Housing Doom

Here’s thoughts on Danish-style mortgages that expand on what I wrote in note [7] to Saturday’s AEI Subprime Danish: (nearly) Complete Annotated Transcript. I originally drafted a version of the following for some private correspondence, but on reflection thought I’d stretch a point on my "retirement" from active comment to share it with Doomers generally.

In the March 26th seminar, George Soros associate Alan Boyce described (from appoximately minute :06 to :36 in the transcript) his ongoing efforts to introduce Danish mortgage practice into Mexico, and outlined how it might be applied to the United States. Discussants describe with relish (e.g. around 1:36) how under the Danish system defaulting homeowners can have a deficiency judgment on their failed mortgage pursue them for the rest of their lives. One Danish bank president is described (around 1:31) as presently pursuing borrowers who defaulted in the Danish housing bust of 1991.

Strategies for implementing this in the US are also discussed (e.g. around :43, 1:36). The panelists think State level mortgage oversight would never allow for recourse mortgages, but that in the current crisis, federal standards could be forced through. Obviously a revolution in how the US Constitution works as profound as the currents that preceded the events of 1860-4.

The World Bank’s Olivier Hassler speaks (about 1:05 - 1:16) on his experience introducing Danish mortgage practice into Chile, and Boyce describes how his Danish / Soros joint venture is working to penetrate a variety of emerging-economy nations with the idea (around 1:49).

To sum up, it would seem that a lot of banks are looking at intensified control and exploitation of their middle-class customers in the US and beyond as a way to recover some of their recent losses. I find this very disturbing.

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[43:00] … If we’re going to offer this new advantage to the homeowner, and allow him to borrow at today’s current market rates, but only because the government’s going to guarantee it, we should have full recourse to every borrower. [1]

Housing Doom is pleased to present an almost [12] complete unauthorized annotated transcript for the American Enterprise Institute’s disturbing [7] March 26, 2009 event "Can Elements of the Danish Mortgage System Fix Mortgage Securitization in the United States?" [1] The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is as yet no official transcript.

UPDATE 6/24: I’ve added a short summary and some comment here.

Peter Wallison [00:00]: We have a really interesting program today, and one [crosstalk] … That’s right. I’m sure you’re going to "tax" us up here.

We really have an interesting program today, and let me tell you how we’re going to work this. We’ll have a presentation by Alan Boyce about his plan, and then we’ll have each of the people on the panel here comment, and then some crosstalk in the panel, and then some questions from the audience.

So if things come up in the course of Alan’s presentation or elsewhere, please make a note so you’re able to ask some questions when the time comes.

I’ll start with a small introduction and then … I’ll introduce Alan, and then the members of the panel before they get started with their commentary.

Although members of Congress and the Obama Administration have sweeping ideas for how to regulate the US economy in the future, few of them, apparently have thought very deeply about how we finance mortgages. Yet at the root of the country’s current financial crisis is a dysfunctional mortgage system.

The central actors in that system are two bankrupt companies, Fannie and Freddie. And they are likely cost taxpayers $400 billion by the time all their losses are toted up, and their conservatorship brought to an end. Their lack of adequate regulation and their domination of housing finance were, more than any other factor, responsible for the financial crisis we now confront.

In light of this, one would think that, rather than planning to extend regulation to the farthest reaches of the financial system — regulation, incidentally, that has not worked, as we can see particularly well with the banking industry — policymakers would spend a little time thinking about how to reform a mortgage finance system that has obviously got major problems.

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Housing Doom is pleased to present our complete unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

1. [0:00:00] Pollock Introduction
2. [0:10:14] Lachman Presentation
3. [0:24:26] Zimmerman Presentation
4. [0:42:32] Whalen Presentation
5. [1:00:00] Makin Presentation
6. [1:15:15] Panel Discussion
7. [1:26:56] Q&A
8. [1:57:58] (end)

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… And the only point I’d make is that in Europe, you’ve got banks in Europe have loans, something like $1.5 trillion to Eastern Europe. If you don’t solve that problem, you’re just going to have another subprime sort of problem in the global banking system, which is going to be the implosion of East Europe. … - Desmond Lachman

Housing Doom is pleased to present the seventh and final installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the Q&A session. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

back to AEI Subprime V transcript links

PREVIOUS: Panel Discussion

Alex Pollock [1:26:56]: … May I remind you you need to wait for the microphone. Tell us your name and affiliation please, and then ask your question. And we’ll go first to Bert, because the … look at this, the … Karen is right there with the microphone.

