When the Good Default

[c1ue]

Re: When the Good Default

What is the modern school of economics?

The modern school of economics is best known by its most visible practitioner, Alan Greenspan:

Irrational Exuberance:

Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?

Alt-A mortgages:

http://www.federalreserve.gov/boardd...23/default.htm

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. [Ask and ye shall receive]

Subprime lending:

http://www.financialsensearchive.com...2007/1005.html

We weren't aware of what was happening in subprime lending until late 2005 or early 2006. When we did see it - very late in the game - we were surprised at some of the things that we saw.

Mortgage securitization:

(same link as above)

When mortgage securitization was transferred to Wall Street, regulation became unnecessary. Investment firms, hedge funds, ratings agencies, and their ilk - these are all "self-regulating" entities. That's what you see today - these firms are all re-assessing risk and a new set of business practices is evolving.

It goes on and on and on and on and on...

Today the modern school of economics is exemplified by Ben Bernanke:

Subprime problems contained:

http://archive.newsmax.com/archives/...8/110709.shtml

At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained

No Recession in 2008:

http://money.cnn.com/2008/02/14/news...lson/index.htm

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson both acknowledged problems in the U.S. economy Thursday, but both said they believe the nation will avoid falling into recession.
The two made their comments at a hearing before the Senate Banking Committee about the economy. Their testimony comes in the wake of troubling economic readings that have raised recession fears on Wall Street.
But while Paulson and Bernanke repeatedly insisted they expect the economy to avoid shifting into reverse - thanks in part to a series of interest rate cuts by the Fed and a $170 billion economic stimulus package signed by President Bush Wednesday - they conceded the economy faces additional headwinds.
Bernanke and Paulson both said the outlook for the economy is noticeably worse than it was as recently as a few months ago, and both expect cuts in official growth forecasts from the administration and the Fed in upcoming months.

Fannie and Freddie don't face failure (!)

http://www.msnbc.msn.com/id/25704447/

Federal Reserve Chairman Ben Bernanke told Congress Wednesday that troubled mortgage giants Fannie Mae and Freddie Mac are in “no danger of failing.”

...

The two mortgage giants are “adequately capitalized,” Bernanke said. However, “weakness of market confidence is having an effect” on the companies, making it difficult for them to raise capital.

And Zimbabwe Ben keeps going - like the Energizer bunny

[vinoveri]

Re: When the Good Default

The rich do it too – Los Angeles County and million dollar distressed properties. 1,947 homes in L.A. County valued at $1 million or more are three payments behind or in foreclosure. Beverly Hills prices down 31 percent from one year ago. 14 out 100 homes on the MLS are priced at $1 million and up.




Washington Mutual made a loan back in 2007 for close to $3 million on this place. Not even a year later, a second mortgage was secured on the property for $1 million. All it took was another year and in 2009 the notice of default was filed in June. Three months later it was scheduled for auction. Even though it is listed as bank owned it is showing up as being postponed due to mutual agreement. This is probably why the home is up for sale for the current price. How many people do you think are ready to shell out $4.5 million in this market? Whoever is selling this home is trying to have a safe exit in the worst housing market since the Great Depression.

When I look at the data it is amazing how many of these homes are secured with Alt-A and option ARM products. Banks are hoping and praying the market will turn around but they are fooling each other. Many of the people that bought these places never were wealthy enough to own the home. Sure, their incomes were higher than the average but it is another level to afford a million dollar loan.

Apparently the “rich” strategically default as well and have deep housing problems like millions of Americans. Still think it is a wise idea to push home buying for everyone before we patch up these massive kinds of loopholes? Keep in mind tax dollars are going to bailing out these owners indirectly by funneling money to the banks that made these absurd loans. After all, even the rich need a bailout to keep the Jacuzzi running.

http://www.doctorhousingbubble.com/l...closures-high/

Wow, a $1Million cash-out second mortgage in 2009? Looks like this goes beyond strategic default, and should be termed strategic looting.

