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  • March 24, 2009 at 11:37 PM #15361
    analyst
    Participant

    UCGal’s comments induced me to do some more searching for details.

    What I learned is that the deterioration of news organizations matches the deterioration of financial organizations.

    Before making the original post, I read what appeared to be a non-editorial, factual summary of the new program with a Reuters by-line. I previously thought of Reuters as a real news organization. The summary said:

    “A bank wanting to divest a pool of residential mortgages with a face value of $100 million approaches the FDIC. The FDIC determines how much financing it is willing to extend to potential buyers of the loans, and the FDIC then auctions the loans and chooses the highest private-sector bid. The winner forms an investment fund with both private capital and funds from the Treasury. The FDIC then extends its loan, which can be for up to six times the amount of public-private capital.”

    During the second round of reading, I found a summary by a law firm which tells a different story. In their version, the bank who is selling the assets makes a loan with an FDIC guarantee. The FDIC guarantee limit is predetermined by the FDIC based on their own analysis with the aid of outside evaluators. The loan guarantee cannot exceed six times the combined (private/government) equity amount, but presumably could be less.

    So the bank would not receive cash for the full sale amount. It is trading the right to collect on, or sell, the loans it already has for a fractional down payment (the combined private/government equity amount) plus the right to collect on, or sell, a loan it has just made to the investment fund for the balance. I have yet to find any detail about how the interest rate or term of the seller financing would be determined.

    Still a lot of room for malfeasance, since the FDIC-guaranteed loan should be immediately saleable for a high percentage of its face value, and the guarantee would pay off if the fund collections could not pay off the loan (bankruptcy of the investment fund).

    This is only one of three programs announced together, apparently unconnected except as to their general goal.

    Another one does in fact have the Treasury lending to the investment fund in addition to being an equity participant in the fund, but with a limit of 50-100% of the fund equity amount.

    I was puzzled before that some of the criticism from people independent of the government with good credentials was more along the lines of “it won’t work” (failure to agree on price) than “it’s a giveaway”. Now I see why. The potential for taxpayer exploitation hinges entirely on the value assigned to the assets by the FDIC and its “outside evaluators”, effectively setting the the sale price.

    March 25, 2009 at 12:48 AM #372698
    CA renter
    Participant

    Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins!

    March 25, 2009 at 12:48 AM #372982
    CA renter
    Participant

    Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins!

    March 25, 2009 at 12:48 AM #373155
    CA renter
    Participant

    Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins!

    March 25, 2009 at 12:48 AM #373199
    CA renter
    Participant

    Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins!

    March 25, 2009 at 12:48 AM #373313
    CA renter
    Participant

    Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins!

    March 25, 2009 at 1:58 AM #372708
    analyst
    Participant

    [quote=CA renter]Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins![/quote]

    The possibility of debt reduction to the borrower is an interesting angle. At least it adds a plausible explanation for why certain non-bankers might see some merit in backing this approach.

    But how does anybody propose to know or control how the borrowers will be treated by the second purchasers of the loans? Without the inhibitions the banks had (the effect of principal reductions on the solvency of the bank), they might just push the foreclosures through as fast as they can. It does, after all, require significant effort to staff and run a real estate lending operation, even if you are offering attractive deals. The borrowers must be properly assessed, even at the new lower dollar levels, to make the loan attractive on the secondary market. Given the drop in real estate prices behind us, the more yet to come, even a 50% reduction in the loan balance would not create a proper loan-to-value ratio in many cases.

    March 25, 2009 at 1:58 AM #372992
    analyst
    Participant

    [quote=CA renter]Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins![/quote]

    The possibility of debt reduction to the borrower is an interesting angle. At least it adds a plausible explanation for why certain non-bankers might see some merit in backing this approach.

    But how does anybody propose to know or control how the borrowers will be treated by the second purchasers of the loans? Without the inhibitions the banks had (the effect of principal reductions on the solvency of the bank), they might just push the foreclosures through as fast as they can. It does, after all, require significant effort to staff and run a real estate lending operation, even if you are offering attractive deals. The borrowers must be properly assessed, even at the new lower dollar levels, to make the loan attractive on the secondary market. Given the drop in real estate prices behind us, the more yet to come, even a 50% reduction in the loan balance would not create a proper loan-to-value ratio in many cases.

    March 25, 2009 at 1:58 AM #373165
    analyst
    Participant

    [quote=CA renter]Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins![/quote]

    The possibility of debt reduction to the borrower is an interesting angle. At least it adds a plausible explanation for why certain non-bankers might see some merit in backing this approach.

    But how does anybody propose to know or control how the borrowers will be treated by the second purchasers of the loans? Without the inhibitions the banks had (the effect of principal reductions on the solvency of the bank), they might just push the foreclosures through as fast as they can. It does, after all, require significant effort to staff and run a real estate lending operation, even if you are offering attractive deals. The borrowers must be properly assessed, even at the new lower dollar levels, to make the loan attractive on the secondary market. Given the drop in real estate prices behind us, the more yet to come, even a 50% reduction in the loan balance would not create a proper loan-to-value ratio in many cases.

