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Hope for Homeowners hedging terms


The NYT shows us this angle on the bailout:

William Frey, the president of one of the funds, Greenwich Financial Services of Greenwich, Conn., said that he was acting to protect the firm’s investments. “Any investor in mortgage-backed securities has the right to insist that their contract be enforced,” he said.

In letters sent to banks and others, Greenwich Financial said that it was particularly concerned about the impact of a relatively new government program, Hope for Homeowners. That plan, which Congress approved over the summer, allows some borrowers to refinance their mortgages into fixed-rate loans with terms up to 30 years.

Mr. Frey said that he was aware of two other funds in addition to his and Braddock Financial that sent similar letters, but he declined to identify them.

Told about the letters, John Taylor, the president of the National Community Reinvestment Coalition, a consumer advocacy group in Washington, said that he believed that the government might have to take action to protect homeowners from getting caught between different classes of investors.

“We can’t try to operate in a crisis and think that we will be able to satisfy all the lowest common denominators like hedge funds,” said Mr. Taylor.

Officials at banks and policy makers who have pushed for loan modifications say the servicing companies have the right to change loans if doing so will maximize returns to all investors.

“We think that by doing more modifications rather than less, investors are going to be better off,” said Tom Miller, the attorney general of Iowa and a leading proponent of aggressive loan modifications.

So far, disputes over loan modifications have been largely theoretical because most mortgage servicing companies are not aggressively altering the terms of loans and the government’s refinance program is just two weeks old.

But lawyers expect the tension over the issue to build. In authorizing the Treasury to buy $700 billion in mortgages and related securities last month, Congress instructed the Bush administration, as an investor, to modify more loans.

Officials at Braddock, a hedge fund firm based in Denver, said they were not against loan modifications per se but that they wanted to make sure renegotiations conformed to the contracts governing mortgage securities, which are backed by thousands of home loans. The most restrictive servicing contracts limit how many and what kinds of modifications mortgage firms can pursue. Other contracts allow the firms to pursue modifications more freely if doing so will minimize overall losses.

David R. Myers, a senior portfolio manager at Braddock, said that if mortgage servicing firms did not strictly follow those contracts, it would delay the recovery of the credit market because investors would be less willing to buy securities in the future.

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Dollar Hegemony–China Complaining?

By Stormy

Much twittering is going around that China is fed up with the dollar hegemony. According to Reuter’s:

“The grim reality has led people, amidst the panic, to realise that the United States has used the U.S. dollar’s hegemony to plunder the world’s wealth,” said the commentator, Shi Jianxun, a professor at Shanghai’s Tongji University.

The above quotation apparently appeared in the overseas edition of the People’s Daily, not in the main edition. Naked Capitalism argues that this reflects the official China position.

While this is clearly not an official statement, the fact that the commentary was given such prominent placement suggests that is a sanctioned view.

I am not persuaded. I would turn Shi’s presumed comment back on China itself, to wit, “China has used currency manipulation to plunder the world’s wealth.”

In tying the yuan closely to the dollar, China has been a shadow world currency. Recently, China tightened that connection to protect sensitive industries. (Note the slight downward tick in the yuan-dollar graph.)

There is no question that many are now hoarding dollars in an attempt to cover loses; hence, the strong dollar. But take a look at this year’s exchange rates tracking the yuan against the Euro, the yuan against the Pound, and the yuan against the dollar.

[Note: All graphs are from]
I would be the last to defend American financial institutions; nor would I defend America’s use of the dollar hegemony. America has not been a good financial steward.

But to argue that China is innocent in the debacle we see around us is a real stretch. As I have pointed out repeatedly, trade is at the heart of China’s rise; trade has conferred upon it the wealth it now enjoys. For a long time, China pegged the yuan to the dollar, a major cause of for its success in trade. (It relaxed that peg for a while; now it is tightening it up again to protect some of its industries.)

That peg gave exporters in China a real edge. Produce cheap; sell high. And, as Chinese officials have said time and time again, foreign companies inside China are primarily responsible for its export machine. Those companies did not want the peg abandoned. (Hence, our rather lukewarm push for China to abandon its peg. Corporate America was doing fine in China.)

