Market Currents
Robert Shiller backs a proposal from Cornell's Robert Hockett for local or federal governments...
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Sunday, June 24, 2012, 6:10 AM ETRobert Shiller backs a proposal from Cornell's Robert Hockett for local or federal governments to seize underwater mortgages, pay them off at fair value with money from new investors, and issue new loans with smaller balances to the homeowners, who would then be less likely to default.
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No quick fixes, please. Quick fixes are tomorrows disasters.
Prices have to reach a bottom before they can start moving up. It takes time to de-leverage an entire nation.
The system needs to clear!
Either you make this stupid and dangerous plan open to EVERYONE or None!
What about the poor slob who has not taken a vacation in 10 years and is busting his / her butt trying to "HONOR" their commitments?
This is a terrible idea Mr. Shiller,
you should know better than this!
Hey Bob, please stop hanging out with the "progressives" like Krugman / Sperling / Reich / Altman and the biggest looser of them all,
Robert Rubin!
Lord have mercy on our beleaguered republic already!
And who eats the immediate losses?
Innocent taxpayers who had nothing to do with their originations.
It was the taxpayers/voters who elected the politicians who created /legalized the government-mortgage-po... They got the "fairness" they wanted: Homes for all!
Of course voters/taxpayers should pay the invoice: They're the one's who made the order.
The problem is that the very same folks who vote for this "fairness" and freebies are the near-50% not paying any taxes, plus a few more sympathetic bleeding hearts to give them a voting majority. They're mostly not paying any bills.
Most of the mortgages that were going to default have already done so. Those remaining in underwater mortgages are there by choice because they see it as unwise to default and wish to retain their homes. As such, these people are servicing their mortgages, as per contract, so to the bank holding these mortgages, their value on a performance basis -- not some mystical mark-to-market "for-sale" basis -- appears not much different from the day they were issued.
Now, comes along a do-gooder academic, like Shiller, who wishes to expropriate these performing mortgages from their legal and rightful owners at "fair" value (yeah, sure), provide a huge unjustifiable cash gift to the homeowners who volunteered to undertake the obligations (hey, how about all the owners who didn't take out excessive home equity loans or buy too-expensive homes?), and saddle the banks with the loss differential, by fiat.
And, giving the same performing mortgages to "new investors" at reduced prices isn't "eminent domain," i.e., for public use and benefit; it's simply a gift to new investors, who get performing mortgages at through confiscation of the existing holders property rights, and it's a gift to some select private homeowners, who get portions of their debt forgiven, free of charge.
This plan all too typical of liberal academic types, for whom the respect for the conventions of law and the Constitution is merely an inconvenience to their grand schemes.
The value of the home _is_ the collateral backing up these bits of paper debt. That value has, in many cases, been completely eviscerated.
The only thing mythical about mark-to-market is how we don't do it anymore and instead simply mark-to-unicorns that nothing has happened since the ponzi began to collapse in 2008/9.
That said, I agree, this plan is more crap on top of crap.
Sorry, you've bought into the recent populist theme perpetrated during the recent crisis by short sellers (as it was their road to wealth) and swallowed whole by the media.
In fact, "mark to market" had never existed as an accounting concept for bank loans held as non-sale assets until very recently (mid 1990's). For eons prior to that, bank loans were valued on the books based on discounted-cash-flow models, which valued the loans by virtue of their future stream of payments. These models had been refined over many decades, which included assessments of default rates, delinquencies, collateral and other factors.
When a loan is being held for account, and is not "for sale," why would anybody part with it at a steep discount, artificially applied by ABX values, which were created by the very entities that sought to short such paper? The fact of the matter is that a loan that is being amortized on schedule by the mortgager looks very much like the loan that the bank initiated and holds the bulk of its cash-flow-based value. It's only to exterior profit seekers that it is contrived to be worth less. In any case, the assertion that the value of a loan is only the liquidation value of the collateral is patently false.
Lastly, to recapitulate, the suspension of mark-to-market for non-sale assets wasn't some new invention, contrived to avoid reality; it was merely a return to the method accounting for non-sale assets had been done for generations, prior to the recent "new-and-improved" alterations that led to so much mischief and manipulation, resulting very nearly in the collapse of the entire financial system.
