Unstructured Finance

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.

In other words, the Fed’s efforts to buy up agency mortgage debt to keep rates low has done little to provide relief to borrowers whose loans are packed in private mortgage securities and they owe more money on their loans than their homes are worth. These borrowers have not been able to take advantage of record low mortgage rates, even as many of the private label bonds their loans are bundled into have soured in value.

As my colleagues¬† Samuel Forgione and Katya Wachtel have pointed out that’s been good news for investors in private mortgage bonds, including hedge funds, especially mortgage funds, but not so much for the actual borrowers.

Will FHFA opposition to principal reductions boost eminent domain efforts?

By Matthew Goldstein and Jennifer Ablan

There’s nothing surprising about FHFA head Ed DeMarco’s decision to nix the idea of writing down some of the debt owed by cash-strapped homeowners on mortgages guaranteed by Fannie and Freddie. DeMarco, whose agency regulates Fannie and Freddie, has been a consistent opponent of principal reductions–something we pointed out last October in our story on the need for a “great haircut” on consumer loans and including student and mortgage debt to stimulate the economy.

But DeMarco’s renewed opposition comes at a time that there is a growing consensus that something needs to be done on the housing front to get the U.S. economy going, as opposed to simply churning along at the current anemic rate of growth. More and more economists are saying that reducing mortgage debt will not only reduce foreclosures, it will give ordinary Americans more money to spend on goods and services.

It doesn’t take an MBA from Harvard to know that when people have spending power it translates into more demand and that usually prompts employers to hire more people to fill that demand.

Eminent Domain reader

Jenn Ablan and I have done a lot reporting on Mortgage Resolution Partners’ plan to get county governments and cities to use eminent domain to seize and restructure underwater mortgages. As we’ve reported, it’s an intriguing solution to the seemingly intractable problem of too much mortgage debt holding back the U.S. economy. But it’s also a controversial one that threatens to rewrite basic contractual rights and the whole notion of how we view mortgages in this country.

And then there’s the issue of just who are are the financiers behind Mortgage Resolution Partners and whether they’ve gone about selling their plan in the right way.

The debate over using eminent domain has sparked a lively debate on editorial pages, on blogs and in other media, and that debate is likely to continue now that Suffolk County, NY says it is looking at eminent domain just like San Bernardino County, Calif.¬† So here’s a bit of sampler of some of the differing views and coverage on this important topic:

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.

The confession season

By Matthew Goldstein and Jennifer Ablan

The year is not yet over and already the confessions are starting to roll in from some of the biggest U.S. money managers.

Bill Gross, manager of the world’s biggest bond fund, sent out a “mea culpa” letter late Friday to his many mom-and-pop investors, saying he’s sorry for putting up such bad numbers this year. Mea culpas from Pimco’s guiding light and the self-styled “bond king” are rare, largely because his Total Return Fund has long been one of the industry’s top performers.

But this year has been a tough one for Gross, who guessed wrong by betting heavily against U.S. Treasuries, which have turned out to be one of the biggest out-performers of 2011. The fixed income guru, who helps manage more than $1.2 trillion at Pimco, wasn’t farsighted enough to foresee a flight to Treasuries prompted by events like the European debt crisis, the battle over the U.S. debt ceiling and the general anemic state of the global economy.

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