Other important factors in China’s rise are, of course, its taxation schemes and its cheap labor.

In the long run, the dollar hegemony will go. It may disappear sooner than later. Who wants to use a currency whose owner is deeply in hock, and going deeper in hock with each passing minute?

I am not at all sure what will replace the dollar; maybe some kind of world currency. The coordinated effort of central banks to lower interest rates may be only the beginning of the path the nations of the world are about to follow.

From this writer’s point of view, the enormous trade imbalance, favoring China and other emerging nations, is the mirror image of the enormous American debt.

Ignoring its deteriorating trade position, America has relied on credit in every conceivable form. Finally, the excesses of our unregulated, financial system broke world’s piggy bank.

[Note: I did not include the yen. The yen has improved dramatically over the yuan.]

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Tidbits: A Small Slice of the World

By Stormy

China’s Hats & Caps Exports in the First Half of 2008 Seem to Buck the Trend, Posting 20.9 Percent Sales Growth to a Value Exceeding $844 Million

China’s 1,800 hat and cap suppliers export more than US$1.5 billion worth of products annually. Makers produce a wide range of designs including sports and fashion caps, as well as winter headwear.

Poorest countries must improve trade capacity: WTO

The world’s poorest countries need to get more competitive at producing and exporting goods in order to take advantage of preferential access offered by rich countries, an internal WTO report says.

The Financial Crisis in China and Japan

As the global financial crisis expands in the United States and Europe, the Asian financial system remains full of cash and not as vulnerable to the credit crunch proper [Subscription only]

Global apparel markets: winners and losers

US apparel production has decreased every year since 1997, and in the first half of 2008 was at its lowest level since 1963. However, the average price per unit increased 25%, as the product mix shifted to higher priced articles.

China, meanwhile, saw its apparel exports rise by 15% in volume and almost 20% in value in 2007, despite quota restrictions levied on several apparel types. China was responsible for 34.3% of total EU apparel imports, and 83.9% of clothing sold in Japan sported Made in China labels.

Mexico sales fell over 7% in 2007 as US and EU importers shifted orders to low cost and high quality outsourcing countries in Asia such as Vietnam and China.

U.S. Motorists Drove 15 Billion Fewer Miles in August

U.S. motorists drove 15 billion miles less in August than they did a year earlier, down 5.6 percent for the biggest monthly decline ever, as high gasoline prices and a weak economy cut into highway travel, the Transportation Department said on Friday.

China queries banks on loans to foreign-owned firms

China’s banking regulator has ordered lenders to report on the volume and status of their loans outstanding to foreign-owned firms, due to concerns about possible defaults…

Worries had already been mounting over asset quality at Chinese banks as an increasing number of manufacturers reported losses or went bankrupt due to weaker exports and sluggish consumer demand, as the global economy falters.

Many manufacturers in China are owned by foreign investors or controlled by off-shore vehicles.

Chinese media have also recently reported rising defaults by South Korean-owned companies as they pulled out of labour-intensive operations in eastern China’s Shandong province.

In its notice to lenders, the banking regulator urged them to learn from previous cases in which foreign investors transferred profits and assets out of China and dodged loan repayments.

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Failout Part 3 – The Summary or “Remember the Gift Horse & All That…”

Failout Part 3 – The Summary or “Remember the Gift Horse & All That…”
We’ve paid off the mortgages of people who would otherwise have gone into default triggering all sorts of chaos in the financial markets – from institutions performing loan portfolio write-downs to calling in credit default swaps, we’ve avoided that nasty mess and in the end those items are now dropped from financial institution’s balance sheets.

Those who had mortgages paid off are not necessarily off the hook for a financial obligation they chose to make but instead of owing it to a truly faceless institution (and one who’s generally subject to quarterly performance metrics and might not want to renegotiate) they get to pay their Uncle.

If you compare this to the bill signed into law by our “CEO President” the bill really is no solution in the end. Since we decided from the beginning it was in our country’s financial stability’s best-interests to borrow a hell of a lot of money to throw at the problem let’s make sure we’re throwing it in the right direction instead of where we think the problem might lie. Excepting for institutional coercion of the banks I highly doubt you’re going to see willing participants in the TARP (as evidenced by this week’s meeting with banks & heads of Treasury & the Fed).

