Guest Commentary: Ramsey on the Big Mortgage Bailout

Submitted by Rich Toscano on December 10, 2007 - 9:13pm

My old friend Ramsey Su, foreclosure expert and keen observer of the ongoing mortgage trainwreck, is back with another guest commentary. His latest email missive puts the infamous mortgage freeze in his crosshairs, and he's agreed to let me reprint it here. Read on, and if you like this you might enjoy Ramsey's prior commentary here, here, and here (the first of these, a prescient piece on the impact of foreclosures written in February, is one of the most widely read articles ever to appear on the Econo-Almanac).

Ramsey's piece follows...


The Big Mortgage Bailout -- The Big Lie
by Ramsey Su

WARNING: THE CONTENTS OF THIS ARTICLE ARE DEPRESSING. If you take the time to read it, you will realize that I am not kidding. Most of you who have been receiving my emails know that these emails are generally just a way for me to organize my thoughts by writing things down. In this case, I do hope that you will take the time to read it. (All highlights are mine; a friend at the WSJ sent me most of the links).

The mortgage bailout has been capturing news headlines recently. Regurgitated reports have been at best confusing. I have no choice but to dig deeper myself to see what all the hoopla is about. The following are my findings. What surprised me was how easy it was to research this topic if one has some background in real estate and mortgage financing.

This is probably a good place to start. Last Thursday, December 6, George Bush gave a speech on the subject and it is detailed here. I am going to use this as the framework for this email:

Who is this HOPE NOW Alliance? This is their website.

Who is this HOPE NOW Alliance? This is who they really are.

HOPE NOW is nothing more than an industry alliance with the sole intent of getting to the borrowers. I am not passing judgment on HOPE NOW at this point but I think it is important to understand that they are NOT some consumer advocate group but rather an industry dominated group.

We have also heard about this new initiative called FHASecure. Here is a simple website explaining how to qualify for FHASecure loans:

This is the criteria:

To qualify for FHA Secure, eligible homeowners must meet the following five criteria:

• A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;
• Interest rates must have or will reset between June 2005 and December 2009;
• Three percent cash or equity in the home;
• A sustained history of employment; and
• Sufficient income to make the mortgage payment.

Aside from adding #2 above, which is really inconsequential, there is no difference between the FHASecure and a normal FHA loan.

The White House claimed:

In just three months, the FHA has received over 120,000 refinancing applications and has already helped more than 35,000 people refinance.  By the end of 2008, the FHA expects this program to help more than 300,000 families.

I wonder how many refinancing applications FHA normally receives in any three months period and what is the normal approval rate.

What captured the most attention recently is of course the Paulson Plan. Naturally, this would be the most logical website to find the details of the plan, right?

As it turned out, I cannot find the plan at the Treasury website but rather at the website of the American Securitization Forum.

What is this American Securitization Forum? I must admit I have never heard of them nor did I hear them mentioned in any of the speeches. Well, this is who they are and what they do.

So this Paulson of the Paulson Plan is not Henry Paulson, Treasury Secretary, it is Henry Paulson, Spokesman for the ASF. Take a look at the members of this group. Do they look familiar?

The ASF/Paulson bail out plan is 34 pages but all you have to do is read the executive summary which is only five pages. I strongly encourage anyone interested to take a few minutes to read through it. I will post the link again: Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans

One short sentence on page 1 and one short paragraph on page 5 pretty much summarized the entire intent of the plan.

On page 1, the scope of the bail out is limited to:

• were originated between January 1, 2005 and July 31, 2007;
are included in securitized pools; and
• have an initial interest rate reset between January 1, 2008 and July 31, 2010.

Any reasonable person may ask: if the plan is intended to help borrowers avoid foreclosure, why would a government plan be limited only to loans in securitized pools? ASF answered this question on page 5:

The modification maximizes the net present value of recoveries to the securitization trust and is in the best interests of investors in the aggregate,
because refinancing opportunities are likely not available and the borrower is able and willing to pay under the modified terms.

