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An antidote for toxic assets

By Jack Guttentag, Monday, April 27, 2009.

The government is betting that by lending large amounts to private investors to purchase securities, markets will revive and security values will rise. It is a costly and risky venture, I hope it works, but fear it won't. This article proposes another approach to the same objectives that would cost the government nothing. I call it "desecuritization." All it requires is the appropriate enabling legislation.

Desecuritization means reversing the securitization process. Securitization converts large numbers of individual loans into security issues. Desecuritization converts the securities back into individual loans. The objective of both is the same: to enhance value. more...

'Home Affordable' loan mods offer hope

By Jack Guttentag, Monday, April 20, 2009.

My previous articles in this series criticized the Obama administration's new "Making Home Affordable" (MHA) program because it ignored negative equity -- which is the major factor underlying the currently horrendous foreclosure rate -- and because it offered refinance relief only to borrowers lucky enough to have their mortgages owned or guaranteed by Fannie Mae or Freddie Mac. This article is about the loan contract modification part of the program, which covers loans owned by any investor. more...

Many ineligible for 'Home Affordable' refis

By Jack Guttentag, Monday, April 13, 2009.

Last week I criticized the government's new two-part program "Making Home Affordable" for being too narrow and limited in scope. This article describes the refinance part of the program, which applies only to mortgages owned or guaranteed by Fannie Mae or Freddie Mac.

Purpose: The objective of the refinance program is to allow borrowers to refinance who otherwise find it impossible or excessively costly because of declines in the value of their properties. more...

Negative equity: a housing time bomb

By Jack Guttentag, Monday, April 6, 2009.

Flickr photo by <a href="http://www.flickr.com/photos/16581899@N07/3186122400/" target=blank>Umberto Fistarol</a>.

Most of the small print about the Obama administration's plan to help beleaguered mortgage borrowers is now available. In my view, it is coherent and well thought out, but disappointing in its limited scope. The program is designed to provide benefits to owners who deserve to be helped, rather than to reduce foreclosures and stabilize home prices.

The limited scope of the program is why its cost is estimated at only $75 billion, or less than the amount required to bail out AIG. The systemic impact will be correspondingly small. more...

The facts on FHA-insured loans

By Jack Guttentag, Monday, March 30, 2009.

The Ups and Downs of FHA: The importance of Federal Housing Administration-insured loans in the home mortgage market has changed markedly over the years. This has been due less to changes in the FHA itself than to changes in the broader market in which it operates.

In the early 1990s, FHA had about 15 percent of the home purchase market. In subsequent years through 2006, FHA lost business to the growing subprime market, which took many borrowers who could have gone FHA. In addition, FHA lost business to the prime conventional market, which developed and aggressively merchandised option adjustable-rate mortgages (ARMs) ...
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Life insurance for financial firms

By Jack Guttentag, Monday, March 23, 2009.

Last week, I discussed why capital requirements -- requiring firms to have capital equal to some percentage of their assets -- cannot prevent financial crises. Among other evasions, regulated firms can shift to riskier assets (such as subprime mortgages) within the asset categories defined by the regulations. Discretionary actions by regulators to offset such shifts during a bubble period would be extremely disruptive, requiring more foresight and political courage than we have any reason to expect from public servants.

Proposals have emerged to rectify these weaknesses of capital requirements by automating the adjustment process. This would require identifying one or more statistical measures to which capital requirements would be tied. more...

Capital requirements could hurt banks

By Jack Guttentag, Monday, March 16, 2009.

While policymakers and their kibitzers, among which I count myself, debate what is needed to cure the current crisis and associated recession, another debate brews in the background. It is about how to fix the system so that it doesn't happen again.

Any coherent proposal for fixing the system is necessarily based on judgments about the causes of the current crisis. While there are many differences in emphasis, I believe that most observers would agree on the essentials: The crisis originated with a bubble in the residential real estate market, followed by its inevitable aftermath of declining home prices, and a subsequent explosion of home mortgage defaults and foreclosures. more...

Senior dilemma: lots of equity, little income

By Jack Guttentag, Monday, March 9, 2009.

A common problem among aged homeowners is that they no longer have the income to service their mortgage, and don't have a good way to convert the substantial equity in their house into cash flow. The case below is typical.

