A Little Insight into Forced Repurchases from Fannie and Freddie

The fact that the mortgage market and the GSEs are screwed up is not a new story, but these requests for repurchases from Fannie, Freddie and the mortgage insurers is  surely one to keep an eye on particularly if you are an investor in bank stocks.  (I am an involuntary investor in bank stock as a result of receiving a good chunk of my compensation in the form of unvested restricted bank stock.  If it weren’t for that, I wouldn’t touch these stocks with my worst enemy’s money, owing to the lack of transparency on the marking of assets.

One little-discussed aspect of this is that Freddie doesn’t do at the time of purchase (or at least didn’t as of 14 months ago when I last cared about this topic).  They rely on the automated approval engines at the time of purchase, then once a mortgage defaults, they go back and figure out if they should have bought it in the first place.  If it fails that test, they seek reimbursement from the party that sold them the mortgage.  Unfortunately for us taxpayers, there are many originators that are no longer in business, so there’s no one to put the defaulted mortgage back to.  In the case of the big bank mortgage shops, these levels of repurchases are, theoretically, being reserved against in current earnings figures, but those reserves are only as good as their current default estimates and reliant upon an expost facto review of the original underwriting.  Many articles have pointed out, the underwriting being done during the go-go days was often quite shoddy, both in terms of creditworthiness of borrowers and documentation.    Original loan and underwriting documentation was either lost, faked or never existed.  These practices, from which very few sellers are immune, make it pretty easy pickings for Fannie and Freddie to argue that the defaulted mortgage their holding should be repurchased.

What the Ancient Greeks knew about Brett Favre

Is "Viking" the Scandanavian word for "hubris"?

My favorite football commentator, Gregg Easterbrook (author and general smart guy) in his guise as ESPN.com’s Tuesday Morning Quarterback shows us not one but two lessons of Ancient Greece in his analysis of the Vikings / Saints game on Sunday.

The first example is of hubris in the posting of the picture attached above on the Vikings’ website during the fourth quarter of the game.  Aristotle and his boys would have loved that.  Considered the greatest crime of the ancient Greek world, the hero performs some act  out of  great pride that leads to his/her death or downfall.  Well done, Vikings front office!

TMQ provides the second lesson:

Hamartia. The “tragic flaw” described by Aristotle: A leader cannot control his own inner shortcoming, which causes him to achieve the reverse of what he desired. In “Antigone,” the king, Creon, tells himself he is acting in the interest of the city, when actually he is acting to glorify his own ego — this hamartia destroys him. Brett Favre comes up a bit short of a character in ancient Thebes, but on Sunday he was brought low by hamartia all the same. It was not enough for Favre’s team to reach the Super Bowl — he had to get the credit. Game tied with 19 seconds remaining, Favre scrambled at about the New Orleans 40-yard line, with open field ahead of him. All he needed to do was run a few yards, hook-slide, call timeout, and the Vikings’ strong-legged kicker, Ryan Longwell, had a solid chance to win the NFC championship. But the credit had to go to Favre; he had to throw a spectacular pass at the end, so television announcers would swoon. So he heave-hoed a dramatic across-the-field pass. It was intercepted, and the Saints won in overtime.

Perhaps you are thinking, “It was just a dumb mistake, and the whole thing happened in a couple of seconds.” No. Two years of Favre’s life built up to that moment. For two years, Favre has insisted that entire NFL franchises, the Jets and the Vikings, become thralls to his celebrity. He has used his stature to demand, demand, demand — the crux of the demands are always attention and publicity for himself. Now he is brought low. In two of the past three seasons, Favre has lost in the NFC Championship Game. Each time, his team seemed poised to win at the end; each time, Favre’s final play was a disastrous interception. And each of those title losses eventually came in overtime — to punish Favre for his hamartia, twice the football gods allowed him to come so close, so close, then denied him. Favre has been brought so low, he is now being laughed at in Wisconsin, and he has only himself to blame. Aristotle would not be surprised by the ending of the Favre saga. If, of course, it was the ending.

Hit the guy in the right flat that’s standing 5 yards from any other opponent and he steps out of bounds and you win.  But no.  And now it’s vacation time down on the bayou for ol’ Brett, and time for another round of “will he or won’t he”.  Can’t wait for that.

