by Tanta on 12/21/2007 09:55:00 AM

With a curtsey to sunsetbeachguy, we stare in wonder at an interview with the Treasury Secretary in the LAT.

On disclosures:

The key is to get the balance right and not go so far that you cut off credit and make the situation worse. The Fed has also been looking at disclosure. I think when you look at the mortgage area, it's almost a caricature of what you see in other areas. You've got pages and pages of disclosure, which doesn't mean you're getting the people good information that they can understand. It's sort of, "Everybody cover their rear end," protect themselves legally. But, I've made the case several times, with all the disclosure there should be one simple page signed by the lender and the borrower that says, "Your monthly payment is x and it could be as high as y in a couple of years." The Fed I know has done some real consumer research on this.

I also have done some real research on this. I have found that when you prepare a simple, one-page document that says, "Your monthly payment is x and it could be as high as y in a couple of years, and you can't afford that, which is why we are denying your application for credit," you call it an "Adverse Action Notice" instead of a "Disclosure." But that kind of runs into that "cutting off credit" problem.

On interests, best:

And the way I think about it is this: that historically when a homebuyer, homeowner has a problem, a default's clearly not in the homeowner's interest. And it's clearly not in the lender's interest. It's very costly; defaults are very costly. So in a normal world the two sides come together and they strike a deal. Today we're dealing with two factors that make this more difficult. First, as you know, the institution or company that made the mortgage no longer holds it. It's spread all around the world with investors. That creates a cumbersome, complex decision-making process. It's one that can be dealt with when you've got home prices rising or you've got a stable mortgage market.

Historically, homeowners had a down payment invested in the property; also, historically homeowners who defaulted knew they'd have a hard time getting credit again in the future. Having removed the downpayment and minimal credit standards, there isn't much "cost" to default for a lot of people. Furthermore, if a default is costly to the "lender," then it is surely costly to whoever the "lender" is today. Why a transfer of servicing rights would, in and of itself, remove the incentive for working out loans is still kind of hard to see. But, as Paulson notes, this incentive failure can be responsibly managed when defaults are not costly. We pay this guy with tax dollars.

The whole interview goes on for a lot longer, but I can't take any more of this. You all will have to take it apart in the comments.

by Tanta on 12/10/2007 12:06:00 PM

Tom Petruno in the LAT gets it:

Some analysts said the risk of borrowers returning for more forbearance could be intensified by a provision in the program that calls for fast-tracking hundreds of thousands of loans for a rate freeze, as opposed to undertaking a detailed and time-consuming study of the borrowers' finances.

"To decide if a modification is beneficial," analysts at brokerage Deutsche Bank Securities wrote in a note to clients Friday, a mortgage servicer needs to assess the borrower "with the same degree of care as a new borrower walking through the door."

Determining eligibility for a rate freeze based on just a few criteria, as the Bush plan proposes, "is to repeat the same type of underwriting shortcuts that got us here," the analysts wrote, referring to the no-questions-asked frenzy of 2005 and 2006 that gave home loans to almost anyone who could fog a mirror.

But the administration and its financial industry allies said the crumbling housing market dictated the need for speed in addressing the problem many borrowers are facing in holding on to their homes.

"The standard loan-by-loan evaluation process that is current industry practice would not be able to handle the volume of work that will be required," Treasury Secretary Henry M. Paulson Jr. said Thursday in announcing the program.

That is the issue and has always been the issue. But then Paulson wasn't in much of a position to lecture servicers about doing things right the first time and displaying a "degree of care":

As President Bush announced the modification plan, The Wall Street Journal reported that the SIV fund likely would be half of the $100 billion originally envisioned, apparently because some SIVs did not want to participate.

The loan modification agreement, meanwhile, came together in a relative rush. Sources said that discussions on it did not begin until after Thanksgiving, and that the first meeting on it was not until Nov. 29. Details of the plan were still being worked out until moments before the announcement Thursday afternoon.

