Notorious R.O.B.

Inman News has a very interesting… I guess one would have to call it an Op/Ed or News Analysis on the Washington Post’s story on HUD Secretary Jackson’s last day:

An article in last Sunday’s Post deserves credit for attempting to go beyond the allegations of cronyism that forced Jackson to resign, and taking a deeper look at the role HUD policies may have played in the housing downturn. Unfortunately, the article doesn’t deliver on that promise.

The Post claims that because Jackson “pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down,” he will be “remembered as a Cabinet secretary so committed to carrying out President Bush’s goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis.”

Matt Carter does go on to explain some of the political shenanigans that went on in wa-wa land (aka, Washington DC, which is like la-la land, aka, Hollywood, in that they both indulge in fantasies, but different in the personal attractiveness factor) and basically debunks the WaPo story.  The entire thing is worth a detailed read, especially if you’re interested in legal and political issues in real estate.

I thought it interesting, however, that there were two assumptions made in the story.

First, Matt assumes good faith on the part of the Washington Post.

What’s ironic about the Post’s story is that the Bush administration (and Republicans in general) usually come under fire from housing advocates for attempting to limit the government’s role in lending — especially when it comes to Fannie and Freddie, which during the housing boom were hobbled by caps on their portfolios and requirements to maintain additional capital (those limitations were imposed in the wake of management and accounting scandals that forced both companies to restate several years of earnings). Some critics say the limits on FHA, Fannie and Freddie were one reason “private label” lenders — many employing much looser underwriting criteria — were able to boost their market share so dramatically during the boom.

To claim that the administration’s lone attempt to expand a government-backed loan guarantee program “threatened to exacerbate the mortgage crisis” suggests a lack of awareness of the changes that took place in the lending industry during the housing boom, or the motives for expanding FHA loan guarantee programs.

Matt — maybe it’s not a “lack of awareness” but willful ignorance?  Or worse still, perhaps the WaPo simply doesn’t care about inconvenient things like the truth.  I think he actually means to suggest it, but is politely refraining from calling a spade a spade.  I have no such restraints, polite or otherwise.  Washington Post’s story is nothing more than a politically motivated hit piece on the Bush Administration written by left-wing editors and writers in an attempt to lay the blame for the current pain in the real estate market at the feet of the White House by any possible means.

It’s a shame, but that is the state of the “news” media in this country today.  When people like Ron Peltier of HomeServices and Alex Perriello of Realogy talk about the relentlessly negative media environment for real estate, there is some truth to their complaints.

As Matt Carter himself reports in another article on Inman, fact is that this whole ‘subprime’ thing may have been much ado about nothing:

According to the latest economic letter from the Federal Reserve Bank of San Francisco, it’s likely ARM loans have higher delinquency rates than fixed-rate loans not because of the payment shock associated with interest rate resets, but because the people who took them out had higher risk characteristics.

And later in the article:

The flip side of Yellen’s analysis is that markets that weren’t subject to lots of speculation are in better shape to weather the storm. PMI’s latest risk index shows a reduced risk of price declines in markets that didn’t see steep run-ups in prices during the housing boom.

Huh.  And here we are, thinking all this time that the reason why the housing market is in the tank is because of irresponsible bankers and mortgage brokers selling these DANGEROUS subprime loans to poor unsuspecting consumers.  Turns out, mortgages have less to do with delinquencies than the price fluctuation brought on by speculation?  Whodathunk reading the New York Times or Washington Post?

About those poor unsuspecting consumers… that’s the second assumption Matt makes.  He writes at the end of his excellent analysis:

HUD estimates the simplified disclosures will help consumers save $8.35 billion a year. Had those disclosures been in place during the frenzied buying of the housing boom, many buyers who got into homes by taking out loans they didn’t understand might have instead gone with more affordable mortgages — or not taken out a loan at all. (Emphasis mine)

Why do we continue to believe that the problem was buyers who “didn’t understand”?  Why do we persist in the assumption that these delinquent buyers were tricked, fooled, bamboozled into buying million dollar homes on $35K a year incomes?  Maybe these buyers understood perfectly well that they were taking an enormous gamble but simply didn’t care; maybe they all thought they’d get out before the market crashed and make a few tens of thousands of dollars for nothing.  Maybe they fell into the trap that every bubble-economy fool falls into: the Greater Fool theory.  Maybe they’re not poor unsuspecting victims after all, but simply gamblers without morals or ethics or sense of personal responsibility.

