 2, 2007

New 100-8-20-5 SFM Mortgage Product Pulled From Market Before Launch Date

The Mortgage Bankers Association announced today that it’s much anticipated 100-8-20-5 mortgage product will not be available for sale in late 2007 as planned. The 100-8-20-5 Self Financing Mortgage (SFM) was a whole new class of mortgage product that was designed by the best financial engineers in America.

The basics of the SFM mortgage can be seen in the 100-8-20-5 numbers:
- 100% is paid to the seller for the cost of the property
- 8% is paid in modest administration and origination fees
- 20% is set aside in a new form of financial trust, which would cover at least 36 full months of missed payments by the borrower
- 5% invested in highly leveraged funds expected to make near 100% returns every year

The elegance of this product was that, thanks to the 20% set aside trust, the delinquency rate was guaranteed to be zero in the first few years. Because of the zero delinquency rate, the MBS would likely get an AAA rating by the market. Even after three years of no borrower payments, the expectation was that the highly leveraged 5% investment might have grown to 40% of original property value, and could be used to replenish the set aside trust. This would allow for another 36 or 72 months of nonpayment by the borrower. And so on.

It seems to offer a 133 LTV, but the financial engineering is complicated, and the SFM is said to have complied with all enforced and marketable mortgage standards as of January 1, 2007.

The SFM class was designed to be the successor to all ARMs written between 2004 and 2007, as well as an easy ‘no doc’ upgrade to any troubled subprime, Alt-A or even prime mortgage. What shall become of any troubled 2004-2007 vintage mortgages, now that they will not be able to convert to SFMs, is currently unclear.

Changes in the market and regulatory environment may shelve the SFM for years. There was a more conservative 100-9-30-10 SFM variant that was also put on hold indefinitely.

Federal Reserve, SEC Enlist Psychics to Help Assess Credit Risk of Hedge Funds, Investment Banks

Financial investigators for the Federal Reserve and SEC took an unusual step today in their ongoing efforts to assess credit and stock market risk. In a move normally associated with grisly, unsolvable murders, investigators called on the services of several renowned psychics to help them solve their most baffling financial conundrums.

"It's the worst job I've ever had." said one psychic. "Stock readings are not so bad. With stocks we’ve seen a lot of earnings and CEO compensation problems. They all have transfer pricing issues of course, and nobody cares."

"But when you go through the tranches of Mortgage Backed Securities, it just makes your head want to explode. You are overwhelmed by thousands of bad financial decisions all at once. There is not a person involved in the making or selling of these things who has clean hands."

When asked if the job was really that bad, the psychic said: "Yes, it is. I literally vomited 4 times while assessing a single BB- tranche. After this government contract ends, I am sticking strictly to murders."

Wednesday, August 1, 2007

No Run On US Banks or Check Cashing Outlets Foreseen in Global Market Turmoil

Finally some good news, US Banks are likely to remain solid through the market turmoil, no matter how bad things get.

"With the US savings rate near zero, most Americans aren't going to be running to their bank and demanding to withdraw much, if anything." Said one leading economist. "Savings accounts typically have a near zero balance, and checking accounts typically have just enough money to cover this month's bills. Also, Home Equity Lines of Credit are pretty much tapped out for the average American. "

Further, with millions of Americans unable to even qualify for a checking account, many will unlikely even set foot in a bank. Americas thousands of Check Cashing outlets expect a mild uptick in their "Pay Day Loans" line of business. The outlets, after large investments in infrastructure over the past 10 years, expect to be able to handle the volume.

All of this points towards pretty short lines at the bank over the next few months, no matter how this plays out.

No Credit Crunch Here, Internet Lending Business Still Booming!

Sweeping rumors of a credit crunch seem to be proven false!! Just look at the sheer volume of home finance offers on the Web.

If you even have bad credit (called subprime), there are still lots of lenders willing to finance your home at surprisingly low rates!!

A quick survery of the Web tells the tale much more clearly than pouring over money supply statistics and rate spreads. Our findings are below:

At http://www.lendingtree.com/ right now I am still offered pretty darned favorable terms with "$200,000 loan for $644/month!† Bad Credit ok!". Wow, sign me up for 400k, maybe even 600k!! They have a BIG network, over 200 lenders - so what if a couple of Mortgage companies are on the rocks, that leaves 198 lenders who will gladly fund me with bad credit.

As of today http://www.homeloantrust.com/ is going to give me 4 offers, with "Rates as low as 2.9%" And again, "Bad Credit - Okay". One extra thing they offer is help to "Pay-Off Credit Cards", which would probably really help some people.

At https://www.lendgo.com/ I am still told their service requires "No Credit Checks!" and "Bad Credit OK!"

There are too many others to list, you get the idea. In conclusion, it seems pretty obvious that for now there is nothing to worry about.