California Government Fights Against Foreclosures
An article published by Loan Workout gives details on the California government’s plans to actively fight the rise in foreclosures- which rate in California is twice the national average. According to the article:
- With California impacted more than any other state by the national home foreclosure crisis, Governor Arnold Schwarzenegger worked with loan servicers from Countrywide, GMAC, Litton and HomeEq to agree to streamline “fast-track” procedures to help keep more subprime borrowers in their homes. Together these four enterprises service more than 25 percent of issued subprime mortgage loans.
- “With this type of cooperation from loan servicers, we can save tens of thousands of people from being added to the foreclosure lists. This common-sense approach does not involve a government subsidy or bailout,” said Governor Schwarzenegger. “Borrowers need to do their part too. If these lenders are willing to meet more than halfway, it’s important that consumers don’t run when they reach out. It was a two-way street that got us into this mess and it will be a two-way street that gets us out.”
- The Governor will also continue to lobby Congress to raise federal loan limits so that more California families can take advantage of these secure products, rather than relying on subprime loans.
It is good to see government officials working to find solutions for the crisis at hand. That is, after all, what we elect and pay them to do. I particularly like the fact that Governor Schwarzenegger is going to make borrowers and lenders alike work to get themselves out of this mess. All the government is going to do is make sure that both parties are giving and receiving what they should be. In a time like this, I think that is exactly what role the government should be filling. Sometimes borrowers just need to figure things out themselves, with options such as home equity lines of credit always viable alternatives.
OTS Considers Loan Modifications
An article published on the website, The Truth About Mortgage, takes a look at what the Office of Thrift Supervision (OTS) will do after an incredibly low third quarter. According to the article:
- “Despite the difficult environment, I am encouraged that the managers of OTS-regulated institutions are taking the appropriate steps to provide a cushion for the future,” Reich said.
- “Strong capital and higher loan loss allowances will serve thrifts well if housing markets weaken further.”
- The OTS plans to release their own loan modification strategy within days, which will compensate servicers with $500 per modified loan, and assist borrowers who are current but facing unaffordable resets.
- Reich has criticized FDIC Chairman Sheila Bair’s “one-size-fits-all” approach, which he believes would spook investors.
- “I think investors will never return to the market again if they know that at some given point in time the agreement they thought they entered into when they bought those securitizations can be modified by fiat,” he said.
- The OTS loan mod proposal would call for a case-by-case determination made by servicers, giving qualified borrowers a 36-month interest rate freeze on their initial teaser rates.
It will undoubtedly be difficult to try to cope with the credit crisis while still keeping in mind the borrowers. But it’s a relief to see that someone is willing to try when all the other lenders just seem concerned about keeping their heads above water, even if it means pushing other people under. Borrowers can certainly use the help, given the hurdles that currently exist for those looking to pay off their mortgages.
Examining “Liquidity Puts”
An article published by Financial Times gives some more detail on the current examination of the mysterious “liquidity puts” that have been troubling banks. According to the article:
- Doing the rounds is talk of a CDO “liquidity put” that has troubled Citi with billions in extra subprime exposure.
- Speculation about the “liquidity put” kicked-off after an interview with Citi president Robert Rubin in Fortune magazine last week.
- FT Alphaville noted Citi’s massive growth in CDO exposure - bizarrely through the commercial paper market - when the bank reported its Q3s… In a nutshell, this is the mystery “liquidity put”.
- Back in early November, we didn’t know them as “liquidity puts” - just “agreements” in the structuring of Citi’s CDO deals.
- To mitigate any CP rollover risk, Citi entered into a series of “agreements” which forced it to buy the CDO CP if no one else would. As Mr Rubin calls them, “liquidity puts”.
- And those CDO commercial paper “liquidity puts” forced a staggering $25bn increase in Citi’s CDO exposure - at a time when the market was falling apart. Like Salmon, we’re bemused as to why that notion hasn’t been more widely reported.
- And it may not just be a Citi problem.
- It seems that Bank of America had similarly structured CDO deals in place.
