I.O.U.S.A.: Byte-Sized – The 30 Minute Version

I.O.U.S.A.: Byte-Sized – The 30 Minute Version If you haven’t read the book, or seen the full length movie, watch this.

Ethics in the world of working "other peoples' money"? ABOUT TIME

In the AIG debacle, where AIG has officially estimated a discount of 20% to 50% for clients who have been offered the opportunity to redeem half the fund; and while they can redeem residual income, due to mature in 2012, now, it appears that will be at 30% lower than face value. Finally, some Ethics are being exercised in the world of  working “other peoples’ money” While I don’t lately think of ethics and Wall Street banks in the same sentence, Barclays Wealth says they will “step up to the plate” to offer their clients support in recovering from AIG. An unnamed  Barclays spokeswoman confirmed the bank’s earlier comment: “We have a dedicated team working with AIG to determine the best way to achieve the return of all funds to our clients. This team is working closely with other private banks. We are focusing our efforts on representing the interests of our clients in these discussions. You may recall that Sallie Krawcheck (known as one of the most powerful women on Wall Street,  named as one of Forbes 100 Most Powerful Women)  resigned from Citigroup’s wealth division in September, “after failing to persuade her former employer that it should compensate clients for investment losses” according to the Wall Street Journal.
Sallie Krawcheck

Sallie Krawcheck

(Read the article, it wasn’t the only reason she left, but it makes her a hero in my book.) Maybe the Universe will right itself . . . maybe.

Should you take Cramer's advice and quit the Market?

“Whatever money you may need for the next five years,” Jim Cramer told the legions of Cramericans yesterday, “please take it out of the stock market right now.” From Agora Financial’s 5 minute forecast: “Mr. There’s always a bull market somewhere” officially checked out of the current market, suggesting that a the current drama could cause “as much as a 20% decrease in the stock market.” You don’t have to run screaming from the market and take losses today because Cramer said to.  You can take a loan against your portfolio to hedge against losses; non-recourse loans mean that if your stock tanks, you can walk away. I don’t recommend making any decision on the emotions we’re experiencing now.  Check out your options, take a deep breath, then sleep on it. Manage the risk of owing stock in this market by taking out a stock loan.  If you have $1 million in stock you can borrow $500,000.00 now and if the stock drops in value during the loan you can walk away from the loan without any negative impact on your credit. If the stock increases in value you can capture that appreciation. There is NO fall-back position to selling your stock. Done is done. Use a stock loan to hedge your position instead of abandoning it.

Update to Bear Stearns indictments

Dan Slater writes in the Wall Street Journal LAW BLOG: Bear Fund Managers Get Good Draw, Sizing Up Judge Block So, Justice Carries a Swift Sword?  We’ll See – Curiously, a poster named “Anonymous”, says “the sub-prime mess  . . . has plenty of people who deserve fines and jail time . . . BUT these guys are not the scapegoats we need.” Well, gee, they thought up the hedge funds, created them, bought the mortgage backed securities, and then (!) CIOFFI was charged with insider trading for moving TWO MILLION DOLLARS OF HIS MONEY out of the fund . . . leaving institutional investors in the fund with no warning . . . when they knew the fund was in danger. They may not be the scapegoats we NEED, but it certainly appears they need to be in front of a judge for the way they ran the funds!

Quick Notes from all over . . . indictments at Bear Stearns . . . a new kind of black widow

The U.S. Attorney’s Office for the Eastern District of New York handed down indictments for Ralph Cioffi and Matthew Tannin formerly with Bear Stearns.  You may or may not recognize them as the brains (if you will forgive me) behind the Bear Stearns High Grade Structured Credit Strategies Fund (begun  in 2003) and the Bear Stearns High Grade Structured Credit Strategies Enhanced Fund (begun  in 2006), both of which failed miserably earlier this year. From the US Attorney’s Office (Eastern District of New York) Press Release   “… The indictment alleges that by March 2007, the defendants believed that the Funds were in grave condition and at risk of collapse. However, rather than alerting the Funds’ investors and creditors to the bleak prospects of the Funds and facilitating an orderly wind-down, the defendants made misrepresentations to stave off withdrawal of investor funds and increased margin calls from creditors in the ultimately futile hope that the Funds’ prospects would improve and that the defendants’ incomes and reputations would remain intact. ” (italics all mine) “… The subsequent collapse of the Funds during the summer of 2007 resulted in losses to investors totaling more than $1 billion.” CIOFFI was also charged with insider trading, as I understand it, for moving TWO MILLION DOLLARS OF HIS OWN MONEY out of the fund and into another. Probably one that didn’t fail, doncha guess? Attorneys for the men maintain their innocence . . . Well, would they get paid otherwise? I understand the FBI is investigating 19 other companies who were originating and securitizing sub-prime loans for accounting fraud, insider trading, and the failure to disclose true valuations. Lovely ~~~~~~~~~~~~~~~~~~ Billed as social networking with a bite  (pun intended I suppose) the Black Widow Network is designed to send real estate investment deals direct to your in-box . . . Other websites designed to take advantage of REOs and the possibility of making money off them are BiggerPockets.Com PropertyShark.Com Krunching.Com If you’re looking for deals – try them out –

