Housing Doom

Japanese mortgages are recourse loans, meaning the borrower is still liable even after foreclosure. Depending on the state, most banks in America offer nonrecourse loans, which are secured by collateral, usually the property itself. Once they foreclose, the borrower’s debts are gone. If you default on a recourse loan, you’re messed up three times: you lose your home, you lose all the money you sunk into it, and you still have debt. Wait, make that four times — your credit rating is garbage.

Wow!  Sounds like Japan doesn’t have to worry about The Danish Model. Doom once again thanks the mysterious Jesse for allowing us humble mortals in the blogosphere to freely re-post their stuff under Creative Commons.

The Japanese Stagnation

by Jesse

This is interesting, and probably an eye-opener for most Western readers.

Most Japanese mortgages are ‘recourse’ loans meaning that the borrower still owes the full amount of the loan even in the event of foreclosure. One of the reasons for this is that so many Japanese residential buildings are not intended to outlast the 35 year mortgage and depreciate from the day they are bought.

The Japanese government promoted officially backed mortgage programs to keep the economy going, cutting down payments to zero from the traditional 20 percent. This lured in buyers who really could not afford the houses, and are often the first to have their pay cut in an economic downturn.

Japan uses a semi-annual bonus system as part of its pay structure for employees, the bonus portion of which is more readily sacrificed for the company good.

Please consider these things in the context of the governance of Japan which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.

This will go a long way in helping to understand the "Japanese disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite. [what follows is a re-post of a Japan Times article supporting the above with Jesse's emphasis -- jm]

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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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… 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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Reggie’s putting his cards on the table [1] with respect to a powerful indictment of the Fed Stress Tests. I thought this was important enough today to pass it up the line for Implode-O-Meter to consider, but since then it’s gotten thumbs-up from both Doomer V and one of SeekingAlpha’s top commenters, so it probably should go above-the-fold here too.

UPDATE: today (Thursday) the co-CEO of SAP, the world’s leading vendor of business software, simply makes the pretense that the tests’ validity is an accomplished fact.[2]

PARIS, May 14 - The U.S. government’s recent bank stress tests were all about clarity. With hard data and clear facts, they shone a bright light on the shadowy uncertainties of complex financial transactions.

Truly an astonishing performance: Debate? What debate?

…………………..

… meanwhile, The Economist can barely contain its skepticism.[3]

In effect the stress tests asked American banks if they had more capital than losses. A better question is whether they have enough capital to stand on their own without a state guarantee. Any hopes that Europe might do better were dashed when its regulators promised to conduct similar tests, to keep the results secret and to avoid singling out individual lenders. That points to a Japanese-style future for Western banks, in which a thinly capitalised system staggers along, insisting on its rude health, while the state follows holding crutches an inch beneath its armpits. If that is the answer, then the stress tests were asking the wrong question.

SAP Audit Committee please take note.

The point is not his shocked disbelief in the tests, but his assertion that he’s got a document with sources and methodology to back up his claims. Simply put, if he’s bluffing or BS’ing there’s enough eyeballs out on this story his claim shouldn’t survive more than a couple of hours. This story is clearly falsifiable so it deserves lusty attack. Here’s the payload, Doomers, please go to it

The full report, complete with sources and methodology is available here, free of charge. I simply ask that you forward it to your local congressman/woman and/or favorite media personality. The Truth shall set you free (or get you locked up, depending upon which side of the Truth you are on): BoomBustBlog.com’s Realistic Recast of SCAP 2009-05-12 14:52:09

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He told the committee [French], looking into how the Caisse lost $40 billion in the value of its portfolio last year, that Caisse managers considered the commercial paper to be safe, an opinion reinforced by the DBRS bond-rating service, which blessed it with its top AAA rating.

Warning signals came, Bergeron said, when Coventree,[2] a Toronto company the Caisse held shares in, and an issuer of commercial paper, warned its products contained four-per-cent subprime mortgages.

That was July 24, 2007. [1]

Quebec’s provincial legislature is presently holding hearings [3] into how the manager of their civil service pension monies could have lost so much of them investing in Asset Backed Commercial Paper (ABCP).  This should be of intense interest to students of the credit crunch, because it provides a microcosm and early prototype for the subsequent seizing up of the entire world’s private corporate finance system.

Note that Coventree’s faint warning to the Caisse occurred just 5 weeks after the two Bear hedge funds with the ludicrous names blew up.[4] DBRS was the bond rating agency for the ABCP, and failed in much the same way as other raters like S&P and Moody’s would in the following months.

What Quebec’s "National Assembly" is doing this week is performing an autopsy on "patient zero" of the world financial meltdown.

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…

"Thank you for contacting us regarding "share entitlements". When you purchase stock, they are held in ¿book-entry¿ (electronic) form but in"Street-Name". This provides secure and reliable methods of ownership,without the risks and worries that can be associated with a paper certificate.

Due to a change implemented by the Depository Trust Company (DTC) and approved by the Securities and Exchange Commission (SEC), a physical certificate is "no longer" available through TD AMERITRADE. Your ownership of a security through TD AMERITRADE is maintained electronically in street name at the Depository Trust Company (DTC). from the comment thread of [1]

The above would seem to be right out of the seal the cockpits, fire all your pilots and outsource to a bunch of Predator drone operators school of corporate safety and soundness.  That was a commenter, but the post itself [1] was even more hair-raising.  The assertion there was of a widespread amount of "failure to deliver" in the "repo" market in T-bills themselves in the wake of all the chaos last September.  The good new is, what with all the bailouts since September 18th, it can’t possibly be that bad now.

However … last Sunday the WSJ sent up a flair that new rules coming into effect tomorrow will cause issuers of treasuries who fail to deliver to be charged a hefty fee, and that the immediate impact will be such as to likely cause Treasury Debt yields to go negative.[2]  Today Bloomberg is warning this could drive away short sellers and impare market liquidity.[3]

OK, so if I’m reading the below quoted bit from this 2-week-old blog post in The Atlantic [4] correctly, treasuries are sort of the last bastion of the Commercial Paper model for doing corporate short term finance and a host of other related things.  We’re talking here about the pressure of the transmission fluid, as it were.  Do we really want to mess around with the liquidity of this market starting May Day?

UPDATE: belated thanks to both twist and the Implode-O-Gang for critical digs on this story.  And further thanks to Aaron’s people for their pickup of this post, although of course they had to quote the most egregious typo in the above ("hefty fee" not "heft fee")

…………………………………………….

Meanwhile, I’m sitting an hour’s drive from about half of Canada’s present Swine Flu cases (in Windsor), and then this afternoon, without warning all hell broke loose (this is the CBC story with more video) just a 10 minute drive away..

"… anyone got some marshmallows?" It’s something of a joke in Canada that Maritimers tend to be a wee bit laid back. It’s not a joke.

Well, it’s been almost 9 years since Love Bug I came zorching out of the Philippines and exactly half a year since Love Bug II, Porche’s stealth short-squeeze against VW, caused chaos among the hedges and other speculators.  Do we really want tomorrow to look like another badly dubbed Disney B-movie?

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