On November 17, 2008 U.S. Senator Dick Durbin (D-IL) introduced legislation to address two areas not adequately covered in the $700 billion financial recovery legislation passed by Congress earlier this fall. According to Durbin, the Emergency Economic Stabilization Act did not do enough to help families facing foreclosure and has inadequate safeguards on taxpayer dollars.

“Virtually every economist agrees that the financial crisis will not diminish, and the economy will not begin to recover, until we address the root cause of the problem: the failed mortgage market,” Durbin said. “We also have an obligation to make sure that taxpayer money is spent responsibly and that the American people see a return on this investment. My bill would address both of these important issues.”

Durbin’s bill, the Homeowner Assistance and Taxpayer Protection Act, provides real hope to families who fear that they will lose their homes by:

• Requiring the Department of the Treasury, the Federal Reserve, the FDIC and FHFA to restructure all loans where these regulators  now own or have a controlling interest in the loans, rather than simply encouraging them to do so as the Emergency Economic Stabilization Act currently  does;
• Requiring servicers to restructure all loans that qualify for the Hope for Homeowners program, rather than simply encouraging them to do so as current law requires; and
• Allowing bankruptcy judges to modify mortgages on primary residences. Durbin has previously introduced the provision as stand-alone legislation and has long argued it is important to spur nationwide systematic mortgage restructurings.

Currently, cramdowns are not allowed on mortgages secured by a debtor’s residence.  Bankruptcy Practitioners have availed themselves of lien stripping under In re Lam on wholly unsecured junior liens.  However, this practice only is available in a Chapter 13.  In today’s economic climate there is little reason not to have a similar cram down provision in Chapter 7 and to reduce the principle of the loan to the value of the residence.  Pres-elect Obama has previously indicated that he would sign such legislation, and it is unknown when Congress will act on this legislation as part of the growing Bailout.  A cramdown to the value of the collateral would assist those in Bankruptcy to keep their homes.  At the same time, it would appear unfair to those who struggle to make ends meet and stay out of Bankruptcy.  That’s a good argument for making loan modifications available for consumers outside of Bankruptcy tied to Mortgage and Bank Bailouts.

paulbar PROPOSED LEGISLATION Cramdowns, lien valuation

CNN reported today that

“Fed bets $800 billion on “consumers”"

Central bank and Treasury announce a massive plan to jumpstart lending.

The headline should have read “Fed bets $800 Billion on Banks and Investors.”  That’s because upon closer scrutiny of the treasury “plans,” the prominent Features Include:

a)  A plan to make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

b) The Treasury Department will allocate $20 billion to back that lending in order to cover any losses that the New York Fed might suffer.

c) In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.

CNN reported that, “Together, the programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms. The Fed said the money will come from an increase in its reserves — in essence, it is creating new money.”  (Translation: printing new money.)

CNN also reported that “The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.”  (Translation: Boost the economy by encouraging consumer spending, not the production of goods and services.)

Keith Hembre, chief economist at First American Funds said, “It’s certainly not directly going to go through to the consumers… I don’t know if anyone can say how much will get through. It certainly shouldn’t hurt. We’ll have to see how much it does help.”

To that end, government officials said that they would not set up the $200 billion consumer lending program until February. So officials couldn’t say if the mere announcement of the program would cause lenders to make more credit available to consumers in time for the holiday shopping season.

Paulson described the $200 billion consumer lending program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.

It’s not a coincidence that the fact that the New York Fed is taking the lead on the consumer lending program and that the man nominated by President-elect Obama to succeed Paulson, New York Fed President Timothy Geithner, played a central role in this new effort.

Call me a cynic, but this plan seems to be little more than a plan to bailout the banks by printing paper money, the same practice that got the banks in trouble in the first place, by lending money not backed by anything real to unworthy borrowers, and then by selling it as an “investment” to the public, in this case, the taxpayer.  The problem is the security isn’t backed by anything real, its all paper money, and what it’s designed to do ultimately is encourage consumer borrowing and spending, not to encourage prudent lending based on the credit of the borrower and value of the security, with the goal of building assets having long term value.

Jim Wasserman in the Sacramento Bee reported that in the wake of 30,000 foreclosures in the Sacramento area and 3,000,000 nationwide, a newly enlightened FHA, Fannie Mae, Freddie Mac and a growing list of lenders are now aiming for a kinder, gentler foreclosure posture and “moving to quick, simple loan rewrites and foreclosure moratoriums instead of cumbersome case-by-case workouts.”  The goal is to reduce the payments to less than 38 percent of the borrowers income.

Notably missing from this noble goal is how exactly they are going to implement the plan, and even more important, what you have to do to qualify for the modification.  Traditionally, lenders have not entertained loan modifications once an NOD has been recorded but the Sacramento Bee.  This plan is targeted at “borrowers who live in their homes, not to investors. The federal proposal in particular targets owners who are at least three payments behind and have not filed for bankruptcy.”  Does that mean you are still eligible if you are three months behind and the lender has filed an NOD?

