How Will We Finance the MBS Fix? 10 comments
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Co-authored by Scott J. Wilson.
Since the United States Government has decided to go into the MBS business (Mortgage Backed Securities), I have noticed in all of the debate and coverage that there is a serious lack of knowledge on the part of our congressional membership and in the news media regarding the mechanics of such a plan, and no one has even come close to outlining the actual costs that will be incurred.
I don’t expect government bureaucrats or news jockeys to know and understand all the intricacies of the mortgage business, but someone, somewhere has to have wondered what exactly the long term costs required to administrate a program of this magnitude would be.
What will happen when the government buys trillions and trillions of dollars of these “toxic” loans in this MBS bailout? How many thousands of people will it take to do all the legwork on these mortgages? Will there have to be a new government division created just for this purpose? How many hundreds-of-millions of dollars will this plan need that has not been budgeted for - or even considered as of yet?
Or will they contract this all out? Then the real corruption can begin! Can you imagine all the “deals” that will be made with “friends” to get these huge government-paid contracts?
Everybody, there is an 800 lbs gorilla sitting in the living room of this banking bailout, and the general public doesn’t see it. Trust me it’s there, and there are more than a few bank executives that have taken notice.
I know Hank Paulson and Ben Bernanke are quite aware of the situation.
I worked for one of the three largest banks still standing, and I have done everything from marketing, originating, processing, closing, secondary markets, and even foreclosures - at one particular bank I would estimate that there were no less than 2000 people who work in foreclosures, loss mitigation, and short sales alone - and that was before the bubble popped when foreclosures were minimal.
Thousands upon thousands people will be needed to take care of foreclosures alone.
In addition to this new government agency that will need to be created to manage these loans, there is also a highly complex computer system that will have to be developed to handle all the different formats and software that currently store the loan information at the different banks.
There is also a tremendous risk to data security and system integrity in this process, with additional costs of their own.
I know what a hassle it was when the bank that I was at purchased a block of loans from another bank. We basically had to “build” a new in-house system to adapt to the format of the system that the loan information was stored on, and it could take weeks.
This is just one bank assimilating one block of loans from another bank, nothing like the task of assimilating thousands of blocks of toxic loans from hundreds of different banks, with dozens of different systems and software packages being consolidated into one single system, and then expecting that system to run properly.
As it never ran well with only two different systems, I can not imagine the nightmare of problems that lie ahead for the programmers on this project. It literally will take years to get the data organized, and at a tremendous cost that has not been addressed.
And then there are the servicing problems.
The banks I worked for made tens-of-millions of dollars a month for “servicing” loans. The bank gets a “servicing fee” every month for basically just collecting your payment. They don’t make a lot on every loan, the basic principal is making a little on a large volume - and they do.
This is a huge profit machine for banks, but it takes a large number of loans to be profitable, so large in fact that many banks just opt to sell the “servicing rights” to the big banks like Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) for an SRP (service release premium), basically an upfront payment against the value of the servicing fees.
The issue that I am getting at is this: Who will do the servicing for all these toxic loans when the government buys them all up?
If they let the banks service them even though the government holds all of the risk, the banks will be getting the best of both worlds. The banks will get rid of the bad debt on their books courtesy of the American Taxpayer, and they still get to make a ton of money by servicing them for the government.
And what happens if the taxes and insurance are not paid on the loan? Normally it is the servicer’s responsibility to pay the taxes and insurance whether the borrower has paid them or not.
Will this cost be passed on to the taxpayers too?
Again, this is a division of the banks that employ tens-of-thousands of people - will this mean yet another government department will have to be created? Will it be contracted out? Either way, it is a tremendous expense to taxpayers that is not being addressed in any of the MBS bailout talk, and will be in addition to the cost of the assets to begin, which is all they seem to be discussing.
More unseen costs of this MBS bailout.
I don’t expect the government officials or journalists to know or understand all these small details of how the mortgage business operates, but if this is the business they are itching to get into, they should at least understand the basics of it before they dig our nation into a financial hole we will not be able to climb out of.
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This article has 10 comments:
The government’s proposal to buy up MBS has substantial unresolved issues. There is plenty of excessive work in servicing toxic loans versus well performing loans. The government is ill equipped to perform this task and customarily boggles these type of tasks. A small number of major banks and mortgage servicing companies are qualified and equipped to service the MBS purchased by the Feds such as Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC). There may be a buying opportunity with one or more of these companies.
Anthony, your picture, or mug shot looks like is was taken in the exercise yard of Attica Correctional Facility. The fact that you worked in marketing, originating, processing, closing, secondary markets, and even foreclosures does NOT make you a “subject matter expert”. A blind, one-armed monkey could and probably does do those small tasks on a daily basis.
SHEESH!
On Dec 23 08:06 AM Alan von Altendorf wrote:
> Your spelling and grammar are atrocious. You also forgot to address
> MBS as such. Kinda scary that you worked in banking.
It is a fairer question than the comments realize. But here is the right way to do it --- not saying it is how they will...
First, the unmarketable tranche structure of existing MBSs needs to be wiped out. They lower tiers are not marketable in less than perfect conditions, ergo that whole model is dead. The way to fix this is to buy up all the subordinate tranches of existing mortgage pools and then combine them with ownership of the top tier, to recreate whole loans. An owner of all tranches is free to move what he likes among his various pockets, so all the subordination issues and cash flow ownership issues can simply be eliminated. The whole loan pool belongs to the entity that bought up the whole original lissue.
