The Baseline Scenario

WHAT SECURITIZATION PROBLEM?

There are a few points I would like to make regarding Professor Johnson’s presentation to Congress today, but I will do that in another comnment.

First, I have been quite interested in the problem of how to deal with home mortgages, seemingly out of bounds for modification because they are securitized.

According to the FDIC, securitization is not an impediment to mortgage modification.

What the heck! Is this securitization worry much ado about nothing?

In an article posted Tuesday, Nov. 18, in the NYTs, “WHAT SECURITIZATION PROBLEM? THE F.D.I.C WEIGHS IN”, Joe Nocera describes how he got a call from Sheila Bair and Michael Krimminger of the F.D.I.C. They indicated to Mr. Nocera that contractual stipulations for mortgages in a security pool generally do not prevent the mortgages from being modified.

Here’s a quote from the article.

The F.D.I.C., however, begs to differ. As you’ll recall, the agency took over the California bank, IndyMac, which had, as Ms. Bair put it, “a pretty impaired portfolio.” It has since instituted a broad mortgage modification effort that also serves as a laboratory for what can and cannot be done. What the agency has discovered, said Mr. Krimminger, is that the contracts are rarely as constricting as investors and servicers have been portraying them. They do not allow principal reduction, for sure, but they almost never disallow interest rate reduction — or delaying principal payments for a short time. What’s more, Mr. Krimminger said, the servicer agreement simply says that the servicer’s job is to maximize the investment — which often means avoiding foreclosure.

“One sample Pooling and Servicing Agreement provides as follows,” Mr. Krimminger wrote me in a follow-up e-mail message: “In connection with a seriously delinquent or defaulted Mortgage Loan, the Master Servicer may, consistent with the Servicing Standard, waive, modify or vary any term of that Mortgage Loan (including modifications that change the Mortgage Rate, forgive the payment of principal or interest or extend the final maturity date of that Mortgage Loan ), accept payment from the related Mortgagor of an amount less than the Stated Principal Balance in final satisfaction of that Mortgage Loan, or consent to the postponement of strict compliance with any such term or otherwise grant indulgence to any Mortgagor if in the Master Servicer’s determination such waiver, modification, postponement or indulgence is not materially adverse to the interests of the certificate holders (taking into account any estimated loss that might result absent such action) and is expected to minimize the loss on such Mortgage Loan.’”

End quote.

The article can be viewed at this URL:

http://executivesuite.blogs.nytimes.com/2008/11/18/what-securitization-problem-the-fdic-weighs-in/

If this is the case, then THIS COUNTRY NEEDS TO QUICKLY GET ON WITH A COMPREHENSIVE PLAN TO MODIFY ALL MORTGAGES, SUBPRIME OR NOT, WHICH ARE IN DEFAULT OR ARE IN DANGER OF DEFAULTING.

Please do not point out the dangers of “moral hazard”. Considering the severe economic circumstances the world and this country are in, moral hazard should be a far distant secondary concern right now. It is time that the country comes together to help out those who are in dire situations, whether that be from their own fault and stupidity or because of factors outside of their control.

A broad based mortgage modification program will serve to
1) stabilize housing prices and the housing market,
2) reflate the value of mortgage based securities held by banks,
3) ease the crisis of confidence in the financial sector,
4) free up more credit for individuals and businesses,
5) generally blunt the most severe effects of the economic downturn.

IT IS TIME THAT CONGRESS AND THE BUSH ADMINISTRATION EMPOWER THE F.D.I.C. TO CARRY ON WITH THE MORTGAGE MODIFICATION PROGRAM PROPOSED BY SHEILA BAIR.

Paulson, because of his obtuseness, refuses to do what is needed. Fed chairman, Bernanke, however has indicated he supports the F.D.I.C. program, with qualifications (not sure what those are).

Maybe it is time to really get on Paulson’s and Bush’s case for not doing what is needed with regard to mortgages.

Tom Krebsbach (Seattle area)

It is my humble opinion that the statement delivered Nov. 19th by Professor Johnson to the Senate Banking Committee outlined an excellent course of action for the United States government to effectively deal with the ongoing financial crisis and severe recession which plagues this country and the world.

It is clear that a very strong stimulus is needed to bring the U.S. economy back on track. I particularly find the two pronged stimulus strategy, quick acting measures followed by slower acting but more long-lasting measures, to be an effective remedy.

