Opinion

Felix Salmon

Why the AGs are right to leave second liens alone

Felix Salmon
Mar 17, 2011 16:00 UTC

Jesse Eisinger has a conspiracy theory about the way that second liens are treated in the proposed mortgage settlement:

The proposed agreement — which is preliminary and subject to intense negotiations being led by Tom Miller, the attorney general of Iowa — would allow banks to treat second mortgages, like home equity lines of credit, just like the first mortgages. Under the proposal, when a bank writes the principal down on the first mortgage, the second should be written down “at least proportionately to the first.”

Suddenly, the banks would be given license to subvert the rules of payment hierarchy, as Gretchen Morgenson pointed out in The New York Times on Sunday. Yes, the clause says the other alternative is to wipe out the second’s value entirely, but given a choice, the banks would be extremely unlikely to do that…

When the principal on the first mortgage is reduced, the second lien is typically wiped out…

The proposal “seems astonishingly generous to the second-lien holders,” said Arthur Wilmarth, a law professor at George Washington University. “And who are those? Of course, they are the big mortgage servicers.”

I don’t understand this at all — especially not the “suddenly” bit. The mortgage settlement is designed to lay out basic minimum standards that mortgage servicers have to live up to. There have been a lot of sleazy practices to date, and the settlement is designed to put an end to such practices. But if you owe a bank a large amount of money on your home equity line, it’s not sleazy for the bank to ask you to pay at least some of that money back.

In any event, the settlement is in no sense allowing banks to do something they weren’t allowed to do before. The idea is to set rules for banks servicing first liens, remember — and the owner of the first lien has always had the freedom to leave the second lien entirely untouched if they want. In most cases, banks don’t actually want to do that. If you’re taking a hit on a secured loan, you don’t want to be bailing out someone whose debt junior to your own.

So the banks will always push as hard for the second lien to be written down as much as possible, except perhaps when the owner of the second lien is the same as the owner of the first. Jesse’s contention that the banks would be “extremely unlikely” to wipe out the second entirely makes no sense to me — that’s exactly what they’re going to want to do, in pretty much every case when they don’t own the second lien themselves. And in any case the settlement doesn’t allow the banks to do anything they haven’t been able to do all along.

Morgenson says that the proposal is “turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later” — but what we’re talking about here is a voluntary loan modification, not a foreclosure liquidation. The law determines what happens to the proceeds of a foreclosure sale; it says nothing about what banks can or can’t do of their own volition. If I lend you money, I have every legal right to forgive the loan entirely if I want, no matter how many creditors junior to me end up getting paid in full.

Eisinger and Morgenson might want to force banks to write second liens down to zero as a matter of public policy whenever there’s a loan mod on the first, but that would be step too far for me. Sophisticated banks already do a delicate dance with each other in these situations: the owner of the first lien wants the owner of the second to write down that loan as much as possible, but the owner of the second has a certain amount of negotiating leverage in terms of being able to hold up the modification or even push for outright foreclosure.

Let the banks dance this way: the outcome is normally fine, and no one is being unfairly taken advantage of. The AGs’ settlement seeks to enforce basic decency in mortgage servicing; it shouldn’t also try to enforce dubious policy on second liens.

Update: In the comments, ErnieD and Jesse Eisinger explain what the issue is here. The banks securitized the first liens, but they own the second liens. So modifying a first lien costs them much less than writing down a second lien. In that situation, there’s a big conflict of interest at servicers, which are owned by banks, and have a financial interest in transferring too much value from the first lien holders to the second lien holders.

This is a good point, but I’m still not convinced that the AGs’ settlement is the right and proper place to address it. Servicers are treating borrowers badly, and the settlement addresses that. On top of that, they may or may not be treating bondholders badly, too. Trying to address that issue simultaneously I think makes an already-complex agreement so hard to construct that it would never see the light of day.

COMMENT

It is acceptable, but sad, that the stupid and blind can’t see or understand the implications of a Naked Emperor riding an Elephant indoors.