Bert Ely: Because she knew I’d ask the first question. Bert Ely, Banking consultant.

This a question, I guess for the entire panel, maybe primarily for Chris and John. We talk about dealing with big institutions, shutting them down. But these are huge complex financial institutions — 10s of thousands, several 100s of thousand employees, … [mic off, several seconds of dead air] … FDIC is ….

Chris Whalen: … going back to my …

Bert Ely: … if I could just add — in doing so without committing economic arson. I mean I realize that we kind of just … shut this thing down …

Chris Whalen: I know … you’re making Larry’s [refers Obama advisor Larry Summers?] …

Alex Pollock: Let — this long question be finished, and then we’ll get your answer.

Bert Ely: … but doing it in a way that minimizes damage to the economy and to the taxpayer.

Chris Whalen: Bert, look. Imagine if criminals, unbeknownst to you, secretly hired a dirty lawyer to put a lien on your house. And then a whole bunch of other people came, and they put a lien on your house, too. So one morning you wake up, and there are 10 collateral liens on your house that have been registered and validated by the court, and they say, "Oh, Bert, you can’t blow these things up, you do that and the whole community’s going to collapse. I’m sorry, you’ve just got to subsidize this."

That’s what the over-the-counter derivatives community is saying to the rest of us. "Oh me, oh my! You can’t do this, you can’t pull the plug. Bad things are going to happen." Well I put it the other way. If we don’t put AIG into receivership and pull the plug on the credit default swaps market for good, which is exactly what that means, then we are in big trouble.

We don’t go back if we make this decision.

Alex Pollock: You don’t mean pull the plug as a metaphor, you mean retrade these contracts.

Chris Whalen: … I mean …

Alex Pollock: … give people a haircut on contracts! …

Chris Whalen: … I mean give it to the Trustee in the Southern District of New York …

Alex Pollock: … and that’s what happens …

Chris Whalen: … and just like Lehman Brothers, exactly. The Lehman liquidation is your model.

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… Because, what scares me is, the Chinese are indicating that they’re not too comfortable with the trillion dollars in US Treasuries that they’ve already got, and what I’m scared about is, when I see the CDS’s on US treasuries going — trading now at close to 100 basis points. The implied probability of the US government defaulting according to the market is now 10 percent. I think that that’s a scary proposition. - Desmond Lachman

Housing Doom is pleased to present the sixth installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the discussion by the panelists that followed the presentations and preceded the Q&A session. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

back to AEI Subprime V transcript links

PREVIOUS: Makin Presentation

Alex Pollock [1:15:15]: I want to do 2 things. I want to talk about the — before we let the panel jump in some more — I want to talk about the pronoun "who?", and then I want to tell an Irish joke.

The several things in this panel came up with … question of management. And you know — when we talk about policy, we love to talk about institutions and policies, and formulas, and what are inaccurately called mechanisms, when it comes to markets, which of course are really organic behavior –

But we don’t talk enough about the question of "who?". Everybody who is an actual manager knows that more important than the organization chart, although it’s important, is who you have in charge of various functions, and this brings me to one of my favorite characters in financial history, who is Jesse Jones.

Jesse Jones ran the Reconstruction Finance Corporation during the 1930s, which was the bank, and other things — bailout, government corporation of its day. Reconstruction Finance Corporation made investments in more than 6,000 banks during that crisis, which was about 40 percent of all the banks there were. Who was Jesse Jones? Well, he wasn’t even a High School drop-out. Because he never got to High School. He quit school in the 8th Grade to take over one of his father’s cotton farms. He was a self-made man, a very successful entrepeneur, both in politics and business. He was very experienced … getting on towards 60 when he took over the Reconstruction Finance Corporation. He was a tough minded, tough, very financially savvy guy.

And I think it’s generally considered, he did quite a good job, and was highly trusted. So the question I’ve been putting to people is: "where is our current version of Jesse Jones, to run these bailout operations?"