Now that I have laid out the background, the bailout plan is much easier to understand. Every word in the proposal is intended to maximize the net present value of recoveries, nothing else. If you are looking for the section as to how it will help borrowers, let me know when you find it because I sure can’t.

Here are some of my analysis and opinion of various parts of the bailout plan:

FICO test:

• If the current FICO score is less than 660 and is less than a score 10% higher than the FICO score at origination, the borrower is considered to have met the “FICO test.” If the borrower meets the FICO test, the servicer will generally not determine the borrower’s current income.
If either a) the current FICO score is 660 or higher, or b) the current FICO is at least 10% higher than the FICO score at origination, the borrower is considered to not meet the “FICO test.” If the borrower does not meet the FICO test, the servicer will use an alternate analysis to determine if the borrower is eligible for a loan modification.

While the masses may consider this FICO test totally illogical, it makes perfect sense under the profit model. The plan is to make anyone who has ability to pay, pay. The 10% higher rule is to weed out those who had taken steps to improve their credit score and therefore must have some money to pay and make them pay pay. There is no consideration for fairness, moral hazard, or just morals; this is purely about maximizing profits and our government is not only endorsing it, our government is promoting it.

Page 2

• All servicers of second liens to subprime borrowers should cooperate fully with this framework by providing information needed by first lien servicers and by agreeing to subordinate the second lien to any new first lien resulting from a refinance (with no cash out) under this framework.
• If the borrower also has a second lien on the property, this framework contemplates that the borrower is able to refinance the first lien only, on a no cash out basis. In order for the loan to fall into this segment, the second lien does not have to be refinanced; however, any second lien holder will need to agree to subordinate their interest to the refinanced first lien.

My thoughts: There is no doubt that the 2nd lien holder is the biggest benefactor of these bailout plans. Their position improves from total loss to possibly no harm at all. Whether it is a short pay refinance or a 5 year freeze, the 2nd may get something out of nothing. They may be the biggest driver of these plans.

Page 3 – (Segment 2 are the targeted borrowers)

Segment 2 includes current loans where the borrower is unlikely to be able to refinance into any readily available mortgage industry product.

• Current: For purposes of this framework “current” means the loan must be not more than 30 days delinquent, and must not have been more than 1 x 60 days delinquent in the last 12 months, both under the OTS method. Corresponding tests would apply under the MBA method if the servicer uses that standard.

I wonder how many people, when they heard the word “current”, would define it as ASF does here. In simple terms, you are current if you are not delinquent by 1 payment right now or have not missed more than two consecutive payments in the last 12 months. Why is this “current” an issue? It is sold under the pretense that the bailout is to help responsible borrowers when in fact it is to identify those who can still manage to pay something.

• LTV test: All current loans with an LTV (based on the first lien only) greater than 97% are deemed not to be eligible for refinance into any available product, and thus are within Segment 2. (97% is the maximum LTV allowed under FHA Secure.)
• Not FHA Secure eligible: All current loans that otherwise do not satisfy FHA Secure requirements, including delinquency history, DTI at origination and loan amount standards for this program, are within Segment 2 unless the servicer can determine whether they may meet eligibility criteria for another product, by reviewing eligibility criteria without performing an underwriting analysis.

This is a brilliant two part scheme. Here is how I believe the scheme is intended to work.

Scheme Part 1: Say the subject property was valued at $100,000 with an 80/20 financing package in place. Now the property is worth $90,000. Using only the 1st lien, the LTV is only 88.9% ($80,000/$90,000), far below the 97% LTV. The idea is to get these suckers (borrowers) to refinance into one of those FHASecure while the 2nd lien holder agrees to subordinate to a new 1st. The old securitized 1st is now home free with a FHA/government bailout while the 2nd, though still in an over-encumbered position, has just received a reprieve. How brilliant.

