Opinion

Felix Salmon

Why is it so hard to modify a mortgage?

Felix Salmon
Jun 29, 2009 21:59 UTC

Peter Goodman‘s infuriating and important report about the impossibility of modifying mortgages raises an interesting question: why is it so hard? There are three possible answers, I think.

The first is that it’s sheer incompetence — the banks, at least at senior levels, have lots of good will, but they just can’t find the staff to get this stuff done.

The second is that it’s greed on the part of the banks — that while they pay lip service to the idea of modifying mortgages, they actually make more money by being recalcitrant and obstructive and unhelpful.

The third explanation is somewhere in the middle: that it was always difficult to modify mortgages, that the massive wave of loan-mod applications has made it harder still, and that banks just move slowly, even if they do have good will.

My gut feeling is that the reality is somewhere between #2 and #3. If loan mods really made sense for the banks, they would be better at it than this, and they wouldn’t make life so unbearably hellish for their borrowers.

Once again, this is an area where a regulator with teeth could and should step in. If banks claim to be working hard to modify mortgages, they should be tested on that claim, and held to account if it proves to be false. If the carrot of getting a reliable stream of future mortgage payments, along with $1,000 from the government, isn’t enough, then add a stick as well. Someone needs to fix the current broken system, and it won’t be the banks themselves.

COMMENT

Well, we certainly can’t rule out incompetence or greed by bank management. Maybe those toxic assets wouldn’t be so toxic, if the underwriting guidelines were realistic to begin with. But selling a rotten loan to an unsuspecting investor was such easy money at the tine. Now it’s still easier money for the banks to do what they know, ignore risk, and then foreclose (hopefully stripping some equity in the process), raise fees on other products and services, and come hell or high-water, make those big bonuses (or salaries, these days) for that oh-so-rare, hard-to-come-by “Talent” in bank management. Banks have no problem imposing forced liquidation on their clients. Why doesn’t the FED do the same. So, management doesn’t want to take losses, and would rather let these assets (with their pie-in-the-sky, imaginary valuations) sit, while they hope to find a buyer willing to pay the price the greedy bank presidents still want for their crap. Why not force banks to liquidate and put these mortgages in the hands of people who can then modify the loans and maybe actually help, instead of victimize borrowers. Those CEO’s may know how to read a balance sheet, but they still need to sign up for Ethics and Morals 101.

Why architecture isn’t collectible

Felix Salmon
Jun 29, 2009 21:46 UTC

David Galbraith, looking at a floor of Le Corbusier’s Villa Stein on the market for €1,080,000, concludes that either “architecture is vastly under valued or painting prices are almost entirely irrational”.

I hope he’s right: architecturally-important residences should sell at a premium. It’s by far the best way to prevent them from being demolished. But it’s hardly irrational that they don’t.

The apartment in the Villa Stein, for instance, is in Garches, an undistinguished western suburb of Paris which, in the words of one website, is “mostly known for the Raymond Poincaré Hospital, which is specialized in medical treatment of road accident victims”. Not the kind of place that a rich art lover would really want to live. What’s more, it’s only 105 square meters, or 1,130 square feet: decidedly cramped if you’re the kind of person who is likely to drop millions of dollars on an artwork.

A great piece of architecture in a desirable location can sell at a premium, and a great piece of architecture which can be packed up into six containers and reconstructed anywhere in the world will sell for even more. But in general people looking to buy important architecture only want to do so if there’s a reasonable chance of them actually living in the house in question — at least for some of the year. If such people don’t want to live in Garches, then the seller of the Villa Stein flat is out of luck.

I am ultimately bearish about the prospects for collectible architecture — while it’s possible to imagine a world where it exists, it seems impossible to get there from here. But that doesn’t mean that the entire art market — a market where people get to buy unique and portable objects to savor and enjoy at their leisure — is irrational. It just means that architecture doesn’t behave in the same manner.

