FDIC to mortgage servicers: Freeze ARM rates

[SD Transplant]

Top bank regulator suggests industry cuts losses now to prevent foreclosures. I guess our friendly bankers are hard at work cutting their losses now rather than deal with more problems later. I smell recession control.

I guess with Goverment of Bankers intervention things are made to look/feel pretty good.

http://money.cnn.com/2007/10/05/real_estate/fdic_rate_freeze/index.htm?postversion=2007100516

[(former)FormerSanDiegan]

Makes me wish I had poor credit and got a stupid loan a couple years ago. This won’t fly, though. It’s simply a veiled threat to the industry to try to make some progress on getting more folks out of suicide loans.

… but if it did happen, it’s a huge windfall to the borrower.

[HLS]

…but if it did happen, it’s a huge windfall to the borrower.

AND the sad thing is that we here realize that, but many of the clueless that have these loans are expecting/hoping to get bailed out, like they are entitled to be saved…

It’s a disgrace, but not a surprise.

With all the chopped up tranches, an investor that was expecting a higher return will be told you can get less OR you can get nothing.

It’s a way to keep the borrower in debt for an overinflated stucco box, which will still decline in value.

People will still owe 50% more than the property is worth.

[davelj]

But here’s the problem…

… let’s say I’m a thrift executive and I’ve got a bunch of $400,000 loans at 3% teaser rates that “should” be indexed up to 7% (or pick a number greater than 6%). So now I’m going to reduce the rate back down to 3% and fix the loans at that rate. So, dear readers, what’s the value of these loans if the terms have been changed such that the borrower has locked in a 3% coupon?

(Imagine yourself owning a government bond yielding 6% in which the coupon got cut in half… permanently. What do you think that would do to the market value of your bond?)

Let me tell you what it ISN’T worth: $400,000 or anything even close to $400,000. This loan is now probably worth $200,000 (or less) if it has to be sold in the open market. So, is the all-benevolent FDIC going to allow these companies to not only fix the loans at the previous teaser rate but ALSO allow them to keep these loans on their books at the original par value?

That is so completely ludicrous from a “safety and soundness” perspective that I could actually see it happening.

[Bugs]

If I were an investor and a loan originator/servicer were asking me to take a loss on my investment I’d be expecting them to take the same percentage loss (at least) on their origination and servicing fees.

Sooner or later that investor is going to want their money back. When that happens and the borrower’s income is still inadequate by 50% to service a conventional rate there will still be a loss. It’s just a question of whether the investor is going to throw good money after bad.

[HLS]

I don’t think that there are many institutions that hold these loans. They were sliced and diced into CDO, MBS and sold off on Wall Street to anyone and fund managers that were looking for higher returns.

Is addition rates aren’t 3%. A prime borrower might have been 4-5%, a sub could be 6-8%.. Still not that bad of a return.

There is very little cash value to these today, so they just don’t value them. It’s better to keep it hush hush and get interest payments, with the true lack of value buried.

There are pension managers, life insurance companies, hedge fund managers, city and county treasurers that sre very concerned these days. Some will be out of a job as soon as their losses are exposed.

A bank money market account that is NOT FDIC insured could also have exposure. You own “shares”

Nobody really knows how much is out there, but it will make Enron look like child’s play.

Some of the losses will be buried forever and never get exposed.

The Wall Street folks already took their cut off the top.

[kev374]

what complete BS! So the delinquents get continued benefits of the 1% rates while the responsible guy with the good credit gets the 5% rate. I really do not understand what is happening to this country, it was founded on the principle that hard work is rewarded, now this is just getting to be the opposite. Capitalism is only reserved for the ultra rich, the middle class and poor have to deal with increasing socialism.

[bobby]

Relax Kev,
it’s not going to happen.
Even if it does, who gets the 1% rate and who gets the 7% rates. It’s too hard to determine.
I mean I don’t mind getting 1% rate in perpetuity. I’ll go out and buy a house tomorrow it that’s the case. Claim hardship and then pay 1%. It’s not going to happen.

[davelj]

HLS, I think we have some confusion regarding terms. When you say, “I don’t think that there are many institutions that hold these loans,” I think you mean many “depository institutions.” Correct me if I’m wrong. (Otherwise, you point out correctly that pension funds, insurance companies, hedge funds, etc. own lots of these mortgages via CDOs, CMOs, etc. – these are undoubtedly “institutions.”)

While it’s true that most of these funky loans are wrapped up in securitizations and are not owned by depositories, a HUGE amount – in the hundreds of billions – are still sitting on the balance sheets of traditional depositories like Downey, First Fed, WAMU, Wachovia (formerly Golden West), Countrywide Bank, etc. Believe me: the thrifts and thrift-like banks are sweating this situation – they’ve got boatloads of direct exposure to the dreck.

Regarding bank money market funds, yes, technically you’re correct that “A bank money market account that is NOT FDIC insured could also have exposure.” But this is a bit misleading. The exposure here is largely to the money market fund “breaking the buck,” so to speak, because some portion of its short-term investments go sour. I defy you to find a single “bank money market fund” that is not FDIC insured.

There may be a very VERY small handful of traditional banks in the United States that don’t carry FDIC insurance. But their numbers are so small as to be inconsequential. FDIC insurance is a sine qua non of operating a traditional bank.

[Author]

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