That would, after all, fit the profile of “higher risk characteristics”.

People are walking away from houses not because the loan terms got so damn onerous, but because their gamble didn’t pay off.  That’s the only possible interpretation of the San Francisco Fed report.  ARM or 30-year fixed, makes no difference — the rapid rise, then rapid fall, in housing prices does.  Those are the facts.

The responsible buyers, the ones who didn’t feel like speculating on real estate, who weren’t “flipping condos” and dreaming of making big bucks on No Money Down deals, they’re still buying in this market.  They were buying at the height of the boom too — but they didn’t go pouring everything into $2M condos on $50K a year.  They behaved like rational adults, rational consumers.  And they continue to do so.

Are there innocent victims?  Meh… I suppose… but it would have to be one hell of a story involving either a health crisis or unemployment to pass the smell test if someone bought a house they simply could not afford a mere two years later.

As for the Washington Post and the rest of their comrade-in-arms in the media… should we see a Democrat elected to the White House in the fall, I think we’ll suddenly find that the editors will discover hitherto unseen silver linings in the real estate cloud.  The sun will break through the dark clouds, and wonder of wonders, we may come to learn that WaPo and NYT begin to see a ray of hope, a brighter tomorrow.

Even then, making assumptions about their “lack of awareness” would be a step too far in the direction of naivete.

-rsh

I don’t normally write much on financial matters connected to real estate, because I recognize it as an area where frankly, I have no real expertise. I know generally how mortgages, CDO’s, subprime and so forth work, but beyond the basics, I get lost. Tanta, over at Calculated Risk, however, does not get lost. In fact, you might say he illuminate the path. I think this site is a must-read for serious real estate industristas.

His latest post discusses a story in the New York Times reporting an effort by various gargantuan banks to get the feds to bail them out of their current financial woes. Tanta’s analysis of the proposals by the banks to create “a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.”

According to this proposal, with Bank of America’s name on it, there are some $739 billion (that’s Billons, not their low-rent cousins on the wrong side of the tracks, the Millions) worth of mortgages that are at moderate to high risk of default. So the thought is that the Federales should step in and bail out these banks and borrowers to avoid foreclosures and so forth.

The New York Times itself argues against such a bailout:

In practice, taxpayers would almost certainly view such a move as a bailout. If lawmakers and the Bush administration agreed to this step, it could be on a scale similar to the government’s $200 billion bailout of the savings and loan industry in the 1990s. The arguments against a bailout are powerful. It would mostly benefit banks and Wall Street firms that earned huge fees by packaging trillions of dollars in risky mortgages, often without documenting the incomes of borrowers and often turning a blind eye to clear fraud by borrowers or mortgage brokers.

A rescue would also create a “moral hazard,” many experts contend, by encouraging banks and home buyers to take outsize risks in the future, in the expectation of another government bailout if things go wrong again.

If the government pays too much for the mortgages or the market declines even more than it has already, Washington — read, taxpayers — could be stuck with hundreds of billions of dollars in defaulted loans.

Let’s leave aside for the moment how amusing it is (in a deeply unfunny way) how “news” articles in the Gray Lady have a tendency to make arguments. As if the New York Times were a partisan in the matter. Which, I guess, it is — if you’re honest with yourself, at least. Because in this case, Keller’s boys and girls have a point.

And Tanta expands on the undesirability of such a bailout by pointing out the institutional barriers to executing such a grand plan:

Nobody is going to create a functioning new agency with the relevant expertise and staffing and funding and clear mandate out of thin air fast enough to do what this wants to do, if what we want to do is stave off recession. FHA probably has the expertise to credibly attempt the loan-level workouts, but not enough hands to get saddled with $739 billion worth that has to be dealt with before everybody’s lawns go brown. Ginnie Mae is, in my view, one of the most efficient and quietly professional government agencies ever: they run a highly successful program with a tiny staff. I can’t imagine Ginnie Mae is ready to manage reporting and remittances on a brand-new government-owned pool o’ junk of this size with existing resources.

