This Should Help the Mortgage Lending Environment!
Calculated Risk has wonderful coverage of a new bill that will be on the agenda for early next year, brought to you by the geniuses in the US government:
The post covers a story in the Houston Chronicle about what could be called "Cram Downs".
House Panel Approves Bankruptcy Bill
By ALAN ZIBEL AP Business Writer © 2007 The Associated Press
WASHINGTON — Seeking to provide more aid to troubled borrowers, House lawmakers on Wednesday advanced legislation that would enable homeowners to shrink their mortgages in bankruptcy court.
The bill fiercely opposed by the lending industry but supported by Democrats and consumer advocates was passed by the House Judiciary Committee 17 to 15, with one Republican supporting it.
Mortgage-industry leaders argue that giving judges this power, which they term a "cramdown," would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.
Most Republicans said the bill would harm the market and called for Congress to show restraint. "What we're doing is putting a sledgehammer in the hands of borrowers," Rep. Chris Cannon, R-Utah.
The bankruptcy bill has been far more controversial, and industry groups quickly criticized the House vote. Bill Himpler, an executive vice president with the American Financial Services Association said in a statement it would "inject massive risk" into the lending market.
There is so much wrong here that I cannot really spend the time it commands. Please see Calculated Risk and the always exceptional comments section for red meat analysis. The take home points are that if this comes to pass two things are going to happen; 1.) rates for mortgages are going MUCH higher to offset the cramdowns, and 2.) mortgage lending will tighten even more than it has already. Keep point two in mind as we head towards the next commentary section.
Lost in Translation-24 Hours in The Life of the Federal Reserve
In last nights post I detailed the markets and the FED dance as a result of the 25bps "disappointment". I theorized that the markets would throw a fit at a reasonable level, and that would in turn allow the FED to pull a rate cut "surprise" to prop things up. I mean hardly even 14 hours go by and we get the headline:
Report: Fed May Overhaul Liquidity Rules
Wednesday December 12, 7:33 am ET
Report: Fed Ready to Open Liquidity Facility That Would Auction Loans to Banks
NEW YORK (AP) -- The Federal Reserve may soon announce new support for banks in the form of loan auctions that would provide liquidity directly to the nation's largest financial institutions, according to a newspaper report Wednesday.
The Fed, under a plan that could be announced as early as Wednesday, would provide loans against a wide range of collateral, allowing banks to avoid the stigma of existing discount window loans, the Financial Times reported.
The report follows an adverse reaction on Wall Street to a quarter-point cut in the federal funds rate Tuesday. The federal funds rate is the interest charge on overnight loans between banks.
Isn't that a dandy?! I guess my trusty crystal ball is still working!
That was from 7:30 am, and the markets were all giddy over the news. As the day wore on though, things slowly bled out. Here's the end of day headline:
Stocks Erase Sharp Gains Sparked by Fed
Wednesday December 12, 5:40 pm ET By Joe Bel Bruno, AP Business Writer
NEW YORK (AP) -- Wall Street closed only moderately higher in an erratic session Wednesday as investors remained unconvinced by a Federal Reserve plan to work with other central banks to alleviate the global credit crisis.
Investors erased a 272-point gain in the Dow Jones industrial average that followed the Fed's announcement of an agreement with the European Central Bank and the central banks of England, Canada and Switzerland to confront what it called elevated pressures in the credit markets. The Fed said it will create a temporary auction facility to make funds available to banks and set up lines of credit with the European and Swiss central banks for additional resources.
This move is the biggest concerted liquidity injection since the aftermath of the 2001 terrorist attacks and helped boost investor sentiment a day after the Fed disappointed Wall Street with a quarter-point cut in interest rates. Many investors had hoped for a half-point reduction to help the economy weather the credit and mortgage crises.
Now at this point you may be wondering how my call could be correct when the markets went nowhere today? Glad you asked! The FED was too cute by half today. The plan will allow banks to borrow at the discount window in a hidden fashion, while providing the kinds of absurd worthless mortgage paper they need to unload as collateral for the loans. Ths will serve as a temporary help, but not a TOTAL BAILOUT. Of course as the markets read over the plan, as it takes them a few hours to read 3 paragraphs, they found out the small numbers involved as well as the 6 month loan term. Not nearly good enough. Also, what you have to understand is that market players have only one playbook. A fancy loan plan by the FED and ECB does not fit any model that they know, and so it was a non event. The markets still want and fully expect RATE CUTS. That is all they know or think they understand. Expect more pressure to come to bear on the FED to make an emergency cut before the next FOMC meeting.
In the same story I again found a lapse of journalism so amazing it deserves a mention here. here is the key excerpt:
"I think it's certainly a strong measure to ease this credit crunch, and I think it will encourage banks to use the discounted borrowing. If banks won't lend to each other, then at least the central banks will lend to them," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago."
So the problem is that banks will not lend to each other? Why not? Is Mr. Ablin asked the question? Of course not. If banks that are aware of all the hidden offsheet wizardry at play here will not lend to other banks, why should the central banks line up to offer money? We don't get that kind of answer even though the question is staring us in the face.
FED Closing Observations
Both moves by the FED over the last 24 hours were "Lost in Translation" (a wonderful film by the way). The 25bps disappointment engineered the kind of fake selling the boys on Wall Street use to protest. The FED moved too quick with a measure that smells of desperation and panic. The market needed time to rally and build in the "surprise cut on the way" mantra I detailed last night. Things got pretty messy today indeed.
The problem right now is not a lack of liquidity, it is a lack of solvency to borrow a term form Mike "Mish" Shedlock. The FED cannot supply capital, only liquidity and there lies the problem. Rate cuts and cash infusions can only mask the underlying problems of the banks. Consider:
- Banks need to hoard whatever cash they have to make up for massive losses
- The only capital the banks have is either worthless, or almost worthless mortgage paper
- The paper cannot be used as capital for loans from other banks, as they have the same crap and know what its worth
- The FED cannot take all the paper as collateral because the perhaps TRILLION dollars needed to cover it will NEVER be paid back
So there is no "credit crunch" nor a "lack of liquidity". There is a lack of hard assets that are worth any where near what is being lost by the banks. Short of a total and complete Federal Bailout Plan on the order of magnitude never seen before, the situation will continue its slow death.
Have a good night.