Jason Reitman, “pretty good” and pretty dumb

Dumb

In the doctor’s office today, I picked up the January 18^th edition of Time, a publication I rarely read. I made it as far as page ten, for it was there that I read a column titled “10 questions for Jason Reitman“. From what I gathered, this is a regularly occurring item in which readers lob softball questions into a celebrity and (s)he parries them with rapier wit.

Having seen and enjoyed some of Mr. Reitman’s work, especially his latest “Up in the Air” (a film that I enjoyed principally for two reasons: the scene in which Ryan Bingham teaches his young colleague how best to navigate the security line at the airport and the presence of George Clooney).

Softball question, glib answer. Softball question, glib answer. Reitman was nine for nine. It was the answer to the tenth question that caught me.

Q: Have you ever been fired? (Jessie K., WASHINGTON)

A: I have actually never been fired. It turns out I’m pretty good at what I do.

What did he say? Being “pretty good” prevents him from being fired? This is so wrong on at least two levels that I can hardly contain myself.

Jason, son of famous filmmaker Ivan, Reitman appears to have never done anything outside the film industry in which his father is wonderfully successful. Perhaps if he spent 10 years as “Jason Smith” instead, he might have a better idea of the way things work. For this he gets my favorite insult to priviledged people: He was born on third base and thinks he hit a triple.

Jason, son of Ivan, makes a movie about firing people, yet all he seems to have learned out of the process is that sucking up to American Airlines gets you good perks, not the fact that there are many, many people who were not merely “pretty good” at their job who find themselves fired and out of work through no fault of their own.

In the words of a character in one of his dad’s best movies, “Nice going, asshole.”

Running up the score at Yates High

Congratulations to Greg Wise whose Yates High School basketball team beat Lee High by the unbelievable score of  170-35, in a game that was marred (understandably) by a second half brawl.

According to this Houston Chronicle article, Yates was leading 100-12 at half-time.

I coached my son’s travel team (a B level squad) a couple years ago, and we encountered a team from Mt. Prospect that was instantly recognizable as much more talented that we were.  They belonged in the A side of the league without question.

They half-court zone trapped us and our kids had trouble getting the ball past the free throw line-extended.  We tried a couple different screens and things, but their kids were bigger, stronger and quicker.  They built about a 2o point lead in the first quarter, shooting only lay-ups as I recall.  The lead continued to grow and the press stayed on.  I got teed-up by the officials early on who also weren’t giving our kids a break despite the score.  My kids parents were hollering at the other coach (who was a hired gun, not a parent).  I thought long and hard about pulling my kids off the floor at half-time and simply leaving the gym, but I worried about what message that would send to them and how much grief I’d get from the parents.

Into the second half we went, with a couple other things in mind, thinking that our opponents would be sporting and run a little zone or a man-to-man or something other than the half-court zone trap, secure in the knowledge that they were going to win the game by a comfortable margin no matter what defense they played.

Out we went.  Zone trap.  They zone trapped for the entire game.  I couldn’t believe it.  No relief, no mercy, no sportsmanship.  There was nearly a fist fight with a couple parents and my fellow coach.  The other guy was smirking and proud of his kids.  He cited some of the same things that Coach Wise noted, too.  Which of course doesn’t make it right.

I was very proud of our kids for putting up with it, and have felt bad for not having spared them the humiliation since.  If I had it to do again, I’d have loaded up the bus at the half and explained later.  I’d forgotten how bad that felt until I read the story of Yates and Lee.  No kid signs up for that.  The presence of “national rankings” for high school doesn’t help this and this clown that coaches the Yates team is just trying to build his cred.  He should be ashamed (but isn’t) and disciplined and maybe fired, but, it being Texas where the even the assholes are bigger, he probably won’t.

In through the out door at Newark Liberty

These doors don't exist at Newark Liberty or other airports. An outrage.

