All of the talking heads and all of the politicians keep talking about how we aren’t just giving $700 Billion to Wall Street, we’re investing in mortgage backed securities that we’ll eventually be able to resell and earn a good portion of that $700 Billion back, heck we might even make a profit on it.
Let me lay out a couple of things that I know:
- Chairman Bernanke said that the $700 Billion number was determined in that they feel they need to buy 5% of the mortgages that are “out there.”
- They are going to buy the mortgages that no one is able to sell today because the price that they would have to sell them at would require that the seller immediately goes into bankruptcy.
- At this point (9:45 PM EST on Thursday), it appears that there is a very good chance that the amount that the Treasury will be paying for these assets is above “what they are worth.” (It’s hard to know what they are really worth, but it sounds like the price the government will pay is way more than what they could get on the market right now).
Now let me attempt to make a conclusion from this:
- The Treasury is going to buy 5% of the mortgage market and I think that it’s a safe assumption they aren’t going to get the highest quality portion of the market.
- According to the Federal Reserve’s own report, (just taking that snapshot in time) delinquency ratios for residential mortgages at commercial banks were running approximately 4.2%.
- That means that there is a very good chance that the portion of the mortgage backed securities market that the Treasury is going to buy is the “garbage” that’s currently part of the delinquency ratios.
- So, if the 4.2% delinquent portion becomes 84% of the the pipeline that the Treasury buys and 80% of that portion becomes essentially worthless, that means that we’d, as tax payers, take on approximately $470,400,000,000 in additional debt that won’t be “paid off” any time soon by the sale of assets.
I’d love it if I was missing something here, but I have a feeling that my numbers are, if anything too optimistic. So, anyone who tells you that this is a good idea (I’m not so sure), a necessary evil (I think something has to be done, but I like my plan better), and something where we as taxpayers are going to make money, don’t believe them.
Unless of course you believe that real estate prices always go up and “It’s different this time.”
Robert Kerr says:
According to the Federal Reserve’s own report, (just taking that snapshot in time) delinquency ratios for residential mortgages at commercial banks were running approximately 4.2%.
4.2%? Last I looked, 9% of *all* mortgages were in some state of delinquency.
Mortgages: No relief in sight
A record 9 percent of U.S. homeowners with mortgages were either behind on their payments or in foreclosure at the end of June, as damage from the housing crisis continued to mount, according to an industry group’s report.
…
September 24, 2008 — 8:11 pm
Sean Purcell says:
Alright Tom, I’ll bite. How, exactly, does 80% of the pipeline become worthless? We are talking about homes in the end, right? I mean there will be derivatives in there too (which I disagree with) but your contention has to do with delinquencies and foreclosures. Unlike the stock market, these assets do not drop to a zero value. So agree with the plan or not, it’s hard to see how we get saddled with worthless debt.
BTW, real estate prices do always go up and “It’s no different this time.”
September 24, 2008 — 8:58 pm
Brian Brady says:
Tom,
I think you’re confusing face value with loss value; we get SOME of the money back when we foreclose. If the average loss of a defaulted loan is 20%, then the number should be $58B
If Robert’s assumptions are correct, then we should double that number. I believe it’s twice Robert’s projections ($240B)
How do we make this work? Don’t pay over 65 for the loans. That ain’t so bad; it’s twice what Merrill got for theirs.
So…how does the Treasury guarantee a profit?
September 24, 2008 — 10:47 pm
Tom Vanderwell says:
Sean,
How, exactly, does 80% of the pipeline become worthless?
Maybe I was using as a number, something close to what Merrill sold theirs for. Didn’t they get 22 cents on a buck for their stuff that they sold to Lone Star? And they financed it too?
Robert,
Thanks for the “correction” in my numbers. I did a quick search and the 4.2% number was from a report that I found from earlier this year.
Brian,
Yep, you’re right. We do get some money back. I think my 80% “guestimate” might be too high. But do you really think that that worst 5% of the mortgage portfolio (which has to be almost exclusively subprime high loan to value loans) is going to perform in such a way that we’ll only lose 20%?
My point remains the same – the government is trying to “spin” this to say that we aren’t really going to lose money. My feeling is:
1. It needs to happen.
2. We will recoup some of our money
But
3. We are not going to get out of this without losing some significant tax payer dollars.
Tom
September 25, 2008 — 4:37 am
Cheryl Johnson says:
Remember back in the summer of 2007, when Bubble Bloggers were abuzz about bailing out individual borrowers? http://housingbubblecasualty.com/senator-dodd-and-los-angeles-councilman-alarcon-bailout-buddies/
Here we are a little over a year later, bailing out the whole flippin’ system.
Interesting.
September 25, 2008 — 5:24 am
Sean Purcell says:
Tom,
Let’s see if we can increase Brian’s and Robert’s numbers and still make sense. Let’s assume that 100% of the mortgages purchased default (like you said,these are going to be the worst of the worst). The best info I am able to get talking to various banks and reading reports is that the average bank loses .40 on the dollar with a foreclosure. So, if the Treasury does every inefficient, poorly thought out move the banks do, the loss is – worst case scenario – a little more than half of your number at $280 billion. (I just saved $200 billion dollars and I’m still depressed. 🙁 ) I suppose we could assume that the Treasury is twice as incompetent as the banks and that the nationwide housing market is in a freefall that does not end. Then they might lose .80 on the dollar and now, finally, we have reached your number… but that is quite an assumption, wouldn’t you agree.