"I am a 67-year-old widow with a mortgage of $414,000 on a house valued at $1.25 million. I can no longer afford the mortgage payment and property taxes, but the lender will not discuss modifying my loan contract until I am behind three payments. I don't want to destroy my credit, and have been borrowing from family to stay current. Is there anything else I can do?" more...

Licensing alone won't prevent bad loans

By Jack Guttentag, Monday, March 2, 2009.

"The Associated Press recently ran a story about how the mortgage crisis was leading the federal government and states to tighten licensing and other requirements for operating as a mortgage broker. Will this have a material effect in curbing the abuses that led to the crisis?"

No, because mortgage brokers played only an incidental role in the crisis. Blaming the crisis on brokers makes as little sense as blaming it on greed. Brokers have been with us for decades; greed has been with us forever; and neither suddenly caused a financial crisis. more...

Many borrowers paying premium to refinance

By Jack Guttentag, Monday, February 23, 2009.

It is unusual to have a refinance boom in the middle of a foreclosure crisis. In the 1930s, which was the last time we had a foreclosure crisis comparable in magnitude to this one, lenders were so spooked by the foreclosures that there was almost no refinancing. That changed only after the creation of the Home Owners Loan Corporation (HOLC) in 1933, which refinanced many borrowers at the government's risk.

The refinance boom today is also fueled by government. With few exceptions, refinanced loans are either being sold to Fannie Mae or Freddie Mac, or insured by FHA. The requirements of those agencies largely dictate who can and cannot profit from a refinance. more...

Saving banks without breaking the bank

By Jack Guttentag, Monday, February 16, 2009.

While plans for saving the financial system are being formed, modified and dissolved by the day, the common thread through every plan seems to be to assist financial firms holding depreciated assets, most of which are mortgage-related assets. The cost is now unofficially estimated at $2 trillion or more. In contrast, aid to distressed borrowers is a second priority, with costs estimated at $50-100 billion.

There are two things about this approach that scare me. The first is that the cost of assisting financial firms in trouble is completely open-ended. The ultimate cost will depend on future declines in the value of their assets. If home prices continue to decline, and at this point there is no end in sight, asset values will continue to decline and $2 trillion may not be enough. more...

Pros, cons of a no-cost refi

By Jack Guttentag, Monday, February 9, 2009.

The current refinance boom has focused attention on no-cost mortgages -- henceforth NCMs -- which have attractive features to refinancing borrowers. NCMs help borrowers avoid being overcharged, and they eliminate most of the uncertainty involved in determining whether a refinance will pay.

On the other hand, the price of NCMs -- as measured by the interest-rate increase borrowers must pay to avoid refinance costs -- is unusually high in the current market. The challenge is to obtain the benefits of NCMs without paying an excessive price for them. more...

Housing fixes fall short

By Jack Guttentag, Monday, February 2, 2009.

Flickr photo by <a href="http://flickr.com/photos/sixthworld/3051194260/" target=blank>Thomas Ott</a>.

The government's efforts to combat the worst financial crisis since the 1930s can be divided into three phases. Phase one, executed in good part in catch-as-catch-can fashion, was directed toward shoring up financial firms that were undercapitalized and had lost the confidence of their creditors. The goal was to prevent their failure, which would have made the crisis worse -- far worse.

Phase one is still far from over, new flare-ups continue to arise, and new approaches for recapitalizing banks are being considered. more...

Why banks hoard bailout money

By Jack Guttentag, Monday, January 26, 2009.

"Is it not shameful that our financial institutions receive capital infusions from the government, and instead of lending it out, they hoard it?"

I hear this complaint a lot, and the U.S. government has not done a very good job of responding to it. My view of government intent is that the capital infusions were meant to be "hoarded," defining that word to mean adding to the firm's capital rather than adding to its loans. more...

Mortgage shopping is all about technique

By Jack Guttentag, Monday, January 19, 2009.

Last week I reported the results of a mortgage shopping expedition, but did not say much about how I got those results. This article is about shopping technique. Most of it is simple. In a highly imperfect market, an investment in the time needed to shop effectively can pay large dividends.

Shop online: Lenders generally are prepared to deliver the prices they post online. Prices shown in printed media are obsolete when they are published, while quotes offered over the telephone are worthless. more...

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