Didn't know banks still did large cash outs in 2009 ..., but maybe the owner of the house was a banker.

[don]

Re: When the Good Default

Why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income. Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).

This push could also be an effort by the GSEs to shift blame, Whocouldanode 2.0: “whocouldanode prime borrowers would default at such high rates?” It wasn’t our crappy procedures and unduly optimistic assumptions, it was the black swan of a change in values!

Now let us say I am wrong and the banks and GSEs are about to embark on new tactics versus defaulting borrowers, say by getting more aggressive in trying to garnish wages when recoveries fall short. That has the potential to backfire massively.

Right now, contrary to popular opinion, virtually the only parties fighting foreclosure are either people who think they can afford the house but are the victims of massive servicing mistakes (I could write a separate post on this, trust me) or people who have filed for Chapter 13 bankruptcies where the servicer (acting on behalf of the trust) tries to block the bankruptcy stay. In 45 of 50 states (this is a simplification but pretty accurate), the mortgage (which is a lien, in some states called a deed of trust) can only be enforced by the legitimate owner of the note (the IOU). Mortgage securitizations had very specific requirements as to what the trust (the securitization entity) needed to do to obtain the note. Trust are very brain dead vehicles, they can only do what their governing agreements permit them to do, nothing more. In short form, it appears to be widespread, if not endemic, that securitizations starting around 2004 began not bothering to do what they needed to do so that the trust had clear ownership of the note (the key item being proper endorsement of the note by all the parties in the ownership chain of the securitization prior to or on the day of closing. Limited fixes were permitted post closing, generally up to 90 days, but they were designed to be narrow and apply only to a small percentage of the notes in a pool).

Increasingly people who are fighting foreclosures are having good results by questioning whether the party who shows up in court to foreclose is entitled to do so (the legal concept is “standing” and is fundamental). Note the person fighting the foreclosure is NOT arguing that they don’t owe the money but whether the party who wants to take the house has the right to. And this is not a theoretical objection; there have been cases where the same note has been sold to multiple securitizations. If the wrong party forecloses, the borrower is at risk that ANOTHER trust will show up, and again demand that he pay the mortgage debt in full. Although decisions vary (usually by state, based both on state law considerations and the temperament of the judiciary), many judges are ruling for borrowers, typically dismissing cases without prejudice (meaning the lender can try foreclosing again if he can get his act together, but typically the issues that led to the unfavorable ruling are insurmountable).

So if the banks and Freddie and Fannie start on a big, and very badly aimed push to go after defaulting borrowers to extract more blood from stones, one outcome may be that they don’t get the headlines they want. Instead of “Greedy guy reneged on his mortgage when he has plenty of dough (be sure to include photo of deadbeat with luxury car or in front of very fancy new residence)” you will get “Cancer victim who had to abandon beloved home harassed by greedy banks.”

But more important, this sort of move will lead incorrectly targeted “strategic defaulters” who willingly gave up their houses to fight the efforts to extract more cash from them. That in turn has the potential to increase awareness of the widespread problems with mortgage securitizations, with the potential to shift to dynamic. What if the owners of private label mortgage bonds come to realize that in many cases, the instruments are effectively unsecured? What happens if Fannie and Freddie’s strategic defaulter push backfires from a financial standpoint (the cost of a badly-targeted collection effort exceeds any increased recoveries?)

And most important, what happens if the public comes to understand the hypocrisy of the banks’ stance, that they are demonizing borrowers for failing to live up to contracts, when they couldn’t be bothered to comply with the terms of their own contracts, which set up procedures for conveying notes to the securitization entity, and in many cases foreclosure mills have forged documents to cover up that fact? Whoever is behind the “strategic defaulter” push may well wind up hoist on his own petard.

http://www.nakedcapitalism.com/2010/...re-queens.html

[don]

Re: When the Good Default

"The city of Los Angeles last week passed a city ordinance allowing for fines up to $100,000 to lenders and servicers of properties under foreclosure for failing to adequately preserve properties."

Throw that in the mix....