The bottom line is that proposed funding is designed only to protect the Banks and Investors, not to do anything to protect the consumers or borrowers.  Unless the bailout funds are conditioned on a simple way for borrowers to do loan modifications, the bailout is meaningless to borrowers.  Its also meaningless to borrowers who are three months delinquent on their payments, because they are not going to be able to take advantage of this availability of “new credit” because they simply are not qualified applicants because their credit has already been torched.  So while the bailout might help the banks and private investors of bogus security instruments, its really not going to help the consumers and they not going to get any help from the lenders, they’re going directly where they’ve been headed all along…to the Bankruptcy Court.  Without conditioning the funds on making loan modifications to severely distressed and unqualified borrowers, there doesn’t seem to be much prospect in a significant mitigation of foreclosures.

paulbar THE CURRENT BUZZ The 800 Billion Bank Bailout

The latest round in the financial meltdown involves the Big Three Auto Makers in the U.S.   The three high-powered Captains of the Automotive Industry – General Motors’ Rick Wagoner, Ford’s Alan Mullally and Chrysler’s Bob Nardelli – appeared before Congress asking for for a measly $25 billion in aid. In light of the 700 Billion bailout of Wall Street, this doesn’t seem like a lot.

The problem is that this is nothing new.  In 2005 Wagoner admitted that the company had made a lot of mistakes and announced last, but definitely not least, GM had to make cars competitive against Japanese rivals in the US.  In 2005, in the wake of worse-than-expected, third-quarter results, GM announced that it would axe 30,000 of its 173,000 manufacturing jobs and shut 12 facilities by 2008. This enraged unions with the United Auto Workers vowing that future negotiations with the GM management would be jeopardized if the company went ahead with its plan.  At that time, GM was running out of options. The company lost nearly $4Billion in the first nine months of 2005. GM hoped to cut its annual $42-Billion operational costs by $7B by shutting down plants and cutting worker health care benefits.  GM hoped that it would help them absorb up to $12-bn of liabilities from bankrupt components giant Delphi.   This week, Wagoner admitted GM should have concentrated less on the more profitable SUV line of product and on the lower end fuel efficient models.

But the Corporate Execs made a big bonehead move and all traveled to Washington by private jet to hold out their tin cup.  Really, they should have hired an image consultant before making their appearance.  I would have told them to all go by bus to the airport, fly coach, and drive to the Capitol in a fuel efficient vehicle like the Chevy Volt or a Ford Hybrid.  When the leadership of your company demonstrates bad leadership, they don’t have any credibility.  And that’s a major problem in Corporate America today.  Because while they’re saying that they’re in trouble, they are obviously making poor choices where and how they spend their money.

GM spokesman Tom Wilkinson said on Friday GM decided to return the aircraft because of a “really aggressive cutback in travel.”The company, which is in a cost-cutting mode, is scrutinizing every trip, he said, but declined to disclose the name of the company it leases the airplanes from.  Wilkinson went on to say that the company had already made the decision to return the leased corporate jets and that “There is a perception issue,” Wilkinson said of Wagoner’s travel to Washington on a private jet. “We need to be very sensitive to that going forward.”

Well, no Tom, I hate to disagree.  Its not a “perception issue.”  Its a matter of bad business management, planning and judgment.  GM has been losing money for years as a result of bad management and planning.  In 1978, thirty years ago, when the Peanut Farmer was president, the automakers were told that they were going to have to build lighter, more fuel efficient cars.  And yet all the American automakers sought short term profits in the popular SUVs like the Hummer, Lincoln Navigator, the Ford Explorer, the Cadillac Escalade, and the most popular of all, the Chevrolet Subdivision.  Instead of developing hybrids like the Toyota Prius, and retooling their assembly lines to crank out different production models, the Big Three kept right on course–a flight designed to go right in to the ground.  I have a friend who told me that the Japanese automakers can turn around an assembly line in 24 hours to change models, and not just on one but two assembly lines.  In contrast, in America, once again our corporate leaders chose short term profits over serving the needs of a changing economic and energy world.

But I’ve got an idea that might be able to help. Its probably too much to ask the automakers and the unions to all take paycuts, stop throwing away money, and do what they can do first themselves to clean up their own house.  Its too much to ask what they should have done thirty years ago and start preparing to change because of the issue of energy dependcy.  After all, if the taxpayers will pay for the bailout, why should they give up anything?

