Tom Brown - Enough With the Loan Mods!

I thought the article below from Bankstock.com's Tom Brown was worth posting in full:

“We know how to prevent foreclosures,” Paul Willen, a senior economist from the Boston Fed, said at a housing conference in Washington yesterday. “We just need to be prepared to spend the money.”

Just “be prepared to spend the money”! Economists sometimes make things sound so simple, don’t they? Alas, I have a sense that the “we” Willen was referring to when he was pointing out who should be prepared to do the paying included more than just himself and the other Fed economists in the room. He was being more expansive.  Willen meant all of us. Taxpayers. We’re the ones, according to the Beltway conventional wisdom Willen yesterday found himself spouting, who ought to be shelling out money to pay for large-scale loan modifications so that delinquent borrowers to can stay in their homes and “prevent foreclosures.”

Thanks for the insight, Paul! Now, I have a question: Why me? I have my own mortgage, thanks very much. Why do I have to be on the hook for someone else’s, too? If a delinquent borrower, through bad luck or bad judgment, finds himself unable to meet a loan agreement that he freely entered into, let him go through the same thing that generations of defaulted borrowers before him have: foreclosure. No one’s being thrown in jail or being forced to listen to Justin Beiber. You borrowed money from a bank, with your house as collateral. You can’t repay your loan. The bank gets your house. It’s time to move on. Literally.   

Do I sound too hard-hearted? Well, if you’re asking me to help finance an alternate transaction—a loan mod—I have a right to, don’t I? And, anyway, for all the sad-sackery we’ve had to listen for the past three years about the tragedy of families losing their homes as a result of the housing blowup, what, really, is so bad about foreclosure, from a borrower’s perspective? The typical defaulted borrower is a year-and-a-half behind on his mortgage by the time eviction finally happens—which means that that’s how long he’s been able to live rent-free. On the face of it, that doesn’t sound like a bad deal. And if the property is located in a market that’s depressed economically (which it likely is), the borrower is unchained from it at last, and can pick up and move to somewhere with a better jobs outlook. Why’s that bad? It’s a hassle, sure, and embarrassing. Life’s full of hassles and embarrassments. But foreclosure is a fresh start, too, and one that solves both the borrower’s and the bank’s problem the most economical way possible. Why do I (and the bank) have to foot the bill for an alternative—especially since the odds are overwhelming that borrower will go ahead a default on the modified loan, too? 

Washington’s fetishisation of loan modifications as a cure-all for the housing bust is idiotic. If the housing bubble and crash taught us anything, it’s that home ownership is not a right. Defaulted borrowers don’t deserve extraordinary taxpayer- (or lender-) financed measures that will allow them to stay in their homes. They deserve to be foreclosed on. Let the cycle take its course, and leave my wallet out of it.

Not Union Jack - Union Mohammed

From Britain's Daily Mail:



Mohammed is now the most popular name for newborn boys in England and Wales ahead of Jack and Harry, it emerged today.


The name, when 12 different spellings were included, was given to 7,549 youngsters in 2009, official statistics revealed.


Oliver was the second most popular and it was given to 7,364 boys in England and Wales in 12 months.

Passing Your Way to Victory?

The conventional wisdom in college football today is that if you are not a pass oriented offense, you will struggle to win, attract recruits, excite fans, etc., et.c, etc.


Maybe we should take Sherlock Holmes' advice of not theorizing before we have the data (from Coach Wyatt's blog)



(1) Halfway through this season, in the list of the top 25 major college rushing teams (yards per game), there is not one with a losing record; you have to go clear to number 28  before finding one (Wake Forest, at 2-4).


(2) Among the top major college passing teams, however, there are three teams in the top 25 with losing records: Duke at 15, Central Michigan at 18 and Arkansas State at 24.


(3) The Top 10 rushing teams have an overall record of 50-8 (.862) ; the Top 10 passing teams are 35-15 (.700)


(4) The Top 25 rushing teams are 116-30 overall (.795) ; the Top 25 passing teams are 83-48 (.633)

Uh-Oh

The information below came from John Mauldin's latest letter. The excerpt below was an email sent to one of Mauldin's friends. The person who sent the email is in the financial services industry:


This is very long, but I think it's extremely important that you ready every word of it:



"Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper...only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.


"Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn't go anywhere: it stayed in the offices of the S&L down the street.


"But once mortgage loan securitization happened, things got sloppy...they got sloppy by the very nature of mortgage-backed securities.


"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.


"Therefore, as everyone knows, the loans were 'bundled' into REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced & diced"...split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.


"This slicing and dicing created 'senior tranches,' where the loans would likely be paid in full, if the past history of mortgage loan statistics was to be believed. And it also created 'junior tranches,' where the loans might well default, again according to past history and statistics. (A whole range of tranches was created, of course, but for the purposes of this discussion we can ignore all those countless other variations.)


"These various tranches were sold to different investors, according to their risk appetite. That's why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds.


"But here's the key issue: When an MBS was first created, all the mortgages were pristine...none had defaulted yet, because they were all brand-new loans. Statistically, some would default and some others would be paid back in full...but which ones specifically would default? No one knew, of course. If I toss a coin 1,000 times, statistically, 500 tosses the coin will land heads...but what will the result be of, say, the 723rd toss? No one knows.


"Same with mortgages.


"So in fact, it wasn't that the riskier loans were in junior tranches and the safer ones were in senior tranches: rather, all the loans were in the REMIC, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder last.


"But who were the owners of the junior-tranche bond and the senior-tranche bonds? Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn't be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond.


"Therefore, how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier tranche?


"Enter stage right the famed MERS...the Mortgage Electronic Registration System.


"MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac (yes, those two again ...I know, I know: like the chlamydia and the gonorrhea of the financial world...you cure 'em, but they just keep coming back).


"The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially where the digitized mortgage notes were sliced and diced and rearranged so as to create the mortgage-backed securities. Think of MERS as Dr. Frankenstein's operating table, where the beast got put together.


"However, legally...and this is the important part...MERS didn't hold any mortgage notes: the true owner of the mortgage notes should have been the REMICs.


"But the REMICs didn't own the notes either, because of a fluke of the ratings agencies: the REMICs had to be "bankruptcy remote," in order to get the precious ratings needed to peddle mortgage-backed Securities to institutional investors.


"So somewhere between the REMICs and MERS, the chain of title was broken.


"Now, what does 'broken chain of title' mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it's the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the 'chain of title.'


"You can endorse the note as many times as you please...but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.


"If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.


"To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.


"Read that last sentence again, please. Don't worry, I'll wait.


"You read it again? Good: Now you see the can of worms that's opening up.


"The broken chain of title might not have been an issue if there hadn't been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn't have bothered to check to see that the paperwork was in order.


"But as everyone knows, following the housing collapse of 2007-'10-and-counting, there has been a boatload of foreclosures...and foreclosures on a lot of people who weren't sloppy bums who skipped out on their mortgage payments, but smart and cautious people who got squeezed by circumstances.


"These people started contesting their foreclosures and evictions, and so started looking into the chain-of-title issue, and that's when the paperwork became important. So the chain of title became crucial and the botched paperwork became a nontrivial issue.


"Now, the banks had hired 'foreclosure mills'...law firms that specialized in foreclosures...in order to handle the massive volume of foreclosures and evictions that occurred because of the housing crisis. The foreclosure mills, as one would expect, were the first to spot the broken chain of titles.


"Well, what do you know, it turns out that these foreclosure mills might have faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby 'proving' that the banks had judicial standing to foreclose on delinquent mortgages. These foreclosure mills might have even forged the loan note itself...


"Wait, why am I hedging? The foreclosure mills did actually, deliberately, and categorically fake and falsify documents, in order to expedite these foreclosures and evictions. Yves Smith at Naked Capitalism, who has been all over this story, put up a price list for this 'service' from a company called DocX...yes, a price list for forged documents. Talk about your one-stop shopping!


"So in other words, a massive fraud was carried out, with the inevitable innocent bystanders getting caught up in the fraud: the guy who got foreclosed and evicted from his home in Florida, even though he didn't actually have a mortgage, and in fact owned his house free -and clear. The family that was foreclosed and evicted, even though they had a perfect mortgage payment record. Et cetera, depressing et cetera.