A guy walks into Terminal C at Newark Liberty through the exit, disappears into the masses, resulting in the entire airport being put into lock-down, grounding flights for six hours.  If you’ve never been there, the exit is no different than it is in many other airports in this country.  It’s nothing more than a doorway that’s the size of the hallway (i.e., no threshold, no barrier) that’s “guarded” by a distracted TSA employee.  Wide open access.

In a world where every major building in the United States has some kind of gating mechanism before you can get to the elevators, why WHY are these hallways still accessible?  For all them money they spent upgrading the screening area at LaGuardia in the last couple years, no one thought to make the exit from the terminal inaccessible to people trying to swim upstream.  The same is true at O’Hare and, apparently, Newark Liberty.

This is outrageous.

How the AARP discount seeps into the subconcious

Yesterday in the hardware store, an old guy shows up at the checkout counter with two of the most expensive bags of ice melter (FKA “salt”) in the store. The cashier rings it up and announces the total as $66.74. The old man’s face registers his shock at the price. He immediately strikes the pose taught to us by popular culture: VICTIM!

“I’m an old man. Don’t I get some kind of discount? Do you know how often I’m in here?”

Clerk: No.

Old man: Can I talk to the manager?

I didn’t have time to hang around and watch how it worked out, but if I had, I probably would have said something stupid like, “where’s my unemployed discount?” or “isn’t that your Lexus in the parking lot?” or something.

Favorite Holiday Names

Back when I was attending office holiday parties, I wasn’t above grabbing the name tags intended for spouses and have a little fun. I generally stuck with one or two, but over time I developed a list of other names that never got used. I figured I’d share the list in the hopes that it brightens your day. If you’ve got any additional ideas, I’d love to hear them. Enjoy.

1. Marion Bright
2. Hal Lelujah
3. Byrum Babumbum
4. Dick T. Halls
5. Noel Bjorn Iztheking
6. Chet Snuts
7. Harold Angels
8. Gloria S. Ongofold
9. Miss L. Toe
10. L. B. Homeforchristmas
11. Will T. Omen
12. Al Iscalm
13. Al Isbright
14. Cy Lentnight

Mortgage Mess

Sadly, the mortgage mess is going to be with us for a long time.  The big thing that I think is likely to prevent a resolution any time soon is complicated, but worth thinking about.  It’s really much more complicated than I depict here, too, but for simplicity I’ve stripped it down to one issue and the essentials at that.

As you think about why more mortgages aren’t being renegotiated so that foreclosures can be avoided, consider this:

The holder of the first mortgage is quite often different from the holder of the second mortgage or HELOC.  If both mortgages were written at the same time, the chances are that the first was sold off and likely securitized, while the second was either held by the lender or sold in a separate securitization.  That second lien loan is, in many cases, worthless because of declines in market values of homes beyond the point where the homeowner has any equity (as discussed in this WSJ article).

For example, if the home was worth $250,000 and the owner got an 90% first mortgage and a 10% second at the outset ($225k and $25k, respectively), but that home is now worth only $190k (a drop of 24%–not unheard of these days to be sure), the second lien holder is S.O.L.

The reason that this is important and the reason that the crisis is going to be around for a long time is that those separate holders of the mortgages have different motivations and different exposures to be managed.  If the holder of the second lien is the originating bank and that bank acts as the servicer for both loans, there is a potential incentive for that servicer to not renegotiate the first mortgage to avoid having to realize the worthlessness of the second.  Setting aside the fact that the servicer can potentially make more money keeping a struggling homeowner barely alive than they can with a fully renegotiated loan, the holder of the second lien has no incentive to realize the true value of its position, so they don’t.

The government is pressing lenders to restructure mortgages to avoid foreclosures–but those are first liens that they’re thinking about.  If the first mortgage is restructured to the point that principal is forgiven and the balance reduced, the servicer/second lienholder must recognize that its loan is wiped out and write it down to zero if it’s still unsecuritized.  (If the second is securitized, the situation is potentially much more complicated.)  It’s not at all clear that this process of clearing bank balance sheets of “toxic waste” has occurred, despite the massive losses recognized during 2008.

To say nothing of the commercial real estate exposures that are lingering in a semi-dead state to be dealt with at some point in the future, hopefully after banks can earn enough money to replace the capital they’re about to deplete with big CRE write-downs.