As intelligent sighted people it is amazing that Americans are still missing the implications and continue to allow it to happen without comment while the guy cleaning up the poop left behind is arrested for having contraband elephant poop (MARS FTC Rules)…

Hopefully Americans will see the truth and ask why the emperor is naked and riding an elephant in the first place…

Continue to call a Naked Emperor, naked, and have the due diligence done to make the banks pay one poopy loan at a time… Negotiated private settlements are here! Do not expect the system will produce a just settlement by itself. We must all fight individually to compel a fair outcome for ourselves. Educate and arm yourself then please step into the ring! The Banks may have unlimited resources but Americans have an unlimited will to fight for justice!

http://diligencegroupllc.net/

http://diligencegroupllc.net/

American Homeowner

-AH

Posted by ahouse1 | Report as abusive

Counterparties

Felix Salmon
Mar 17, 2011 06:50 UTC

Google Offers Advanced Chat for Collaborative Doc Editing — Wired

Goldman’s selling Litton. You could probably get it for 15 cents if you asked nicely — NYT

Why BGR switched back to an AT&T iPhone — BGR

This could be great: “Are Federal Judges Competent? Dilettantes in an Age of Economic Expertise” by Jed Rakoff — Fordham

Just catching up on this great post on interchange — Rortybomb

FX markets deal Japan another blow

Felix Salmon
Mar 16, 2011 23:01 UTC

If FX moves were measured on the Richter scale, this one would be a monster — the yen managed to strengthen by 4% against the dollar and almost 6% against the Australian dollar in a matter of minutes.

This move is overwhelmingly due to technicals, rather than fundamentals: you don’t get jumps like this because people have donated a few million bucks in aid which is now being converted to yen. It’s not even because Mrs Watanabe is cashing in her high-yielding Aussie dollars because she needs the cash in yen right now. No: this is a prime example of how even an economy the size of Japan can be buffeted hard by international capital flows in the multi-trillion-dollar FX market.

The Japanese currency is now stronger than it has been at any time since WWII, at exactly the point at which it needs to start cranking up its export engine. And on the face of it the move doesn’t make a lot of sense: countries’ currencies are just as likely to fall in the wake of a natural disaster as they are to rise.

But what we’re seeing here is a function of ultra-leveraged hedge funds unwinding their carry trades. If you borrowed yen and invested in higher-yielding currencies like the Australian dollar or the South African rand, you made lots of money so long as the rate of appreciation of the yen was lower than the interest rate you were getting in the target currency. But when the yen starts to appreciate dramatically, you get margin calls, which force you to buy a lot of yen in an illiquid market, which in turn drives the yen up even further, which in turn not only increases the size of your margin call but also triggers a large number of stop-loss orders and other triggers embedded in exotic FX options. The result can be massive, as we’ve just seen.

The G7 is reportedly going to try to help out “to support financial stability in Japan”, but it’s far from obvious what they can do: currency intervention is rarely effective when you’re trying to push against the direction markets naturally want to go. It seems that Japan, after being hit first by an earthquake, then by a tsunami, and then by nuclear disaster, is now going to have to suffer the effects of a volatile and overvalued currency as well. It’s the last thing the country needs, and it does help bolster the case for some kind of Tobin tax.

COMMENT

As you wish, Greenfelder…

I’m willing to bet that my understanding of Chemistry surpasses your own, however.

Posted by TFF | Report as abusive

How blogs have changed journalism

Felix Salmon
Mar 16, 2011 21:08 UTC

Benzinga’s Laura Hlebasko sent me some questions about blogs and online media for a feature she’s writing. Here they are, along with my answers:

1) As an established journalist, what is the difference between you writing an article for traditional media and you writing an article for a blog? What do you like and dislike, or see as the benefits and limitations, of those mediums when you are reporting on a topic?

I find pretty big differences in how I write, depending on whether it’s for a traditional media outlet or for the blog. I have a more conversational voice on the blog — I think of any given post as being part of a much broader conversation between bloggers and between me and my readers. Nearly all of my posts are reactions to something elsewhere online, and I try to be as generous as I can with links. I’m also not one of those bloggers who likes breaking news: often I’ll actually wait for the news to be broken elsewhere before weighing in with my view, since it can be dangerous to mix subjective opinions into the reporting of hard facts.