Indeed, federal regulators appeared to have been kept in the dark about many of the plan's details. That proved awkward at a House Financial Services Committee hearing on loan modifications Thursday morning. Chairman Barney Frank challenged bank regulators on the plan, who acknowledged it was still in flux.

A Treasury spokeswoman did not return calls seeking comment. [American Banker, registration required]

I don't know that I've ever really seen this much homework eaten by this many dogs before. I guess the good news is that the dogs aren't going to starve.

Of course, if you ask Paul Krugman, he'll tell you that it's not so much that the dog ate the homework; it's that we're grading on the Bush Curve:

By Bush administration standards, Henry Paulson, the Treasury secretary, is a good guy. He isn’t conspicuously incompetent; and he isn’t trying to mislead us into war, justify torture or protect corrupt contractors.

There's a masterpiece of damning with faint praise.

So putting together some sloppy plan to let sloppy servicers slop along with sloppy modifications is probably the best we could have hoped for. At least no one is (yet) suggesting that we load the nonperforming loans up in CIA planes and fly them to secret detention centers in the dead of night for a few torture sessions. What a relief. I doubt we could have found the original loan file to put it on the plane . . .

But fear not: having gotten permission to do sloppy mods, we're sure that lenders are done asking for permission to do more sloppy stuff, right? Wrong. According to Mortage News Daily (sub required):

To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages. The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB.

I guess we're supposed to be grateful that they're asking first.

by Tanta on 12/09/2007 10:18:00 AM

CR did a wonderful post yesterday clearing up some of the myths and misunderstanding about the Hope Now/"Paulson Plan." I just want to follow up on one of them, the issue of whether this is a "bailout."

We will never establish consensus on that point as long as anyone uses the term "bailout" to mean just any post-hoc action that could benefit someone. CR is using the term somewhat more specifically, in the sense of providing actual taxpayer funds to subsidize mortgagors or make whole mortgagees. In that latter specific sense, the Paulson Plan does not represent a "government bailout."

Several people have noted that it does seem to rely on the availability of government-insured refinance loans (FHA and FHASecure), and it proposes, certainly, the development of government-sponsored bond programs (the "government" in the latter case would be states and counties and cities, not the federal government, as far as I can tell).

I therefore thought it would be helpful to remind everyone what the difference is between a "government-insured" loan and a bond program. FHA does not buy loans. It does not provide capital to make loans with. It is not entitled to any interest income from performing loans. It does not service loans. Ginnie Mae securitizes FHA loans, but Ginne Mae doesn't buy loans either. It "wraps" pools of loans with its guaranty.

So FHA gets nothing out of performing loans except the required insurance premium that the borrower pays. Premiums are held in the MMIF (Mutual Mortgage Insurance Fund) and used to pay out for claims on defaulted loans. We don't need to get into all the technical parts of that today. The point is that the general goal of the FHA MMIF is to be revenue-neutral. Whether it is or not at any given point in time depends on how well the premiums were priced and how well the loans perform. For a long time the MMIF has been a "negative subsidy" on the federal balance sheet, meaning that it actually is in the black. It may well not continue to be in the black, but my point is that what's in the black isn't "profit" from interest payments made by mortgage borrowers. FHA doesn't own any loans. What's in the black is insurance premiums collected in excess of claims paid.

Bond programs are different. There are a jillion flavors of them, but in essence they are public versions of securities: they actually do buy loans, pool them, and issue bonds to investors who receive the principal and interest payments from the loans. Typically, they are set up to buy low-interest (below market) rate loans, because they are issued by governments and everything gets favorable tax treatment. It is possible that the loans in a bond program pool also have some other kind of credit enhancement like FHA insurance, private mortgage insurance, or second liens.

But the bottom line issue here is that insofar as the loans do perform, the bond program's investors do receive the interest income. The bond issuer is ultimately at risk if the loans default and there is not enough principal recovered to make the investors whole.