COMMENT

You shouldn’t downplay the lack of a secondary market that has self-interest as a motive of establishing and increasing value. Even a modest home by an architect (well know or not) is difficult to value or to finance (regardless of the RE market). So the traditional secondary market is unstable. If galleries bought and sold actual structures (which, given the pricing, isn’t unreasonable — Gagosian or Saatchi could quite easily afford a number of notable home, even speculatively) instead of drawings, then the market would probably increase. This might encourage museums to do the same, though problems of access would arise. The Lowell House in LA was for sale (maybe still is? I think you covered this a while back) and being marketed as a collectible of sorts, but there is next to no public access. You can’t even see it (at least you can walk down the street in Silver Lake and see a collection of three Neutra houses with some degree of satisfaction) from the street, let alone appreciate the complexity of the plan. The best you can get is watching L.A. Confidential.

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The CPSC and homeownership

Felix Salmon
Jun 29, 2009 20:56 UTC

Jim Surowiecki weighs in on the Consumer Product Safety Commission today, but says that “the new regulations will come at a price”:

Serious regulation will mean that fewer people can buy homes. But this may not be a bad thing, given all the trouble the housing bubble caused.

For one thing, regulation doesn’t necessarily mean that fewer people will be able to buy homes. Expanding the number of people who can buy homes is the kind of thing that the CRA does, along with government downpayment assistance and the like for low- and middle-income families. That’s not going to go away.

Regulation does, on the other hand, mean that fewer people will be able to overpay for homes — to buy homes they can’t afford. In other words, it will help put a cap on house prices, since speculators and flippers won’t be able to buy anything they like armed with nothing but crossed fingers and a NINJA loan. So long as it costs less to buy than to rent, however, banks should be able to find a way to help most people buy a home if they really want to.

But in any case the housing bubble was hardly a consequence of rising homeownership: homeownership peaked long before the height of the bubble, at the end of 2004.

Rather, the positive effects of lower homeownership lie elsewhere: in more liquid labor markets; in thinner and happier people (not to mention much less leveraged households); and in less societal inequality between rich neighborhoods where substantially everybody owns their home and poor neighborhoods where substantially everybody rents. But Surowiecki knows all this: he wrote an entire column, last year, on the downside of homeownership.

Fewer people buying more affordable homes, then, isn’t a “price” of setting up the CPSC, as Surowiecki would have it. Rather, it’s set to be one of the CPSC’s main benefits. Let’s hope that homeownership falls as a result of the CPSC: it would make America a significantly better place.

COMMENT

A house sold at a low price to a low-income family is a PRIME loan. If the CPSC does nothing other than simply enforce 20% down, 36% back-end DTI for all housing loans.. no exceptions, not even for Phil Gramm.. we would not be in a horrific recession, and we would have stability in the housing market.

Yes, that means rich folk would have had to take their loss after the 2001 dot-com burst.. but now we have yet another example of why the balance sheet pain of making bad loans MUST be forced to occur.

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Manhattan property datapoint of the day

Felix Salmon
Jun 29, 2009 18:30 UTC

Ilaina Jonas reports on commercial property in Manhattan:

During the second quarter an additional 4.7 million square feet of office space was put on the market, surpassing the 3.9 million square feet that hit the market in the first quarter.

The really scary thing is that this is presented as good news, due to the positive second derivative:

The increase slowed significantly in the latter half of the quarter, according to the report released to Reuters on Sunday.

That could help major Manhattan landlords such as SL Green Realty Corp, Vornado Realty Trust, Boston Properties Inc and Brookfield Properties.

I don’t see how landlords care much about the second derivative. They care about supply and demand, and there’s likely to be an enormous amount of unlet office space in Manhattan for the foreseeable future, giving them little if any pricing power. Commercial rents are going to fall, not rise — and all those toxic commercial mortgages are going to start defaulting en masse Real Soon Now.

Is the banking system ready for that hit? No: the idea behind the PPIP was that banks could get some of that toxic waste off their books. But the PPIP failed to get off the ground, and now the banks are left to face the nasty consequences on their own. It won’t be pretty.

COMMENT

The second derivative of the rate of new supply is favorable. That presumably correlates more-or-less with the third derivative of continuing overhang, depending on how good a job it’s doing of coming off the market.

Media goes barbell

Felix Salmon
Jun 29, 2009 18:13 UTC

As journalists get laid off across the world, the number of professional bloggers is growing fast. Michael Learmonth today has a look at AOL’s fast-expanding suite of web properties, with a quote from AOL’s Jeff Levick saying that he “will continue to grow these sites and launch new sites”. Meanwhile, TPM Media has just posted seven new staff positions in one day.

