FedUpUSA

Archive for July 4th, 2011

Now this is interesting….

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.

Well, there are some potential reasons why a bank would do this.  Chief among them is that they might not be able to show they actually own the paper.  That is, they may have done something that has destroyed the security interest.  If you voluntarily refinance in such a fashion, you will have re-affirmed and given them a “do-over” on the paperwork.  Of course they don’t want you know that one potential alternative is for you to pay nothing.

“It’s a huge problem,” said the economist Sam Khater. “Reducing negative equity would spark a housing recovery.”

Bah.  “Housing recovery”?  In what way?  The root problem is that houses are too expensive.  The way to resolve this is for them to become cheaper.  Removing the leverage in the system will make them cheaper.

While many homeowners desperately need help to keep their homes and cannot get it, the borrowers getting unsolicited relief from Chase sometimes suspect a trick.

Oh there almost-certainly is a trick.  I suspect the ‘trick” is that their “loans” were in some way defective and unable to be collected or foreclosed upon, particularly in judicial states.  But if Chase reworks the loans and you sign new paperwork, well, that little problem is extinguished.

Bank of America’s chief executive, Brian T. Moynihan, told the attorneys general in April that cutting principal for current borrowers would send the wrong message to all those who have struggled to pay their bills. His counterpart at Chase, Jamie Dimon, bluntly said it was “off the table.”

It appears he lied, doesn’t it?

Option ARMs were never quite as bad as predicted, partly because the crisis pushed down interest rates so far that the resets were relatively mild.

The issue is not “resets”.  It is recasts.

When an Option ARM reaches (typically) some term of years or principal balance it is forcibly recast to a fully-amortizing loan on the original terms.

Let’s say the “Option” is to make a 2% interest payment on a $500,000 loan.  The normal interest rate is 6% and the “full term” is 30 years.  A fully-amortizing payment is $2,982.84.  But a 2% interest payment is $833.33; the rest is “capitalized”, or roughly $2,150/month.

When the loan hits the hard recast limit, whether on principal balance or time, you must then make a fully-amortizing payment on the balance over the remaining original term.

So let’s assume you have a 125% negative amortization cap.  At roughly $25,000 in negative amortization a year you can make minimum payments for about five years.

Now you have 25 years to amortize $625,000 @ 6%.  Your home is worth half of the original balance, or $250,000.  And you have a big problem, because the fully-amortizing payment on that $625,000 is $4,006.85 or 481% – nearly five times – your “option” payment!

The real screw job is that many of the people who got these $500,000 loans had gross family incomes under $100,000.  The fully-amortizing recast payment is nearly $50,000 annually! There is absolutely no chance you will be able to make that payment – default, when the recast occurs, is assured.  It is a mathematical certainty, and since your home is worth far less than the principal balance a “conventional” refinance is flatly impossible unless you happen to have $300,000+ laying around that you’re willing to part with.

Thus, the incentive for “lenders” like Chase to “modify” these loans: They know that they’re going to get screwed when the recast occurs – with certainty. If there is no reasonable way for them to get a recovery on that note that exceeds what they offer you, it’s clearly in their best interest to “fix” the loan.

They key is that this strongly suggests that you, as a borrower, in such a situation have an insane amount of leverage with the banks and investors.  Your leverage rises materially if you’re able to discern that the loan was never properly processed in the first place.

Is this “moral hazard”?  You bet.  Bigtime.  But what’s the solution?  Strategic default is in fact the proper resolution when you discern, on balance, that the debt you’ve taken on cannot be paid.  It is part of recession, it bankrupts both borrowers and lenders, and there is absolutely nothing wrong with it. If the bank discerns that you are likely to recognize this and avail yourself of this option and proactively does something that will cost it less than if you do strategic default, what’s the problem?

Leverage is a bitch in all financial transactions: It helps (a lot) when things go well, and it hurts (a lot) when they go poorly.  Choosing to use it, and all borrowing is inherently the use of leverage, comes with the risk of your economic destruction if things go poorly, either through your foolishness or simply random chance.

The Market-Ticker

Discussion (registration required to post)

Please consider a collections of charts from  The “Jobless and Wageless” Recovery from the Great Recession of 2007-2009. Annotations in red (where present)are by me.

GDP 2007 Q4 – 2011 Q1

GDP made a new high but look at the amount of US fiscal stimulus from Congress, monetary stimulus from the Fed, and global stimulus especially China, that it took to achieve that.

Nonfarm Jobs

Total Civilian Employment

By the “end” of the recession the US economy shed 7 million nonfarm jobs and 6 million civilian jobs. Since the official end of the recession, there has been a small net loss of both nonfarm jobs and civilian jobs.

Mean Weekly Private Sector Hours

Mean weekly hours have risen by .5 hours since the recession ended but are still .2 hours below the start of the recession.

Change in Civilian Jobs vs. Prior Recessions 7 Quarters Later

Private Sector Real Hourly Earnings in Constant 201o Dollars

Thanks to the Fed specifically and central bankers in general, real wages are below where they were when the recession ended.

Real Median Weekly Earnings Full-Time Wage and Salary Employees in Constant 2010 Dollars

Trends in Annualized Wage and Salary Accruals CPI-U Adjusted 2010 Dollars

Annualized Value of Corporate Profits in Constant 2010 Dollars

Snip from the report ….

“To date, through the first quarter of 2011, the nation’s recovery from the 2007-2009 recession is both a jobless and a wageless recovery. Aggregate employment still has not increased above the trough quarter of 2009, and real hourly and weekly wages have been flat to modestly negative. The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders. Most holders of savings and money market accounts also are net losers due to declining real interest rates which have been in negative territory for many interest bearing and money market accounts.”

There are more charts, tables and commentary in the 23 page PDF report.

Given the global economy is clearly weakening (disregarding inventory building and the latest US manufacturing ISM numbers), there is every reason to believe the jobless, wageless, “state of affairs” will last.

Notice I called it “state of affairs”. The recovery, if that is what one wants to call what we had, is on its last legs.

For a look at the latest manufacturing ISM numbers and trends in other countries, please see Manufacturing ISM Weaker Than it Looks; Digging Into the Numbers; Inventory Restocking Accounts for Much of the Rise

Mike  “Mish”  Shedlock
Global Economic Analysis

S&P seems to think that when you effectively stick a gun in someone’s mouth and threaten to blow their brains out unless they take your alleged “voluntary” deal that still counts as a default.

Standard & Poor’s said today a rollover plan serving as the basis for talks between investors and governments would qualify as a distressed exchange and prompt a “selective default” grade. That may leave the bondholders unwilling to complete the exchange and the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

That’s because it is a default.  “Take this exchange on less-favorable terms or we’ll screw you” is still a screwing.  There is no material difference between the two; differences are in degree, not kind.

Greek government bonds rose following the finance ministers’ authorization of the payout, pushing the yield on the 10-year bond down 2 basis points to 16.3 percent as of 11:35 a.m. in London. Two-year yields dropped 86 basis points to 25.9 percent.

Wow, 25.9%?  That is not an interest rate, it is an imputed recovery.

“Consultations with Greece’s creditors are under way in order to define the modalities for voluntary private-sector involvement with a view to achieving a substantial reduction in Greece’s year-by-year financing needs, while avoiding selective default,” euro-area finance chiefs said in a statement after their July 2 conference call.

Voluntary?  Yeah, right.

Those who believe the Greek problem is “resolved” may have a few surprises in store for them yet.

The Market-Ticker