Second, simplest triage of the loans within the now-owned pool. First, all the performing loans become a full quality MBS, get an underwriting guarantee from GMNA, Fannie et al, and out the door they go. This brings in some cash from the investing community early in the process, to repay what was spent on the tranche buy-up. Since they now own a (1) transparent (2) whole loan consisting entirely of (3) performing loans with (4) a government guarantee underwriting it, this portion of the pool will be valued at a 5% cap rate or thereabouts. Which is much better than the secondary market for these things right now. The gain on that revaluation of the stable portion of the cash flows will fund a lot of the rest of it, though not all.
Then you have a big remainder left of non-performing loans. The remainder of the triage is to refinance loans that can remain performing on recent bailout terms, which need to "season" against re-default for up to a year before they can be added to an investment grade loan pool. And the third category, property already owned as a result of foreclosures plus additional loans that will foreclose. The best thing, if there were enough capital working this market, would be to auction off the latter two rapidly, but at the moment there isn't. Instead, use an auction procedure for bundles of the properties in the last category only.
The model for the auctions is the 1990s RTC and its handling of the assets of failed savings and loans. Announce pools of properties in the financial press and take bids on them. Yes, some will buy up a lot of property cheaply that way. Better to get it into hands of speculators making profits, than leave it zombifying banks treating it all as dead weight loss. The speculator-buyer has every incentive to turn the things he bought back into money as rapidly as he can, and to fix up things, and to hire efficient servicers, etc.
That is the way to get it to work.
And it is a problem, I can tell you. In real estate markets I actively track and bid within, the biggest remaining issue is no longer financing stuff. Rates at 5% for prime buyers plus most of the price adjustment already having happened, can deal with getting bidders, though low ball bids. No, the issue is getting anyone at a bank to even look at all their short sale offers and approve them. It can take months, and the entire time, the properties are sitting on the market at low asking prices without actually moving. They have to move. The issue it to restore liquidity, above all, and that can only happen if banks stop sitting on their short sale offers and just sell them all, instead.
Is there a need to police that pretty closely? Certainly. Otherwise sharpers will just stick banks with losses and keep properties they failed to pay for, by using cut-outs and the like. It will be work, a lot of it. And the original writer is correct, with tens of thousands of people in the industry let go in the last year or so as profits disappeared, the experience base to handle it all isn't working the problem yet. They need to end up rehired by loan-pool bidders and government contract servicers, etc.
I think this generally means that you are a coward and an ass, with little or nothing to offer.
No Bio? You probably have no education or credentials, hence the need to hide from everyone.
Cowardly Troll!
On Dec 23 09:00 AM I should know wrote:
> Your 957 word, 23 paragraph rhetorical oratory could have been summed
> up in a few sentences.
>
> The government’s proposal to buy up MBS has substantial unresolved
> issues. There is plenty of excessive work in servicing toxic loans
> versus well performing loans. The government is ill equipped to perform
> this task and customarily boggles these type of tasks. A small number
> of major banks and mortgage servicing companies are qualified and
> equipped to service the MBS purchased by the Feds such as Chase (JPM),
> Bank of America (BAC), and Wells Fargo (WFC). There may be a buying
> opportunity with one or more of these companies.
>
>
> Anthony, your picture, or mug shot looks like is was taken in the
> exercise yard of Attica Correctional Facility. The fact that you
> worked in marketing, originating, processing, closing, secondary
> markets, and even foreclosures does NOT make you a “subject matter
> expert”. A blind, one-armed monkey could and probably does do those
> small tasks on a daily basis.
>
> SHEESH!
You obviously do not know anything about which you speak, and you propagate ignorance.
Your are a Bush voter I bet. You guys got us into this mess, and you want to make a buck getting us out of it? Forget you!
If the US taxpayer is going to own the risk, then we should get the rewards as well - or at least the "easy money" from servicing.
I bet you are all for the bailout, CEO's golden parachutes and lower taxes. People like you are ruining our country, and making us a second class economic power.
On Dec 23 09:36 AM tcornelison wrote:
> I think the lack of knowledge is with the authors. It is amazing
> that two of you couldn't do better than this. They are purchasing
> the securities, not the servicing rights to the loans. No one has
> suggested that the government will begin servicing loans.
> Your spelling and grammar are atrocious. You also forgot to address
> MBS as such. Kinda scary that you worked in banking.
You write in sentence fragments, and you sound like a troll.
Glass house stone throw no. Does that make sense to you?
On Dec 23 11:46 AM A.M. Freed wrote:
> I notice you do not offer any articles or analysis yourself, just
> empty criticism. You also hide behind anonymity and have not posted
> a picture of yourself.
>
> I think this generally means that you are a coward and an ass, with
> little or nothing to offer.
>
> No Bio? You probably have no education or credentials, hence the
> need to hide from everyone.
>
> Cowardly Troll!
Clearly the US Taxpayer should get 50% of the upside and the terms should be explicit and transparent. It is "our time" !
These guys at USAffordableHome have it right. All mortgage market participants need skin in the new game. The new game is called "Fix It".
Stop the ranting...anty up your share to make the payments affordable...now !
Stop the ranting....just "Fix It" and make sure my daughters don't have to chase down some government entity for their fair share of the deal that Daddy and Mommy agreed to.
Sorry for the ranting but this endless search in academia, advocacy groups, CSPAN hearings for solutions from people that never originated a retail mortgage has got to stop !