Subprime Daily Briefing, Dec. 6
By Arnold Kling
Here is today’s edition.
LATER: more addedThe Washington Post reports,
The FBI today will launch a mortgage fraud task force in its Washington field office, joining a widening net of state and local investigators digging into the market crisis.
So the barn door is finally going to start to close.
Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio.
Read the whole article. It sounds as though some Wall Street folks closed their barn doors in time. Others didn’t.
Finally, the teaser freezer seems to be a done deal.
The plan, hammered out after weeks of talks among Treasury Department officials, mortgage lenders and Wall Street firms, would allow distressed borrowers who are current on their payments to keep their low introductory rates and escape an increase of 30 percent or more in their monthly payments when the rates expire.
Democratic lawmakers and presidential contenders quickly criticized the plan as being too timid and promoted more ambitious proposals of their own.
Lord help us.
If the problem here consisted of poor, strapped borrowers needing a break from impending rate increases, this might be a solution. But the problem is (a) the housing market is looking for a bottom and (b) securities markets are illiquid. For both of these problems, the teaser freezer is at best irrelevant and at worst counterproductive. The best that might be said for it is that it forestalls the “more ambitious proposals” which no doubt would muck things up even worse.
Keep in mind, however, that neither a teaser freezer nor a “more ambitious proposal” is going to turn those loans that are defaulting within 6 months of purchase into good loans. You can’t make a silk purse out of a sow’s fraud.
Speaking of fraud, Felix Salmon passes along this doozy.
more than 100 defaulted and foreclosed-upon properties can be traced to associates of Crisp & Cole. ..
Here’s how one scam worked, as reported by the Bakersfield Californian. On July 12, 2006, Crisp & Cole sales agent Jeriel Salinas bought a Bakersfield home for $620,000. The deal was “fully financed” — meaning Salinas put no money down. On Aug. 21, Salinas granted — for no apparent compensation — a 99 percent interest in the home to Aiden, Logan & Associates Inc., another company affiliated with Crisp & Cole. The very next day, on Aug. 22, Aiden, Logan sold the home to David Crisp’s mother, Tu Crisp, for $959,000 — a 55 percent markup in just one month. Again, the deal was fully financed. Both the Salinas and the Tu Crisp transactions were notarized by Crisp & Cole employees.
On May 10, 2007, Tu Crisp’s loan defaulted. On Sept. 17, the lender foreclosed.
I don’t think that the teaser freezer is going to make these loans any better.
Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash. In a symptom that the financial fever hasn’t broken, interest rates for one- and three-month loans among banks are up sharply. The Fed and the European Central Bank are now forced to consider the economic equivalent of alternative medicine.
Bank capital standards may be counterproductive at this point. I worry about this scenario: Every bank has to mark down some of its securities, and this means that they need more capital. So they all start selling securities, which means that the prices go down, which means more markdowns, more need to raise capital, etc. I’m not sure that such a vicious cycle truly can occur, but it seems like a possibility worth worrying about. The way to stop it, of course, is to loosen up the capital regs for a bit, under the assumption that the banks really are solvent if the market is given time to recover in an orderly fashion.