Scheme Part 2: If the property has dropped to approximately $83,000 or below, then Scheme part 1 is not feasible. So it is best to keep this borrower paying in a 120%+ CLTV property. As you can see, with the property value so low, they know with certainty that a default would be a total wipe of the 2nd and a severe loss to the 1st.

This two part scheme assures that there are no crumbs left on the table for the borrowers.

In summary, regardless of its devious intent, this bailout plan will not work. After all, the plan is concocted by the same financial engineers who got us into this big mess in the first place. I have heard and read numerous analysis of the plan since it came out last week. As I was typing, some professor from Wharton was on CNN, explaining how this is a good start and how it could cut foreclosures by 25%. No wonder. Half of these financial engineers were probably her students.

I will let Will Rogers finish this email.

If Stupidity got us into this mess, then why can't it get us out?
-- Will Rogers

---

The following is an email I sent out 12/4/07. I do not see how the bailout is going to help these borrowers.

In response to the Treasury Secretary’s comical ideas today, I decided to take a look at a few recent REOs from the perspective of a workout.

The following 4 properties are just the first 4 REO closings on November 30, 2007 from the MLS. Here are their stories:

Property 1 – Manchester Ave.

This property was last purchased for $350,000 on 8/3/03 and sold as an REO for $380,000 on 11/30/07.

In between, the borrower refinanced, took out a 1st of $400,000 and a 2nd of $73,965, totaling $473,965.

This borrower had a choice. He could have done nothing and the property would have appreciated by $30,000. Or, he could have refinanced as he did and taken out a “profit” of $123,965 ($473,965 - $350,000). Since he probably put nothing down in the first place, this is pure profit.

If this borrower walks away from the loan, he pockets the $123,965 plus a year of free housing.

If this borrower stays, his gross equity is a negative $93,965 or -24.7%.

Hank, assume this borrower was facing a reset and could easily have made the old payment, what could you have offered him that would be to his benefit?

Property 2 – Ledgeview.

This property was last purchased for $274,000 on 10/3/02 and sold as an REO for $340,000 on 11/30/07.

In between, the borrower refinanced, took out a 1st of $345,600 and a 2nd of $86,400, totaling $432,000.

This borrower had a choice. He could have done nothing and the property would have appreciated by $66,000. Or, he could have refinanced as he did and taken out a “profit” of $158,000 ($432,000 - $274,000). Since he probably put nothing down in the first place, this is pure profit.

If this borrower walks away from the loan, he pockets the $158,000 plus a year of free housing.

If this borrower stays, his gross equity is a negative $92,000 or -27.1%.

Hank, assume this borrower was facing a reset and could easily have made the old payment, what could you have offered him that would be to his benefit?

Property 3 – Creek.

This property was last purchased for $82,500 on 2/27/81 and sold as an REO for $330,000 on 11/30/07.

In between, the borrower refinanced, took out a 1st of $356,000 and a 2nd of $54,000, totaling $410,000.

This borrower had a choice. He could have done nothing and the property would have appreciated by $274,500. Or, he could have refinanced as he did and taken out a “profit” of $327,500 ($410,000 - $82,500). In this case, since he held on for so long, it was only an extra $53,000 “profit”.

If this borrower walks away from the loan, he pockets the $327,500 plus a year of free housing.

If this borrower stays, his gross equity is a negative $80,000 or -24.2%.

Hank, assume this borrower was facing a reset and could easily have made the old payment, what could you have offered him that would be to his benefit?

Property 4 – Neddick.

This property was last purchased for $145,000 on 10/27/95 and sold as an REO for $322,500 on 11/30/07.

In between, the borrower refinanced, took out a loan in the amount of $432,000.

This borrower had a choice. He could have done nothing and the property would have appreciated by $177,500. Or, he could have refinanced as he did and taekn out a “profit” of $287,000 ($432,000 - $145,000), an extra $109,500 versus just hanging on without the refi.

If this borrower walks away from the loan, he pockets the $287,000 plus a year of free housing.

