Tag: Treasury Department

Hope Now, Pay Later

Some analysts were complaining that the Treasury Department/Hope Now Consortium plan to fix some mortgages at “teaser rates” – as a way to stall the foreclosure wave – was nothing more than delaying the pain. This may be true, and the fact that mortgage backed securities investors seemed to be missing during all the planning (and press releases) meant something eerie was afoot. Judgment day has now come, and numerous borrowers are going to get government sanctioned rate freezes that fly in the face of several hundred years of contract law. With the Treasury Department noting this is “not a government subsidy” and that potential lawsuits will be “manageable,” I can’t help but think individual investors are about to get clubbed from behind.


It’s pretty clear the quality of the loans diminishes if they are subject to rate co-opting (which is exactly what is happening here). Investors should hope that Standard & Poors does the right thing and follows through with their threat to downgrade such paper. It will serve two valuable purposes: state and local government funds will be precluded from investing, and everyone else can demand significant discounts to carry what can turn to junk whenever the political winds blow.

UPDATE: Nouriel Roubini has attempted to portray the positive aspects of the blanket bailout in what Paul Kedrosky called a “lucid” analysis. I’m inclined to categorize the take as a condescending, wholesale endorsement of socializing losses.


The “Hope Now” Mortgage Plan: Where Are The Investors?

One need look no further than the so-called member list of the Hope Now Consortium to realize an important constituency in all this is missing:

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Of the 33 entities on the list, only three are classified as “investors.” In addition, you could easily exclude all of those – the American Securitization Forum is a trade association, not an investor (and is already included as such), and Fannie Mae and Freddie Mac are quasi-governmental agencies that, while they hold and/or “guarantee” a lot of mortgage loans, also derive a significant amount (if not the majority) of their income from packaging and selling debt to others. The majority of members are lenders or “mortgage market participants” – in other words, the folks whose faulty underwriting standards produced the mess in the first place. Then there’s the sprinkling of not-for-profits…I take it so the initiative has the appearance of “do-good-ness.”

Where the heck are the investors?

UPDATE: As Asia-Pacific credit risk grows as a result of the mortgage debacle…

Treasury Secretary Henry Paulson said yesterday he’s confident the government and banks will agree on a plan to fix some subprime mortgage rates before they reset higher and trigger a wave of defaults. A lack of information has created doubts about the proposal, analysts say.

When the people that actually own the mortgage debt aren’t invited to what is potentially the biggest forgive-and-forget party in the history of modern finance, I’d say that’s worthy of a few doubts.

UPDATE 2: Yves Smith notices the same problem.