My goodness, where to even start without writing a book in response. When FASB 157 was suspended it opened the door to this flawed logic. In residential real estate, there is no more value than what the asset will sell for- its that simple. Just follow the MBS CDS market as it blew up in 2009. Or better yet, read a history book about great depression trustee auctions. Do you really think banks are now holding mortgages, otehr than servicing? Most every residential loan is sold off to GSE's within weeks of settlement. Except for smaller regional or local banks, very few mortgages are carried thru to maturity. Take the govt out of the equation and the mortgage market crumbles. Just another reason the FED continues to punish the savers with 2.5% 30 year bonds.
Shortsellers like Bill Ackman were watching and waiting while FAS 157 came down the pike. It provided them with the ammo they needed to bring down the system.
The prior system, which used amortized cost, had worked for generations. FAS 157 caused trouble from the day it went into effect.
In the insurance industry during the Depression, mark to market would have made most companies insolvent. Regulators determined that any bond that was current on its payments would be valued at amortized cost. It worked, and it worked until it was superceded by FAS 157, and it worked again when FAS 157 as susupended.
The lax monetary policy that created the mess to begin with should be gradually reversed, to let the markets stand on their own two feet and let the normal laws of supply and demand resume operations.
The lax lending policies that fed the bubble have mostly disappeared, in favor of "just say no" mortgage underwriting. Regulators should position themselves to exert the missing prudential regulatoin when it again becomes necessary. That would include bean by bean examination of mortgage lending practices, with the offenders shut down before they morph into the next Countrywide.
I don't have anything against lenders, per se. I simply dislike the effect that fraud in the issuance and securitization of morgages has had on the US economy and financial system. It has impoverished millions and cost the country millions of jobs.
You're getting a little personal here: you will do well to cultivate the abiltiy to engage in constructive dialogue and discussion.
I don't overlook that aspect of it. They were all in it together. The successful flipper was a repeat customer, and highly esteemed, until the bottom fell out. Likewise the real estate agent who bought 18 houses and claimed to be the owner occupant of all of them.
After the fact, some states passed laws with meaningful penalties for mortgage fraud. Enforcement has been sparodic, mostly directed at organized gangs.
A lot of businessmen take the attitude that honesty and ethics in business are old-fashioned relics of morality, and should be treated similar to commandments against adultry.
Leaving morality out of it, mis-statements of facts in business transactions create inefficiency, waste, misallocation of capital, and inappropriate redistribution of wealth. They undermine the assets that undergird the financial system, endangering the economy.
The answer is pretty simple, mis-statements of facts in business transactions need to be curtailed, by imposing penalties sufficient to reduce them to a manageable level.
I said as much previously yet you took offense, it is what it is, you own it Tom
Here's a link to an article I published here on Seeking Alpha in December 2009. I clearly identified the nature and scope of the mortgage fraud problem, and attributed a due measure of blame to all participants.
http://seekingalpha.co...
Here's are some quotes:
"Mortgage Fraud is a very unpopular topic. It is simply not something anybody wants to talk about at all, let alone trace the corrosive effects of the dishonesty of our neighbors and fellow citizens on the fabric of the economy. However, it is not something that will go away. Indeed, the longer this fundamental problem is ignored or swept under the carpet, the more futile will all economic remedies be to alleviate the weakness and fragility of our financial system."
"The normal lying that goes with commerce in residential real estate - exaggerating your income so you can buy a bigger house, mis-stating intended occupancy so you can control a house long enough to flip it, filling out the application with answers the applicant would not have given if asked, inflating an appraisal so the transaction can go through, holding your nose while you package the stuff into a bogus bond - will have to be punished by jail time."
I touched all the bases. The article is as relevant today as it was when written.
I'm awaiting your apology.
What kills me about this entire debacle is that every paper I ever signed seemed like it was thorough. I had late $50 utility bills from three years ago questioned by the lender, so it appeared to me that a "liar loan" was crazy. Little did I know, that the bankers were creating all sorts of borrowers, with no discretion, so they could compete with me and jack up my purchase price.
THe borrowers or the lenders should not be bailed out. Heck, if everyone simply defaulted in 2008 we would only be 3 years away from them having clean credit.
The idea that liars should be punished is crazy. The banks were offering "no documentation" loans to these people. Kind of hard to now scrutinize them for not documenting their financial past!