But in both cases--government-insured loan programs and bond programs--private investors are providing the capital. Of course cities and states and counties can themselves invest in mortgage securities, and we see that they have. But that's hardly the traditional way of doing a mortgage-backed bond issue: the idea there is to get someone else to provide the capital, since the issuer is providing the credit enhancement.

The federal government does not have any program in which it directly buys mortgage loans, or directly invests in mortgage loan pools. The lending capital in this context is always coming from the private sector.

So to get back to the "bailout" question: at the simplest level, what's going on here is that loans that were "insured" (or credit-enhanced) by the private sector are being refinanced into loans that are insured or credit-enhanced by the public sector. Therefore the risk is moving off the private balance sheet and onto the public one. The rewards--such as they are these days--are still firmly in the private sector. In that sense, you could call this a bailout: it's moving the risk of default.

On the other hand, it only works if investors are still willing to buy Ginnie Mae securities or municipal bonds. There has to be some capital supplied. The idea here is that nobody's stupid enough to buy high-risk mortgages right now without government guarantees. So far--and I do stress so far--not even FHA has been willing to go down the road of upside down loans to borrowers who can't qualify with income docs. That's why the whole Paulson Plan is about, in essence, what to do with those loans. So FHA is "taking out" some pretty weak loans, but it isn't taking the weakest ones. The weakest ones get "the freeze" or the foreclosure. That is why this Plan is usefully described as not a government bailout. If FHA or municipalities would take all the toxic waste, we wouldn't need this Plan; servicers would just be busy refinancing. The Plan exists because there is a big pile of loans that do not qualify for any of those refinancing opportunities.

Some people are getting confused by the extent to which The Plan talks about refinances. We already had FHASecure and plain old FHA before this Plan; the Plan did not invent those options. The Plan is about designing rules of thumb for quickly sorting out the loans that don't qualify for refinances, and doing something about them. In that sense it's no more of a "bailout" than what we had before The Plan.

Now, as I noted last week, Paulson's "total package" includes lobbying for "FHA Modernization," which would certainly increase the number of loans FHA could "take out" and decrease the number of loans the private investors have to live with somehow. There are many reasons not to like that; even if you do like the idea of FHA taking on more of the problems, though, the answer here would be to expand FHASecure, which is a new program specifically designed to refinance troubled loans. Changes to the regular old FHA warhorse program would allow more "take outs," but it would also apply to new loans, and we'd have it forever (because there's never the political will to tighten FHA requirements during the next boom), and so FHA would be in the front of the mess next time, with no "dry powder."

"FHA Modernization" might be a kind of bailout, but it's not, in my view, really much of a bailout of existing, defaulting mortgage securities. It's a "reflation" of the mortgage origination industry and the RE market (existing and new). That's the only rationale for pressing for FHA Modernization rather than pressing for easing restrictions on FHASecure. As I said, there are precious few investors who will put money in mortgages right now without a government (or quasi-government) guarantee. Ignore the spin: FHA Modernization is about making new purchase money loans, not about refinancing old problems. That is not an "investor bailout"; it's life-support for loan originators and builders and sellers of existing homes.

We should, I guess, pause over "sellers of existing homes," because we have a vocal subset of the commenting community who keeps arguing that borrowers in trouble should just be counseled to mail in the keys and be done with it. I take it the idea is not to have the banks and REMICs own that REO forever; the idea is that the REO would be sold at a much lower price to new borrowers. Who quite possibly can't get financing right now because the mortgage market is stalled and all appraisals are now in question. So even at a lower price, you need financing for these new borrowers. Enter "FHA Modernization."

There are many kinds of "bailouts," and they don't all depend on not foreclosing on current owners. I frankly am more worried about FHA Modernization becoming a "bailin" than I am FHASecure being a "bailout."

by Tanta on 12/05/2007 11:17:00 AM

Much has been said and debated about the Hope Now Alliance and Treasury Secretary Paulson’s comments last week thereon. Accrued Interest has a good post on the subject, which I take in part as kind of a nudge to explain some of my discomfort with the proposal. I’m working on a longer post addressing the question that seems to bother people the most, namely the question of the extent to which this involves the government changing the terms of existing contracts, or providing protection from liability for servicers who might be accused of violating contracts. That’s a big issue and in many ways a highly technical one, so it may take me a while to deal with it.

