Howie Hubler’s second act
Loan Value Group has one of the best ideas I’ve seen in the housing crisis so far. It involves no legislation or government cash, it keeps homeowners in their home, it prevents distressed foreclosure sales, and it benefits both borrowers and lenders. In a world where the pervasive problem of negative equity is signally failing to turn up in significant principal reductions, LVG has come up with a clever way of doing something substantially similar, without lenders having to take the hits to their balance sheet which are necessary when they do an immediate principal write-down.
The LVG trick doesn’t work for everyone: it’s really only for strategic defaulters, who have the ability but not the willingness to pay. And the idea is to give them a nudge to keep on paying, and to do what most people with mortgages want to do, which is to stay current on their loan. Up until now, homeowners have faced only the sticks of moral disapproval and reduced credit rating when pondering whether or not to walk away from their loans; now, LVG is offering them a substantial cash carrot as well.
If you just keep on doing what you’ve been doing all along, and make your mortgage payments on time, LVG will offer you a lump-sum payment under its Responsible Homeowner Reward plan, which is explained in some detail in this press release. The reward is paid by the lender, and is calibrated to your specific circumstances, including just how underwater you are on your mortgage. And it can be implemented in just a few days, bypassing entirely the infuriatingly incompetent customer service representatives at loan servicers, who seem to be able to do nothing but lose paperwork on a predictably regular basis.
One of the surprises about this crisis has been how few strategic defaulters there have been to date. But the number is rising, and it’s very much in the best interests of the financial system that it never approach the kind of critical mass at which strategic default tips over into being a perfectly normal and acceptable thing to do. Schemes like LVG’s are a very good way of minimizing strategic defaults, and they benefit not only the homeowner and the borrower, but also the solvency of the financial system as a whole. I hope they catch on among more than just a few hedge funds buying up mortgages in the secondary market.
Today, Max Abelson uncovers a very interesting nugget about LVG: one of the owners is none other than Howie Hubler, the former Morgan Stanley bond trader who contrived to lose $9 billion on mortgage-backed securities and who is one of the great chumps in Michael Lewis’s new book. Hubler saw clearly that subprime mortgages were going to go bad, but he believed for far too long in the models which banks and ratings agencies used to get triple-A ratings for a bunch of nuclear waste. And so he ended up selling Deutsche Bank’s Greg Lippmann, and others, enormous amounts of credit protection on triple-A MBS in order to fund his bearish bets on the weaker end of the market. When the crisis then hit and correlations went to 1, Hubler lost billions — but not before walking away from the bank with a ten-figure bonus.
I have no problem with Hubler’s second act: he’s received the single most expensive education in mortgages that anybody could ever have, and it’s silly for that expensive education to go to waste. If he can turn LVG into a force for good in the housing market, that might make up for some tiny part of the chaos he caused during the crisis. I wish him and LVG luck — especially if they don’t turn into patent trolls who try to aggressively prevent other people from implementing similar ideas.