Posted by Karl Denninger
The gloves came off entirely Tuesday in testimony before the House Committee on Financial Services. David Lowman, Dimon’s lieutenant and the CEO of Chase’s home lending, argued strongly against a cornerstone of the Obama Administration’s plan to help homeowners facing foreclosure.
In his testimony (which can be read in its entirely in this pdf), Lowen sought to take the high ground in opposing the reduction of mortgage principal. “Like all loans, mortgage contracts are based on a promise to repay money borrowed,” he said. “If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?”
If would be nice if that was the issue, of course.
But Housingwire nails the true factor involved here, which I have been writing about for more than a year, just below:
For all of the bank’s moralizing, that’s not what’s at issue here. It’s the $448 billion in equity lines and other junior loans held primarily by the nation’s four biggest banks. If principal writedown is allowed, most of the equity lines involved will be wiped out if the property is underwater. In fact, the plan Obama announced last week for owners of such homes allowed only 10 cents to 20 cents on the dollar for second-lien holders.
Right now second lienholders are holding up mortgage modifications for underwater homes. Yet mortgage experts clearly have determined that a borrower whose mortgage is more than 115 percent underwater will likely walk away from the home. If the borrower walks away, the first lienholder forecloses and the second lienholder gets nothing anyway.
$448 billion times zero = how many times the Tier 1 Common Equity – or Tier 1 Capital – of those very same four large banks?
There’s your problem right there – if the actual market value of these seconds was to be recognized by the banks (that’s zero – bupkis – nil – bandersnatch – zilch) they would all be insolvent right here and now.
It’s nice to see this showing up in more and more publications.
Oh, and let’s add in their exposure to the nearly half-a-trillion in CDOs too, with nearly all of those worth a nickel on the dollar – at best.
Now if we could just get the attention of those pesky jackasses at the OCC, SEC – or even better, the FBI – we might get them to quit swilling coffee and donuts and instead start doing their damn jobs!