My feeling is that there’s media jobs are looking pretty much like a barbell these days: you either work for a last-man-standing monolith or else you’re part of a small and nimble team. It’s the media properties in the middle — regional newspapers, small cable-TV properties, anything with high fixed costs and less than a million paying customers — which are suffering the most. And it’s not going to be at all easy for the journalists at those properties to move into the world of blogs.

Customer-gouging datapoint of the day, Bank of America edition

Felix Salmon
Jun 29, 2009 17:57 UTC

From WaPo:

Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10.

This seems incredibly short-sighted to me: BofA here is just asking to get slapped down — hard — by Elizabeth Warren when she takes over the new Consumer Financial Protection Agency. And with behavior like this, it will have precisely no one defending it.

COMMENT

Fees like this are a tactic in a ploy that Ms. Warren has characterized as Trick & Trap. Stand back a bit and what you see is folks on the margin, for whom it’s necessary to get the most out of their available balances, encountering a predatory regime that has established a minefield of new rules in that space.

Each one triggers a fee or a status change that invokes an even more dangerous and costly minefield replete with bloodsucking rate hikes and fees that kick account holders when they’re down. Ms. Warren describes an encounter with Citibank credit managers where she was sharing her insight about how to predict when a bankruptcy was coming to avoid losses when she learned about the dark side. What she hadn’t understood was that the extreme rates and fees that this cohort pays, losses and all, was actually the key to Citibank’s profitability.

I’ve seen that before on mortgage company financial statements where the profit reported on the income statement is equal to the income from late fees. The trap happens when the aggregate of these moves has the effect of locking a person in at this level. And then the players, careful to not kill the host right away, engage in parasitic engorgement of money from people who may be brave but they are not free.

It appears that Ms. Warren, a 30 year overnight success, will get her day in the sun having won the respect of just about everyone looking at these issues. Any attempt to throw her under a bus would result in its destruction and expose the throwers as chumps – it’s not a realistic prospect after the Bush: Justice Department revelations.

What she will face is lobbyists, dipped in blood money, who have learned how to enshrine incumbent legislative politicians. They peddle compromise of obscure things with hidden consequences. What you get when they’re done is the donut hole in Medicare Part D prescription payments and the administrators being forbidden to negotiate better prices.

That’s too much nonsense for any sane person to engage – let’s hope that she can find ways to render it. I’d love to see a couple of these predators get knee-capped somehow. It’s obvious that she has the chops and there’s every reason to think that Ms. Warren has the moxie to change the stage – it’ll be interesting to see what she finds to use as a woodshed.

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Latin coup datapoint of the day

Felix Salmon
Jun 29, 2009 16:39 UTC

The Wikipedia list of successful coups d’état is a very useful resource. You can argue the toss on many of the specifics (was Alberto Fujimori’s dissolution of the Peruvian parliament in 1992 a coup?) but the big picture is clear: Latin American coups are increasingly rare things.

coups.png

The 1960s saw 12 successful coups in the region; the 1970s saw 9; in the 1980s there were 6; in the 1990s there were 3; and so far this decade there has only been one, in Ecuador in 2000. Honduras might double that figure to two, but that misses a more important datapoint — that if you look just at the big three countries in the region — Argentina, Mexico, and Brazil — there hasn’t been a successful coup since 1976, 33 years ago.

It wasn’t that long ago that all Latin American politicians had to carefully mollify the military, lest they suffer a coup. Today, that really isn’t a worry in most Latin countries, even though the military naturally leans right while politics in the region is tending leftward. What’s more, the important countries have fewer coups than the small ones: Bolivia had no fewer than 11 successful coups between 1930 and 1980, only for Haiti to take on the mantle with further coups in 1986, 1988, and 1991. But coups in bigger countries, like Venezuela, have been notable for their lack of success: Chavez failed with his own attempt in 1992, and then successfully rebuffed another ten years later.

For all the fears about the future of Latin American democracy, the fact is that the region is far more democratic now than it has been at any point in the past, and that even when there are coups, like the present one in Honduras, the military moves quickly to install a new civilian leadership, rather than ruling as a junta. That’s the silver lining in today’s cloud. (Full list of datapoints here.)