Which is why I’m coining the term “failout” for the proffered ‘solution’ to our problem as it may very well continue our problems into the foreseeable future.

Ultimately, who would be better off at the end of a bailout? The businesses that got us into this mess or the citizens who elect these officials to office to mind said businesses? And if that doesn’t exemplify where our elected official’s priorities are I’m not sure what else will.


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Failout Part 2 – The Example or “The Uncle Sam Payment Plan (USPP)©”

by reader Tinman

Failout Part 2 – The Example or “The Uncle Sam Payment Plan (USPP)©”
Previously we put forth a fairly simple solution to the “housing/mortgage/credit crisis”. Let’s follow the solution through using our example above; Mr. & Mrs. Smith, earning $75k/year, have just had their monthly expenses dropped by a whole bunch however, here is where the next phase of the solution appears.

That $750,000 mortgage that was just paid off by the US government is now allocated as a liability of the Smith’s to the IRS. We’re putting them on the “Uncle Sam Payment Plan”© the same as if you have unpaid income taxes.

The USPP© would provide for the following:
• Balance of payoff added as a liability of the homeowners, payable to the IRS
• “Appropriate” payments from the homeowners to the IRS are developed to pay down the principal balance of the now government-held note/property (the interest rate, if any, could be commensurate to the standard IRS repayment option but without the late tax payment penalties added to the balance) to keep a homeowner in the home until sold/refinanced
• Similar to owing the IRS back taxes, any refunds you were to have received are applied to the outstanding balance

Granted, this brings with it a host of other issues all inter-related such as the following questions:

What about the postman earning $40k/year that managed to buy the $1m home?
That, I think, will turn out for itself a better option for everyone (think taxes, insurance, maintenance…). See the example below.
What happens when they sell the house and how much do they have to sell it for?
There is a minor risk of tanking a region’s real estate market by selling too cheaply.
What about insurance, property taxes, HOA dues, maintenance?
The homeowners are still obligated for these items as they are not related to the mortgage.
What if they abandon/destroy the house?
That doesn’t eliminate the debt they owe to the IRS and only makes it harder for the IRS to recoup and outstanding funds via sale of the house.
If they stay in the house and pay down the principal balance can they borrow against the equity?
Removing equity (housing ATM) from a home claimed by the IRS may not be in the best interest of both sides (homeowner & IRS). This is what kept us in trouble over the past 18-24 months.
What about the homeowners who have NOT made a bad decision to buy a house they couldn’t afford?
That’s where the developed monthly payment comes into play. If they really can’t afford it (and all the other components to maintaining home ownership) then they will be working towards selling it.
What about the renters who aren’t even attempting to buy a home now but could otherwise? Is there an incentive for them in this plan?
I guess be thankful you’ve not only made a good decision on your housing but are able to afford where you live. What about being able to use some of the excess funds recouped by the IRS as part of a down payment assistance program?
How do you select those mortgages to receive this government assistance?
Select a starting date and state any non-conforming mortgages from this point forward are eligible?
What about the banks who receive a paid-in-full mortgage as part of this plan? They can just turn around and lend it foolishly again!
• Any mortgage they write post-failout could be limited in the securitization of these new mortgages. Make it so they can’t sell the note to Fannie & Freddie or bundle it into a CDO/CLO.