Traditional media outlets, by contrast, generally have an incomprehensible love affair with Microsoft Word — a piece of software I loathe and try to use as little as possible. It’s generally more difficult to insert links, especially when I’m dealing with people who edit for print first and who then just put that edited copy up online. The pieces have to be much more self-contained, and you have to be much more careful about assuming any kind of expertise on the part of your readers: if they’re reading your stuff on paper, then it’s much harder for them to Google anything they don’t understand.

The upside of traditional media is that you generally put a lot more time and effort into reporting, editing, and illustrating stories. They go through many iterations before being published, and nearly every iteration makes them better. What you lose in quantity, you often make up in quality.

2) Most of the talk about blogging and its impact on traditional journalism has centered around declining readership and revenues for traditional print media, questionable credibility of blogs, etc., etc.,– what are some of the unseen, underreported, or not-yet-fully-realized impact of blog reporting vs. traditional journalism?

The main impact I think is the way that blog reporting can iterate. In traditional media, you report the story and then you publish it; with blogs, you can start with something much less fully formed and then come back at it over time in many ways and from many angles. Every print journalist knows the feeling of publishing a story which is read by great sources who then provide lots of really good information which would have been great in the original piece. Bloggers don’t worry about that: they just put up a new post, or an update.

Blogs can also geek out in a way that traditional journalists can’t. There’s no space constraint online, and so if I want to spend 5,000 words writing about vulture funds, or a reporter at HuffPo wants to spend 4,000 words getting into the weeds of regulatory reform, they can. Or look at the Ars Technica reviews of every new Macintosh operating system. That kind of material can be incredibly popular, but it just doesn’t work in print. Blogs have a reputation for being superficial, but they can also be much more detailed and accurate than traditional journalism. Not to mention the fact that they’re often written by genuine experts in their fields, rather than by journalists.

3) How do you think blogging has changed the nature of the news and information people consume? Since blogging allows for more reader-driven content than traditional newspapers, what do you see readers choosing to focus on in terms of news?

Blogging has clearly given readers a much wider range of news sources to choose from, and it’s great that readers are no longer confined to getting their news from a handful of outlets. Everybody’s different, though: some people become loyal to certain sites, others get their news from Twitter or Facebook or Google Reader, others still just follow links from the AOL home page because they haven’t updated their browser settings since 1996. In aggregate, it’s easy to see what people are reading: just look at the ubiquitous “most-read” lists which are on pretty much every news site these days. But the aggregate figures hide a wonderfully diverse range of unique individual reading patterns. And the more you generalize, the less useful the information you’re getting becomes. The web is much better at narrowcasting than it is at broadcasting.

4) How has Twitter impacted journalism?

It’s made news reporting much more distributed: no photojournalist produced anything like this, for example. It’s massively increased the velocity of news: people now know what’s going on before it’s formally reported. It’s made it easier to find things you didn’t know you were interested in. It’s given journalists a much more human voice, an outlet where they can be themselves. It’s helped build a culture of linking to wonderful stuff. It’s made the world smaller, and it’s made news travel faster than ever. Overall, it’s been great.

5) Are there any aspects of journalism that are “untouchable”, that won’t (or shouldn’t) change no matter what new technology comes along?

I think that depends on what you mean by journalism. Professional journalists should always be beholden to high standards of professionalism, ethics, and accuracy. Random people with a Twitter account, not so much. And of course there’s a spectrum between the two, there isn’t a bright line.

6) What is/are the main way(s) blogging has evolved since you began, and how do you see it evolving both on its own, and in its effects on journalism, in the future?

Old-school blogging, where an individual puts their own work up on a dedicated website in reverse chronological order, is clearly on the decline. It’s been replaced by Twitter and Facebook, on the micropublishing end of things, and by big professional sites like Business Insider or Huffington Post, at the other end of the spectrum. Mainstream news organizations have all embraced blogging to a greater or lesser extent, although a lot of them use the existence of blogs as an excuse not to do much in the way of external linking elsewhere on their websites. In general, news sites are becoming bloggier, with more assiduous editorial standards, while big blog sites are becoming newsier; that trend is likely to continue. But it’s still possible to make a name for yourself by starting a blog! And it’s also a great way of improving your writing and general communication skills. More people should do it!