Jim Cramer talks about DB (my mini-cooper)

In Jim Cramer’s Mad Money lightening round on Friday June 27  he said, “In the end, people aren’t spending… they are on the Interstate and you just don’t feel rich anymore when you’re on the Interstate, unless you’re driving a Mini Cooper.”

DB, My Mini Cooper

DB, My Mini Cooper

Meet DB, my mini-cooper . . .

I don’t feel rich on the Interstate, but I’m not bleeding money for gas anymore. I went from $95 a week for the truck I was driving to about $40 every other week. The savings almost equals the car payment AND it is a kick to drive!

Daniel Gross talks about Hedge Funds and the Black Swan

Came across  an interesting reference to The Black Swan (see my earlier entry) on MSN/Newsweek (Posted August 15)

Daniel Gross writes on “Speaking Hedgie: Translating the strange dialect of hedge-fund managers who are trying to explain big losses.”

Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.

Anyone who read the best seller The Black Swan  [I did, and highly recommend it] knows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds.

“Wednesday is the type of day people will remember in quant-land for a very long time,” Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week.

“Events that models only predicted would happen once in 10,000 years happened every day for three days.”

Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.

Daniel Gross writes for Newsweek and Slate, and has a book on economic bubbles, one of my new favorite subjects:

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More on FHA Secure

While the FHA Secure program is going to help people in default because their arms reset, I wonder about those people who took a second job, or a second and third job, and are eating cornbread and beans in order to make their mortgage payments rather than let them go into default . . . When is someone going to let them refinance for some relief? More on the FHA Secure program: “It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” said President Bush. “Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government.” Homeowners must have 3% equity in their home and demonstrate that the original loan was being paid on a timely basis until it reset in order to qualify under the FHA Secure Program. Previously, the FHA would not guarantee refinances on loans with delinquencies. The loan must be within standard FHA loan limit guidelines, but the administration apparently supports legislation to raise the limits. The FHA plan is to charge slightly higher mortgage insurance premiums to address the additional risk The FHA estimates that 500,000 of 2+ million arms set to adjust could go into foreclosure. Even with the 80,000 borrowers the FHA will bail out, it still estimates it will only assist about 250,000 with its current FHA programs. Bush also indicated support for a Democratic bill pending in Congress that would temporarily alter tax law to allow homeowners to forego paying taxes on forgiven debt in loans being restructured by financial institutions. This could turn into a nightmare to manage . . . In a previous press conference, Bush opposed helping consumers outright out of foreclosure. “We must show an enormous empathy,” Bush said, but he didn’t think the feds should give financial aid. “If you mean direct grants to homeowners, the answer would be `No, I don’t support that,'” said Bush. Sen. Charles Schumer suggested in a news conference this is a shift for an administration that favors the free market. “The president has gotten out of his ideological straitjacket and seen that in times of crisis, one of the jobs of government is to help,” said Schumer. What else could he do? Sit back and watch the homeless population explode?