Tanta’s conclusion is that the Feds ought to find some smart private company or two and outsource the administration of the whole thing to them. I think that’s very smart.

However, I have a different question on the issue.

What’s in it for US?

And I use the word US in two senses — “US” as in the United States, and “us” as in the taxpayers who are funding these bailouts.

In theory, I suppose the benefit is that using taxpayer dollars to provide welfare to Bank of America, Goldman Sachs, and other ginormous financial institutions would increase stability in our financial markets, soften a recession, etc. etc. Seems kinda remote. And a terrible investment.

So I have a better idea.  Well, probably a better idea.

If we’re going to do a bailout of any kind involving $739 billion, I suggest we do it as an equity investment in these large and wealthy banks and hedge funds and insurance companies. The Feds ought to go to Warren Buffet and tell him, “Okay, we’d like you to identify the banks, Wall Street firms, and insurance companies who have large exposure to subprime debt — then buy them on behalf of the people of the United States. Here’s $750 billion to work with, Warren. Get us some good deals.”

Rather than buying BofA’s crappy debt, let’s just buy BofA.  Bank of America’s market cap is only $189B or so, and their stock price hit a 52-week low on Feb 22.  Seems like it’s a bargain, maybe, for the taxpayers to snap up.  That way, the Federales are backing BofA’s debt as well, and the taxpayers could be stuck with hundreds of billions of nonperforming loans. But at a minimum, once the loan losses are written off, the good loans rescued, and the market turns around, and BofA starts to throw off billions in profits, the gubmint will share in that turnaround as well. And the gubmint can use that money to (a) issue a profit-share to each taxpayer on a pro-rata basis, or (b) reduce taxes (which amounts to the same thing).

As it stands, BofA had profits of $14.9 billion in 2007, and $21.1 billion in 2006.  And the bank executives are crying in their beers.  Okay, so let’s buy ‘em out, and see if profits in 2008 go back to $21 billion, and go up from there.

Add in JP Morgan, Citigroup, Morgan Stanley, and any other financial institution who wants some of the government handout, and we’re looking at what may possibly be a pretty good investment for the American people.  Yes, this does mean dilution for existing shareholders — their choice is to accept the dilution, or watch the stock price float to zero as the bank gets overwhelmed by bad mortgage debt and CDO instruments.

Seems to me that the troubled banks can get over this hump with an injection of capital to the tune of $739 billion from the Feds. In return, the Feds get huge chunks of these very valuable, very profitable financial institutions. In all honesty, the employees of said financial institutions might find their annual bonuses curtailed a wee bit to pay the new owners their fair share of the pie. But that’s better than looking for a job after one or more of these banks go under, no?

Since none of us want a nationalization of our money center banks, the investment can have very specific mandatory out-clauses. At a certain price level in the stocks of these companies, or at a certain profit multiple, the Feds will start to liquidate the holdings in banks by selling shares to the private market.  That has the added benefit of capturing any appreciation in the stocks of these banks, which then can be used to pay down the government’s debt (probably incurred in the course of trying to bail out these banks in the first place).

So, the Rob Hahn plan for bailing out our mortgage banks.

1.  Go hire Warren Buffet.

2.  Invest $750 billion in 2008 into these banks who want government welfare, as equity — and only as equity, not as loans or loan guarantees.  Yes, this probably means dilution for all of the current equity holders.  Too bad, so sad, guys — you knew what you were doing when you invested in financials.
3.  $750B buys you, in today’s valuation, the following financials:

• Bank of America ($189B)
• JPMorgan Chase ($148B)
• Countrywide Financial ($4B)
• Citigroup ($125B)
• Wachovia ($67B)
• U.S. Bancorp ($57B)
• Wells Fargo ($103B)
• American Express ($52B)

4. Make money, use the money to lower taxes (which has the benefit of stimulating the economy, thereby making recovery faster), then sell the stocks once certain triggering conditions are met.

I’m sure someone more versed in the arcana of the financial markets will point out various flaws in this plan.  But as you do so, please then answer the question: What’s in it for US in any bailout plan?

-rsh