In the meantime, though, I wanted to point out one large problem I have with Paulson’s remarks, and a news item this morning gives me a great excuse to do so:

NEW YORK, Dec 5 (Reuters) - Countrywide Financial Corp's (CFC.N: Quote, Profile , Research) chief executive called on the U.S. Congress to temporarily raise the maximum size of mortgages that Fannie Mae (FNM.N: Quote, Profile , Research), Freddie Mac (FRE.N: Quote, Profile , Research) and the Federal Housing Administration may buy or insure by 50 percent to $625,000.

In an opinion piece in the Wall Street Journal on Wednesday, Chief Executive Angelo Mozilo, whose company is the largest U.S. mortgage lender, said the increase from $417,000 should be implemented for up to a year.

He said this would go a long way toward alleviating a nationwide housing crunch, which analysts expect to pinch borrowers and lenders throughout 2008 and probably beyond.

"It should be enacted as part of a broader package of reforms to ensure that these linchpins of our mortgage system can aggressively support the housing market in a time of need, and that the appropriate controls and oversight are in place to protect taxpayers," Mozilo wrote.

Mozilo had previously called for the cap to be raised to as much as $850,000.

You may recall that Bernanke, in a fit of exuberance, had suggested at one point that the GSE limit be raised to $1,000,000. Like most people, I pretty much instantly discounted that as a real possibility. Apparently even Angelo Mozilo has been forced to back off from $850,000 down to $625,000, and only on a temporary basis, at that. I suggest to the powers that be that continuing to ignore this sort of thing is working: wait til they get down to about $420,000, and then close the deal.

But I do not trust Henry Paulson one little bit when it comes to ignoring this sort of thing. This is from Paulson’s speech to the OTS’s National Housing Forum, part of his remarks on the Hope Now proposals:

We in the federal government are also taking steps. This fall, HUD initiated "FHASecure" to give the FHA the flexibility to help more families stay in their homes, even those who have good credit but may not have made all of their mortgage payments on time. An estimated 240,000 families can avoid foreclosure by refinancing their mortgages under the FHASecure plan.

The Administration is taking action to help homeowners, and Congress must do the same before it leaves for the year. Since August, the President has been calling on Congress to pass his FHA modernization proposal which, by lowering the down payment requirement, increasing the loan limit and allowing risk-based pricing, will make affordable FHA loans more widely available. The Administration's proposed bill would help refinance another estimated 200,000 families into FHA-insured loans.

FHASecure and “FHA Modernization” are horses of a different color. “FHASecure” is HUD’s response to the subprime refinance market meltdown; it is a way to offer refinances for a specific class of borrowers facing exploding ARM resets. It still requires a minimum of 3.00% equity, and it does not involve an increase in the maximum mortgage amount. You can read about the details here.

“FHA Modernization” is the kind of thing that got us into this mess in the first place. It is disingenuous of Paulson to say that Bush has been asking for this “since August”; he has been asking for it as far as I know since his first presidential campaign in 1999 (when the whole “Ownership Society” thing got launched). Only someone drinking too much bongwater, in my view, can think that now is a good time for FHA to start taking the oversized no-down loans (with casual appraisals) that are blowing up in the conventional sector. The Bush administration simply treats “FHA Modernization” like tax cuts: they’re good when the economy is good, they’re good when the economy is bad, they’re good when the economy is indifferent. They’re good; it’s a religion. Using the cover of the current crisis to sneak in permanent changes to the base FHA programs, changes that would allow future purchase transactions of the sort that we need FHASecure to bail out, is playing politics. Bad on Paulson.