    March 25, 2009 at 1:58 AM #373209
    analyst
    Participant

    [quote=CA renter]Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins![/quote]

    The possibility of debt reduction to the borrower is an interesting angle. At least it adds a plausible explanation for why certain non-bankers might see some merit in backing this approach.

    But how does anybody propose to know or control how the borrowers will be treated by the second purchasers of the loans? Without the inhibitions the banks had (the effect of principal reductions on the solvency of the bank), they might just push the foreclosures through as fast as they can. It does, after all, require significant effort to staff and run a real estate lending operation, even if you are offering attractive deals. The borrowers must be properly assessed, even at the new lower dollar levels, to make the loan attractive on the secondary market. Given the drop in real estate prices behind us, the more yet to come, even a 50% reduction in the loan balance would not create a proper loan-to-value ratio in many cases.

    March 25, 2009 at 1:58 AM #373323
    analyst
    Participant

    [quote=CA renter]Excellent post, analyst! IMHO, you are exactly on target.

    One thing to consider outside of this, is if the eventual purchasers — of securities that control the mortgages — buy the assets for 30 cents on the dollar, they can go to the home debtors and reduce their principal by 50%, repackage the loan and sell it on the secondary market for 50% of its original value. The private equity guys make their spread, the home debtor now has a mortgage cram-down, and the taxpayer foots the bill.

    Perhaps this is their plan after all? Everyone but the taxpayer wins![/quote]

    The possibility of debt reduction to the borrower is an interesting angle. At least it adds a plausible explanation for why certain non-bankers might see some merit in backing this approach.

    But how does anybody propose to know or control how the borrowers will be treated by the second purchasers of the loans? Without the inhibitions the banks had (the effect of principal reductions on the solvency of the bank), they might just push the foreclosures through as fast as they can. It does, after all, require significant effort to staff and run a real estate lending operation, even if you are offering attractive deals. The borrowers must be properly assessed, even at the new lower dollar levels, to make the loan attractive on the secondary market. Given the drop in real estate prices behind us, the more yet to come, even a 50% reduction in the loan balance would not create a proper loan-to-value ratio in many cases.

    March 25, 2009 at 5:33 PM #372969
    carlsbadworker
    Participant

    Basically, we know there are a lot of people in US now who can’t sell their houses, because they’ve leveraged themselves for more than the house will sell for on the open market. They have negative networth and selected not to honor their liability, but our government decides that they need a bailout.

    So it only makes sense to extend it to the banks, which too leverage themsevles for more than their assets will sell for on the open market. They too will have negative networth and contemplate not honoring their liability(i.e. declare bankrupcy) so they too need a bailout. Only in this case, the government marks up their asset but in the home owner’s case, the government lowers their liability.

    My point wasn’t that it’s right. My point was the government has been doing all the nonsense for a while already, it is unlikely the law makers will repent now, given the banks have more lobbying power than the FBs who got the loan remodification.

    March 25, 2009 at 5:33 PM #373251
    carlsbadworker
    Participant

    Basically, we know there are a lot of people in US now who can’t sell their houses, because they’ve leveraged themselves for more than the house will sell for on the open market. They have negative networth and selected not to honor their liability, but our government decides that they need a bailout.

    So it only makes sense to extend it to the banks, which too leverage themsevles for more than their assets will sell for on the open market. They too will have negative networth and contemplate not honoring their liability(i.e. declare bankrupcy) so they too need a bailout. Only in this case, the government marks up their asset but in the home owner’s case, the government lowers their liability.

    My point wasn’t that it’s right. My point was the government has been doing all the nonsense for a while already, it is unlikely the law makers will repent now, given the banks have more lobbying power than the FBs who got the loan remodification.

    March 25, 2009 at 5:33 PM #373425
    carlsbadworker
    Participant

    Basically, we know there are a lot of people in US now who can’t sell their houses, because they’ve leveraged themselves for more than the house will sell for on the open market. They have negative networth and selected not to honor their liability, but our government decides that they need a bailout.

    So it only makes sense to extend it to the banks, which too leverage themsevles for more than their assets will sell for on the open market. They too will have negative networth and contemplate not honoring their liability(i.e. declare bankrupcy) so they too need a bailout. Only in this case, the government marks up their asset but in the home owner’s case, the government lowers their liability.

    My point wasn’t that it’s right. My point was the government has been doing all the nonsense for a while already, it is unlikely the law makers will repent now, given the banks have more lobbying power than the FBs who got the loan remodification.

    March 25, 2009 at 5:33 PM #373468
    carlsbadworker
    Participant

    Basically, we know there are a lot of people in US now who can’t sell their houses, because they’ve leveraged themselves for more than the house will sell for on the open market. They have negative networth and selected not to honor their liability, but our government decides that they need a bailout.

    So it only makes sense to extend it to the banks, which too leverage themsevles for more than their assets will sell for on the open market. They too will have negative networth and contemplate not honoring their liability(i.e. declare bankrupcy) so they too need a bailout. Only in this case, the government marks up their asset but in the home owner’s case, the government lowers their liability.

    My point wasn’t that it’s right. My point was the government has been doing all the nonsense for a while already, it is unlikely the law makers will repent now, given the banks have more lobbying power than the FBs who got the loan remodification.

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