Greed Kills and Other Observations

The bad news just keeps on coming. New claims for unemployment remained near a five year high, GM (GM) has announced plans to lay off while collar workers and to stop matching employee contributions to their retirement accounts, Goldman Sachs (GS) will be laying off 10% of its workforce and the CEO of the nation's largest package delivery company, UPS (UPS), told analysts in a conference call that a U.S. economic recovery may not emerge until 2010.

Shall we go on? Three-month dollar Libor failed to decline for the first time in nine days while overnight rates actually increased 8.7 basis points. RealtyTrac said foreclosure filings rose by 71% in the third quarter as compared to the same period a year ago and DOW Chemical (DOW) believes the global economy will be in a recession in 2009.

Former Federal Reserve Chairman Allan Greenspan is testified before Congress yesterday, and it is obvious the basic tenets of his belief system have been shaken to the core. To wit: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief."

We now beg to submit a new tenet which the government and its regulatory authorities, including and especially the Federal Reserve, should absorb to the deepest parts of their belief systems. To wit: "The self interests of lending and other financial institutions will often come at the expense of shareholders and more importantly, taxpayers." Put more succinctly: greed kills.

Crude is on the rise ($2.35, +3.6%) and investors are favoring energy stocks, which in turn have given an overall boost to equity markets on Thursday. In recent trade (as of writing), the DOW was moving 1.77% higher. The broader S&P 500 was up 1.38% and the NASDAQ 0.06%. The dollar was generally stronger again, gaining 0.02% on the euro, 0.71% on the pound and 1.34% on the Australian dollar. The greenback was 0.09% weaker against the yen. Gold futures were down $28.30 (-3.86%) to $705.00 per ounce.

Comments

[MichaelZZ:]

Resolution for Distressed “Reset” Mortgages:

Concepts:
1) One size does not fit all, i.e., each situation should be tailored for the borrower.
2) Responsibility should be resolved between the lender and the borrower.
3) No taxpayers’ funds should be involved.
4) A mortgagor must sign a document, subject to perjury, whereby the mortgagor states
that he or she was unaware that the interest rate was to be reset.

The mortgagor has the option of the following alternatives:
The mortgagor will be allowed to wind the clock back to the time prior to the purchase
with the information that the mortgage will be reset at the end of five years at a rate to
be determined and explained that the rate may be significantly higher than the rate
offered at the time of purchase.
1) Can agree to the purchase and will remain with the current situation.
2) Can refuse the 5/25 loan as offered and opt for a conventional fixed rate loan
at a rate of the then-current rate, e.g., 7.25% and will have all payments adjusted to reflect that loan.
3) Can terminate the potential purchase.
4) Can remain in the property, while making the same payments. The lender or agent thereof will be given a lien on the property that will be equal to the accumulation of the difference between the contractual payments and the payments being made. Further, interest will accrue on this differential at the contractual rate.

If the mortgagor opts for option 3), and there is no significant evidence reflecting that the
rate reset information was given prior to entering into the mortgage, the mortgagor will
vacate the premises and the mortgage will be cancelled, with no further obligation.
Any other encumbrance upon the property will be the responsibility of the mortgagor.
Further, the mortgagor will be responsible for any damages done to the property.


One of the most critical factors is the business model of a CountryWide negotiating mortgages, and then having them bundled and sold as securities. That "model" stimulated the numbers, since the negotiators were no longer involved with these mortgages.
The logistics of my idea would be to have the funds consisting of two pieces (one, the payment from the mortgagor, and the second, the augmented payment from the "negotiator", who will hold the 2nd) and the total would be paid to the "security" as a whole payment.
This would place the responsibilities where they should be, on the mortgagor and on a "CountryWide", i.e., the negotiator.
I would have argued this concept during the negotiations between the various AG's and Bank of America regarding the CountryWide resolution. I think the cost would be much less than the eight billion dollar settlement
If these logistics require some tweaking, so be it.

Michael Z.
[e-mail]

2008 Oct 24 08:17 AM

[blisterchicken:]

So are you using your above points as an alternative to the 700 Billion bail out? Or are you using these points as a point to move forward from.

If the latter is the case I disagree with one specific point. That is the No tax money should be involved. I say that because it is absolutely disgusting that the same companies who foreclosed on families because they wouldn't renegotiate their loans with people in strife were the ones who were bailed out. Makes no sense at all.

Granted, some of these loans should have never been written. 550 credit scores getting stated income stated asset loans? How risky was that? It was all short sighted greed game. Bust these poeple over the head for 4-8 points on a $150K property without a care if they could actually afford it. Craziness.

Then we have the pay-option ARM. Yikes! That to me is the single most destructive laon out there. But the profits were huge! How could a loan officer resist?

2008 Oct 24 10:53 AM

[PeteK:]

blisterchicken: You are right on the button. Remember those politicians who were scolding the Banks for not lending to certain groups of people and certain regions ? Some were yelling "Racist" to banks, to WFC and so on. Its not the President, its some Congressmen who pushed too hard at Banks.
With numerous greedy CEOs, that's what happened and resulted from all that. But the Media don't want to tell people that, that showed much bias and is not good for this country.

2008 Oct 24 05:52 PM