[mattduke]

What's it going to be on the 11th?

[MrBill]

The Fed will toss a 25 basis point bone to the market just to keep everyone in good holiday cheer. It won't help, but along with Paulson and his moratorium on foreclosures, it at least makes it appear that someone somewhere cares what's going on in the real economy. My prefered scenario is crash and burn, but those damned powers that be keep frustrating me! ; - )

[Tanada]

$this->bbcode_second_pass_quote('MrBill', 'T')he Fed will toss a 25 basis point bone to the market just to keep everyone in good holiday cheer. It won't help, but along with Paulson and his moratorium on foreclosures, it at least makes it appear that someone somewhere cares what's going on in the real economy. My prefered scenario is crash and burn, but those damned powers that be keep frustrating me! ; - )

[MrBill]

The USA is already having a Japan moment, but unfortunately it looks like the policy response has been borrowed from Japan as well...

[LoneSnark]

No it has not. The banks are not hiding devaluations; they have been painted on a billboard in times-square.

What happened to Japan was an institutional phenomenon. America does not have the institutions required for such an outcome.

That said, our banks are not whats in trouble, its a few financial firms. So, while the crisis is ongoing, I'm sorry to disappoint, but the 'subprime' crash has already occured. What we have now is more like a wimper, being drug down by faltering consumer spending. Just another recession, no more spectacular than any other in history.

[MrBill]

I am referring to the policy response of the Treasury's plans to put a 90-moratorium on foreclosures and the plan that is on the table to hold down re-fixable mortgage rates at their low teaser rates for as long as 5-7 years. Doing a MOF! [sup]TM[/sup]

That will drag out the adjustment process; postpone the write-off of bad loans; depress new lending as capital is tied-up; suppress a recovery in lending margins as banks have less capital with which to make new loans at new higher market rates; and along with the Fed easing inspite of inflationary forces elsewhere in the 'US dollar zone' it appears that they are losing their inflation fighting credentials. Doing a BOJ! [sup]TM[/sup]

UPDATE:
$this->bbcode_second_pass_quote('', 'I')f you're like me, you've spent the last few days sorting through the sketchy outline of the U.S. Treasury's subprime rescue plan and mulling the potentialimpact. (Hey, I never said I was a swinger!)

We learned last week that Treasury Secretary Hank Paulson was working with the mortgage industry and major financial institutions to craft a plan to freeze introductory teaser rates on certain subprime mortgages that are due to reset higher, as specified by the original terms of the loan.

Such a plan is easier said that done.

In the old days, a mortgage lender -- in many cases, your local banker -- had a relationship with the borrower. When a homeowner fell upon hard times, he and his banker would sit down to renegotiate the loan. It was in the interest of both the homeowner (he keeps the house) and the banker (he avoids costly foreclosure) to modify the loan terms.

Nowadays, subprime loans are bundled, sold, chopped up into pieces and packaged into collateralized debt obligations. The lender -- in this case, the owner of a CDO tranche -- has been replaced by a Cayman Islands hedge fund, a Florida municipality or a German bank. Their interests aren't necessarily aligned with those of the homeowner, not to mention one another.

The investor who owns the AAA-rated CDO tranche and is first in line to get paid has no motivation to support a modification of the underlying loans; the holder of the residual tranche does.

[cube]

$this->bbcode_second_pass_quote('MrBill', '.')..
The Japan Moment [sup]TM[/sup] occured when asset prices could no longer be pumped-up any higher. Not even with a zero interest rate policy (ZIRP), so they had to correct lower.
...

[MrBill]

And The Economist has called the global real-estate bubble due to global liquidity caused by excessive money supply growth 'the largest bubble in History'!

By the way, as I have no links, I thought I would post the whole article from the excerpt I inserted above.

$this->bbcode_second_pass_quote('', ' ') If you're like me, you've spent the last few days sorting through the sketchy outline of the U.S. Treasury's subprime rescue plan and mulling the potential impact. (Hey, I never said I was a swinger!)

We learned last week that Treasury Secretary Hank Paulson was working with the mortgage industry and major financial institutions to craft a plan to freeze introductory teaser rates on certain subprime mortgages that are due to reset higher, as specified by the original terms of the loan.