As this new term floats around people are starting to have questions. Why hasn’t this been covered by more news groups? Who else has these “liquidity puts”? It seems that every day the credit crisis is becoming more and more complex as things like these “liquidity puts” are unearthed and exposed to the public. It just makes you wonder how much longer this will all go on while everyone else struggles to get out of debts.
Interbank Trading Suspended in Europe
An article published by Bloomberg takes a look at the recent agreement among European banks to suspend trading in the second mortgage debt market. According to the article:
- European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region’s main source of financing for home lenders.
- The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26.
- “In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads,” the committee of banks and borrowers “recommends that inter-bank market making be suspended,” the council said in an e-mailed press statement.
- “Conditions have really weakened over recent days,”said Andreas Denger, a covered bond analyst at Calyon SA in London. “Most investors are not willing to invest in the current volatile market.”
- “Without market making between banks, investors will shun the sales of new covered bonds.”
Is it any wonder that banks worldwide are scared? After seeing what has been happening in the United States, it would be foolish for other nations to not take serious precautions. But will it be enough? Right now, all they can hope to do is “avoid undue over-acceleration” of the problem. That doesn’t mean that they will be able to stop the credit crisis from seriously hurting their economy. All anyone can do now is wait and see if these decisions will help anything.
The Government’s Shadow Mortgage Bailout
An article published by eFinance Directory talks about the government’s plans to sponsor a mortgage bailout for borrowers and lenders even though the majority of Americans are against it. According to the article:
- A recent survey found that 62 percent of Americans are against a mortgage bailout. Most people want to see borrowers and lenders work out their own problems.
- Unfortunately, our government has other ideas. Policymakers have very carefully orchestrated a shadow mortgage bailout.
- Securities were key sources of money during the housing boom. Now that investors have stopped buying, many institutions have been forced to seek out alternative sources of mortgage funding.
- A number of banks have turned to the Federal Home Loan Bank (FHLB) system. The 12 FHLBs are cooperatives first created during the Great Depression to boost mortgage lending and revive the struggling housing market.
- The concern is that the FHLBs are taking on too much debt in their attempt to bail out lenders. If investors lose confidence and begin to get rid of FHLB debt (in the same way they dumped mortgage securities), one or more banks could collapse and leave taxpayers with the financial burden.
On the surface it may seem that the government’s mortgage bailout is helping the situation, but all it is doing is moving the risk to the taxpayers. It is no wonder then that so many people are against the idea. What is frightening, I think, is that the government is going against the wishes of the majority. We may be in a credit crisis, but does that excuse deterring from the democracy that this nation was founded upon? This may even make things harder for the average borrower to payoff mortgage debts.
Who’s Really at Fault Here?
An editorial published by the Market Traders takes apart the blame game that will ensue when people start to ask who is responsible for the credit crisis. Here is an excerpt from the editorial:
The usual suspects will be lined up: crazy investors, corrupt lenders, and crooked accountants.
Have you heard this one: “It’s not the fall that kills you; it’s the sudden stop at the end”?
Most economic analysis is like this popular pearl of wisdom: it is often technically correct, but fails to give all the factors their due consideration. There would be no fatal stop without something close to terminal velocity preceding it. The fall and the stop are inseparable parts of a whole. Can we let that old saying go now?
Historical examples are a persuasive tool to show the crowd that monetary inflation is the root cause of bubbles and their subsequent busts.
Go over the other bubbles in history. Rehearse the data and the stories. Have it at the ready whenever someone asks. If enough fingers of blame point to the source instead of the symptoms, change is possible.
It is all too true that people fail to take into consideration all the factors of a financial crisis. This editorial is particularly persuasive because it shows how history has repeated itself in this area. And only when we learn from the mistakes of the past will we be able to change the future. I think the most important thing to remember is that you cannot blame the woes of an entire economy on a few unwise or corrupt people. It takes the nation as a whole to get us into this mess and get out of debt, and only when we realize that will it be possible to prevent such financial crisis.
Subrime Mess Continues to Worsen
An article published by Reuters talks about the increasing problems associated with the subprime crisis, including the trouble borrowers have to payoff mortgage loans. According to the article:
Blackstone Group president and chief operating officer Hamilton James said on Monday that the subprime mess that hit Wall Street banks appears to be getting worse.
