MichaelSchmichael

What Obama Needs to Know about Tim Geithner, the AIG Fiasco and Citigroup

Kinabalu -- You're right, the math is wrong. But I am not sure it matters all that much -- whatever the number is, it is huge. Even if you used 50% of the numbers you questioned ($25T instead of $50T outstanding; 20% instead of 40% in the money), you would still have over $1T. Whatever it is, we are all guessing at this point, but it is likely very large.

I think the point of the article goes more to the implications of the policy decisions being made and the potential motivations behind those decisions, not whether the specific numbers cited end up being correct or even reasonable. It would be short sighted to dismiss the article out of hand based on an unfortunate and presumably very embarassing arithmetical error.

Credit Crisis Review: ARMed for Failure

Uh, Jimmy Lathrop, you think First Fed is going to voluntarily take the 40%-plus haircut required to get the principal balance on this loan (from the WSJ) low enough for Mr. Truong to afford his payment?

"Dien Truong, a 35-year-old, water deliveryman, pulled out $156,000 in cash when FirstFed refinanced the $628,000 mortgage on his Richmond, Calif., home in 2005. Mr. Truong used the money as a down payment on another home and turned the FirstFed home into a rental property. But the $2,500 a month he collects in rent is no longer enough to cover his mortgage payments, which have climbed to roughly $5,100 from $1,618.

FirstFed offered to refinance him into a new loan with payments of roughly $4,250 for the first five years, but Mr. Truong says he can afford only to pay the $2,500 in rental income. Because he has been making the minimum payment, his loan balance has climbed to more than $690,000, which is more than the home is worth.

"I've been a good customer," says Mr. Truong, who hasn't made a loan payment since March. "This time my credit will be screwed up for good." His loan application shows that Mr. Truong and his wife earn $165,000 a year, more than double their actual income, says Katrina Vizinau, a housing counselor with Community Housing Development Corp. of North Richmond. Like Mr. Truong, she says, many borrowers say they didn't read the application until later."

Credit Crisis Review: ARMed for Failure

The article and comments re modified terms disregard the impact loan recasts and teaser rates are going to have on losses in the Alt-A portfolios. The "payment shock" and related defaults associated with these factors will operate independently of interest rates. Further, because many of the borrowers could not afford the payments on their principal balances if subject to fully amortized payments at market interest rates, loan modification is simply not an option without a principal haircut (which banks don't appear willing to take on a preemptive basis).