Such a plan is easier said that done.

In the old days, a mortgage lender -- in many cases, your local banker -- had a relationship with the borrower. When a homeowner fell upon hard times, he and his banker would sit down to renegotiate the loan. It was in the interest of both the homeowner (he keeps the house) and the banker (he avoids costly foreclosure) to modify the loan terms.

Nowadays, subprime loans are bundled, sold, chopped up into pieces and packaged into collateralized debt obligations. The lender -- in this case, the owner of a CDO tranche -- has been replaced by a Cayman Islands hedge fund, a Florida municipality or a German bank. Their interests aren't necessarily aligned with those of the homeowner, not to mention one another.

The investor who owns the AAA-rated CDO tranche and is first in line to get paid has no motivation to support a modification of the underlying loans; the holder of the residual tranche does.


Take a Number

According to the broad outlines of the plan, the Treasury will divide subprime borrowers into four groups.

Group 1 includes those who can afford the higher mortgage reset rate. ``These homeowners need no assistance,'' Paulson explained at a housing conference in Washington yesterday.

Check.

Group 2 consists of the folks who haven't been able to pay the teaser rate, not to mention the higher reset rate. Implicit in Group 2's specifications is the fact that these people couldn't afford their mortgage in the first place, lied or were encouraged to lie about their income, got a no-doc, no- questions-asked loan or were victims of fraud. They were counting on higher home prices and refinancing as a way out. ``Some of these homeowners will become renters again,'' Paulson said.

Check.

Group 3 consists of the homeowners who might ``choose to
refinance their mortgage,'' Paulson said. (See Group 1 above for
Treasury's commitment.)

Misplaced Incentives


Group 4 includes those who can continue to make their mortgage payments if the teaser rate stays in effect or the maturity of the loan is extended. For this category, and this category alone, help is on the way.

How do you spell b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e? If fraud was widespread during the housing bubble, the current plan has its own set of incentives.

``People will come up with eight ways of rearranging their finances to stay in Group 4,'' said Ram Bhagavatula, managing director at Combinatorics Capital LLC, a New York hedge fund.
$this->bbcode_second_pass_quote('', '
')Edit: MrBill - including making payments on their first mortgage while falling behind or defaulting on second mortgages, personal loans, credit card bills and auto payments - all of which have been securitized at some point and passes along to investors. Needless to say this will also depress bank's willingness and ability to make new loans. Or earn fee and interest income from new loans. What's worse than a $10 billion write-off? A $10-billion write-off and no new income coming in through the frontdoor!

[seahorse]

Hey Mr. Bill and others,

Legally, anything can be renegotiated, I just don't know how it can be done with all these mortgages bought and sold. As I understand it, and as the Deustch Bank has just found out, no one knows who is holding the notes and mortgages. So, although anything can be renegotiated, that assumes you can find the legal owners of all the notes/mortgages tp renegotiate with. I don't know if it is going to be possible to find the note/mortgage holders.

I suspect that many of these mortgage companies that have gone out of business may be part of the problem in trying to locate who holds the notes/mortgages. Though many trust funds think they hold the notes and mortgages, if they can't produce the original (or satisfy the court why they can't produce the original), they can't sue on them (at least not in Arkansas). So, my suspicion is these notes and mortgages are obviously signed locally, and the notes/mortgages are still sitting in some file cabinet of a now defunct mortgage company or broker. Only a suspicion I have.

On another issue, I am involved with several large foreclosures right now. These are foreclosures against entire unfinished subdivisions that have been sitting for about two years. I've often wondered how it is the developer is getting by and the fact that the banks took no action to foreclose. Both of the foreclosures I'm involved with were initiated by materialmen, not the banks.

Through discovery, I have learned what I suspected, which is the banks were simply allowing the developer to roll over into new notes and not charge any interest. The banks did not want to foreclose and did not want to show these as bad loans.

[MrBill]

An ounce of local input is worth a pound of subjecture from the outside looking in. Thanks Seahorse! Cheers.

[Doly]

$this->bbcode_second_pass_quote('seahorse', '
')Through discovery, I have learned what I suspected, which is the banks were simply allowing the developer to roll over into new notes and not charge any interest. The banks did not want to foreclose and did not want to show these as bad loans.