The Federal Reserve Bank cut the Fed Funds Rate

from 5.25% to 4.75%. (Fed Funds Rate is the rate banks pay to borrow money) This should be a positive development for credit markets. Additionally, although less noteworthy, they also cut the discount rate (rate at which banks who can’t borrow from other banks can borrow directly from the fed) from 5.75% to 5.25%. – short rates (1 month through 3 years) are slightly lower – long rates (10-30 years) are slightly higher due to expected increase in inflation that will result from the fed stimulating the economy now through a larger than expected rate cut **note that about 37.5bps of the 50bp cut was already priced into the market based on investor expectations going into the announcement. Therefore, rates are only lower about 0.125% (not 50bps). What does this mean for mortgage rates: Short Term: short arms (1/1s, 3/1s, 5/1s) should go down 1/8 in rate (in line with 2yr treasuries) 10/1s and Fixed Rates will be inch’d to 1/8 higher in rate (in line with 10 yr treasuries) Long Term: The real hope/expectation is that banks will start buying loans for portfolio now, providing liquidity to the market. When short term rates were higher than long term rates, it made no sense for banks to borrow overnight to hold 5/1 arms or 30yr fixed rate loans on the books. Now that short rates / borrowing costs are lower, they can make money buying loans. This should provide some support to the jumbo-A market long term. This is all speculation of course. The worsening of the housing market could trump everything (in which case the fed would need to cut more and eventually that will probably happen, the question is when.)

Car Dealers Cause Auto Emissions

I read that headline today in an email from Rich Workman, President of the Florida Mortgage Brokers Association.

He goes on to say: Car dealers sell the cars the automakers engineer and manufacture. If it were not for the car dealer then there would be no car emissions. Therefore, it is clear if we simply eliminate the car dealer we can solve global warming. His point being that Mortgage Brokers are taking the hit for the subprime melt-down in the news and from politicians everywhere.

I, for one, am really tired of hearing remarks like these: The Bush administration is pressuring the Department of Housing and Urban Development to speed up the issuance of a Real Estate Settlement Procedures Act proposal to improve good-faith estimate disclosures of mortgage broker fees and settlement costs. Why, when mortgage fees are discussed in the press, and by elected officials, are they always referred to as Broker Fees? It is as if a loan can’t be completed by a Mortgage Banker, or a Mortgage Lender, only a Mortgage Broker. . . and that is not the case.

AND, what brokers make, or lenders make, or mortgage bankers make is already on the Settlement Statement. That’s the law. It isn’t as if we have secret incomes. Whatever we make from the borrower or the lender is on the Settlement Statement.

From the website of Senator Charles Schumer from New York: “Up to 80 percent of subprime loans originated in 2006—the year that lax underwriting seems to have been the most problematic—were adjustable rate mortgages with low “teaser rates” that reset to higher rates that induce payment shock on the borrowers.”

How shocked can they be when they knew it was coming for two years? I have an arm. It adjusted in August. Not only did I know that was going to happen, I got at least ten pieces of mail a week from people trying to refinance my house. And in the last month before it adjusted, the lender called three to four times a day! There was no avoiding the knowledge that my arm would adjust UPWARDS during the month of August. Those high risk, high loan-to-value loans that were generated from the Sub-Prime industry were designed to help people get into homes.

There is not a lender in this country who would just as soon have your house as get the monthly payment. They would all rather get paid than foreclose. I’ve had borrowers who couldn’t qualify for a loan of any kind ask ‘why not? The lender will get the house if I don’t make the payments’ . . . As if in making a loan the lender becomes part of a quiet side agreement to “buy” the house by default.

That’s not how it works. Borrowers who take a two year arm or a three year arm do so based on their plans to sell or refinance in two or three years. In an increasing real estate market, this plan works. BUT, if the property values go down, or even stay the same, there is no refinance to be had, and in a declining market, there is no selling the house to get out of it either.

Paraphrasing Rich Workman again, here: ‘When the real estate market pulled back from a 24-month unsustainable growth spurt, people couldn’t refinance a house that was worth less than the mortgage, and couldn’t make the payment, the Sub-Prime market was left with mortgages that were in default. Then market reacted and the Sub-Prime guidelines got tighter.’

And they got tighter without legislation. They got tighter because the market demanded it. Long before a politician decided to make a to-do about it. AND, 2/28 and 3/27 arms don’t have teaser rates. They are fixed for two years or fixed for three years. After that they adjust, up or down, with caps on how high they can go. I can’t believe that none of the people who got an arm for two years or three years didn’t know that payment was going up. In addition to a loan originator’s verbal disclosure, there are written disclosures at the application process, and at closing, there is a real estate attorney or title company responsible for explaining every document that is signed by the borrower. Arm Riders are separate and distinct documents in the closing package.

If I didn’t understand what I was signing at a closing, I’d ask the guy who was handing me the papers. My pen would hit the paper when I understood what I was signing and I was okay with it. Teaser rates are those 2% payment rates you see advertised that have nothing to do with interest rates. Totally different animal, but people who aren’t in the mortgage business, like politicians don’t know the difference and seemingly don’t care to learn.

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