Wednesday, December 3, 2008

How Long Can You Tread Water?


Those of you who are fans of William Cosby, EdD, a/k/a Bill Cosby comedian, might remember the line from his "Noah and the Lord" routine. That is the position we are in now with regard to the mortgage crisis (ongoing). The wild swings in the stock markets have grabbed the headlines on nights that the 3 automakers have not. Guess what? It all seemed to start with the mortgage mess. If you have not already done so, I suggest that you read my previous posts that have dealt with the credit and mortgage crunch. In reality, the mortgage difficulties are really securities markets problems, as I have explained before.

Below is my contribution to a discussion which is taking place on Wharton School of Business's online Journal Knowledge@Wharton. The article in its entirety can be read by using the link immediately following the text of this post. While it is written in a more technical fashion that I post, a careful reading will put many issues into perspective; at least into some perspective (although not all of them).

Since my submission to "Knowledge", there has been a flurry of activity of Sheila Bair's (head of FDIC) proposals to help stop the foreclosure slaughter. I will be posting my analysis of the criticism to the idea that mortgages be modified with the Federal Government underwriting part of the losses incurred by lenders and loan servicers, within a day or two - I am just waiting for some dust to settle, or more in keeping with the title above, until the flood waters recede.

(see link at end of this posting for full article entitled):

The Fairness Issue: How to Cope with the Flood of Foreclosures
Published: November 26, 2008 in Knowledge@Wharton

(my commentary) In "The Fairness Issue" article an excellent job was done in presenting nearly all views of the mortgage scene. As with views of anything however, the viewer's perspective determines what is seen, and what is not seen. The problems are set out well, but if one relies on the economists' and bankers' views, one will get only the macro financial picture.

There is no taking into account the effect on actual homeowners and their effect on the economy as a whole. One could argue that the micro analysis, the review of individual mortgagors, does not really matter, because no one of them matters in the scheme of the economy, ours or global. The argument would miss the point while being correct a the same time; it was this logic that gave us "toxic assets", mortgage-Backed Securities.(To me, the concept of an asset being "toxic" is an oxymoron and would only apply to enriched uranium and the like anyway). William Frey's comment that no one anticipated a catastrophic meltdown is exactly on point, but we had such a crash. If millions of individual mortgages created the problem, then why would there be a global solution?

Professors Guttentag and Wachter are correct in the assessment that the housing market should be the primary concern. If so, a semblance of normalcy can be restored; then maybe confidence can also recover. I have seen this with my clients. At the present, most of my time is spent trying to save homes, not just houses-- but homes. The fear, anxiety, and recriminations created by a foreclosure destroy families. Working with mortgagees, and their appointed servicers empowered by PSAs has proven to be a challenge. There are no rules; the government has let the servicers determine what happens in our economic life. Ms. Bair's [Chair of the FDIC] proposal through the FDIC, flawed as it may be, at least gives a ray of hope and a view towards Main Street rather than Wall Street.

Mr. Smetters' sentiment is a valid position, but begs the question: We cannot fix the housing markets, determine the value of mortgage-backeds, and effectively put in place long-term solutions by taking a broad brush approach. The Federal Government, has to back-stop the losses; it has to allow the MBSs to be taken apart, if necessary, to modify loans through write-downs of principal, interest, or both. The regulators are in place. FDIC, OCC, and the Treasury just to start; and we could always resurrect the RTC (Resolution Trust Corporation). I make no claims of originality in my ideas, but I ran failed S&Ls in the mid-80s, for the State of Maryland and with FSLIC, where there were depositors who could not get their money for months, and where loans were just as volatile as the ones in the MBSs. There was no "one size fits all" solution then, and there is not one now.

Last, if we are concerned about cost, we have already given the markets many times more than it would take to shore-up the MBSs by underwriting a portion of the losses an investor might realize. As Bill Cosby, certainly not an economist, so aptly stated in a routine, "Noah, how long can you tread water?"(asked the Lord). We had better ask ourselves that before the flood of foreclosures drown us all in unquenchable debt. The fire would be easier to handle.

full article at

Author's Copyright by Richard I. Isacoff, Esq., December, 2008

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