also, the mark-to-market issue is more of a money center issue than a regular commercial bank issue given the sizes of the securities portfolios on their respective books – so the money centers could probably care less if m-t-m applies to the others

lastly, in terms of competition – the drag on future earnings/dividends from having to re-pay the tax payment should put the commercial banks in slightly better competitive position, all other things being equal – but the key is, the tax plan stops the negative feedback loop we are currently stuck in

and one other point I didn’t mention before – if the gov’t doesn’t want to be ‘out’ the tax payments, they could set up a trust and create a plain vanilla asset backed security that will collect the future tax repayments and distribute the cash flow payments to bondholders – if necessary, the gov’t can provide whatever credit enhancement is needed to spur investor demand

p.s. – dunnage, I’m not picking on you – just trying to spur thinking that will generate ideas for a solution as opposed to more criticisms of what may (or may not) be – we all need to find a way to move forward

that’s the most rational ‘pro-Bank’ rationalization I’ve seen ‘in public’..

two things: 1.) some of those ‘Securities’ Are improperly structured/poorly perfected/incorrectly written
2.) if the ‘Banks’ were Really worried about the ‘Market’ for their “Assets”, all they would have to do is pull back the Kimono–Show the ‘Goods’–explain what they’re holding..

157, or no, serious Investors, if there were readily Identifiable Assets, would smoke Shorts, post-prandially..
http://www.thefreedictionary.com/prandial

the BS CF in D.C., and the lack of ‘show ‘n tell’ by the ‘Banks’, doesn’t, as was said, “Play well in Peoria”–for good Reason..

you say ‘And the “toxic” paper the government is buying is actually worth the money.’

2 things:
1 – the gov’t hasn’t been buying any of this paper – they’ve been trying to set something like this up since TARP was put in place, but…
2 – the dilemma is two-pronged – lets say these things are priced at $0.60 on the dollar, but the banks think they are worth $0.90 – if the gov’t tries to split the difference and buys it at 75 cents, but it turns out in the end they really were worth only $0.60, taxpayers will fume
further, the banks probably won’t want to sell at 75 cents – they’d have to lock in the loss and that would hurt their regulatory capital ratios

hence, the stalemate, and why they haven’t been able to put this part of the program together

Geithner is trying to get around the first dilemma posed above by replacing the government with private money (the ‘private-public’ partnership that he trotted out)

but that still leaves the second dilemma – perhaps just give the banks a $1-for-$1 tax write-off equal to the dollar amount of the ‘loss’ on the sale to the pub/priv partnership (or the gov’t, whoever the buyer is) so that it is all even on the bank’s books (not sure if the accounting is that simple) – this would incentivize the banks to sell and get these things off their books – if that doesn’t fly by itself, make the banks pay back this tax write-off over x number of years so (not inflation-adjusted) the gov’t comes out even as well – maybe even tax the hedge/private equity funds (the private part of the public/private partnership) if the return is over and above some prescribed windfall profit amount

yes, it is true – and if the people here weren’t so pre-occupied with slamming Steve Forbes, they’d read through to what the real issue is, as you point out it is the tragedy of mark-to-market
(as an aside, these people remind me of our Congressman who are so intent on getting back at those evil bankers that they are focusing on the wrong short-term issues (executive comp, marketing budgets, private planes) instead of figuring out solutions to fix the system, improve confidence and thus attract private capital!! (instead of only attractig taxpayer capital))

anyway, I digress…

yes cix, it is true – while some of these assets are toxic, bank after bank after bank are recording ‘unrealized losses’ in their securities books not because of actual credit deterioration but simply because of market illiquidity – THE PRICING THAT YOU POINT OUT FORCES COMPANIES TO TAKE THESE UNREALIZED LOSSES, WHICH HITS THEIR TANGIBLE CAPITAL RATIOS, AND THEN EFFECTIVELY FORCES THE GOVERNMENT TO GIVE THE BANKS TAXPAYER-FUNDED CAPITAL TO REPLACE THIS ‘LOST’ CAPITAL – THIS ACCOUNTING RULE IS UNNECESSARILY TAKING MONEY OUT OF EVERY TAXPAYER’S WALLET! – if you want to stop the bank bailouts (at least for long enough to figure some kind of game-plan), getting rid of this rule is an incredibly low-cost solution… its $free!

