Unstructured Finance

Money manager titans who can’t wait until 2014

The year can’t end fast enough for some of the world’s biggest investors.

Bill Gross, who many like to consider the King of Bonds, lost one of his prized titles last week when his PIMCO Total Return Fund was stripped of its status as the world’s largest mutual fund because of lagging performance and a swamp of investor redemptions.

The PIMCO Total Return Fund — somewhat of a benchmark for many bond fund managers — had outflows of $4.4 billion in October, marking the fund’s sixth straight month of investor withdrawals, and lowered its assets to $248 billion, according to Morningstar.

For the year, the PIMCO Total Return Fund has had outflows of about $33.2 billion. The Vanguard Total Stock Market Index now holds the title of world’s largest mutual fund with $251.1 billion.

Fears of rising interest rates once the Federal Reserve scales back its extraordinary stimulus have resulted in continued net cash outflows by investors and led to Gross’s fund being down 1.36 percent for the year — beating the industry benchmark but lagging behind many of the fund’s competitors.

The housing proposal that won’t die

One of the biggest economic stories this year has been the recovery in U.S. home prices. But for the more than 11 million homeowners stuck with a mortgage that’s worth more than the value of their home, it has felt more like being Bill Murray in the movie Groundhog Day.

The housing crisis may be over for Blackstone, Colony, American Homes 4 Rent and other deep-pocketed investment firms snapping up foreclosed homes with cheap money courtesy of the Federal Reserve, but for many Americans they are still living with it some five years later.

So maybe that’s why  a controversial idea of using the government’s power of condemnation to seize and restructure distressed mortgages in order to provide debt relief to struggling homeowners  just won’t go away, even though many think it’s unconstitutional and bond investors have rallied to savage the proposal.

One more try at the Great Refi

By Matthew Goldstein

Don’t be surprised if President Obama includes a line or two in his State of Union address this evening about the need for a plan to allow millions of struggling homeowners whose mortgages are packaged into so-called private label mortgage-backed securities to get a chance to either refinance their loans or restructure them.

The Washington Post is reporting today that mortgage refinancing may be one of the laundry list of items Obama will talk about tonight. And for several months now, investors in private mortgage-securities–deals issued by Wall Street banks and financial firms and not guaranteed by Fannie or Freddie–have been quietly bracing for the Obama administration to move forward with a new refinancing effort.

Up until now, the federal government’s main attempts at trying to help homeowners take advantage of the Federal Reserve’s efforts to keep pushing interest rates to zero has been to prod banks and mortgage servicers to refinance home loans held in so-called agency debt guaranteed by Fannie and Freddie. But programs like HAMP and HARP have provided little relief to the millions of homeowners whose loans are held in private label securities.

Eminent domain or principal reductions, the bottom line is reducing mortgage debt

By Matthew Goldstein and Jennifer Ablan

It’s been almost six months since we first reported on the plan by Mortgage Resolution Partners to find a community willing to use eminent domain to condemn and restructure underwater mortgages and pay a handsome fee to the private investment group for overseeing this process. The proposal has generated a lot interest, debate and heat, but so far  no community is yet willing to go down this road.

Still, Steven Gluckstern, chief executive of the San Francisco-based group, said he’s confident that by early next year some community–most likely one in California–will go forward with the idea of condemning underwater mortgages and rewriting them so cash-strapped homeowners can afford the payments and stay in their homes.

But Gluckstern, in an interview with ReutersTV as part of the Reuters Investment 2013 Outlook Summit, was also a bit realistic and said if nothing gets done in the first-half of next year it may be time for his group to pack it in. In the interview, Gluckstern said he and his investors were a little taken aback by the organized opposition from investors in mortgage-backed securities, who would take a financial hit in any condemnation proceeding.

The eminent domain brush fire

By Matthew Goldstein

It didn’t take long for the powerful voices on Wall Street to rise up in protest over an intriguing and controversial idea to condemn distressed mortgages through local government’s power of eminent domain.

Two weeks after Jenn Ablan and I first reported that officials in San Bernardino County, Calif. were giving serious consideration to the novel idea being pushed by financier-backed Mortgage Resolution Partners, 18 financial trade groups are voicing strong objections. The groups, led by the Securities Industry and Financial Markets Association, are concerned that if local governments can seize underwater mortgages it might discourage bank lending. Why? The argument is that if it can happen now, who knows when local governments might move to condemn mortgages again–crisis or not.

The unified opposition may make it difficult for Mortgage Resolution Partners, which says it is talking to public officials in Nevada, Florida and on Capitol Hill, to get much traction for its plan outside of San Bernardino. And if San Bernardino County goes forward with using private money to buy-up underwater mortgages held by banks and in mortgage-backed securities, a U.S. Supreme Court lawsuit challenging the legality of the measure seems more than likely.

Eminent domain for underwater mortgages could have biggest impact on banks

By Matthew Goldstein

A controversial idea of using the power of eminent domain to seize underwater mortgages may hurt some of the nation’s biggest banks more than investors in mortgage-backed securities.

The reason is the process of condemning a mortgage in which a borrower owes more money than their homes are worth will likely result in a seizure of any home equity loan–or second lien–on that property as well. And that could spell trouble for many U.S. banks, which at the end of the first quarter had $700 billion in second liens on their books, according to SNL Financial.

The trouble is that analysts say many banks have not adequately reserved against losses on those second liens or taken write-downs to reflect the impairment in value on the underlying mortgages. So an outright seizure of those second liens by a local governments could result in unexpected losses for the banks.

Debts no honest man could pay

By Matthew Goldstein

For months now we’ve been hearing a lot about the $14 trillion in debt owed by the U.S. government. But there’s been far too little talk about the almost equally high debt tab owed by U.S. consumers.

The Federal Reserve recently reported that total outstanding debt owed by U.S. consumers was $11.4 trillion, down from its third-quarter 2008 peak of $12.5 trillion. At that pace, it could take years for U.S. consumers to delever, or in plain English–reduce the debts they owe on their homes, credit cards, autos and student loans. But when it comes to the staggering sum of consumer debt in this country, it’s pretty clear that time is not on our side.

In fact, the longer it takes for consumers to pay-down their debts, it simply means demand for homes, autos and other big ticket goods will remain lax. And that means the unemployment rate won’t get much lower than its current 9 percent rate anytime soon. In fact, with all the signs pointing to a double-dip recession, unemployment could very well inch higher in the next few months.

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