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Why won’t the Fed catch the sudden onset of deflation? Because they’ll look at past models and say, "Oh, it only comes on gradually." Past models aren’t working now. They don’t work. No reason why they should. So you have to be really cautious about a sudden deflationary impulse.

Housing Doom is pleased to present the fifth installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by AEI Fellow John Makin. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Makin contributed a supplemental PDF paper on why inflation is better than deflation [2] to the event site.

back to AEI Subprime V transcript links

PREVIOUS: Whalen Presentation

John Makin [1:00:00]: Get on with life, good idea, good idea.

And you know I’m always very well informed when I come to these things, and I … I don’t know what to say after all this, so [laughter] … But I guess I will try to talk about something very specific, which is a little bit of how we came here and why it’s so hard to get out.

When Chairman Bernanke was testifying two weeks ago, and on his 60 Minutes performance, appearance I should say, on Sunday night, unprecedented for a Fed Chairman, he was pretty candid about admitting that … "We at the Fed missed how serious the problem was," and a lot of the problems we’re discussing here, and that Chris and Tom and Desmond have highlighted for you are due to having got seriously behind the curve on apprehending the problem.

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What the derivatives guys have done to us over the last 20 years is they’ve leveraged the real economy. They’re safe. They’ve already paid the members of Congress to change the laws so that they’re safe, but everybody out there who’s got a real claim on a real company or real asset is absolutely left out to dry.

Housing Doom is pleased to present the forth installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by Chris Whalen. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

back to AEI Subprime V transcript links

PREVIOUS: Zimmerman Presentation

Chris Whalen [42:32]: Thank-you Alex, and again let me thank AEI on behalf of Professional Risk Managers International Association for partnering with us on this event.

I’m going to make 10 points and then — what do I have, 15 minutes? — there you go. And hopefully I won’t end up in the Penalty Box again. [laughter]

At about 4 o’clock this morning I was christened by an Irish lady who has just come into our home. She’s only 3 months old, and she’s covered with light fur. But she peed all over me and wished me a Happy Saint Patrick’s Day and … [laughter] … my wife declared that this was a good omen. So here I am.

[laughter]

Where are we? — I should just sit here and tell Irish stories — You’ve already heard from my two colleagues about the residential markets, so I’m going to dive into the banks first, and then talk a little bit about what we ought to be doing. We talked a bit about some of these issues here in various events that we’ve held since the beginning of the year. And I’m very grateful to Alex and others here at AEI for putting these programs on.

As of the end of the year the banking industry was already at 1990 / 91 levels of loss. And that’s measured both by chargeoffs and also by mark-to-market valuation losses that flow through the income statement of banks.

Now, to give you an example of what I’m talking about, there’s about 8,400 FDIC insured banks in the United States. My company rates a quarter in F right now.

Now I don’t think all 2,200 of those banks are going to fail, in fact I’d tell you that less than half of that number of F-rated banks are going to fail or be merged with …

Alex Pollock: … Do you have a lower grade than F?

Chris Whalen: … no … we only have five … [laughter]

And the reason they’ve all failed, and this includes some very good names that I like a lot, like Regions, and some others, is because of the big minus sign on return-on-equity.

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Housing Doom is pleased to present the third installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by Tom Zimmerman [scroll down]. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Zimmerman’s presentation makes use of a slide deck.[2]

Highlights

• … Because this does not get better as each time you turn around, what you thought was your worst case scenario turns out to be the average scenario. That’s the problem.
• What happens though is those loans that are in this pipeline, this delinctive pipeline, takes them 6 months, 9 months or a year to get through to the end where they come … on the market. So the real pressure in terms of the number of homes that end up in the marketplace and the pressure on the housing market is not going to come here, it’s going to come 6 months or a year later in here somewhere. ,,,
• ".. this, by the way is what’s killing real estate development firms, because they can’t roll … the terms to roll are basically liquidation terms, so they liquidate instead …" - Chris Whalen
• If you managed to really lie a lot on your first loan, and really are overburdened and cannot handle this, and you get your loan crammed down to your DTI — the interest rate down to the point where it’s only 31 percent, you’ve won.

back to AEI Subprime V transcript links

PREVIOUS: Lachman Presentation

Tom Zimmerman [24:26]: Hi, Good afternoon. [slide 0 -- refer to note [2] ] I’ll sort of pick up where Desmond left off … more on the housing market. But before I do that just real quickly in terms of a policy prescription …

As we sat here for the past 2 years every 6 months talking about this problem, none of us got it right 2 years ago. We thought … were all pretty bearish, but we had no concept of how bad it would be. My own personal experience in some of the securitized markets, whether it’s residential mortgage-backed securities [RMBS] or now commercial mortgaged-backed securities [CMBS], we always get it wrong. [25:00] And it’s always much, much, much worse than we anticipated.

