Buyer’s Choice Realty blog

James Lockhart, Director and Chairman of the Federal Housing Finance Agency (FHFA), announced a large loan modification plan today.

How big is it? According to Lockhart, tens of thousands of mortgages can be renegotiated. Servicers of these loans have agreed to this plan and will receive $800 for each loan modified by the program. Unfortunately, it appears that the only folks eligible at this point are borrowers who are at least three months delinquent in their mortgage payments, and the loans must be owned or securitized by Fannie Mae or Freddie Mac. The plan is designed to get homeowners into mortgages they can afford. Mortgages may be extended, and Lockhart mentioned a 3% rate for 40 years. Naturally, many questions remain about actual plan implementation. Lockhart wants to renegotiate mortgages so that borrowers will have no more than 38% debt-to-income ratio.

The Chairman of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, when asked for her thoughts regarding this plan, called it a, “step in right direction, but falls short in what is needed to address widescale mortgage issues.”

Why should mortgages be renegotiated? Why bail out people who made bad decisions? Lockhart answered those questions and stated that foreclosure is extremely expensive for Fannie and Freddie. It often costs them 50% of the loan, and renegotiating should only cost 20%. He went on to say it’s good for homeowners in general because it will start to stem price declines in neighborhoods where there are foreclosures. He believes this program will hopefully help in the overall market to stabilize home prices.

While this is only a first step, it is sure to be hotly debated in the days to come. What are your thoughts?

Some smarty-pants Professor from Yale got the NY Times to publish his thoughts about solving the foreclosure crisis. As I was unable to get an op-ed piece in a major newspaper, you can read a few of my thoughts on this same issue from a previous post.

That stated, Mr. Geanakoplos, along with coauthor and fellow smarty-pants Susan Koniak, provide a sound argument for enacting new legislation based on their ideas. If you are a home owner, potential home buyer, potential home seller, or engaged in business with any of these parties, take a few minutes to read

Mortgage Justice Is Blind

Finally! Some tough questions for the CEOs of the big three: Moody’s, Standard & Poor’s, and Fitch, the credit rating agencies that many feel are ultimately responsible for the sub-prime crisis and ensuing meltdown on Wall Street. For a little background, see my previous post questioning who is to blame for the sub-prime crisis.

As Jeff Macke says of these agencies on CNBC, “they should be taken out and annihilated…they are bringing economy around the globe down”.

Simply stated, the ratings agencies did not do their job. They are the symbols of trust and credibility to a giant industry that spans the globe, and they have failed. When will someone be punished for this amazing lack of common sense? Not everyone that works for one of these companies is to blame, but the fact remains that the companies made money by bestowing AAA ratings on suspect mortgage-backed-securities (MBS). For an example of how ridiculous this behavior became, check out this article.
Looking for a scapegoat to blame for your declining retirement savings? Here are three:

Raymond McDaniel, Moody’s CEO

Stephen Joynt, Fitch CEO

Deven Sharma, Standard & Poor’s President

The power brokers in Washington just met for a photo shoot and gave some brief comments about the pending bailout that has dominated the news in recent days. After negotiations between both parties, Sen. Chris Dodd announced that they have agreed, in principle, to the principal amount. Got it? Here are the vague details that Dodd, among others, provided.

• Congress will give Paulson the money he needs (assumption: $700 billion)

• They have agreed on protecting home ownership (how?)

• They have agreed on executive compensation limits (this will be part of the terms of the bailout)

• There will be taxpayer protection (likely story)

• The federal government will get equity stakes in the form of warrants from the companies that participate in this bailout. (exactly how much, how this will happen has not been disclosed, nor agreed upon as of yet)

Thus far, there has not been consensus reached regarding who exactly will be covered under executive compensation limits (not giving golden parachutes to executives). Is it only the top officials from these companies, or will it encompass all executive officers, of which there are hundreds in the large Wall Street firms.
When will Wall Street get this money? Most likely the money will be paid out in installments. The mortgages and associated securities will be sold via reverse auction to the government. Pricing these assets is the tricky thing. Companies will need to write off these assets and most likely raise new equity (here comes…. shareholder dilution!).

Whether you think this bailout needs to happen or not, your opinion does not really matter. It will happen, and they will most likely be voting on the bill Friday or Saturday, according to many reports.There are still many items to negotiate and iron out, but things are progressing at a fairly rapid rate.

Big Hank went before Congress today to ask for a sizable investment into his fund. He says he needs $700 billion from us, and congressional folks are so far trying to sate him somewhat by contributing $150 billion over the next couple months. The questions are many, and for those of us who are not money market, credit, derivative, TED, swaps experts, they are a bit overwhelming.

Here are the main issues:

• Should we give Paulson a blank check so that he can, according to Senator Dodd, “act with absolute impunity“, in rescuing our nation’s financial system?
• What amount of money will be sufficient to overwhelm the system in order to restore confidence?
• What exactly does the plan/bailout entail? Sen. Dodd, commenting on the Treasury’s plan, called it, “stunning and unprecedented in its scope and lack of detail.”
• How can we be sure this plan will not fail? Clearly that is an impossible question to answer, but those in power need to get this right, the first time. In truth, this needs to happen, as unfortunate as it is for each of us that pays taxes. Also, it needs to happen within the next week.
• How will this plan help to stem foreclosures? HPHF will be buying risky mortgages so that lending can again take place in the market as a whole. Will HPHF renegotiate with homeowners on their mortgages, or allow them extra time to refinance at a fixed rate?

Please enjoy some great quotes from the testimony today:

Sen. Bunning said the plan would, “take Wall Street’s pain and spread it to the taxpayers. It’s financial socialism, and it’s un-American.”

Ben ‘the beard’ Bernanke, “if financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.”

Sen. Schumer, “Even on Wall Street, $700 billion is a lot of money.”

Hank Paulson’s hedge fund (HPHF) has struck again. They are taking a bunch of bad debt off the hands of the U.S.’ largest financial firms. No, they’re not banks any longer, simply financial firms. Banks are not having troubles like these multinational companies are.

From my understanding, HPHF will buy MBS (mortgage-backed securities) for less than 50 cents on the dollar, sit on them for a year +, and then resell them. Hundreds of billions of dollars will be spent to do this. Luckily, HPHF has an effectively unlimited supply of funds since we are all investors, can afford to hold terrible investments for multiple years, and they do not have to provide any returns to shareholders. Some of these MBS will be bought for 20-30% of their original value. These would be many of the mortgages that originated from 2005-2007. You know the ones, where there is an exhorbitantly high default rate? Yeah, those.

In any event, this plan has just been formulated, and many of the details are still in the minds of HPHF bigwigs. Updates will be a-plenty over the next week, and you can be sure you will receive my next HPHF newsletter.