Comments on: Principal writedowns of the day, mortgage edition A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Tue, 27 Mar 2012 07:10:38 +0000 3/lawler-on-possible-fannie-and-freddie. html

Some context on when it “makes financial sense” for Frannie to do principal writedowns.

Mr Salmon why, why, why do you keep quoting this guy as if he is an even vaguely serious source.

By: Kiffmeister Mon, 26 Mar 2012 18:36:20 +0000 @MrRFox @GJOA and @dthor
Thanks for the very thoughtful comments on a topic we think about a lot here at the IMF. Even though we don’t see eye to eye on everything, you’ve all given me some food for thought!

By: MrRFox Mon, 26 Mar 2012 05:13:39 +0000 @ Kiffmeister, 24th – 8:28

I can think of some good incentives for borrowers to go with some kind of SAM deal with their banks on underwater loans – preservation of credit rating is probably the biggest item, assuming it’s not already too late for that; staying put in their present homes is another (leasing or buying elsewhere requires moving); below market rent should be plausible in theory as cap rates on leases are now higher (in many cases) than banks’ cost of funds/lending rates (leasing with a SAM option at below market rates could generate both more current income for the bank than a sale at current rates/prices and lower rent for the tenant than leasing in the open market).

Still, there is the balance sheet problem for the banks. Any kind of lease deal we’re talking about here requires the loan to be written down to the current value of the property of lower. Can banks really survive if all their underwater loans are written down to current FMV? Doubt it, at least without another capital infusion from some source. Hey – maybe the government could ….?

By: Strych09 Sat, 24 Mar 2012 16:20:24 +0000 I’d personally prefer Kiffmeister’s approach of letting underwater foreclosures take place, let the market find it’s bottom, and aid price discovery.

Calculating the NPV of a mortgage portfolio is fine, but from a behavioral finance perspective, we really do want to disincentivise people from thinking that if the value of a home goes up, they’ll reap the rewards, and if the value of a home goes down, the government will leap to their aid with some kind of a bailout. Principal writedowns just create profound moral hazard on the demand side.

By: Kiffmeister Sat, 24 Mar 2012 12:28:59 +0000 @MrRFox you make some really good points about Sams, but does the regular underwater “Joe Blow” enter into the complex lease and option transactions you describe? I can see “investors” playing games like that but maybe the program should be designed to exclude them?

By: Kiffmeister Sat, 24 Mar 2012 12:21:22 +0000 @GJOA As I said earlier to @dthor everything is murkier with the GSEs so I guess we just let underwater foreclosures slowly kill them off.

By: GJOA Sat, 24 Mar 2012 08:59:23 +0000 @Kiffmeister
Share Appreciation model:
1-Why FnF’s shareholders have to suffer the losses and ask for taxpayer money to fund the losses. Treasury can triple the incentives to do it, but the loss still exists.
2-How can FnF realize the profit if the home value increases.
3-How to hedge the incremental risk in their books for having a long position on a new asset (appreciation of the home value) if the mortgage already had insurance. Do we eat the previous insurance?
4-FnF’s mission is not to have a long position on home values, neither help borrowers. FnF are just housing market liquidity suppliers or market-makers (role of providing countercyclical liquidity).

It’s time for a judge to explain FnF’s charters to the american people.

By: MrRFox Sat, 24 Mar 2012 04:15:56 +0000 Allow me to pile-on with rest of the commenters – creating a powerful financial incentive for underwater borrowers to “go delinquent” so they can claim a principal write-down is bad policy. Can bank balance sheets survive such an experience? IDTS.

Doesn’t seem like SAMs (shared appreciation …) are the solution either. As an underwater borrower, why would I agree to share future gains when I can get them all for myself by leasing a different house and taking an option to purchase – or just buying outright at the lower current value? It could work if the rent offered in exchange for the SAM deal was below market rates, but then the bank would suffer lower current rental income (the only thing that can be booked as income, and the reason banks have always shunned SAMs) as well as a principal loss. IDTS.

By: Kiffmeister Sat, 24 Mar 2012 02:59:46 +0000 @dthor As I said before, we can mitigate the moral hazard risk with some form of shared appreciation. Without something like that, of course there’s a real risk of current underwater borrowers going delinquent to pick up the free lunch.

I agree with you, however, that GSE writedowns are a bit murkier, especially if they’re eligible for HAMP incentive payments, which perhaps they should not be for the reasons you give.

I also agree with you on your mortgage insurance point – the GSEs should writedown only when it makes expected NPV sense.

By: TFF Fri, 23 Mar 2012 20:12:45 +0000 “If they fail to make their rent payments, then they can be evicted just like any other delinquent renter.”

I.e. it requires a long and costly legal battle to evict them.

Depends on your state, I suppose… :)