Felix Salmon

Howie Hubler’s second act

By Felix Salmon
March 24, 2010

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.

8 comments so far | RSS Comments RSS

This sounds pretty interesting. While, as you argue, it appears to be a win-win for borrowers and lenders, will the reduced value of the house be recorded in any official manner? I guess what I would worry about (as an academic) is that if there is no reporting of the recognized reduced value of the home, then house price indexes will not accurately reflect the true value of the house in public records.

Of course, this seems to be a feature, rather than a bug, for all parties involved as banks seem to be willing to do anything to avoid taking the corresponding principal write-down.

Posted by framed | Report as abusive

This is bs. What, a bond trader who puts other peoples money at risk at GS in instruments he doesn’t remotely understand is ‘admired’ when he intimidates authority that questions the legitimacy of trades that threaten the liquidity of the firm like a punk street gangbanger in a suit.

Do you know what transaction friction is in an economic system? This is pathetically waistful. This is a role for the Fed and US Treasury not private sector morons who’ve already proven their to inept to make feduciary financial decisions. The following quote from the hyperlink above says it all…”It is no different from me putting $20,000 in a sack on a kitchen table and saying, ‘This is your money,’” Frank Pallotta, the firm’s executive vice president, and a former Morgan Stanley banker, told me this week. “I can’t talk through numbers. But we’ve signed up many. We’re live and we’re rolling.”)

Felix, is this your form of crony reporting?

Posted by csodak | Report as abusive

Dear Felix Salmon: You never really responded fully to the posted substantiated comments/critiques of your defence of CDSs in your posts a week or so back. I suspect that this post will expose you to a similar level of substantial criticism – i.e. you are defending once again financial products that seek to profit off underlying market imperfections rather than offering an analysis aimed at how to resolve the deeper causes. E,g, as the previous poster noted, lack of transparency appears to be a feature vs. a defect of the offered product from a marketing standpoint. But how is this helpful to restoring confidence in markets?

Posted by spencercat | Report as abusive

This is highly distasteful; not only because of shady minus-multibillionaires involved at the top, but because the official numbers so blatantly don’t add up.

Where do you think the sucker cash bribes LVG’s offering come from? A bank-side write-down by any other name, is where. Just like with any other rotten old shylock consolidation, there’s a deal behind the scenes. You can bet on it.

Fence-sitting homeowners should run, not walk, rather than buy this Trojan gift horse.

Posted by HBC | Report as abusive

I really don’t understand the objections here. If a house falls in value, its reduced value is not normally “recorded in any official manner” unless and until it is sold. So why should that happen here, where there is no sale?

It’s true that the value of the *mortgage* should probably be reduced by some sum, maybe by layering onto the mortgages the contingent liabilities of the rewards. But how is that bad for the *homeowner*?

Posted by FelixSalmon | Report as abusive

I’m not really making any objection, just curious about how it works. You’re correct as there is no sale here, but there is a recognized reduction in value equal to the present value of the payment offered to the borrower. If we are to have indexes offering systematically unbiased information, then all such mutually agreed upon transactions should somehow be reflected in the data.

I would (and do) have the same questions about loan modifications using principal reductions.

That being said, there is clear evidence of a huge dead weight loss when banks foreclose on properties. If the LVG can identify the subset of borrowers that are most likely to strategically default if no intermediary steps in, then it appears to provide a lot of value to both borrowers and lenders.

Posted by framed | Report as abusive

This sounds a lot like the principal reduction program Bank of America announced a few days ago. Maybe I’m thick, but I don’t see why an outside group is needed to do this…

Posted by ChrisMaresca | Report as abusive

Dear Mr. Salmon,

You write that Mr. Hubler “might make up for some tiny part of the chaos he caused during the crisis” through his current venture.

I would suggest that his role was hardly “tiny” as it was his $9.0 billion loss that put in motion the rapid descent of Morgan Stanley, ultimately leading to the Federal Reserve’s rescue. If one believes — and I think many do — that Goldman Sachs would have followed MS into the abyss had it not been for the Fed’s intervention, then I think Mr. Hubler’s part in this crisis is much greater than you suggest.

Posted by dismayed | Report as abusive

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