More to come on this topic.

Thoughts on Freezing My Arse

Another Day in Paradise

Old Thinking:  I prefer cold weather to abjectly hot weather because if it’s cold, you can always put more clothes on, but when it’s really hot, even taking off every stitch of clothing you have on won’t cool you down.

New Thinking:  How could I have been so friggin’ stupid to think that?

It’s the time of the year when even life-long Chicagoans ask themselves “Why do I live here?”  It is a question of particular curiosity for me, because I don’t have a job and could look for a new one anywhere in the world—even God forbid, someplace warm.

The Great Book of Parenting will note that I continue to look for work in this beautiful for 9 months out of the year (ok, maybe 6 months out of the year—check that, 4 non-consecutive months out of the year) place only so my children stay with their friends.  I told my 16-yr old that a few months back when she was complaining about the weather,  “Hey Caroline, I don’t have to look for a job here.  We can live anywhere!  Think of the possibilities!  I just thought you wanted to stay here and go to school with your friends.”  She has not complained about the weather since.

The winter thinking is so perverse that you curse the clear days and think, “If we just had some cloud cover…”

We’ve lived in Chicago for almost 20 years now.  The closest I ever came to leaving was one April day in 1997 when there was a freak (!) three-inch slush fall and I had to walk the half-mile home without any overshoes.  Tromping through the muck, slipping every third step I muttered first, then shouted once I realized that I’d ruined my shoes “Why do I live here?”  The next day a headhunter called me about a job in North Carolina (state motto:  Spit Cup Optional).  I took the call and very nearly took the job.  It wasn’t the weather there that kept me from doing it. It was because two of the people I met there couldn’t remember either their young children’s ages or what grades they were in.  Seriously.

It occurred to me this morning that the conditions here today are so severe that they meet even John Yoo’s definition of torture—“an activity that could lead to organ failure, impairment of bodily function or even death.”  Perhaps Amnesty International can get the UN Human Rights Commission to take action to outlaw The Alberta Clipper.  Tomorrow’s Chicago Tribune headline:  “Dick Cheney Endorses Subzero Temps”.  Maybe this is the reason they want to move the Gitmo prisoners to western Illinois—we’ve exposed them to the brutal sun and humidity of Cuba, now it’s time for a little Arctic blast. Tell us what we want to hear or else we’ll take your coat away from you.

But if I didn’t live here, what would there be to complain about? Humidity?  Mudslides and forest fires?  The federal government’s failure to protect my beachfront home from hurricanes or its attempt to “steal” beachfront property from me by creating a buffer to protect my property from erosion and hurricanes? The fact that sand gets all over the carpeting? Skin cancer and the lack of adequate dermatology coverage in the Health Care Reform bill?

As I look out my window, for about the last 15 minutes there has been a constant flow of Canada Geese flying overhead in their characteristic V formations, headed south to crap on golf courses there.  Wave after wave of them, about twenty per group.  Honking and mocking me in my overly bundled up, but still not warm state.

No matter which direction you walk in the winter, you’re always walking into the wind.

The UnIntelligent Investor

Thanks for coming, Mr. Wurfel

From today’s Wall Street Journal comes an article about two guys who just don’t get it.

One, Jonathan Wurfel of Rolling Meadows, Illinois, doesn’t seem to understand even the most rudimentary thing about being an investor in common equity.

“Should common shareholders now serve as the final scapegoat for others’ flaunty egos and suffer a total and complete loss?, he asks the Federal Bankruptcy Judge.

YES, that’s what common equity is, the last place money goes after lenders their claims.  The people from whom CIT borrowed money accepted stock in lieu of cash.  That’s the way it works when you owe more than you can repay.  That’s the definition of “bankrupt.”  If there’s no equity, owners get nothing. You, Mr. Wurfel, were and owner and you get nothing.

In a fitting piece of irony, Wurefl’s letter head is reported to be adorned with an image of Wile E. Coyote from Looney Tunes.  I would have suggested Porky Pig.  “Abedee, abedee, abedee That’s all folks!”

This is why people know there’s money to be made in the stock market.  You’re not picking company stocks, you’re taking money from fools.