Do note that FHA loan limits are now, and would be under “modernization,” tied to some percentage of the GSE conforming limit. This means that any change to Fannie and Freddie’s loan limits are an automatic change to the FHA limits. The “modernization” proposal would increase “lower cost” area limits from 48% to 65% of the conforming limit, and “higher cost” areas from 87% to 100% of the conforming limit. Therefore, the combination of “modernization” and—should it occur—increases in the conforming limit could very rapidly increase FHA loan amounts, at the same time that it relaxes appraisal requirements and lowers down payments. If Mozilo’s proposal were enacted along with FHA Modernization, the FHA limits would go to $406,000 (lower cost areas) and $625,000 (higher cost areas). Without “modernization,” the FHA limits would still increase to $300,000 and $546,000, respectively, unless there were a specific limitation in the bill holding the line on FHA limits. Those are pretty big loan amounts for a program that currently allows 97% financing and that is lobbying for the ability to offer 100% financing.

So far, cooler heads seem to be prevailing on the question of raising the conforming limits. So far. This is what Lockhart had to say on the subject to American Banker (subscription only):

"From the Fannie and Freddie side at this point, they should really stick to their knitting, given their capital constraints and given their lack of experience in the jumbo market," Office of Federal Housing Enterprise Oversight Director James Lockhart said in an interview last week. "From my standpoint, they have their hands full in the conforming loan market, and they're doing a good job, and if they're going to go anywhere, I think it should be to help out more in the affordable [housing market], because that's part of their mission."

If Fannie and Freddie don’t belong in the jumbo market, then FHA certainly doesn’t.

My position has always been that the only really good thing about a full-blown credit crisis is that it creates a context in which restrictive legislation that would normally get successfully fended off by industry lobbyists can get passed, as part of the price tag of various bailout or pseudo-bailout efforts. In other words, you can kick them while they’re down. Changes to bankruptcy law to allow cram-downs is a great example of this, as are the state laws seriously curtailing or outright prohibiting stated-income lending. Those aren’t the kind of regulations you get when the punchbowl is still full.

Using the current crisis as an excuse to sneak through more irresponsible “innovation” is making a bad situation worse. The best thing you can say about FHA and the GSEs over the last several years is that while they took on some real risk—everyone did—they did not—they could not—participate in the worst of the excesses. It was left to the purely private sector to go where the agencies would not go; they went there; we got a postcard; it’s not a pretty one. So the agencies will have to be part of the cleanup. Programs like FHASecure and the GSEs’ various near-prime or “expanded approval” refinances for troubled loans are out there, and will save as many loans as they can save. I can live with that, personally.

What I don’t intend to live with is changes to the agencies’ statutory and charter limits that put them in the front of the next bubble. Put down your coffee and any sharp objects you happen to be holding, and read this interview from August of 2006 with Brian Montgomery, FHA Commissioner (and former “director of advance” for Bush-Cheney 2000):

Q: When we spoke about a year ago, on your 34th day on the job, you noted your vision for FHA and the things about FHA that you wanted to improve. Has your vision for FHA changed or evolved during your first year as FHA commissioner? What do consider your biggest accomplishment at FHA within the past year?

A: I'll tell you that the vision is pretty much the same, as far as what we need to do to make FHA viable again. I'd even go so far as to say that it's been strongly reinforced by the many speeches that I give around the country and the many home-ownership events and ribbon-cuttings where I'm actually getting to meet some of the families who've been able to purchase their first home because of FHA. Getting to see the excitement on their faces tells us we're doing the right thing.

I'd also say that, speaking relative to the industry, when we embarked on this quest to modernize FHA, we worked closely with many industry partners, including the MBA [Mortgage Bankers Association]--in particular, at their conference [92nd Annual Convention & Expo 2005] down in Orlando.

Kurt [Pfotenhauer, MBA's senior vice president, government affairs] and others had set up a roundtable of about 25 small to medium-sized FHA lenders, and what was going to be about an hour-long sit-down ended up being an hour and 45 minutes where they all gave me their input on how FHA should be.

Every one of them essentially gave me an earful--in a pleasant way, mind you--but every one of them would start off [by saying], "I started out in FHA" and "I cut my teeth in FHA or my partner did."