COMMENT

hi, it good & tell us difference between blog and tradional

Posted by frhbtol | Report as abusive

Give covered bonds a chance

Felix Salmon
Mar 16, 2011 19:11 UTC

It’s good news that Tim Geithner is throwing his weight behind efforts to build a US market in covered bonds. This made sense back in 2008, when I did my best to explain what exactly covered bonds are, and it makes sense today as well. The more different ways that mortgages can be funded, the less pressure there is on the US government and government-owned agencies like Fannie Mae and Freddie Mac to fund just about everything.

The problem is that the government has lots of different arms, and one such arm — the FDIC — has issues with covered bonds. At the moment, the FDIC can wipe out billions of dollars in unsecured bank debt when it takes over a failing institution, like we saw with WaMu. If banks moved to a covered-bond system, then a lot of bank debt might be secured rather than unsecured, which raises the prospect of bigger losses for the FDIC.

My feeling is that the importance of fixing the broken mortgage-funding system is more urgent, right now, than shoring up the FDIC — especially given that the covered bond market, if and when it emerges, will in the first instance be very small and pose little systemic risk. Covered bonds have an important role to play, here, so let’s at least make them possible. They might well never really take off. But it’s worth a try.

COMMENT

correction:

Greycap notes the important, broader point. Simply put, banks should be allowed to issue covered bonds all they want but they should NOT be able to own them.

Posted by AABender1 | Report as abusive

Donating to Japan, cont.

Felix Salmon
Mar 16, 2011 17:15 UTC

Stephanie Strom has a fantastic article in the NYT today, which actually reports out the whole issue of why it’s silly to donate money to Japan. Go read the whole thing, but here’s some choice bits:

The Japanese Red Cross, for example, has said repeatedly since the day after the earthquake that it does not want or need outside assistance. But that has not stopped the American Red Cross from raising $34 million through Tuesday afternoon in the name of Japan’s disaster victims…

The Japanese government so far has accepted help from only 15 of the 102 countries that have volunteered aid, and from small teams with special expertise from a handful of nonprofit groups…

Many of the groups raising money in Japan’s name are still uncertain to whom or to where the money will go…

Holden Karnofsky, a founder of GiveWell, a Web site that researches charities, said he was struck by how quickly many nonprofit groups had moved to create ads using keywords like “Japan,” “earthquake,” “disaster,” and “help” to improve the chances of their ads showing up on Google when the words were used in search queries.

“Charities are aggressively soliciting donations around this disaster, and I don’t believe these donations necessarily are going to be used for relief or recovery in Japan because they aren’t needed for that,” Mr. Karnofsky said. “The Japanese government has made it clear it has the resources it needs for this disaster.”

The NYT has, smartly, disabled commenting on the article — people get really emotional about this subject, and can be astonishingly bad at understanding what you’re saying. (No, Bill O’Reilly, I did not tell the government not to send aid; I did not say that there wasn’t much relief in Haiti, and I certainly didn’t say that we shouldn’t send money because “we don’t have any money, we’re bankrupt.”) But Strom’s message is important — the Japanese Red Cross is very explicitly and repeatedly saying it neither wants nor needs the money that the American Red Cross is raising for it. So if you’re going to donate money to a desperate cause, there are much better ways of doing so.

COMMENT

Mr. Salmon, I understand and generally agree with your notions here. However, please make sure your words fit what you really want to say, and don’t just intend to incite, e.g., using the word “silly” when referring to donations. The inference and stigma attached to silliness is meant only to hurt, and though I don’t believe that is your intention, you have still relayed that message.

Posted by flerg777 | Report as abusive

Disrupting the banking system

Felix Salmon
Mar 16, 2011 16:17 UTC

I enjoyed moderating my SXSW panel yesterday on whether and how Internet startups are disrupting the banking system. There was a good range of small, tech-savvy panelists, and they’re attacking the financial giants in very different ways.

Sean Harper from Fee Fighters has a website designed to make it much easier for merchants to get the best deal from their payments processor — his company doesn’t take any risks itself, and is essentially a merchant-friendly broker in an area which has historically been plagued with opacity. Noah Breslow from On Deck Capital takes credit risk: it’s an online small-business lender, which now has about $100 million in loans outstanding, and which has automated everything from origination and underwriting through to loan servicing. Shamir Karkal from Bank Simple is starting up a whole new retail-focused bank, which I’ve written a lot about in the past — but he doesn’t have his own banking license, instead choosing to use an already-existing bank to speed up the time to launch. Finally Suresh Ramamurthi actually went and bought a tiny bank in Kansas and is looking to discover from the inside how the deep plumbing of the banking system works in practice and how it can be improved. It’s a very long-term project, but it could be by far the most important of the four.