"Now, the reason this all came to light is not because too many people were getting screwed by the banks or the government or someone with some power saw what was going on and decided to put a stop to it...that would have been nice, to see a shining knight in armor, riding on a white horse.


"But that's not how America works nowadays.


"No, alarm bells started going off when the title insurance companies started to refuse to insure the titles.


"In every sale, a title insurance company insures that the title is free -and clear ...that the prospective buyer is in fact buying a properly vetted house, with its title issues all in order. Title insurance companies stopped providing their service because...of course...they didn't want to expose themselves to the risk that the chain of title had been broken, and that the bank had illegally foreclosed on the previous owner.


"That's when things started getting interesting: that's when the attorneys general of various states started snooping around and making noises (elections are coming up, after all).


"The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and now Bank of America have suspended foreclosures signals that this is a serious problem...obviously. Banks that size, with that much exposure to foreclosed properties, don't suspend foreclosures just because they're good corporate citizens who want to do the right thing, and who have all their paperwork in strict order...they're halting their foreclosures for a reason.


"The move by the United States Congress last week, to sneak by the Interstate Recognition of Notarizations Act? That was all the banking lobby. They wanted to shove down that law, so that their foreclosure mills' forged and fraudulent documents would not be scrutinized by out-of-state judges. (The spineless cowards in the Senate carried out their master's will by a voice vote...so that there would be no registry of who had voted for it, and therefore no accountability.)


"And President Obama's pocket veto of the measure? He had to veto it...if he'd signed it, there would have been political hell to pay, plus it would have been challenged almost immediately, and likely overturned as unconstitutional in short order. (But he didn't have the gumption to come right out and veto it...he pocket vetoed it.)


"As soon as the White House announced the pocket veto...the very next day!...Bank of America halted all foreclosures, nationwide.


"Why do you think that happened? Because the banks are in trouble...again. Over the same thing as last time...the damned mortgage-backed securities!


"The reason the banks are in the tank again is, if they've been foreclosing on people they didn't have the legal right to foreclose on, then those people have the right to get their houses back. And the people who bought those foreclosed houses from the bank might not actually own the houses they paid for.


"And it won't matter if a particular case...or even most cases...were on the up -and up: It won't matter if most of the foreclosures and evictions were truly due to the homeowner failing to pay his mortgage. The fraud committed by the foreclosure mills casts enough doubt that, now, all foreclosures come into question. Not only that, all mortgages come into question.


"People still haven't figured out what all this means. But I'll tell you: if enough mortgage-paying homeowners realize that they may be able to get out of their mortgage loans and keep their houses, scott-free? That's basically a license to halt payments right now, thank you. That's basically a license to tell the banks to take a hike.


"What are the banks going to do...try to foreclose and then evict you? Show me the paper, Mr. Banker, will be all you need to say.


"This is a major, major crisis. The Lehman bankruptcy could be a spring rain compared to this hurricane. And if this isn't handled right...and handled right quick, in the next couple of weeks at the outside...this crisis could also spell the end of the mortgage business altogether. Of banking altogether. Hell, of civil society. What do you think happens in a country when the citizens realize they don't need to pay their debts?"

Charts to Ponder

Some Pain to Come

The slides below are from a presentation delivered on October 6, 2010 by Chris Whalen with the American Enterprise Institute.

How To Be a Successful Pitcher

If you have been watching the MLB playoffs, you have witness some seriously dominating pitching performances.


If you want to know why the pitchers have been unable to be so successful, study the numbers below:


Roy Halladay (Phillies) - Game 1
104 pitches thrown
79 strikes76% strikes thrown
28 batters faced
25 first pitch strikes89% first pitch strike thrown