If this borrower stays, his gross equity is a negative $109,500 or -34.0%.

Hank, assume this borrower was facing a reset and could easily have made the old payment, what could you have offered him that would be to his benefit?

...I can keep going down the list and I can assure you that all the REOs tell similar stories.

Hank, these little guys are making out like bandits, at the expense of your Wall Street buddies. Tell your buddies there aren’t much you can do to bail them out. Tell them to take their lumps and move on.

(category: )

Submitted by sd_bear on December 10, 2007 - 11:49pm.

Great read. I only wish commentaries like this would be reported by MSM.

Submitted by Nozferat on December 11, 2007 - 11:13am.

I highly doubt MSN or any other mainstream BS channel would even hint of such crookery...it would expose the true financial objectives of corporations...but who would really care right? At this point, I think people have become so dumb and so stupid that you could tell them anything and they'd simply get back in their SUV's and keep going to their 24 hour grocery stores.

It comes as no surprise that the truth behind this plan is what it is. I've always been a "tin foil" hat person and have been accused many times on many websites about being a loon and believing in conspiracies. Unfortunately, this is only the tip of the iceberg as far as I'm concerned. There are some powerful groups out there that shape our way of life. We have no say in it, not here at least. The MATRIX movie is not too far off with the concept it demonstrates EXCEPT that we are fully awake while it's happening...which is even more amazing given how stupid people must have become to accept it all.

Funny thing this whole work/job thing...first it was slavery...now it's called employment..albeit a far milder version but nonetheless a more psychological form of the same thing.

It does not surprise me one bit that this crap is being endorsed and promoted by the scumbags who now reside in the white house. How people can actually sit down and watch TV regarding these people and all the lies they have perpetuated over the last X number of years is beyond me.

I say Americans FULLY deserve what they get. People here seriously do deserve to get fully shafted and nothing less.

Submitted by lendingbubbleco... on December 11, 2007 - 11:20am.

Hear, hear!

Submitted by Nozferat on December 11, 2007 - 11:40am.

Also, another thing...while people believe that this is a MESS per say, I don't think it is for the higher ups involved. There's money to be made off the backs and misery of others. The amount of money being made during the RE hype and now during the downturn is HUGE...wiping out people's wealth WILL go into other people's/corporation's pockets.

This money isn't going to just simply disappear...someone's going to get it and it won't be the general public.

Submitted by Arraya on December 11, 2007 - 2:48pm.

Well here is some tinfoil hat porn for ya...

There is a fundamental difference between financial fraud and warfare implemented by financial means – a financial coup d’etat, if you will. For citizens and investors trying to navigate current events and markets, it is well worth pausing to gain perspective on current events and contemplate which type of event we are experiencing.

As I write to close the Scoop Media serialization of “Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits”, the corporate media is unfolding daily revelations regarding the sub-prime mortgage market “crisis” and accelerating decreases in bank liquidity and equity.

In the news today is the announcement that UBS, the Swiss bank that bought Dillon Read, now totals its mortgage market losses at $10 billion. These losses began with write offs earlier this year by its recently launched hedge fund, ironically named Dillon Read Capital Management.

Also in the news are the latest efforts by Andrew Cuomo, now Attorney General of New York, to subpoena Wall Street perpetrators of the mortgage bubble that apparently got under way – depending on the account you read – in 2001 or 2004. We seem to have somehow missed that the criminal mortgage patterns that we are watching has been growing for decades. We seem to be missing the fact that the latest cycle began in 1996 as part of the ‘strong dollar policy” and that Mr. Cuomo and numerous other current players and their organizations were leaders in starting and building the current mortgage markets and losses.

If you step back and view the current events as the latest pump and dump of the US real estate market (like the S&L crisis and others before them), you will shed a different light on the current players and their roles. You will also shed light on the fact that the investment model we are watching is far from new. Indeed, it is quite old and continues to be quite successful for those who know how to exercise it and its many privileges.