Let’s try and come up with some rules to handle a number of these eventualities (all of the numbers are a bit arbitrary so bear with them for the moment).
• Repayment
o Monthly payments are determined with a base of a standard 30-year mortgage with 0% interest.
o If necessary, this base payment will be adjusted to income of homeowner to accommodate them continuing to live in the home while facilitating an orderly sale but for only 12-18 months.
• If extended beyond 12-18 months, property reverts to a government owned rental unit with rental rates commensurate for the region/area until a non-damaging sale can be made. The current resident is put into the eviction process if unable to afford the rental rate.
o Standard non-payment procedures are followed as if they had defaulted to a private financial entity.
• Resale rules & requirements
o Selling of the house for less than 35% of the paid-off mortgage is not allowed
• If the market is unable to support a sale otherwise (serious market drop), accommodations are made on the payment amount for existing resident or
• The house reverts to a government owned rental unit with rental rates commensurate for the region/area until a non-damaging sale can be made. The current resident is put into the eviction process if unable to afford this rental rate.
o Any sale of the house for less than the paid-off mortgage but above the 35% “low price” threshold
• Remaining balance of principal is forgiven but reported as unearned income for tax purposes.
• Repayment of taxes for that year can be accommodated again via the USPP© under standard IRS repayment guidelines.
o Any sale of the house for more than the paid-off mortgage
• Proceeds are held by the IRS in an escrow* account until sellers make offer on another home.
• This helps to prevent investors from flipping properties and possibly continuing to support an inflated housing market.
• Proceeds are to be invested in US Treasury securities and any earned interest is kept by the IRS
• Borrowing against property or established equity of property
o This is not allowed. The IRS will be the only mortgage lien holder of record for any paid-off property.
o No further debt instruments are allowed to be written on the property while it’s held by the IRS.
• Abandonment/forfeiture
o If home is rendered un-sellable by the occupant, repairs to return it to previous state are added to outstanding balance due.
o Standard processes/procedures available to mortgage holders are utilized.
• Ongoing taxes, insurance and any other financial obligations are paid by homeowner. These other items are not considered in establishing initial monthly repayment amount.
• Non-mortgage payer incentives
o Not sure what can be done here other than a timeframe (from 2003-2008) if you didn’t get a mortgage between those dates you’re eligible for a down-payment assistance (DPA).
o DPA would consist of a 10%-15% bonus of your committed down payment from the IRS.

Where does this ultimately leave us? Notice we’re no longer talking abut the companies being unable to lend anyone money. They should be running better since there’s no longer an issue about defaulting on recently written mortgages or the derivatives written on them. They have an improved balance sheet with capital in hand and an appropriate reduction in portfolio exposure. For those holding US mortgage assets, the elimination of the fear of being called to pay on a CDS or having to mark-to-market your portfolio should improve the appearance of bank’s balance sheets to lenders.
by reader Tinman

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Greenspan Shocked

By Stormy

Divorced one Like Bush
pointed out that the experts always seem surprised. Greenspan, the Delphian oracle, has officially added his voice to the chorus of surprises, nay, shock.

It is hard to hit a guy when you are down, but let’s give it a try. Has anyone who knows anything at anytime been in charge?

Greenspan, who headed the nation’s central bank for 18 1/2 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a ”state of shocked disbelief.”[Italics mine]

Greenspan now feels quite comfortable in making the astute observation–astute for him, apparently–that

”Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,” Greenspan said. ”Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.”

And who is to blame? Why it is those naughty investors who had a

heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

When charlatans and hucksters come to your town peddling fancy, cryptic derivatives containing rat poison, well…caveat emptor is the message. What if those peddlers are none other than AIG, Merrill Lynch, Goldman Sachs, Lehmann Brothers? Houses for everyone. Buy a couple. Get them and sell them while they are hot!

Of course, critics of the fabled one point out that his interest rate cuts fueled the fire; they did not lead to any substantial business investments in the states.

Those investments piled overseas. What we had here was easy money for a housing bubble. On this criticism, the fabled one remains sliently aloft.

And where is the bottom, fabled one? When do we know we are there?

…a necessary condition for the crisis to end will be a stabilization in home prices but he said that was not likely to occur for ”many months in the future.”

Many, many moons we must wait. Meanwhile foreclosures proceed apace. In the third quarter, foreclosures spiked 71%, with 81,312 houses foreclosed in September alone. And “265,968 troubled borrowers received foreclosure filings – such as default notices, auction sale notices and bank repossessions.”

All told 765,558 foreclosure filings were made on U.S. properties in the third quarter of this year – up 3% from the second quarter and 71% from the same period last year.

And, the fabled one says we have many moons to go before we hit bottom. He “done seen” the tunnel. Surprise and shock no longer crease that aging brow.

Now, wise even for his advanced years, he can safely tell us that we are in for one hell of a ride. Meanwhile, he will sit all comfy in his big chair, raking in the consulting bucks, writing his memoirs, and writing and rewriting history.

Like the oracles at Delphi, methinks he had a bit too much of a whiff of his own gas.

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