It was good for me to see--again reinforcing that our industry partners firmly believe that FHA needs to play a large role in today's mortgage marketplace--that we're definitely heading down the right path. I haven't met anyone yet who said, "We think FHA has outlived its usefulness." Quite the contrary--they all tell us we're doing the right things.

As far as a biggest accomplishment, I would say modernizing some of the ways we do our business relative to our procedures and processes. Some of the feedback we've gotten from the industry, because we rely on the industry and we're partners in all of this, [include] improvements in how we do appraisals.

Some previously called [our rules for appraisals] "unique," some called them "onerous" and some [called them] things worse than that, and we just thought maybe in today's hurry-up world it's not so important to go back two or three times to make sure a cracked window pane is fixed or maybe the tear in the carpet has been adequately repaired. Now, if it's something structural, that's a different story.

I think [another accomplishment would be a] lot of those common-sense solutions--the lender insurance initiative [FHA's Lender Insurance Program, introduced by HUD in September 2005], that now about half our loans are using lender insurance, but we were about the last entity out there to send the thick case binders back and forth as our only means of really processing loans.

We decided that it was time for us to come into this century and do what everyone else was doing--just hitting the "send" key.

That's the Bush administration in a nutshell: give happy speeches, see happy faces, hit "send." The fact that they're still pushing hard for this even "post-turmoil" tells me that it has nothing to do with "Hope Now," and everything to do with "Just Keep Hoping."

by Tanta on 11/21/2007 09:20:00 AM

I see you're coming around to a view of the housing and mortgage mess that has a clear reality bias. You're not there yet, but the trend is inspiring. I want you to know that I'm from The Blogs and I'm here to help you.

First things first: why have mortgage lenders worked out troubled loans ever since the dawn of mortgage lending? Because lenders do what lenders do: seek maximum profits. If a loan was supposed to earn you a dollar, but isn't earning you anything because the borrower is not paying, and you have the choice of restructuring, and getting, say, 90 cents, or foreclosing, and getting, say, 70 cents, you restructure. It is possible that, end of the day, you really get 91 cents instead of 90 cents if you cloak it in fine-sounding rhetoric about keeping The Dream Alive and helping borrowers stay in their homes and stuff. (It costs maybe a penny to write boilerplate PRs like that; you get two cents in benefits from Happy Regulators; it nets out.)

How does this get complicated? Well, traditionally, one had to be able to say, with some reasonable degree of certainty, what the cost impact was of the two options. That involved both modeling--looking at your historical experience as well as putting together a complex calculation of all the overt and hidden expenses and recoveries of each situation--and individual loan examination. It never helped you to say that "loans of this type should behave this way." That's what you said when you made them originally. At this point, you have a loan that is refusing to behave the way loans of its type are "supposed to" behave. You just have to break down and look at the borrower, the property, and the overall situation, to see if this is possibly a 90 center or inevitably a 70 center.

That requires people with skills. Enough people with skills to look at a lot of delinquent or about-to-be deliquent loans fast enough to not miss your window of opportunity on that 90 cents. Time is money in this business.

The industry is telling you right now that they just don't have enough people with the right skills to be able to wade through all the problem (or potential problem) loans fast enough to make the workout/foreclose decision. There are two reasons for this. The first is inevitable: no one runs a servicing operation with that many extra people sitting around waiting for a mortgage crisis. The second is not inevitable but is surely predictable: once the crisis happens, lenders start laying off, not beefing up, because crisis means earnings are down and you know what that means. I'm guessing that you had some experience with that kind of issue at Goldman. Plus the whole thing is complicated by these complicated securities we cheerfully put these loans in, that now have a bunch of complicated rules for getting them out. You know how securities lawyers bill out, don't you?