think of it this way – the mark-to-market problem is a byproduct of the process of deleveraging that the system is going through – i.e., too many banks/investors/etc. borrowed too much money and now everyone is going through the process of deleveraging and cleaning up their balance sheets (hedge funds are getting hit two ways – they are seeing redemptions AND the banks aren’t lending them as much money as they used to) – plus, all the securitized vehicles that used to buy this stuff (CLOs, CDOs, etc.) are no longer being created – thus, simply put, there is no money to buy these securities – the fact that they are complex combined with the uncertain economic backdrop adds to the avoidance of these securities as investors will just prefer something perceived (actually or not) to be safer, or at least easier to analyze

so, in many cases, these securities are suffering from a lack of demand because of deleveraging, not credit deterioration – and with the supply/demand dynamic out of whack, they prices are out of whack as well

but BECAUSE OF FAS 157, which was JUST PUT IN PLACE IN 2007, we have to play this mark-down game and it is costing taxpayers billions and threatening the health of the U.S. banking system – the banks say they are willing to wait it out and hold the securities to maturity, when they expect to get paid back at par or close to it – but in the meantime, this accounting rule is putting the banks out of business so they might not even make it to that point

it seems to be a simple choice – if you want ‘transparency’, keep the rule – but understand the only transparency that is being provided is the condition of (non-)buyers in the market, not the condition of the assets themselves AND realize it will knock out probably at least the top 5 or 6 banks in the U.S., with whatever ‘unintended consequences’ that means for the global financial system and our U.S. economy and your wallet

but if you want a functioning U.S. banking system – get rid of this d*mn rule – its killing capitalism
(i.e., by killing banks with this rule, its preventing lending, which sends the economy down, which results in more mark-to-market hits, which prevents more lending, which sends the economy down further… get the drift – its a negative feedback loop!!!! – therefore, its killing capitalism)

note that because of the impact these write-downs have on tangible capital, this rule is a short-seller’s dream! – as long as deleveraging continues and a lack of buyers persist, the short-sellers know they can frighten investors by calling the banks insolvent and thus they can ‘safely’ systemically attack bank after bank (they’re even now going after the ‘stronger’ banks now like JPMorgan, Wells, PNC and U.S. Bancorp)
– note that the metric du-jour isn’t Basel capital ratios, which aren’t impacted by unrealized losses, but the newfound discovery of tangible capital ratios – this ratio is the bullet the short-sellers can use to shoot the banks (other weapons of choice include puts, CDS, triple-leveraged ETFs, no uptick rule, and rumors – sure, the rules allow it (except for the rumors, but you can’t prove those), but I would think the soundness of our banking and economic systems would be more important than allowing investors free-reign to destroy the banks – banks are built on confidence – without confidence, you have what you see today – there are simply too many tools for these players to manipulate the sphere of confidence around these companies – but thats a different topic…)

I haven’t been on this site too long, but I have a sneaking suspicion that Barry is pro-mark-to-market – would be nice to see his opinion on this important matter

note that there is a panel hearing this Thursday in Washington on mark-to-market – but don’t expect anything big to come out of it – Mary ‘head-in-the-sand’ Shapiro already came out on Jan. 2 and said its a good rule – and the FASB apparently is too powerful to let this rule go – but suspending (permanently or temporarily) this rule sure does seem like a cheaper solution for taxpayers than having us pony up more capital for these guys

ST

They got Japan and China on their “jock” to keep buying treasury debt and getting american’s to buy their cars……..They (US again) has Gulf Cooperation Council country’s selling oil in Petro dollars……..now recently the americans seemed to side with China on oil prices (vs OPEC) and allowed oil futures mrkts to have a capital flight (they could have maintained a higher price via PPT infusions) should they have wanted to……Now the thing to watch will be the GCC stiffing america because they are not getting what they once were for a barrell of oil (yes …the dollar strengthened but NO WHERE In realtion to the amount OIL has fallen) ………Watch for america to wage war in the Mid east……should the GCC launch a new currency….. how would this war play out….? perhaps that depends on wether there is a better arangement of currency’s available that will grow the DEBT (banker food) for international bankers in a more sustainable future income stream

THE TALF and the PPP plan are damn near giveaways to the private investors (hedge funds who are left standing) ……the gov’t provides up to 90 leverage (which doesn’t have to be paid back should the investment be a “loss”) considering the MKT price with gov’t gearing will be artificially high….most buyers seem destined for a loss…….imagine putting up .08$ capital plus (getting gov’t to loan .77$) and creating a “current mkt price” of .85 then when it’s time to sell you find you can only get .40$….(since the new buyer isn’t getting generous gov’t leverage) …..poor you …….you lose your .08$ and don’t have to pay the loan back since you took a “loss” but you wind up pocketing .40 (5 x what you risked!)….all in a nifty way to transfer the liability’s from the bank’s book’s to the govt’s and gaming the scam for private investors….