On the other hand, what if the Treasury is a little smarter than the banks. Or, more likely, not any smarter just capitalized (by the taxpayers) beyond any bank’s wildest imagination. The Treasury could decide not to foreclose and instead refinance the homeowner at 1% over the discount rate or in line with the T-bill or whatever rate makes sense as to the government’s cost of money and keeps the borrower in the property. This, as Brian Brady would say, is Loan Sharking 101. Don’t “off” the asset, figure out a way to keep collecting interest until the markets come around. Could be two years (I know Tom, could be ten – different argument for another day). Once the housing market does come back the borrower can refinance in the private sector or sell without loss.
The Treasury bought a $300,000, under-performing debt on a house currently worth only $200,000. But because of the magic powers of the Treasury (a power the banks can only wish for) they simply held the debt until the asset had appreciated. Now we are talking about losses of inflation vs. cost of money and so on. Not trivial by any means, but certainly not even reaching the $1 billion mark. Heck, the Treasury might even profit on some of the assets. (I know, I know, no one is supposed to believe that, but I’m a rebel Tom 🙂 ).
September 25, 2008 — 6:30 am
Tom Vanderwell says:
Sean,
Are you sitting down?
Take a deep breath…..
What you say makes sense! 🙂
It’s going to be an interesting day….
Tom
P.S. Just to set the record straight, I don’t want the government (You and me) to lose any money on this. I’d love to see it work out well and we can get out of this mess with the shirts on our backs and a dime or two in our pockets. I’m just trying to get some answers “out there” for people to hopefully feel better about what “has to” happen.
September 25, 2008 — 6:50 am
Michael Cook says:
Great discussion. I am inclined to think the government mandate will be to work out these loans as best as they can. Foreclosure would probably be the last option simply because of other economy related factors. It would be hard to convince me that the government is going to make money, but I am in the less conservative camp with others, assuming the losses will be in the $100-200 range at worst.
The more important discussion I would like to have is how I (we) can get in on the ground floor of this. The government is potentially forming an agency that will control millions of foreclosed properties. This is a wholesalers dream. Anyone hear anything about whether they will work with HUD or start their own agency. A lot of people made their fortune the last time this happened with the RTC. If anyone has any info on this I would love to write or see an article.
September 25, 2008 — 8:54 am
Sean Purcell says:
Tom!
I thought you were kidding when you asked if I was sitting down. I wasn’t and I think I broke my chair! 🙂
Sean
PS
I’m just trying to get some answers “out there” for people to hopefully feel better about what “has to” happen
Your analysis, reports and opinions are appreciated by more people than I think you know, myself included.
September 25, 2008 — 9:17 am
Sean Purcell says:
Michael,
One of my favorite pieces of lingo from my days as a trader on the CBOE was the response we’d yell out when we wanted in on a trade someone else quoted first:
WITH!
September 25, 2008 — 9:20 am
Tom Hall says:
Michael,
Interesting that you mentioned thinking about forming an agency to deal with the wholesale of soon-to-be owned government-owned property. We seem to be on the same wavelength. I would appreciate it if you would share what you find?
Please forgive what may seem to be a stupid question, but isn’t the disposition of the government owned foreclosed property really where tax payers should expect to make a profit?
I for one am a little bit terrified with the thought of dealing with the future “RTC” in the potential purchase of foreclosed property. Just dealing with the bank is bad enough. My client wants to put an offer on a short sale only to be told that the bank may not respond for 150 days.
I think by then we’ll be speaking to the new agency.
September 25, 2008 — 10:27 am
Jeff Brown says:
Crap on a cracker!! Late to the party.
Oh well, Sean already said pretty much what I would have, and much, much better.
I’m unhappy ‘cuz I think this bailout is maybe just as likely as not to reap a ginormous windfall for the Treasury. Why is that upsetting?
Have you been payin’ attention to what Capitol Hill does with other folks’ cash the last 40 years or so?
September 25, 2008 — 10:40 am
Tom Vanderwell says:
Your analysis, reports and opinions are appreciated by more people than I think you know, myself included.
Sean,
Thanks. But don’t send me the bill for your broken chair…..
Seriously, thanks.
Tom
September 25, 2008 — 12:02 pm
David Shafer says:
Wow, so our costs for this mortgage bail out are going to be around the same as what we spent in the last year for the war in Iraq??????
Makes me alot happier about the situation. Rather see us bail out the economy than fight the never ending war, but seems to make the numbers more manageable!
September 25, 2008 — 1:25 pm
Peter Vekselman says:
Tom:
Your numbers appear to be sad but more true than false. Now if we could give the government a course on how to make wise investments with a suffering portfolio, we may be in business here with the tax payers dollars.
There surely are good notes packaged with the bad and since the Government has the luxury of time on their side (so they say) which the banks, Fannie and Freddie to not have….then there may be some profit realized. I do agree real estate values will go back up, they always have in the past and the past predicts our future.
But here is the problem as I see it, while the Government waits to sell these bad debts off until they actually are worth something, guess what will happen? There will of course be other financial issues, war, education, health care, you name it and it will take away any profits made on these loans. I am guessing we will not see one dime from any profits made as they will be quickly spoken for by other governmental needs.
Thanks for your post!
Peter Vekselman-Real Estate Coach
September 30, 2008 — 1:21 pm