All is not bleak in the economic picture of America, though.  The Oil Companies were the chief benefactors of Detroit’s manufacture of gas guzzling vehicles.  Exxon Mobile posted record profits last quarter alone of $100 Billion dollars. Congress could levy a windfall oil tax on the Oil Companies, because the profiteering in gas prices was piracy not on the high seas but on the highways of America.  Its really no different than predatory lending practices.  So, I think the Oil Companies ought to bail out their friends in the auto industry because they’re the ones that have the money to do it.  And they were the ones who benefited from the need for consumption created by the products that rolled off the Detroit Assembly Lines.  The Oil Companies could loan the money to the automakers since they’re already defacto conspirators, excuse me, partners, in ripping off the American Public, and as the Automakers change their methods of operation and manufacture, the Oil Companies can also cooperate to develop other energy resources for the automakers to run their products on cleaner, more efficient energy.  I’m sure that the Oil Companies are already thinking in this direction because they are not calling themselves “Oil Companies” anymore.  Have you noticed the BP and Chevron commercials?  They are now “Energy Companies.”  Well, if they’re really serious about helping out with America’s energy and economic problems, they could put their money where there mouths are.  Unless of course, its all about being politically correct, or as Tom Wilkinson would say, “a perception issue.”

/s/ PaulBart

paulbar Uncategorized

In the movie Wall Street, Gordon Gecko utters the famous line, “Greed is Good.”  Well, we all know what happened to Mr. Gecko.

I saw Robert Kiyosaki on Mike Huckaby’s show last week before the election.  When asked who we would vote for, he responded that he would vote for neither Obama or McCain.  The reason he said, was that we have a global economic crisis, not a political problem.  Well, like anything, it depends on your point of view.

Obama probably has inherited the worst economic mess ever.  The 750 Billion Barrel Bailout of Wall Street exists with the War in IRAQ, the credit crisis, the energy crisis, 1,200,000 new jobless claims, and oh, by the way, no one’s been talking about Social Security lately, which alone is a 680 Billion dollar a year program.  I’ve seen some estimates that the real bailout number is closer to three trillion dollars, which is, lets see 3,000,000,000,000.  Thats a lot of zeroes.

I want to make a point that no matter what economic program is devised, the underlying character problems that caused this mess are going to have to be corrected.   In my opinion, all the problems can be traced to three main problems:  greed, arrogance, and a refusal to embrace change and evolve with the times.

The real estate mortgage meltdown was fundamentally a problem of unregulated greed on both sides of the loan document.  Brokers were funding loans to anyone with a pulse on stated income, in order to generate commissions.  I have a friend who was an insider and told me that lenders like New Century encouraged brokers to fund as many loans as possible, and that they were given a quota ever month, say of 100 million dollars.  If the broker didn’t fund that amount during the month and only funded 80, his allotment might be cut.  So instead of qualifying buyers, the brokers turned a blind eye and looked the other way.   On the other side of the table were buyers who were easily taken advantage of by promises of, don’t worry about the payment or the interest rate; when your house appreciates 25% in the next year, we’ll just refinance you into a fixed rate loan.”  That of course didn’t happen, because the economy started slowing down in 205 when Hurricane Katrina hit and gas prices started going up, at the same time the real estate bubble was starting to burst.  People got into loans they couldn’t afford on the dubious hope that they were going to somehow make payments they never could afford.  A lot of novice “flippers” who thought they were going to make their fortune in the new gold rush, took a beating because they didn’t understand the concept of debt service.  In a business transaction, the parties are supposed to give and receive value.  What the brokers sold was a financial time bomb ready to go off, and the buyer’s gave in return a false or illusory promise to pay.   The Wall Street melt down because the secondary money market was betting on making a killing on the high rate of return on the packaged or derivative loans.  In reality Wall Street was left holding an empty money bag.  Was it really that big of a surprise?

At the same time we are “shocked” to find oil prices skyrocketing.  Well, not really, because we were warned thirty years ago when the Peanut Farmer from Georgia was President, Skylab was falling, and there was gas rationing.  For my senior project in history class, I did a term paper for my final project, and I found out that we were 30% dependent on foreign oil at that time.  At that time, there was some discussion about whether the world would run out of OIl by now.  In the meantime, there have been new oil discoveries abroad but no new refineries built in this country for thirty years. We have made no substantial efforts to develop alternative energy sources including nuclear power, wind and solar

And now, we are presented with the request for a bailout of the auto industry, which is a cornerstone of American industry.  While Toyota and Honda developed hybrid cars such as the Prius, Detroits response was to build bigger vehicles, like the Hummer, the Navigator, and the Chevrolet Subdivision.  Weren’t they told to build more fuel efficient vehicles 30 years ago?  The automakers should have been working to retool and retrain for the last thirty years.  Instead, they only thought about making the sale then, instead of looking to serve the long term interests of the consumer and the country.  Why should we feel sorry for them for making a stupid business decision.  If I make a stupid decision, I get to pay for it.  Not somebody else.  Not the government, and certainly not my neighbor.  One of the central tenets of free enterprise is that you are free in the marketplace to determine your own degree of success.  You are also free to fail.  Those who do not provide lasting value, do not look to the future for their companies and their customers, and only look for short term profit are likely headed for disaster.

paulbar CHARACTER ISSUES AFFECTING FINANCIAL DOWNFALL

Make Your Own Declaration of Independence

July 5, 2008 by paulbart44

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