Cliff Lee (Rangers) - Game 1
104 pitches thrown
76 strikes73% strikes thrown
27 batters faced
21 first pitch strikes78% first pitch strike thrown
C.J. Wilson (Rangers) - Game 2
104 pitches throw
65 strikes63% strikes thrown
25 batters faced
16 first pitch strikes 64% first pitch strike thrown
Tim Lincicum (Giants) - Game 1
119 pitches thrown
75 strikes63% strikes thrown
30 batters faced
19 first pitch strikes64% first pitch strike thrown
Andy Pettite (Yankees) - Game 2
88 pitches thrown
58 strikes66% strikes thrown
26 batters faced
15 first pitch strikes 58% first pitch strike thrown
Five above starts combined:
69% strikes thrown
71% first pitch strike thrown
38.1 Innings pitched
3 earned run allowed
5 wins

Dropping Six Spots in the Risk Ratings

Not exactly the direction we want to be heading:

Senator Tom Coburn on Education

From an email I received today from Coburn's office:


Thomas Jefferson, our third President and the man who drafted the Declaration of Independence long promoted the importance of a quality classical education in preserving our liberty. 

"Whenever the people are well-informed, they can be trusted with their own government;... whenever things get so far wrong as to attract their notice, they may be relied on to set them to rights." --Thomas Jefferson to Richard Price, 1789. ME 7:253 

Today, this principle is more important than ever. 

However, this does not justify any involvement by the federal government. In fact, federal intrusion is actually harming educational achievement and making our schools less accountable. 

In the decades since Washington decided it wanted to play a major role in our classrooms, nearly every important measure of success has remained flat, or more often, gotten worse. That is no coincidence. 

The federal education bureaucracy is enormous, and it loves nothing more than to issue expensive new mandates—mandates that keep our teachers and principals busy with paperwork and away from students. 

Moreover, it is clear that we have a greater chance of holding a teacher or principal accountable that lives in our neighborhood than a bureaucrat(s) sitting in an office 1,200 miles away. Yet, today many of the key decisions in our classrooms are now made in Washington, D.C. From my own investigations of the Federal education department, I can tell you firsthand that it is neither accountable nor easy to navigate. 

While Rome burns… 

The very politicians who engineered the federal takeover of our schools, and who built the bureaucracy in Washington, have again proven why they have no business in our schools.

Last week, I issued an investigative report entitled: “Education Pork: How Education Earmarks School Taxpayers.”  In it, I detail how members of Congress have set up their own “education” slush funds, spending billions of your tax dollars on pet projects like mariachi classes in Nevada, the development of curriculum for wine studies, and honorary programs to be named after the earmarking politicians themselves. 

The sad irony is that Washington is borrowing from the next generation to pay for mediocre and counterproductive federal programs that will weaken their educational achievement. 

The Founders knew what they were doing… 

Our Constitution does not grant the Federal government a role in education. Each of the Founders knew the central importance of education in our Republic, and each also recognized it was best achieved and most accountable when the major decisions were made in our homes, in our communities, and in our states. 

If we want to restore American educational achievement to its once lofty status, we must begin by getting bureaucrats and career politicians in Washington out of the education business and returning control to teachers and parents. 

The Danger Not Over

The excerpt below is from an essay written in 1801 by Edmund Pendleton.


A brief note on Pendleton: Edmund Pendleton (1721–1803) was a Virginia politician, lawyer, and judge, active in the American War of Independence. He served as president of the Virginia Committee of Safety from August 16, 1775 to July 5, 1776 (effectively serving as governor of the colony) and as president of the Virginia Convention that authorized Virginia's delegates to propose a resolution to move for the break from Britain and creation of the Declaration of Independence. Thomas Jefferson said of Pendleton, "Taken in all he was the ablest man in debate I ever met."

From Pendleton's essay:

In pursuit of our purpose, we ought to keep in mind certain principles which are believed to be sound; to enquire whether they have been violated under the Constitution; and then consider how a repetition of those violations may be prevented. As thus:

1. Government is instituted for the good of the community and not to gratify avarice or ambition; therefore, unnecessary increase of debt — appointment of useless officers such as stationary ministers to foreign courts with which we have little connection and 16 additional judges at a time when the business of the federal courts had greatly diminished — and engaging us in a war abroad for the sake of advancing party projects at home, are abuses in government.
2. The chief good derivable from government is civil liberty, and if government is so constructed as to enable its administration to assail that liberty with the several weapons heretofore most fatal to it, the structure is defective. Of this sort, standing armies, fleets, severe penal laws, war, and a multitude of civil officers, are universally admitted to be; and if our government can, with ease and impunity, array those forces against social liberty, the Constitution is defective.
3. Peace is undoubtedly that state which proposes to society the best chance for the continuance of freedom and happiness, and the situation of America is such as to expose her to fewer occasions for war than any other nation, whilst it also disables her from gaining anything by war. But if, by indirect means, the executive can involve us in war not declared by the legislature; if a treaty may be made which will incidentally produce a war, and the legislature are bound to pass all laws necessary to give it full effect; or if the judiciary may determine a war to exist although the legislature hath refused to declare it; then the Constitution is defective, since it admits constructions which pawn our freedom and happiness upon the security of executive patriotism, which is inconsistent with republican principles.
4. Union is certainly the basis of our political prosperity, and this can only be preserved by confining, with precision, the federal government to the exercise of powers clearly required by the general interest or respecting foreign nations and the state governments to objects of a local nature; because the states exhibit such varieties of character and interests that a consolidated general government would be in a perpetual conflict with state interests, from its want of local knowledge or from a prevalence of local prejudice or interest, so as certainly to produce civil war and disunion.
   If, then, the distinct provinces of the general and state governments are not clearly defined; if the former may assail the latter by penalties and by absorbing all subjects of taxation; if a system leading to consolidation may be formed or pursued; and if, instead of leaving it to the respective states to encourage their agriculture or manufactures as their local interest may dictate, the general government may by bounties or protecting duties tax the one to promote the other; then the Constitution has not sufficiently provided for the continuance of the union by securing the rights of the state governments and local interests.
5. It is necessary for the preservation of republican government that the legislative, executive, and judiciary powers should be kept separate and distinct from each other, so that no man or body of men shall be authorized to exercise more than one of them at the same time. The Constitution, therefore, in consigning to the federal Senate a participation in the powers of each department, violates this important principle and tends to create in that body a dangerous aristocracy.
6. An essential principle of representative government is that it be influenced by the will of the people, which will can never be expressed if such representatives are corrupted or influenced by hopes of office. If this hope may multiply offices and extend patronage, if the president may nominate to valuable offices members of the legislature who shall please him and displease the people by increasing his power and patronage, if he may be tempted to use this power and patronage for securing his reelection, and if he may even bestow lucrative diplomas upon judges whilst they are receiving liberal salaries paid as the price of their independence and purity, then a risk exists lest the legislature should legislate, the judges decide, and the senator concur in nominations with an eye to those offices, and lest the president may appoint with a view to his reelection; and thus may at length appear the phenomenon of a government republican in form without possessing a single chaste organ for expressing the public will.

What You Are Paying For

The AIG Shell Game

From Barry Ritzholz:

Today’s AIG announcement has generated some surprisingly naive headlines. The company may have announced U.S. bailout exit plan, but that does not make it so. (Citi’s numbers don’t look any better).

Let’s take a closer look at the numbers and separate the facts from fiction:

Total Bailout: $182.3 billion dollars
Amount Still Owed:  $132.1 billion (as of June 30, 2010)
Shares Outstanding: ~700 million
Current price:  $39.10 (+$1.65)
Market Capitalization:  ~$27 billion dollars

Today’s transaction was the converting of Preferred  Stock that had a nominal value of $49.1billion — but this was privately held stock that did not trade. Its true value is actually unknown.

For valuation purposes, let’s imagine a hypothetical company that has myriad valuable parts worth about $30 billion dollars.  But the company also owes over $130 billion dollars to creditors. We would describe that firm as insolvent, and heading towards bankruptcy.

Yet that is not how people think of AIG. The wisdom of crowds seems to think that the government is going to keep a firm bid under the stock price. This same crowd also thinks share dilution is positive, and ran the stock up almost $5 dollars 5% on the news of another 12% dilution.

Management is selling off pieces of the company to repay the government. How they are going to find another $132 billion in value has not been remotely explained.

Converting Preferred to Common stock does reduce the massive AIG obligations any more than converting a 20 into 2 tens makes you any wealthier . . .

This is little more than a shell game

Did You Know?