Home-Account.com

Michael Lewis (Liar’s Poker), has decided to write a quickie book on the global financial crisis from the sound of two Op-Ed pieces published last weekend in the New York Times.  You can read them here and here.  I say it’s a quickie book because I can’t imagine he’s taken a co-author (David Einhorn) for any other reason.  This Einhorn guy has the goods and Lewis has the glib, I’m sure.

It is clear from these essays that Lewis plans to make Treasury Secretary Hank Paulson into the Devil, which may be the right thing to do, since Paulson’s policies to this point have been mainly about cronyism and barely about solving a global financial crisis. 

Lewis is a very good writer.  This is going to be an important work that will have at least a superficial effect on Obama policy.  It isn’t clear whether Lewis can actually shape the ensuing debate, but he’s pretty darned good at what he does.

The reason I bring this up is because he’s proposing a homeowner bailout of sorts.  It’s always dangerous when writers come to think of themselves as pundits.  I should know.

Here’s his proposal, excerpted by me:

“If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners..

…. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.”

This idea may get a lot of play in coming weeks.  It’s a clever idea but it probably won’t be allowed to work.  Here’s why

Some of these tactics Lewis proposes are already in use with the Farmers Home Administration.  Farmers Home will subsidize an equity position and loan amount that allows the would-be homeowner to buy a property in designated area in order to attract growth, (This is rarely done anymore, by the way.)

When the homeowner attempts to Sell or Refinance property under this program they must pay Recapture, (pay back to the FHA the amount of the loan subsidy). The big problem with the Lewis proposal is that release of claim by the holders of second mortgages: the banks won’t do it

This proposed second mortgage release of lien will cause problems due to the amount of write downs the banks will be facing.  This will leave them unsecured on junior liens they currently service making that paper default at a much higher rate and therefore the value of the asset will drop considerably.

Let me explain this a little differently.  By decoupling the second mortgage from its collateral (the house) the lender can no longer foreclose (take the house for non-payment) and therefore loses influence with the debtor (the homeowner).  Less influence automatically translates into higher default rates on those second mortgages.  Why pay the second if not paying doesn’t hurt you much?  But the result of non-payment is that the value of the house automatically goes down, owner equity decreases, and our financial death spiral steepens.

While laudable as a good try, Lewis’s proposal not only won’t work, it will make things worse.

I’ll be writing a lot about these issues in the next few days.  It is becoming very clear to me that the U.S. government is in a bad spot when it comes to effectively helping homeowners keep their homes.  The government doesn’t know what it is doing for one thing.  And for another, the lenders simply can’t be trusted to do the right thing

Toward the end of its life Pan American World Airways began to sell-off parts of its global route system to keep the rest of the company afloat.  United Airlines bought Pan Am’s Asian routes along with staff, crews, and as I recall about 25 aging 747s.  Before they handed over the big Boeings to United, Pan Am installed on those planes all their oldest engines, keeping the newer ones for their remaining fleet.  At $1 million per engine it was a $100 million rip-off of United, which eventually had to trash every engine it got from Pan Am.  If something like Lewis’s proposal makes it through we should expect similar behavior from the big banks, offering up first for government refinancing their worst loans, the ones most likely never to be repaid.

cringely Blog bailout, Blog, financial crisis, Michael Lewis, New York Times

Joe Nocera, a financial columnist for the New York Times, two weeks ago busted JP Morgan Chase by revealing that the bank intended to use the $25 billion given to it by the U.S. government not for lending to customers but rather for acquisitions and other stuff. Nocera listened-in to a Chase conference call reported here:

</a http://www.nytimes.com/2008/10/25/business/25nocera.html>

Tough news for Chase, eh? Generally speaking the big banks that accepted $125 billion over the last 10 days don’t intend to lend ANY of it — or didn’t until Nocera’s column hit. His may have been the most valuable — and expensive — piece of financial journalism in history. And as a result Chase is now coming up with a plan to rework 80,000 primarily alt-a mortgages by lowering interest rates, possibly converting some mortgages to fixed rates, or even forgiving some principal. Yeah, right. It’s all described here:

</a http://www.nytimes.com/2008/10/25/business/25nocera.html>

Now we come to the good part. The loans Chase is adjusting are coming primarily from two recent and troubled acquisitions — WAMU (that’s where my mortgage lives) and EMC Mortgage, which was part of Bear Stearns (and is where my mother-in-law’s mortgage lives). To get the spectre of Nocera off its curmudgeonly shoulders, Chase had to announce the workout program this week even though the details aren’t supposed to be ready for another 2-4 weeks. This puts the bank in a very difficult position that it is handling through the simple expedient of….. more lying.

The idea of this program, like the IndyMac and CountryWide programs that preceded it, is to change the terms of troubled loans in order to help homeowners stay in those homes — the idea being in part that foreclosures are more expensive and should be avoided if possible. So these are troubled loans — loans where homeowners have had to have been, at least for awhile, in default. But with only half a program announced, how can we expect mortgage holders to respond? They’ll stop paying, if course, which is exactly what Chase DOESN’T want them to do.

Listen, to be considered for this program, we’re led to expect, homeowners need to be in default. Yet as part of the announcement the bank has strongly suggested homeowners not continue to be in default because that might make them ineligible.

Huh?

You have to have gotten behind on your payments to qualify, but if you get any further behind on those payments, you might then become suddenly UNqualified. It’s as though there is a sweet spot of just enough — but not too much — financial default.

This is hooey and an insult to all involved. If you want to be included it is clear that the best move is to stop paying your mortgage or you’ll never get a chance to participate. And saying that homeowners who haven’t paid their mortgages for 2-3 months are now supposed to somehow find the money just as the economy get WORSE, not better, well that’s crazy and the bank has to know it.

The truth is they intended not to announce anything yet except Nocera interceded (bless him) so now Chase will spread some horse manure on the story in hopes of minimizing the damage. All of which leaves me with the question of where this falls under the Truth in Lending statute?

cringely Blog Blog, mortgage crisis, New York Times, Nocera