This means that the industry cannot do what it needs to do to defend itself. It will continue to take 70 cents instead of 90 cents, because it does not have the resources to commit to this problem, or because if it did commit those resources, the extra cost of staffing up and training and recruiting and so on would make the 90 cents scenario no longer achievable. Eventually the recoveries either converge--it's just as expensive to work out as it is to foreclose--or they don't, but only because the RE market is diving faster than salaries for workout specialists are improving, so that you end up with the choice of 70 cents or 50 cents, then the choice of 50 cents or 30 cents, down to wherever this has to go to sort itself out. Equilibrium in the housing market or servicer bankruptcy, whichever comes first.

Meanwhile, of course, the intangible returns--the credit we get for pretending that this is about Helping the Poor or being Heroes to Homeowners--do tend to inflate. That's the hallmark of a first-class economic crisis. However, on the level of nice rhetoric they don't inflate enough to cover what the industry is spending. Concrete bennies have to be put on the table. Regulatory relief. Fun with reserve and capital calculations. Approval of mergers and acquisitions. You know the drill. This is about maximizing profit. You are going to have to do something that makes this profitable, if you're going to expect lenders to do it on a large scale. Your job, of course, will be to write the PR that says that all this "regulatory relief" to for-profit banks and mortgage companies is all about Helping the Poor and being Heroes to Homeowners. I suspect you're up to that task. There is no shortage of PR-writers in this administration.

All that, of course, is about the historical or traditional approach to workouts. We are, you know, in the aftermath of a historically unprecedented binge of making loans to people whose creditworthiness, capacity, and collateral were, shall we say, not the issue. We can, of course, apply good old-fashioned time-tested methods of analysis of these loans now, after the fact, to see if they qualify for a modification. It will inescapably have an air of ludicrousness about the entire process. I can't help you with that, buddy.

Or, we can process the workouts the same way we processed the original loans: fast and cheap, with lowest-common-denominator thresholds for approval that really don't depend on an honest evaluation of the cost/benefit compared to foreclosure. You have to admit that this would have a charming kind of "fighting fire with fire" quality to it. You'd get some big time bad press here. But if the point is to allow servicers to workout loans without having to spend any money--hiring those workout specialists who know how to examine the loan, compare all the costs, and make a defensible call--this plan has Genius. It's rather like that earlier plan we had for making mortgages to every conscious person in America without having to mess with nonsense like documentation and underwriters and stuff.

All that said, though, it does seem like you might want to be kind of cautious about how many goodies you put on the regulatory table in order to get the lenders to play ball. I for one am not sure you can afford to cover all the checks your mouth is writing any more than the lenders can. It sounds to me like you probably need to hire a bunch of regulatory relief workout specialists who can put some dollars and cents on your options here.

I must say I'm enjoying having you a few inches closer to the reality-based community. I hold hopes that someday you and The Blogs will actually inhabit the same economic planet. That would be like so totally cool.

Thank you for your time and attention to this matter.

Tanta

by Calculated Risk on 10/16/2007 11:46:00 AM

From the WSJ: Paulson Says Housing Is Likely To Adversely Affect Economy

U.S. Treasury Secretary Henry Paulson offered a sobering view Tuesday of the pressure the housing market was having across the country, saying the decline stood "as the most significant current risk to our economy."

Mr. Paulson even acknowledged that problems in credit, mortgage, and housing markets were much more severe than anticipated.

Click on Headlines for Larger Image. (thanks to Brian for headlines)

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," he said in a speech to Georgetown University Law Center, according to prepared remarks. "And it now looks like it will continue to adversely impact our economy, our capital markets, and many homeowners for some time yet." (Read the full text of Paulson's remarks.)
...
"The problem today is not limited to subprime mortgages as the number of homeowners having trouble making payments on prime mortgages is also increasing," he said.

Mr. Paulson said the housing correction was having a "real impact on our economy," citing how annual housing starts have fallen off more than 40% since early 2006. "It looked like housing construction had reached a bottom in the first half of this year, but starts have declined again since June and data on permit applications and inventories of unsold homes suggest further declines lie ahead," he said.

What a change in views. Just three months ago I was asking if Paulson worked for the National Association of Realtors: Is Paulson the New Lereah?