SIZE OF STIMULUS:

JOHNSON – “In this environment, a total fiscal stimulus of around $450 billion (or roughly 3% of
GDP) would be appropriate, with about half front-loaded in the first three quarters of 2009, when there will likely be recession, and the rest following over the next 8-12 quarters, during which otherwise growth will be slow.”

In a recent op-ed in the NYTs, Paul Krugman suggested a $600 billion stimulus might be appropriate. See “Depression Economics Returns”, http://www.nytimes.com/2008/11/14/opinion/14krugman.html.

On Tuesday a gathering of 100 CEOs concluded that a stimulus in excess of $300 billion would be needed. See http://www.nytimes.com/aponline/business/AP-Obama-CEO-Advice.html.

The same article states that a report by Goldman Sachs calls for a stimulus between $500 and $700 billion dollars.

Clearly, many knowledgeable people believe a stimulus package approaching or exceeding half a trillion dollars will be required to get the U.S. economy on the right track.

Unfortunately, we must wait two months for the Texas brush clearer to evacuate the White House before such needed strong measures can be taken.

INVESTING IN AMERICA:

JOHNSON – “Invest in America’s long-term growth and productivity. The stimulus plan should encourage behavior that will increase the long-term economic prospects for the country. A simplistic way of putting this is that given the choice, we would rather
see investments in infrastructure than in consumption of flat-screen TVs.”

The current recession and need for stimulus is an excellent opportunity to invest in America’s infrastructure, energy generating capabilities, and means of production. While the Johnson plan calls for quick acting stimulus through jobless benefits, food stamps, grants to states, etc., it also calls for slower acting and job-creating stimuli such as those listed above. I find this two pronged approach particularly appealing.

One approach which I think should be taken as part of the stimulus package is to upgrade America’s power grid system to a SMART GRID system. Such an upgrade would considerably help this country to conserve energy, and would also benefit the environment. For information on the SMART GRID, see “The Smart Grid: An Introduction” at this URL, http://www.oe.energy.gov/1165.htm.

MORTGAGE MODIFICATION:

JOHNSON – “To these ideas I would add money for relief to distressed homeowners in the form of
government-sponsored loan modifications. This may not be in the fiscal stimulus package per se, but it should not be far behind. The current FDIC proposal to partially guarantee modified loans as an incentive for lenders and servicers to make those modifications is promising.”

It would appear that the securitization of mortgages is not an impediment to altering the terms of these mortgages (See my comment above). The FDIC plan for modifying mortgages currently in default or in danger of defaulting should be funded and put into action as soon as possible.

SMALL BUSINESS LOANS:

JOHNSON – “The credit crisis has not only seen a reduction in the availability of credit, but also an increase in the price of credit for small businesses. Government programs to guarantee small business loans or otherwise increase the availability of credit should have a nearly-direct impact on the economy.”

While the credit squeeze may be easing somewhat for larger institutions, the availability of credit for small companies is next to non-existent. The government needs to lead the way in providing badly needed credit to small companies. The alternative in many cases is to see these companies go bankrupt.

AMERICA’S BALANCE SHEET:

JOHNSON – “Medium-term fiscal consolidation must remain on the agenda. It is vital to retain a high level of global confidence in the US official balance sheet. We should aim for tighter budgets in economic upswings, as a way to preserve financial firepower for
the crises of the future. This may, in fact, be the only effective way to deal with future kinds of unsustainable “bubbles” in asset prices.”

Everybody should be concerned about the enormous debt which the federal government now owes. It will be a burden for generations to come.

There is one area of the federal government where considerable cost savings could be found, if only the politicians had the guts to require those savings.

IT IS PAST TIME FOR AMERICA TO PUT AN END TO THE EGREGIOUS WASTE OF TAX PAYER MONEY WHICH IS FUNNELED DOWN THAT GREAT SINK HOLE CALLED THE PENTAGON!!!

The U.S. reportedly spends more on national security than all other nations of the world combined. That is disgraceful. It is an obscenity.

Furthermore, there is every indication that this colossal waste of money is counterproductive. It does not make us more secure, but rather less secure.

Americans are military fanatics. It is time Americans end this fanaticism and embark on a savings program by slashing the Pentagon budget significantly.

America’s strength should reside in its economic engine, not in redundant, wasteful and unnecessary aircraft carriers cruising the world’s oceans.

Tom Krebsbach (Seattle area)