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Housing Doom is pleased to present the second installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [1] This is the presentation by AEI Fellow Desmond Lachman. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Lachman’s presentation makes use of a slide deck.[2] He also contributed a copy of some recent Congressional testimony he gave [3] on these issues to the event site.

Highlights

• … And what they missed was that housing is a major component of household wealth, and the second point that they missed was that it’s a very important part of the balance sheets of banks. There’s a $10 trillion loan market, and if you get impairment on that, that can really cause real problems.
• … we look like you’ve got something like a million homes too many sitting there vacant, weighing down on the market.
• To be sure, the government has done something that I think is positive in a way, but my view is it doesn’t go far enough, because what it doesn’t do is it doesn’t deal with, for instance, the negative equity problem, …
• … it escapes me why, when we need the fiscal stimulus right now, more than half of it is back-loaded to 2010 to 2011.

back to AEI Subprime V transcript links

PREVIOUS: Pollock Introduction

Desmond Lachman [10:14]: Thank-you very much Alex. [slide 1 -- refer to the slide deck at note [2]] Thank-you for arranging this. I’m always struck by you foresight, having done this 2 years ago, to pick up that this was going to be the key topic, and you’ve done well this afternoon to start with Ireland.

There’s a joke circulating on Wall Street … Iceland, of course you know, had a huge financial crisis, and there’s a joke circulating now on Wall Street about what the difference might be between Ireland and Iceland. And the answer is: One consonant and six months. [laughter] So Ireland is one of the few places that causes me to be optimistic about the United States economy.

When we gathered last time I think that it was very clear-cut where the housing market was going to go. It was quite unambiguous, everything was pointing in a very negative direction. I think now, 6 months later, you can see that there are certain signs of improvement that one really wants to make note of, and that does indicate that this is going to pass like everything else. Maybe not in 2009, but you could see a bottoming sometime in the middle of 2010.

So there is some good news. The trouble in my view is that the bad news really dominates. And the bad news of course is the state of the United States economy, where we’re heading. And with a bad economy, one really can’t expect the housing market to be vigorous and rebound in any rapid or quick way.

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Housing Doom is pleased to present the first installment of our unauthorized annotated transcript of the American Enterprise Institute’s March 17, 2009 seminar "The Deflating Bubble, Part V: Forecast and Policy Recommendations for the Next Six Months." [5] This is the introduction by session moderator Alex Pollock. The event site has several resources, including both an audio and a video recording of the 2 hour proceedings. There is a brief summary, but as yet no official transcript.

Highlights

• "The red line on there is a simple extrapolation of the trend from the beginning of series through 2000. And in that sort of an approximation, you can see we’ve already had a huge adjustment, as we know. And this index is almost back to where it’s extrapolated trend line would be. …"
• "… And the price incentives do work. For first time home buyers of course it’s great. And there have been increases in house sales at these lower prices. We need to get them low enough to have a meaningful speculative interest come into the market to absorb the available inventory, and we’ll see when that happens."
• "The liquor being thrown around is of course the analog to the bailout money … [laughter] and if we splash enough bailout money around, over the corpse, maybe it will sit up."

back to AEI Subprime V transcript links

Alex Pollock: [00:00] Welcome ladies and gentlemen to our conference on the deflating bubble part V.[1] [2] [3] [4] [5] The subtitle "Forecast and Policy Recommendations for the Next 6 Months."

We have an outstanding panel that I’m sure you will find most interesting to listen to. But before that I want to wish you all a happy Saint Patrick’s Day, and it’s being Saint Patrick’s Day, we’re going to start with some Irish music.

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