With the HAMP scam reaching the most becalmed horse latitudes of incredibility,
dubious rumors have it that Obama’s ready to try again with a new mortgage mod scam, this one centering on the GSEs. This rumor
may be just hype, but the issue’s likely to keep coming up, if only because the kleptocrats will feel the need for a fake carrot to accompany whatever sticks they try to use to beat the strategic defaulters. So I figure a short post on the subject is worthwhile.
Whenever you see the system say anything about mortgages, the basic facts to immediately summon to mind are:
1. The system is committed to propping up housing prices and if possible reflating the bubble. This is to prop up the balance sheets of the bankrupt banks, and in their wildest dreams get securitization going again, blowing the same bubble all over again.
2. The system’s worst nightmare is bottom-up debt jubilation. The growing wave of strategic defaults is beginning to comprise a mini-jubilee. So in anything, if we assume they’re trying to stave off strategic defaults we’ll never be wrong.
The only things which could possibly help distressed borrowers are principal writedowns and bankruptcy court cramdowns. But these would constitute the system’s capitulation to reality-based deflation. Therefore, unless they decide to completely overthrow their existing policy, any alleged relief they offer will have to be a scam. The way we can measure this scam is simple: Does the proposal acknowledge lower asset prices of not? If not, it’s a scam meant to string underwater borrowers along, trying to dissuade them from strategically defaulting and to extract more payments out of their doomed position before the inevitable foreclosure.
Thus the HAMP offered temporary mods to those current on the mortgage, dangling the fictitious carrot of a permanent mod while the real goal was simply to get someone who might walk away to instead throw a few more full payments down the rathole.
Ongoing rumors of a streamlined GSE induced refi wave began last week with notes from Morgan Stanley and Bank of America. Folks at these firms proposed that borrowers could benefit, resulting in increased consumer spending, if only the GSE’s initiated a streamlined and broad program to allow those of their mortgagees who are current on their mortgages to instantly refinance from their higher rate mortgages to current market rates.
The argument is, since the GSEs own the credit risk anyway, they should change the refinancing requirements and lower or eliminate appraisal requirements and LTV requirements for refinancing. Doing so would, it is suggested, lower the burden on borrower cash flows, as they would benefit by lowering their rates by about 150bp. The pitch was ‘it would be a costless plan with real benefits’. Nice theory, too bad it doesn’t work and isn’t possible.
So the principal remains the same. The borrower’s payment is refinanced, while the taxpayer covers the rest via last December’s GSE Bailout extension. The banksters win, they keep being bailed out and keep having their fraudulent balance sheets propped up. The underwater debtor keeps drowning, but at a slower pace. Over the long run more could perhaps be extracted from him this way than under the HAMP scam. The limp bubble gets some hot air pumped into it. The taxpayer is robbed all the way down the line.
That sure sounds like Obama. If the rumor ends up being false, it’s not because it was implausible.
Volatility 
Well said!
I argue here and in other blogs that the Subprime Crash was attributable to the combination of conflations of “risk vs. uncertainty” for the financial portion of the economy and “owner vs. renter” for the real goods and service portion of the economy. Until those issues are resolved, the capital market is caught in a recursive cycles of bomm-bust.
Excerpted from: Dodd-Frank: A fine alphabet soup appetizer, but where’s the beef?
http://readingthemarkets.blogspot.com/2010/07/dodd-frank-fine-alphabet-soup-appetizer.html
“Difficulties arise when risk is conflated with uncertainty under deterministic, one-size-fits-all governance metrics that frustrate the market’s price discovery function. We can insure (put options) and hedge (Ford and Exxon) risk. We can insure (natural disaster insurance) uncertainty, but we cannot hedge (Ford and pork bellies) uncertainty. If we cannot hedge, we cannot regulate risk and uncertainty in a one-size-fits-all regime due to non-correlative information. It is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam. Investments that lack cash flow and are valued on a mark-to-model basis are uncertain. Credit default swaps (CDSs) are uncertain derivatives that required constant hedging by dealers. This activity resulted in cost with very little benefit. Absent randomness segmentation, indeterminate information cannot be processed effectively and efficiently by determinate regulatory metrics.
Dr. Stanley Liebowitz of the University of Texas posited that the single most important factor in home foreclosures was negative equity. No-money-down, liar loans effectively gave property rights to renters. This created a moral hazard where investor rights exceeded their responsibilities. Liebowitz demonstrated that the presence of such loans also misdirected policymakers’ focus toward the wrong variables for controlling the adverse consequences of the subprime crash.”
Whether the above is correct or not remains to be seen, but I am reasonably convinced that the one-size-fits-all the capital market system is broken and requires fundamental structural repair. The Dodd-Frank financial reform was brought about by a troubling trend of more frequent and larger economic crashes. In undertaking a complex reform, sequence and timing are critical. Policymakers had to determine whether the capital market needed reform by amending the existing deterministic one-size-fits-all system by advancing transparency issues,; or, whether the capital market system was broken and required fundamental structural repair by segmenting randomness into: predictable (money market investments), probable (positive cash low, earnings-driven, NYSE and NASDAQ issuers that are marked-to-the-market) and uncertain (negative cash low, event-driven issuers that are marked-to-the-model) regimes.
Comment by Stephen A. Boyko — August 8, 2010 @ 8:41 am
Hi Stephen,
It requires structural change all right. The sham bill was no reform but just entrenching the status quo.
For real structural change, what we really need is to rid ourselves of the parasite “financial economy” completely.