The repeal of GS and commodity modernization act created a freeway of fraud. Take high risk, slap a CDS on it, and voila, this liar loan is as good as gold - only its not because the CDS can never be honored because there is not enough capital in the world.
GS needs to be reinstated. and every other relaxed law subsequent to it. Bankers can be banks. If Dimon wants a prop desk he can start his own hedge fund.
What we have done has not worked. Look at bank stocks. They aren't even remotely close to recovered because you can't fix that which is terminally ill. Both the borrower and the lender need to be wiped out. All we have done is waste MASSIVE amounts of capital to prop up banks and politicians....hence, the only real estate up in America is DC and Manhattan. It is a pathetic joke on the average American.
Look lets leave it that I represent "delusion" and you "reality" Im OK with that
Here's alink to one of several favorable articles I've written on Webster Financial (WBS) which is a bank, and in which I invest, profitably.
http://seekingalpha.co...
I'm sorry you missed the articles, I've doubled my money on this one, so far.
Like anything else, there are good banks and bad banks. More bad than good, I'm sorry to say. But occasionally there is an exception to the rule.
Just transfer of wealth by government decree which would also expand government authority and powers.
Govt's specialty is taking a bad situation and making it worse.
a govt program should consider all owners, not just those underwater.
These days, if you're successful, you're just a target.
If you can't pay our obligation that you FREELY entered into..................... MOVE!!!!!!!!!!!!!!!!!!!!!!
What do you expect to achieve with that? More lunacy?
The government's involvement in the housing market laid the groundwork for the rise in housing prices, and created the system that allowed for all the shenanigans the banks did to go on. And their $150+ billion losses show that they are just as unable to predict or control the market as the rest of us. I certainly don't want to give them more control.
And if the Court throws out Obamacare tomorrow, which I believe they will considering the individual mandate is a huge over reach of the Commerce Clause, Obama loses in a landslide.
Per "The Plan":
1) Gov't seized mortgages.
2) Gov't uses Investor money to pay off mortgages at full value (thereby making Banks whole).
3) Gov't issues new mortgage to homeowner in smaller amount.
What is unspoken is how are the "Investors" paid anything resembling a reasonable risk adjusted return on their investment?
Take a handful of houses with original mortgages totaling $1 Million at 6% as an example. Annual income should be $60,000 or so in interest payments.
Now the "fix":
A) Investors supply $1 Million to pay off original mortgages in full, making banks whole.
B) Gov't issues new mortgages totaling $670,000 at 3.6% interest for 30 years - ie. the going mortgage rate.
C) Interest received is about $24,150 annually on new mortgages.
D) After servicing expenses (the Gov't will take their cut) the Investor will earn less than 2.4% on their money for 30 years.
E) 30 year US Treasury Bonds currently yield 2.75%.
Notes: New mortgage values based on Schiller's own chart of 100 Year Home Values. Peak of housing market reached 205 in 2007, the value is ~137 for Q1 2012. New mortgage values reset porportionally to 137/205 * $1 Million = $670,000.
What group of investors will put money into this so called investment scheme and earn less than a 30 Treasury bond coupon with a LOT more risk due to the possibility of future defaults on the even lower mortgage payments?
Answer: None. Any Investor with a functioning brain will buy the 30 year Treasury bond instead.
Shiller is so clueless that he gives Yale a bad name. His scheme is a failure on the merits, unless you're an insolvent Bank holding an underwater mortgage, then it's the greatest thing since sliced bread.
Do we bail out the new Investors, or let them sink? I guess (as long as none of the new Investors are Banks) we should let those foolish enough to buy into Shiller's scheme suffer as a result.
No more give away programs. Actions should have consequences.
Good example; A relative of mine and his wife, both professionals, bought a house in 2007 with the express intent to paint it, put a new kitchen in and sell it for a big profit. Ended up under water big-time. Recently took advantage of the last program that gave them the ability to refinance and now pay $500 less per month than they were. I see no fairness anywhere there.There's no free lunch and someone other than that couple has to eat that money.
As many have said here, we need to leave things alone and let the markets take care of themselves. Sure some people will get hurt, but life isn't fair and wasn't meant to be. When you make bad decisions in life you should have to live with them.
End of story.