Unstructured Finance

UF Weekend Reads

Two weeks of speechifying by the Dems and Reps has come to an end. Well not really–but the conventions are over. And for all the talk, there is one issue that got short-shrift–a solution to the nation’s still unfolding housing crisis.

Oh sure, there was talk about foreclosures and people struggling to pay the mortgages on their homes, but not a lot time for potential solutions.  And that’s unfortunate because as has been noted many times before, it’s going to be hard for the U.S. economy to take off as long as too many consumers are being crushed by mortgage debts they can barely afford.

Indeed, the disappointing August jobs report is a sober reminder of just how much work remains to get the economy humming again.  As we’ve said many times before on U,F it all still comes down to fixing housing, housing housing.

And after a long time without it, we welcome back Sam Forgione and his weekend reads:

From AR:

Managing a tail-risk hedge fund is trickier now than it was in 2008, writes Jan Alexander.

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:

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.

Mr. Geithner and the politics of condemnation

Matthew Goldstein and Jennifer Ablan

The idea of using eminent domain to help out homeowners who are underwater on their mortgages isn’t necessarily a new one.

Two years ago, a group of congressional leaders led by Rep. Brad Miller of North Carolina wrote to Treasury Secretary Tim Geithner recommending that the federal government consider buying underwater mortgages to stem the flood of home foreclosures. The Democratic congressman got two dozen of his colleagues to sign onto the proposal, which Geithner gave a pretty cool response to.

In a May 7, 2010 letter to the U.S. lawmakers, Geithner said the proposal had too many hurdles to be seriously considered. The Treasury secretary said eminent domain is a “complex and lengthy” proceeding. And he worried about the difficulty of  buying “mortgages out of the trusts and other securitization vehicles that own and control a substantial share of mortgage debt.”

Phil Angelides gives up his “secret formula”

By Matthew Goldstein and Jennifer Ablan

Phil Angelides, the former chairman of the commission set up by Congress to look into the causes of the financial crisis, is no longer part of a group seeking to turn a profit by investing in distressed mortgages.

A representative for Angelides emailed a statement to Reuters saying the former California state treasurer stepped down as executive chairman of the upstart firm, Mortgage Resolution Partners, on Jan. 27. Angelides, as we reported today, stepped down about two weeks after our exclusive story about his role with the firm was published by Reuters.

Angelides’ role sparked controversy because the firm touted its political connections as part of its “secret formula” for negotiating deals to buy distressed mortgages.

When (and where) the 1% talk about 99%

By Jennifer Ablan and Matthew Goldstein

The last place you’d think a group of Wall Street financiers and ex-politicians would convene to come up with a master plan for fixing the housing crisis is a luxury lodge overlooking the Golden Gate Bridge. But in November, during the height of the Occupy Wall Street protests, that’s where 30 rich and powerful people assembled to “do a good thing” for America.

The meeting at Cavallo Point in Sausalito, Calif., aimed to “hammer out a business plan and chart a course through 2012″ for an investment vehicle that intends to buy up troubled mortgages and help out the homeowners all the while making a 20 percent annual return. You can read the details here

The group is led by Phil Angelides, the California politician, land developer and most recently, the chairman of a federal commission who led investigations into why the financial markets collapsed. The Federal Crisis Inquiry Commission was criticized for failing to come up with any real proposals preventing another crisis. Yet it seems to have inspired Angelides (his tenure at the FCIC ended last February) and others to come up with a market-based solution to the housing debacle.

Bad data II

By Matthew Goldstein

Bad data continues to confound the U.S. government in its measurement of the economy, with the Federal Reserve Bank of New York noting it too has been a victim.

In the Fed’s most recent report on outstanding consumer debt, the nation’s central bank said it recently discovered it had been underestimating the total dollar amount of student loan debt for a number of years. In the report, the NY Fed said some of the under-counting may have stemmed from the methodology used by one of its vendors.

The Fed said it has fixed the problem, which was a significant one. The Fed says it may have been under-estimating outstanding student loan debt by some $290 billion.

At the intersection of Wall and Main

By Jennifer Ablan and Matthew Goldstein

Whether you agree with it or not, the Occupy Wall Street protests that began two months ago in New York have ignited a debate over income inequality and the political clout of the nation’s banks.

Before the protesters began camping out in Zuccotti Park in lower Manhattan, much of the conversation had  focused on the federal government’s debt and not the equally big debt run-up by U.S. consumers in the years before the financial crisis. Now it seems you can’t go a day without reading a story about the vast gulf between rich and poor and the shrinking middle class, or how the housing crisis won’t get fixed until something is done to alleviate the burden for millions of homeowners who are underwater on their mortgages.

Last month a group of graduate journalism students from Columbia University spent some time at the Occupy Wall Street encampment in Zuccotti where they did in-depth interviews with over 200 protesters. (This was before New York City moved to forbid people from sleeping out in the concrete plaza). And the students findings were surprising in that the OWS protesters weren’t just a bunch of unemployed hippies, who all vote Democratic. Rather, they found that the majority of protesters didn’t identify with either political party, 56 percent didn’t have private health insurance and just under 40 percent gave President Obame a grade of C for managing the economy.

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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