I’ll be adding a module containing your recommendation to the plan I’ve drafted to stop the mortgage, and economic crises. It’s called The AllStreets Bailout Plan found at http://www.themortgagenews.info. The heart of it is a direct loan program using 30-year 3% fixed rate federal loans not secured by properties to to pay down a significant portion of mortgage debt and for other purposes for those adult citizens who do not have a mortgage or don’t own a residential property. The paydown of each mortgage is replaced by loans equal to half the paydown to each of the homeowner and the lender.

However, I do quibble with two non-critical premises in your article. First, in your sentence “The loan officers were not very good, and it turns out that 18% of the homes went into foreclosure and lost an average of 50%” there’s the maddening implication that BECAUSE the loan officers were not very good THEREFORE, the loans went into foreclosure. We find this the same general unjustifiable slam on loan officers everywhere in writing and speaking about the housing and mortgage crises. The truth is, loan officers had almost nothing to do with causing the foreclosure crisis. It’s like blaming the clerks at McDonald’s for serving hamburgers with infected meat that caused a massivefood poisoning crisis. Sure there were possibly more than just a few bad apples who lied about borrower’s income on stated income loans, but that’s probably not much different than historical rates of malfeasance. However, I seriously doubt that occurred in a significant portion of the cases of loan defaults in the last two years. The fact is, loan officers merely filed loan applications. Loan officers do not set loan guidelines, and they cannot APPROVE loan applications. Lenders set guidelines, and underwriters approve loans in accordance with the guidelines if they are doing their job right. Borrower’s sign loan applications attesting to the contents. Loan officers don’t have any power or ability to investigate the underlying facts beyond the documents required by underwriters. Even in the case of stated income loans, the underwriter must check the income against average salaries in the borrower’s region for their type of employent, which is verified. If underwriters approved implauible stated income loans, then they, or their quality control supervisors are to blame, not the loan officers.

In the case of mortgage brokers, they merely send loan applications to wholesale lenders. The lendets’ underwiriters approve the loans. In the case of lenders’ loan officers, they send loan applications to their own company’s underwriters. If you’ve ever tried being a loan officer, you would know that getting a loan approved by an underwriter is often a very difficult task. The underwriters are the gate keepers, and they just evaluate loans against the guidelines, but they don’t set the guidelines. There are a myriad of causes of loans going bad other than the loan officer being “not very good,” including fraud by the borrower, the loan guidelines themselves, the underwiriters’ applications of those guidelines, economic circumstances of the borrowers that changed to “not very good” (50% of all bankruptcies are caused by medical bills, and most of the others by job losses), and the drop in home values that prevented so many from refinancing out of exploding ARMs. Of course, shame on loan officers who lied about income, appraisers who overstated values, and borrower’s who knowingly signed false mortgage applications. However, I propose that those cases are only a tiny minority of the loans going into default. I maintain that in the case of subprime ARMs, the main thing that was not very good was the terms of the loan themselves, which are such that the loans are guaranteed to blow up when the interest rates adjust, due to usurious margins over the adjustment index, typically 5% to 9% over the 6-month LIBOR. It’s just amazing that here we are over a year into global credit crisis that started with adjusting subprime ARMs, and, there still hasn’t been a single regulation, proposed or implemented, to prevent usurious terms of ARMs.

In the case of loan guidelines, you can blame either the very existence of stated income loans, or the allowance of 95-100% financing. However, stated income loans have been around for a long time, and lenders set guidelines for them in a manner consistent to protect themselves in view of historical performance data. High LTV mortgages have been around for decades. FHA has always allowed 97.5% and VA allows up to 100%. Fannie and Freddie allowed 100% with good credit. Even 95% financing, subprime or not, would have resulted in pretty much the same foreclosure crisis, and loans like that had been around for decades. In fact, Fannie and Freddie, still allow at least 95% financing as a routine, 97% for some loaons, and, under Geithner’s new refinance plan, they will allow 105% refinancing (which, I guarantee will have relatively few takers due to the rate pricing, unless mortgage rates drop to the 4.5% area, but that’s another story).