Comment by Russ — August 8, 2010 @ 10:00 am
“rid ourselves of the parasite “financial economy” completely”
Is this not like changing South American dictators? I posit that you have to change the terms of engagement from deterministic, one-size-fits-all governance metrics that frustrate the market’s price discovery function to include “uncertainty.” The difficulty is that policymakers tend to be deterministically trained lawyers, accountants, and economists who support the status quo (i.e., TBTF scale).
If there is complexity, there is uncertainty. As there are innate complexities in the capital markets, the element of uncertainty always will be a part of complex adaptive systems. Difficulties arise when risk is conflated with uncertainty. We can insure (put options) and hedge (Ford and Exxon) risk. We can insure (natural disaster insurance) uncertainty, but we cannot hedge (Ford and pork bellies) uncertainty. If we cannot hedge, we cannot regulate risk and uncertainty in a one-size-fits-all regime due to non-correlative information. It is similar to having a single thermostat regulate temperature for H2O conditions of ice, water, and steam. Absent randomness segmentation, indeterminate information cannot be processed effectively and efficiently by determinate metrics.
Comment by Stephen A. Boyko — August 8, 2010 @ 12:01 pm
Most of the complexity is artificial (just like ALL scarcity where it come to basic necessities), in order to afford greater rent-seeking and other criminal opportunities. And of course the uncertainty flows from there.
I’d let the market price everything at the level of humanism purged of greed. (Which is a far less radical political premise than premising everything precisely on the most scabrous, barbaric greed, and setting the market in motion from there. “The market” is always ideologically predefined. The way the system’s current Hobbesian market is represented to be a natural fact is simply the Status Quo Lie.)
I think we’d find that this human market would price contract gambling and speculation at zero.
Is this not like changing South American dictators?
More like the Zapatistas overthrowing the dictator and decentralizing power.
Comment by Russ — August 9, 2010 @ 1:27 am
•“And of course the uncertainty flows from there”
Then why do we conflate “risk” and “uncertainty” in a one-size-fits-all, deterministic governance system?
•“Status Quo Lie” –
Agreed! But that was predetermined by TBTF scale target.
• “I think we’d find that this human market would price contract gambling and speculation at zero.”
But it should be individual choices that price the contracts not SA dictators or well-intention Zapaistas.
Comment by Stephen A. Boyko — August 9, 2010 @ 9:44 am
Loathe as anyone should be to take at face value an analysis proffered by The Vampire Squid, there is little doubt in my mind that a watered down QE2 is coming-and that the result posited by Zero Hedge will be the result.
http://www.zerohedge.com/article/goldman-explains-imminent-launch-1-trillion-qe-2-muses-dreaded-double-d?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zerohedge%2Ffeed+%28zero+hedge+-+on+a+long+enough+timeline%2C+the+survival+rate+for+everyone+drops+to+zero%29
Comment by Edwardo — August 8, 2010 @ 2:25 pm
They have no choice. Nobody from the private sector’s ever going to buy this crap again. It has to be the criminal government looting taxpayer money.
I like all the commentators I’ve seen saying that in resisting every kind of transparency and regulation, it’s as if Wall Street wants to make sure not one single private investor ever spends a cent on a “security” again.
Comment by Russ — August 9, 2010 @ 1:32 am
@Russ re “Didn’t Frank”
“resisting every kind of transparency and regulation,”
At the expense of getting technical, the command side of the governance equation is comprised of shareholder rights. Shareholder rights are a composite of principles and rules. Principles are prospective societal policies that define industry effectiveness in terms of the right things to do. They are represented by the FLITE Model of Fairness, Liquidity, Integration, Transparency, and Efficiency. Rules, on the other hand, are the retrospective codification of best-practice procedures that define operational efficiency in terms of doing things right.
The problem with “Didn’t-Frank” is that the “transparency” discussion that Senator Dodd promised relative to “information” was limited to rules on “disclosure” that did not further the cause of a more transparent market. Thus, a functional definition of “systemic risk” is lacking from which to segment one-size-fits-all deterministic regulatory metrics into: predictable (money market investments), probable (positive cash low, earnings-driven, NYSE and NASDAQ issuers that are marked-to-the-market) and uncertain (negative cash low, event-driven issuers that are marked-to-the-model) regimes.
Thus, what transpired was “rule-writing” not “governance,” where rule-writing is the proscriptive description of an undesirable situation. It does not necessarily produce a net benefit and should not to be confused as the same as governance. Rule-writing is ad hoc policymaking that Band-Aids over the current problem. It expects buy-in from society by describing the undesirable situation and prefacing it by saying “don’t do this.” Former SEC Secretary Jonathan G. Katz commented, that when “the SEC adopts a rule, it believes it has solved whatever problem it is addressing. … The solution is to rethink the rulemaking process. Instead of assuming, as lawyers do, that rules are self-effectuating, the SEC should adopt a scientific approach.”
Comment by Stephen A. Boyko — August 9, 2010 @ 9:23 am
Sure, the whole thing was a sham. Fake “rule-writing” process.
Meanwhile we haven’t had actual governance in ages, and never will again under the kleptocracy.
For the post-gangster world, we have to finally take the responsibility and seize the right, and govern ourselves.
Comment by Russ — August 9, 2010 @ 4:59 pm
[…] sheet and the laundering of MBS through the GSEs. (On that GSE front, no new word on last weeks rumors of a general rate reduction, though we’re waiting on the next GSE policy huddle on the 17th for definite news on […]
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[…] GSE hearing came and went with nothing special happening. There was no confirmation of earlier rumors that the system would order a mortgage rate reduction. Instead it was status quo all the way. […]
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