COMMENT

I agree with Souza on this. How is it not a coup when the current President is attempting to formulate pseudo dictatorial powers by defying the constitution of said country?

If the legislature and SC of that country declared the actions illegal per their constitution and that president decided to go forward with them (reminds me of a certain US President and his penchant for signing statements on legislation through which he essentially said he wasn’t going to follow the bill he was signing into law) is that not in and of itself a coup?

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The new Oscar math

Felix Salmon
Jun 29, 2009 15:36 UTC

David Carr nails the financial implications of doubling the number of Best Picture nominees at the Oscars. It’s bad for the studios — which will now have even more films to market to the Academy in the hope of winning the award; it’s good for media outlets like Variety which get a lot of those marketing dollars; and it’s something of a wash for viewers:

Americans have tuned out the Oscars not because “The Dark Knight” didn’t get a nomination, but because the telecast is jammed with obscure awards that they have no say over — this isn’t “American Idol” — and no rooting interest in. What the Oscars need is fewer awards, not more nominees. As long as we are doing the math, does the academy really need three awards for short films and two separate awards for sound?

It is a bit weird that Hollywood types are “livid” about this move — one would think that they’re powerful enough to have prevented it from happening. In any event, they’re surely powerful enough to roll it back if and when it proves a dud. I give this experiment one year, three at the most.

COMMENT

What jonathan Said. In response to Carr’s specific complaint: two separate awards for sound–absolutely. (And that’s even ignoring that those nominees tend to be the blockbusters that people saw, such as _Transformers_ or _ST:The Next Parody_.) Same as one award for direction and another for editing. (We all saw _The Sixth Sense_: a masterpiece of editing that overcame pedestrian directing in the most positive interpretation.)

Three awards for short films? Maybe not, but be careful. Certainly two (one documentary, one Pixar shorts–er, fiction). And be careful with this one: between YouTube and iFilm and the like, more and more of the potential audience will either (1) have seen the films or (2) want to see them afterward. From the perspective of getting some return on that investment, short films probably have a higher ROI than the 9th and 10th nominee for Best Picture ever will.

You and Carr are not wrong that 10 BP nominees is too many–although I’ll give odds that one of the pleasanter side effects is that the films that came out a month or two ago will get more attention (the ones that won’t have a Major Video Release before Thanksgiving but will have been gone from the theatre long enough that they might be overlooked). Again, from an ROI perspective, this might not be a bad move.

The question is what this does to the length of the show. There aren’t that many things that can be sidebarred from the current version–the Tech awards are already reduced from the old 3-5 minutes to a 45-second slot, the PwC announcement appears to be nowhere, the Best Songs were done as a boring medley this year, and even the Academy President speech was truncated this year. Unless they’re adding half an hour to the scheduled show time, everything else (the Opening Number, the Necrology, the Thalberg Award) is something that attracts people to the show. And how much time can you really save by cutting down, say, Best Foreign Film (which, again, lost time this year, iirc)?

Now, if the expansion to 10 also means getting rid of “the Pixar Category,” then it might even be a good idea. But it’s not going to make the show run short enough to still pretend it will be 3 or 3.5 hours.

How to sell TARP warrants

Felix Salmon
Jun 29, 2009 13:59 UTC

What is Treasury meant to do with the warrants it acquired as part of the TARP program? Treasury’s proposal is essentially a complicated dance with the banks in question, which involves financial models and a slew of outside consultants and which may or may not end up in front of multiple independent appraisers.

Why the complexity? After all, there’s an incredibly simple way of selling these warrants: just sell them, at the market price, in the market. Says Simon Johnson:

The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part – e.g., people could submit sealed bids and the highest price wins.

What’s the problem with the simple solution? Simply that the warrants might — horrors! — end up in the hands of players other than the banks themselves. So maybe the banks should be given the right to match the winning price, if they’re so inclined. If they’re not, then let the warrants start being traded in the open market. There’s no harm in that.

COMMENT

felix or anyone who can help answer my question: how does one purchase stock being offered by the US Treasury’s TARP auction warrants? i was told that there are six bank/financial companies that will be selling warrants in the coming weeks (end of march 2012). thanks in advance!

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