“Dillon, Read & Co. Inc and the Aristocracy of Stock Profits” is a case study that describes events in Washington, DC during the second term of the Clinton Administration at the onset of the 'strong dollar policy' and the housing and mortgage bubble.

The strong dollar policy was an organized effort by the Federal Reserve and the US Treasury acting in concert with G-8 to increase the market share of the US dollar as the reserve currency. Simultaneously, significant amounts of capital were moved out of the US into emerging markets. Capital was move into areas where currency and equity values were low as a result of a series of co-incidental credit crunches.

The combination of a rising dollar and falling currencies in the emerging markets combined with significant emphasis on "privatization" in the emerging markets made it possible for financial equity to "sell high, buy low" as it shifted out of the Western economies into financing a steady centralization of ownership and control of resources and enterprises throughout Eastern Europe, Asia and Latin America.

The strong dollar policy was a financial "stool" that stood on numerous legs:

- A significant relaxation -- and increase in amounts outstanding -- of housing, mortgage and consumer federal and bank credit that significantly increased liquidity in the US and in the Western economies.

- A significant increase in government debt and relaxation of monetary standards to support ever-increasing dead loads.

- The movement of significant capital out of the United States through covert financial movements -- including the pump and dump of the stock market (internet and telecommunication stocks) and $4 trillion missing from the US government accounts facilitated by the bipartisan commitment to refuse to produce audited financial statements by the US Treasury and a willingness of the US Depository, the Federal Reserve Bank of New York and its owners, its member banks, to manage accounts not managed in accordance with the law.

- The steady assumption of critical government functions -- including military -- by private corporations and banks through government contracting and program vehicles.

- Increased intervention in the capital and commodities markets by central banks, including suppression of the gold price, using complex financial instruments, including derivatives.

- Increased use of corporate media and covert mechanisms to diffuse or stifle transparency or overcome legal obstacles to this significant shift of resources into centralized control.

If we step back and observe events as they really are, rather than as we wish them to be, what becomes clear is that we are watching the reengineering of global governance. Resources – including precious metal inventories and powerful intelligence and weaponry-- are being shifted out of the hands of individuals, communities and governments into private hands. Everything from currencies to militaries is now being controlled and managed in non-transparent ways by private corporations and banks.

The bubbling of the mortgage market has been a huge success. Billions have been moved out of the pockets of the middle class and their pension funds and the municipalities. The enabling institutions now have “losses,” hence they need to be “saved” justifying another round of funding paid for by both government taxes and an inflation tax. No one is asking where the money went and how to get it back. Rather we are anointing the people who engineered the bubble in the first place to now “clean it up.”

Where this goes, no one knows. We know the point of financial coup d’etat is one world currency and one world government – global feudalism, if you will.

However, as a small group of Americans reminded us several centuries ago, our freedom comes to us by divine authority. Government’s come and go – but our thirst for freedom is enduring and may be a tad more difficult to control despite all the latest advances in digital technology and black budget weaponry. One world government sounds simple – it is a lot harder to pull off when the plan is out of the closet and the organizing forces have little beyond force and greed to hold most people in check.

What those who love freedom most need right now is an honest map. The theft of billions in the mortgage market was not a fraud – it was a plan. The success of this plan is unfolding before our eyes. If you wish to understand what is really happening – to your savings, to your community, to your pension fund, to your world -- you should read “Dillon, Read & Co. Inc. and the Aristocracy of Stock Profits” and explore the wealth of supporting documentation.

NOTE:
To help follow current mortgage market events, see the compendium of links, Who’s Who in the Housing & Mortgage Bubble at Catherine’s Blog http://www.solari.com/blog/?p=256

*** See " Dillon Read & Co. Inc. And the Aristocracy of Stock Profits" series at: www.dunwalke.com

Submitted by gold_dredger_phd on December 11, 2007 - 8:27pm.

You should read, "Where are the Customer's Yachts?"