All four of these companies are doing very interesting things, and I’m sure the first three will take some small amount of market share from the big banks by offering friendlier, cheaper, and more efficient services. But my main question for the panel was whether they would actually change the financial system at all, or whether they will always be operating at the margins while the huge players continue to do what they’ve always done, and innovate on their own terms at at their own speed.

Certainly big banks and other financial players innovate slowly. They’re huge, and huge companies can’t be nimble. And they’re also hobbled by trying to combine lots of incompatible legacy systems from all the various smaller banks that they’ve bought over the years. But at the same time, the startups are never going to scale up to megabank size, no matter how attractive their value proposition is. They’ll do clever things with early adopters, and then eventually the big banks will follow suit, or else simply buy them. Huge banks don’t put much store in first-mover advantage: they’re happy letting startups do innovation and then copying what works. It’s certainly a lot easier than putting enormous amounts of money and effort into products like Virtual Wallet which have difficulty getting traction.

Banks also have to deal with vastly more regulatory oversight than startups. To a large degree startups perform the important role of being able to innovate in a largely unregulated environment, and create products which can then be tailored to meet regulators’ requirements. In that sense, it’s good news that the startups aren’t truly disruptive in the sense of replacing the old business models, because otherwise we’d be looking at something which was fundamentally a regulatory arbitrage and which would move even more of the banking system into the regulatory shadows.

And then, this morning, as SXSW Interactive was coming to an end, Visa made what could well turn out to be a truly game-changing announcement: it has built a system allowing individuals to transfer money directly to anybody with a Visa credit or debit card. You don’t even need their card number — an email address or phone number will suffice.

As far as I can tell, this service will only be available, in the first instance, to customers of banks who have signed up for it: you can’t just sign up for it yourself, on your own. But I can easily see it becoming the largest person-to-person payments system in the country. Does anyone have numbers on how many Americans have Visa cards of some description, versus how many have, say, a PayPal account? Systems like this don’t need to be first, or best. They just need to be big, and Visa’s great at being big.

COMMENT

Felix, thanks for the response. In some industries, it is possible to find speakers/panelists who don’t consider themselves an extension of their corporate marketing department, but in tech the most interesting ideas seem to be tied to a business opportunity. I’ve never really found a good way around it, and on occasion in the past I’ve had to battle the conference hierarchy to hear these ideas (or not to hear them, if they were a sponsor). It has always left a bad taste in my mouth.

Posted by Curmudgeon | Report as abusive

The gastronomics of bad service

Felix Salmon
Mar 16, 2011 15:20 UTC

My first monthly Gastronomics column is up at NYMag, on the subject of the economics of bad service. Why are restaurants which do the best job of maximizing discomfort, inconvenience, and noise also the ones which are the most popular? My theory is that it’s all about signaling: that if restaurants succeed at manufacturing crowds and long waits, people reckon that the place must be good, otherwise everybody else would never put up with such things. And so they become self-fulfilling.

There’s a lot more other stuff to cover in this space, so do let me know if you’re in the restaurant/bar business and are happy talking about matters financial and economic. Or if you have any questions which have been niggling at you about the way that these places make money.

Update: Via Eater, Steve Plotnicki explains the downside of foisting bad service on your customers.

COMMENT

Throw “bad food” into the mix of “maximizing discomfort, inconvenience, and noise” and I suspect it won’t remain popular for long–even with the ‘in-crowd.’

Posted by Samdog_07 | Report as abusive

Counterparties

Felix Salmon
Mar 16, 2011 06:23 UTC

What it looks like when you combine serious and unserious news stories — someecards

“The great trick of the last few years has been convincing private and public-sector workers that their interests somehow diverge from one another” — WaPo

Nice video on congestion pricing — Streetfilms

Really smart comment on the dynamics of urban transportation — PaytonC

COMMENT

The Streetfilm series, including the Congestion link here, is excellent. A must read for anyone thinking about improving mobility in urban areas.

Posted by Lilguy | Report as abusive
  •