“The subprime black hole is appearing deeper, darker and scarier than they thought,” James said, referring to investment banks. James spoke on a conference call with media after its results on Monday. Blackstone posted a quarterly loss.
James also said investment bankers expect the Federal Reserve to cut interest rates again, as Wall Street has seen the credit market crisis clog balance sheets with hundreds of billions of dollars in leveraged buyout debt.
That backlog will take around six months to play out, James said, with banks having worked through what Blackstone estimates is around 40 percent of the leveraged loan backlog.
Nobody expected the current crisis to get better anytime soon. But at the same time, nobody wants to hear that it’s getting worse. Just as the subprime mess was a long time in the making, the market won’t fix itself overnight. However, it is good to see that the government and involved companies are trying their best to come up with solutions that may stabilize the precarious financial system.
E-Trade Suffers Plunging Losses
An article published by Market Watch takes a look at the losses felt by E-Trade Financial Corp. as it’s shares fell more than half their value. This is a huge loss for the First and Second Mortgage lender. According to the article:
Monday’s declines added to losses that the shares sustained in late trading Friday, after the company warned about further write-downs in the fourth quarter. E-Trade also backed away from an earnings forecast issued less than a month ago, because the value of its asset-backed securities portfolio dropped further.
“Bankruptcy risk cannot be ruled out,” Citi analysts wrote in a note Sunday. They also lowered E-Trade’s rating to sell.
“The continued negative news flow about charges resulting from its mortgage and CDO exposure, an SEC inquiry and continued deterioration in its financial condition all increase the likelihood of significant client attrition,” the Citi analysts said.
E-Trade is just the next name on the long list of companies that have suffered serious losses as a result of the current financial crisis. What is alarming about this ever-increasing list is that as share values drop, so does consumer confidence, which is the fuel of the financial system. Too much bad news could scare consumers enough to bring on an economic standstill, which would prove very detrimental to the nation.
Commercial Property Plagued by Credit Crisis
An article published by Financial Times discusses the effects of the current credit crisis on commercial property. According to the article:
Global credit turmoil has spilled over into the market for bonds backed by US commercial mortgages, threatening to push down property prices and scuttle deals.The decline in CMBS issuance is crucial because such securities have provided an estimated 40 to 60 per cent of financing for new commercial property purchases in recent years.
Market turbulence is also raising the cost of commercial mortgage borrowing.
Investors have fled the CMBS market, in part because of worries that riskier lending practices in commercial real estate would lead to higher defaults, industry executives say.
The news of these negative effects on commercial real estate is definitely not good news. This will affect businesses that would otherwise be helping to keep the economy moving. Yes, it is a bigger risk than mortgages on homes, but business and commerce are what make the money flow and keep the economy strong. Even locations such as Utah have become hard to get loans in, requiring many owners to take out a utah home equity loan.
The Rising Magnitude of the Subprime Crisis
An article published by Fortune Magazine takes a look at the worsening conditions and the long list of victims of the subprime 1st and 2nd mortgage crisis. Here is an excerpt from the article:
Two things stand out about the credit crisis cascading through Wall Street: It is both totally shocking and utterly predictable.
Shocking, because a pack of the highest-paid executives on the planet, lauded as the best minds in business and backed by cadres of math whizzes and computer geeks, managed to lose tens of billions of dollars on exotic instruments built on the shaky foundation of subprime mortgages.
Predictable because… as the fees roll in, one firm after another abandons itself to the lure of easy money, then hands back, in a sudden, unforeseen spasm, a big chunk of the profits it booked in good times.
In pure destructive power, the subprime mess has become Wall Street’s version of Hurricane Katrina. It has wreaked havoc on the nation’s iconic brokerage firm, Merrill Lynch and biggest bank, Citigroup, which have announced billions of dollars in losses and parted ways with their celebrated CEOs, E. Stanley O’Neal and Charles Prince.
The article goes on to give more details about the losses felt by Merrill Lynch and Citigroup, but I particularly liked this excerpt because it has a good grasp on the magnitude of the credit crisis and gives a basic explanation as to why it has gotten as bad as it has. I think it is important that everyone understand this so that nobody is caught off guard when the crisis only continues to worsen.