Another very important thing that turned out to be “not very good” was the issuance on September 28, 2006 of Interagency Guidance on Nontraditional Mortgage Product Risks” by the U.S. Treasury, the Federal Reserve and all the federal bank regulators. They solicited and received compliance with all state regulators of state-chartered mortgage lending institutions. I get a big laugh every time I hear that inadequate regulation was an important cause of the mortgage crisis, when, in fact, it was precisely ill-timed, aggressive, unprecedented, government regulation of mortgages that contributed mightily to ensuring that a significant problem would become a worlwide financial crisis. The analogue is the Federal Reserve drastically raising margin requirements during the stock market crash of 1929. Perhaps it’s no coincidence that home prices peaked almost the exact month the guidance was issued. The guidance required that all ARMs be underwritten using “the fully-indexed rate with the fully-amortizing payment” regardless of initial “teaser” rate or other terms of the loan (interest-only or negatively amortizing payments). The guidance had the practical effect of guaranteeing that no subprime ARM borrower, or many other ARM borrowers, would be able to refinance with another ARM. The Interagency Guidance almost immediatley put all subprime lenders out of business. By April, 2007 there were virtually no subprime lenders left. Interest rates for most subprime borrowers were adjusted in 2007 when the 6-month LIBOR index was over 5%. so they faced adjusted rates of 10-14% in most cases, and few had any way out of their loans. After index rates dropped it was too late, since their rates had already adjusted and would only come down by 1% per month. Even those who might have refinanced with FHA or GSE loans couldn’t, since by then they were upside down. Of course, that caused a subprime foreclosure crisis which Ben Bernanke warned Congress about in December, 2006 but neither did anything to stop it.

The other premise I quibble with is “And with Obama’s new proposed lower rates, even more of these loans will be refinanced.” I regret to report that it’s unlikely there will be a significant proportion of loans refinaned at significantly lower rates under the part of the Geithner plan that is supposed to refinance 4 to 5 million loans, even if that many refinance. There are approximately 25% of homeowners with zero or negative equity, or about 27 million. Most of those can’t refinance due to LTV’s being over 105%, especially if it’s necessary to finance settlement costs. A huge portion of underwater mortgages are for investment properties, second homes and jumbo loans. Jumbo loans don’t qualify, second homes could be helped, but investment properties have pricing that sets rates too high to allowing significant rate relief for most owners. In additon for the plan to help many it’ll be necessary that mortgage rates stay near or under 5%, a dubious assumption. Rates near 5.16%, as suggested by the Treasury fact sheet, is unlikely for most with more than an 90% LTV loan, based on the pricing adjustments that were published Friday, 3/6/09. Even at today’s rates, near the lowest ever, most folks would get 5.50% or higher. That means that a borrower’s rate needs to be at least 6.25% for the refinance to save much. Most who qualify for a rate like that have already refinanced with agency or FAH loans allowing up to 97.5%. FHA would still be the best bet for most borrowers with LTV’s of 90-97.5% even with the 0.5% mortgage insurance. You can verify this by simply comparing the pricing for such a loan to the pricing for an FHA refinance loan up to 97.5% LTV to the rates on the new Fannie Mae Refi Plus program. FHA will win every time, especially for anybody with a credit score under 700.

First, let’s look at the rate for an FHA refincne loan good to 97.5% LTV? The pricing excercise is simple for any FHA loan, since there are virtually no pricing adjustments. The par rate on 3/6/09 morning was 4.875%. However, there’s a rate add of 0.50% (0.55% for some borrowers) for government mortgage insurance, so the effective rate is 5.375%. That rate is good for all qualifying middle credit scores down to 620.

Under the new Fannie Mae Refi Plus program under the Geithner Affordability program, there is only one pricing adjustment for a loan at 97.01-105% LTV with a credit score of 660-679, and that’s 1.25% fee, which has the effect of raising the par rate to 5.25%. The pricing adjustment is only 0.50% for qualifying credit scores of 680-719, so par is 5.125%. Importantly, however, there is no mortgage insurance required regardless of LTV, if the existing loan being refinanced does not have it. As you can see the rate difference between an FHA refinance loan and the GSE Refi Plus loan is very minor, if any, for most borrowers with credit scores of 679 or less. However, the FHA loan does require an up-front mortgage insurance premium of 1.75% that can be rolled into the loan principal without affecting the LTV. That might push a few into the GSE refi instead. One big difference between FHA and the GSE loans is that the GSE’s will include second homes, and for those there are no pricing adjustments. In addtion, the new GSE loans cover investment properties, however, the pricing adjustment for investment property type alone is 3.75% for LTV’s over 80%, so, in practice, that prices most investment properties out of any rate advantage (3.75% pricing adjustment woul put the rate at 6.125% costing 1.25% in points, with no par rate available on the rate sheets I looked at). On balance, it appears that the GSE Refi Plus program will have its greatest impact on refinancing second homes, and those primary residences that have 97.5%-105% LTV’s owned by folks with credit scores over 680. Remember, however, that in all these cases there needs to be enough equity in the property to pay about 3-4% of the loan in closing costs.