ARMs, IEDs and WMD

The "let's all get together and freeze the ARMs" dance being choreographed by Secretary of the Treasury Paulson leaves the audience with an "I've-seen-this before, but who knows where or when?" sensation.

The dance invitation is for mortgage originators, with the government's guidance, to parse out just that sliver of borrowers that can be expected to continue payments at the introductory rates, which will then be frozen. Sunk into probable foreclosure will be the section of homeowners that are deemed "hopeless," and those "not needing help" will just continue on their merry way.

The immediate question is who will be the referees, the diviners of the "good bet" payment-challenged borrowers?

Will it be the same financial engineers who slipped these default IEDs into portfolios of banks and pension funds from Main Street to Mongolia? This same, new managerial class whose concept of doing the "honorable thing" when their own sub-prime house of cards folds up is to "take responsibility," resign, and then, on their way out, have their Board of Directors' golfing buddies cut them a $150 million check for their otherwise outstanding service.

Should it be the New Age version of a Captain of Finance, Angelo Mozilo, CEO of Countrywide Financial (CFC), who made sure he took every shard of his CFC holdings off the table when he smelled the housing downturn coming? He did, he explained, need money for his grandchildrens' education!

These were attendees at the high-level meeting chaired by Secretary Paulson last week. Surely it is these same mortgage-backed securities peddlers who are now looking for the sweet spot in the deal, and, who, along with their legions of lobbyists, will happily volunteer to be at the drawing board.

Maybe we can expect defter arbiters of which loans will be given special treatment from within the quasi- government agencies? Perhaps Fannie Mae (FNM) and Freddie Mac (FRE) can lend their expertise to the divining process? But then we will need to forget their own massive accounting irregularities for which they too sent their good-old-buddy executives off with nice "thanks for coming to the party" compensation packages?

Or can we expect this assignment to be dumped onto the FHA and the other government oversight agencies whose leadership can be relied upon to appear hapless in any public sighting?

Sheila Bair, the head of the Federal Deposit Insurance Corp, suggested this very same mortgage rate freeze a few months ago. The idea was scorned immediately due to the reality that altering these mortgages, each now in scattered pieces, would be as easy as restarting a half-completed horse race by having the horses back up unguided into their original chutes.

It is reasonable to ask what has changed in the few months since Ms. Bair's original proposal that now makes these loans easier to isolate and reconstruct. If the answer to this is that not much has changed than why has the initiative gone up the chain of command for the Secretary of the Treasury to throw his body over it?

Despite this obvious dilemma, and others, such as a certain evaporation of investment in the US residential real estate market if contracts are seen to be subject to unilateral revision, the plan can expect nonetheless, the full support of every politician who once again can demonstrate that winning an election is more important than working for a responsible solution, even if this time the result is the financial bankrupting of the government.

Just as they fell in to support the Iraq War when Bush waved the flag and gave every politician the WMD myth to use as cover, we can now expect Team Bush to give the same politicians the "fear of a recession" soundbite to eventually make the lenders whole again.

Secretary Paulson carefully adds the assurance that "the plan under consideration does not include any government funds."

However, when the plan flounders with no apparent success, and foreclosures escalate, count on a ratcheted up "fear of recession" gambit to smooth the flow of back door government insurance into the shakiest sector of the mortgage industry.

Which politician will be there to keep that door closed? They all understand that in five years when the larger housing disaster their current acquiescence helped create is apparent, they can say "if we knew then what we know now…"

Sound familiar?

Disclosure: Author has a short position in CFC

Comments

[euripides77:]

FNM delinquency Rate Rose to 2.18%

Late last Friday, FNM quietly released its October Summary. It shows that as of September the serious delinquency rate for its "Credit Enhanced" mortgages rose to a year high of 2.18%, the largest month over month increase for the last year. Compare to 2.00% in August, 2007 and 1.74% in September, 2006.

Given the rate of acceleration in delinquencies, one can only wonder how bad the situation was in October and November. These are serious delinquencies and will NOT be bailed out by the conveniently leaked story of an ARM interest freeze. Nothing they do now can reverse the momentum of this financial debacle. Even if they manage to put together a rescue program, which is not a given, it will be too little too late. Just sugar coating for the stock market by some very desperate people wanting to get their money out of FNM, FRE, CFC etc.

You can find the Summary here: www.fanniemae.com/ir/m...

2007 Dec 02 06:04 PM