That tells you everything about what Wall Street is and was. They're all sleazy salemen looking forward to their year end bonus and they don't care how they do it.

Submitted by MAttJ on December 16, 2007 - 9:52am.

Why is there this assumption that these borrowers can just walk away from the house with no attempt by the mortgage holders to go after their other assets? Is this a California thing? are all of these refi's and 2nd mortgages no recourse?

Submitted by reddgreen on December 4, 2008 - 5:17pm.

The mortgage is against an assett, the house. And, in most cases, the banks or mortgage companies themselves pushed valuations far above reasonable market values by brute force appraisal tactics (similar happened in late 80's.).

In short, its the banks bloody fault, now they have to eat it!

Would you consider, maybe, making indentured servants out of the people who walk away?

MAttJ wrote:
Why is there this assumption that these borrowers can just walk away from the house with no attempt by the mortgage holders to go after their other assets? Is this a California thing? are all of these refi's and 2nd mortgages no recourse?

Submitted by fuggy on January 3, 2009 - 4:55pm.

Continuing the slavery/tin foil hat/conspiracy theory bit...

Our 401Ks and pensions are being dissipated by the Treasury diluting the dollar and at the same time illness is skyrocketing. 1 in 150 boys autistic.
Diabetes is epidemic.

Every year the pharmaceutical industry pushes the flu virus vaccine,then, at the end of flu "season" claims the vaccination didn't work for 9 out of 10 of the viruses...

Making us too sick, too pre-existing condition to ever quit work or protest corruption is part of their plan...

Submitted by In ofreclosure on December 16, 2011 - 5:19am.

How can it be that we bail out incompetent banks, who leveraged into this crisis, and then blame homeowners for getting frustrated and playing the banks' game.

I refused to pay 15-20% to any credit card, stopped making payments when they refused a reasonable payment offer, and closed the accounts. Hell- if they feel they have the right to rape me with 22% interest after being bailed out in order to even exist, then I feel fine telling them what I am willing to pay (4%, a 3.75 spread over their access to Fed funds rate).

This unilateral one-way directives from banks is old school crime. The money belongs to the people ( The Treasury prints money based on constitutional requirements; the Treasury is a department of the government; the Government is of the people, by the people, and for the people). Banks are private enterprises, and are inefficient at distributing money - and they are thieves -

Look at what Geithner did - he gave MF Global special access to get preferential treatment, even though they had a bad balance sheet and were leveraged 40:1. Look at Geithner collecting bank CEOs and Colluding with them to shrink the banking sector in a monopolistic manner, totally against free enterprise. Collussion and monopoly tactics should be eliminated.

Look at how the banks distribute access to funds - it is all smoke and mirrors, and me using bankruptcy, delayed payments, and negotiated terms with the consumer dictating terms is how I believe it needs to be until banks are removed from the system and the people get direct access to the Fed window - that would be much more efficient distribution of capital, which is what capitalism is all about.

Banks assume that it is their money. It is not their money. It is the people's money. Let us not forget that. Believe it or not - I work at a bank - but what we have witnessed is fraud, abusive greed, and false blame - the worker deserves debt relief more so than Greece, Italy, Portugal, Spain, and Banks. And if they get it and we don't, then I am ok with people refusing to pay and walking from their debts. It is either fair for all, or it is not fair. If they can't extend assistance when we need it, after we extended them assistance when they needed to be bailed out, then screw them completely and let them suffer too.

Submitted by Elizabeth on January 25, 2012 - 6:51am.

According to the latest statistics, only 9% of people reaching retirement age have achieved financial success to such a degree that they may live with dignity thereafter without depending upon further income. Eighty-six percents of the 92% of all people having sixty years of age and over are still employed or are trying in some manner to earn all or a part of their livelihood and the remainder are dependent upon public or private charity organizations that provide some help…And a very small part of them actually earn enough for their vital needs, having to use loans for bad credit and very few earn much more for their declining years.

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