No easy fix for housing mess
BY TERRY SAVAGE Sun-Times Columnist Oct 21, 2007
Long-term investing guru Chuck Allmon and his wife, Gwen. "This real estate debacle is not over -- housing prices will keep on collapsing," he says.
Updated: May 3, 2013 12:14PM
Take all your rotten eggs, put them in one basket and tie a bow on it -- and if you believe that you now have the fixings of a tasty omelet, then you must still believe in the Easter Bunny!
That's exactly what the big money center banks said they'd do this week when they took care of all the bad mortgages that they -- or actually their off-balance subsidiaries -- hold in "structured investment vehicles." Those SIVs can no longer sell commercial paper, since they've been downgraded to junk, based on the defaults on the mortgages they own.
Loading up the basket
If the banks were forced to take those mortgages back, it would cause a big dent in their capital, since the mortgages would have to be marked down to their current value. So last week, several big money center banks, including Citigroup, JPMorgan Chase and Bank of America, disclosed plans to create an even bigger basket of bad eggs, called a Single-Master Liquidity Enhancement Conduit, into which they will throw their securitized packages of mortgages -- as much as $75 billion of mortgages.
This "super-SIV" will then sell commercial paper, which presumably will be rated investment grade because the government will give it some sort of seal of approval. No details have been released on that aspect.
The stated purpose of this SMLEC is to "bring liquidity back to the mortgage market." But Christopher Whelan, managing director of Institutional Risk Analytics, says the SMLEC looks like a nice neat package, ready for a government bailout of the banks.
One thing the SMLEC won't do, and can't do -- even if it does get created -- is resolve the problems of the millions of Americans who are suddenly finding they can't afford the rising monthly payments on their adjustable-rate mortgages.
It won't help these homeowners to call the servicing company that collects their payments and passes them on to the trustee of the security that now owns their mortgages. Once a mortgage is securitized, it can't be modified because it's part of a package of collateral for those securities.
That's why so many people who would like to make an honest effort to refinance their mortgage are having so much trouble. It's like trying to pick the pieces of your egg yolk out of an omelet. Unless a lender happened to keep the mortgage on its books instead of re-selling it into a package, there's no way to change the original terms of the mortgage.
There is one way out. You can refinance the house with an entirely new mortgage and pay off the old, ugly mortgage. But that isn't easy these days for three reasons:
**Many of these adjustable-rate mortgages carry steep prepayment penalties.
**Falling home prices mean that many homes will no longer appraise for the amount of the existing mortgage.
**Many people who received mortgages based on just "stating" their income will now be subject to close scrutiny of their income -- and will no longer qualify.
So we're caught in a vicious cycle: More foreclosures mean more homes on the market, putting downward pressure on home prices. Then the lenders take big losses when they sell foreclosed homes, so they're unwilling to make new mortgages. The entire mortgage market freezes, making things worse for everyone.
Should the Fed lower rates?
Economist Peter Morici suggests that the Fed should lower interest rates to give banks some breathing room to refinance loans. But then foreigners who lend us money might start complaining about those lower rates on government securities, and step up the sale of dollars they hold.
Since we're now a debtor nation, we have to keep our creditors happy -- even while we try to rescue both home lenders and home borrowers from past follies in order to stave off a housing-led recession.
The government doesn't have a lot of room to maneuver. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.
102907 Bad Eggs In One (Private) Basket