Mortgage Madness

You gotta love the old commercials from the local (appliance, auto, carpet) guy where he says, "I'm going crazy."



Pitch lines then vary for instance, "until Sunday at Noon;" or "with prices like these...;" or "always and forever, so stop in anytime and I will make you a heckuva deal."

The point was (as I havent seen "that guy" for a long while) that the owner was irrationally trying to reduce stocks or inventory, and/or needed to pay for his divorce, expansion, or next years order.

Thats capitalism.

Crazy Guy, then either procured enough customers with enough profit margin and cost recoupment to justify another year in business, or he went out of business. Simple enough, which was why Crazy Guy would occasionally (or in the case of a really poor business model, regularly) reach out to his local TV Market and plead for assistance in the form of mutual benefit-- he took a loss so you could help him keep his lease (or whatever).

So where is this commercial:

At ABC Mortgage, our Sales manager has absolutely gone apeshit with this Financial crisis, and, not to talk out of school, but on top of all that his wife and his girlfriend are suing him-- right when the Federal government has specified NO MORE GOLDEN PARACHUTES!

His loss is your gain, we are renegotiating all of our current mortgages, and selling up to meet volume for the first two hundred customers (limit one mortgage per customer, some customers will not qualify).

But hurry, his divorce finalizes next Friday, and if we dont firm up our balance sheets to meet Sarbanes-Oxley-- he's fired!

So, come on down to ABC Mortgage and get you a 5% mortgage amortized over 40 years! Who said you couldn't afford that house?



And there you are. No CITI or AIG bailouts... pure capitalism. Oh, wait, I am dreaming again... sorry.

First problem is that brokers only arrange mortgages for banks/lenders, who then sell mortgages to servicing agencies, and once those are seasoned (paid on regularly for 30 ~ 120 days) they are then packaged and sold to the "Secondary Market," which means Fannie-Freddie (whom by now you have all met, and now as taxpayers own). Lets stop there, even though there were then from those secondary mortgage packages a variety of collateralized debt obligations which hypothecated the real (or implied) values of those packages.

Next problem is that Crazy guy from ABC Mortgage, aside from only being an arranger (still remember that guy in So Cal, "The Loan Arranger" for auto finance) 99% of the time, has no more inventory. There is a credit freeze like, literally, no one's business.

Finally, ABC Mortgage, probably did go out of business, and not the Servicing company or Lender (such to say that Countrywide the #1 mortgage company was bought by B of A for a song, and hence still exists).

So, before I complain about how Republicans are Communists (as I expect to do so in a future blog), lets just cut to the number one simplest and most effective way to sort the mortgage mess in short order (as I had promised to write this solution a while ago):

Extend amortization.

Before I go into the maths, let me just state that for the borrower the principal stays the same and it will take longer to pay off the mortgage; for the servicer no long term loss (possibly even more profit over time); the Lender must keep the liability on the books longer, reduce cash flow; and for the secondary market only reduction in cash flow operations. There would only be minor modification of existing contracts (as opposed to major overhauls on a case by case basis). And as for our friends in the "tertiary" markets, the CDO's and derivatives, principal is maintained, defaults mitigated, and only cash flows reduced. Everyone loses just a little bit, but everyone also wins: Borrower gets lower payment and keeps house; Servicer makes more money over time; Lender keeps principal in tact; and so do the secondary and tertiary markets.

The eloquence of this solution is best revealed exactly as it relates to the derivatives. A simple "pick-a-workout" could be sent to all Borrowers in any one CDO class. The post card size item, or letter, would simply show four options including payment adjustments:

1. Keep your mortgage as-is (including disclosures and updates in adjustment estimates as average or worst case)

2. Re-Amortize to 30 years (in other words if you have been paying for x years on a mortgage you extend the mortgage by x years)

3. Re-Amortize to 40 years

4. Re-Amortize for 50 years

NO PRODUCT CHANGES, No messy paperwork, no complex negotiations, and none of this victim stuff. What I mean by that last comment is (a) the people who barely pay on time and can hardly afford the mortgages are much of the focus of the attention {this is why they called it the "sub-prime" crisis, but this has always been the 'secondary market situation'}, but (b) the other 92% of mortgages in the class being paid on time are not benefiting nor being assisted or relieved. The message = Dont pay your mortgage, lose your job, and plead hardship to get a 4% loan.

This current predicament of one-at-a-timing it, then freezes the Secondary market (existing packages are totally kaddywampus right now) and disallows the resale to derivative products.

However if the class (anyone with a mortgage that has been bundled in any particular derivative) is generally offered an amortization extension OPT-IN to be selected by some certain date (say 90 days plus 30 days grace), then that class of mortgages in the CDO (for instance) will be harmonized, not considered "toxic," and that same amount of liquidity would re-enter the Secondary Market by virtue of that Tertiary market buying that package of value (in four months to complete the example).

Thus under my "Class Reset" theory we could be out of this mess in six to nine months.

Here is a simplification of what the offer would look like to a homeowner in year two of a 3 year adjustable $365,000 mortgage LIBOR+3.25% (subprime):

(A) No Change (your payment will adjust in a year... other information)

(B) Your monthly payment will be: $2,188.36

(C) Your monthly payment will be: $2,008.28

(D) Your monthly payment will be: $1,921.38

****

And what if after all of this someone in hardship picks (D), and still cant keep up with the mortgage or refinance? Well ideally the borrower can THEN call the Lender to work out extraordinary arrangements or a forebearance. If after all efforts have been exhausted in earnest and good faith efforts, then in capitalism the property is foreclosed... No risk, no reward. And (Sorry, but I have to throw this one in here) to those punters at the borses who have whinged so endlessly as to become communists-- Dont place the bet if you cant afford to lose!

But we are not capitalists anymore, are we?