Blog Commentators Make More Sense than Our Politicians

Every now and then, I'm reminded that your average citizen is not as dumb as some would take him/her for.

A government committee is now proposing to have holders of subprime mortgages compromise with their mortgagors, in order to get our housing boom/bust situation solved and avoid painful foreclosures.


[This illustration is called "Select committee" for some reason. Buy this poster and other beautiful ones from allposters. com.]

All this political posturing is nothing more than grandstanding. First of all, a mortgage is a contract, just in case no one is noticing. You cannot simply wave a wand and renegotiate the terms of a contract because you find it convenient.

Second of all, the mortgagees who are sitting around a table with Treasury Secretary Paulson, going "Yes of course, good idea," have got their fingers crossed behind their back. They are going along with the show but probably have no intention of making any great effort to see that the government's wishes are carried out. In other words, they know that this is grandstanding.

I've read a lot of commentary about this latest federal plan to solve the crisis, among them today's post at the LAland blog at the LA Times website. The suggestion is, in a nutshell, to freeze the introductory rate of the ARMs so that they don't reset higher for several more years.

I had to go no further than the seventh out of 57 comments to find Tim K., Nov. 30, 8:02 a.m., making great sense and explaining in clear English why you can't just change the terms of these contracts--a problem that very few experts (other than gadfly me) have mentioned to date, to my great chagrin. Here is Tim K's simple explanation:

"This will not have any appreciable effect, because the number of loans that will be allowed to [freeze] at introductory rates will be astonishingly small.

"The reason is this - most of the volume of the loans which were made are no longer held by the banks themselves. They have been bundled into SIVs that are held in retirement accounts and pension funds. An example:

"Suppose you bought into Tim's Super Fund, which yields 7% interest over 10 years. This fund was made up of loans which were purchased from hundreds of banks. You, as an investor, bought $5000 of this, expecting to get your $5000 back plus interest after a few years. Now, imagine, that someone from the government orders that these homeowners don't have to pay the expected rate. What happens to your 7% rate? Right, it goes WAY DOWN. Maybe even NEGATIVE. Who would buy into that fund in the future? What value does it have now?

"That's precisely why this will not happen. The naive folks putting together this bill will come to this realization, and like Arnold S, will find out that in fact, this affects less than a few percentage of the total distressed homeowners. But [these few have] already made waves, so for political reasons, [the politicians] will announce it anyway showing 'we care, we're doing something' when in fact, this will have almost no effect at all."

Must I say more?

It's so gratifying to see that the "common mortal" is still out in that misleadingly silent void we sometimes mistake for a black hole of common sense. Thanks, Tim K. You make me realize I'm not spouting off in a vacuum.

And another thing: Why is no one trying to round up those mortgage brokers who filled out all those fraudulent applications? And don't tell me we have to pass a law saying it is illegal to fill out fraudulent mortgage applications. It may not be illegal to sell too much house to someone who can't afford it, and maybe we can't prove that these people lied outright; but it's surely gross negligence not to verify someone's credit and income. (Is anyone out there a legal expert who can comment on this?)

Come on, all you ambulance chasers. Stop chasing ambulances and start hunting for mortgage hucksters and those who hired them. Let's clean up the mortgage business from the ground up, instead of asking the government to do everything for us.

Hedge Fund Woes Finally Hitting the Fan?

Peter Viles, blogger at the LA Times, writes today about the saber rattling going on among a few of the big bullies on Wall Street, most recently Bear Stearns, JP Morgan, Deutsche Bank, and Merrill Lynch. It seems that those risky subprime mortgage financing vehicles that were all the rage until 2006 are coming back to haunt the current owners.

This touches on a domain that central bankers have been jawboning about for months now, the credit derivative and securitization market imbalances that are becoming dangerously out of whack. They know--and Wall Street bankers must know (even if they don't act like it)--that there are factors at work in the global economy that have created huge waves of what the financial world calls "liquidity," or large holdings of spending and investing money, if you will.

You have only to follow the recent buzz around the newer Basel II accord to see that the international banking community is aware of the problem; however, just like hyper-gifted children, they sometimes have a hard time disciplining themselves. This lack of self-discipline is creating much central banker angst, because the central bankers are supposed to be supervising banking activity. If they fail to do so, their respective governments will either have to mop up the mess (i.e. bail somebody out) or take blame for the devastating consequences that are potentially very bad for the dollar (not that anyone seems to care anymore) and horrible for the US economy.

The nature of the factors behind this liquidity has provoked much speculation, but as yet there is no consensus. The US banking-overseer head honcho, Ben Bernanke, blames it on what he has called a "global savings glut" (as though there could exist an excess of savings). Personally, I suspect that the central bankers themselves are at least partially responsible, but I'm not so sure they would agree. (See this previous post in rebuttal to a couple of Fed researchers who tried to pass the buck.)

But whatever the cause, the fact is that trillions of dollars are currently roving the earth looking for a roost, and everywhere they have chosen to alight they have caused bubbles, to wit the 2000 dot.com event and more recently the 2002-2006 housing boom. Other more sustained and recent bubbles can be found in the current securitizations and derivatives markets, where high-rollers bet on the odds of certain financial events happening. (See my article at Prudentbear.com for a discussion of the process.) Until recently, much of this activity centered around the subprime mortgage market, which as we all know is now turning very sour.


[Thanks to ironicconsumer.com for the photo.]

Now, if these particular bubbles burst, they will smack the face of some pretty embarrassed Wall Street fellows who, up until now, have been riding pretty high, making trillions of high-roller subprime risk-taking profits. Who are these gamblers? The same hedge fund managers about whom Peter Viles blogs.

But it goes beyond a mere squabble among bankers. If these bubbles burst, the amount of money involved is so large that the mess could be substantial. This situation must have every central banker on the edge of his seat, wondering whether he will be able to juggle this new event, on top of the rest of the problems of the economy that they are supposed to manage. (See my earlier post for more.)

I wouldn't want to be in their shoes--and I certainly won't be buying hedge fund stock any time soon. (Yes, they're trying to pass the buck, too.)