BENEWOLF ... on banking

Loan Sale Participations With Failed Banks

Download White paper loan participations

Great Chart From Barry Ritholtz Website

Stop the Insanity - Book II

In the 1990's Susan Powter wrote a book called "Stop the Insanity."  The book was a mega hit about why Americans are overweight.  We already knew that as citizens of the world's wealthiest country that we had horrible eating and fitness habits, yet we still rushed to buy the book of this self proclaimed guru.

We were told in this book that if we didn't change soon we would face a life of obesity, declining health, be subceptable to diabetes, cancer and even death.

Most all of us knew much, if not all, of this information before Ms. Powter sold millions of copies of her book.  She wasn't considered a sage, an oracle or even a "contrarian"as a result of her writings.  But by snapping up this book we could "change" course and be spared of the consequesnces.

You all know how the story ends.  America is still an overweight society.  Self inflicted illness treatment saps our financial resources and "weighs heavily" (pun intended) on our healthcare system.

Fast forward to 2009.  Same plot diffferent subject.  From lack of health to lack of wealth.  We as a nation again know better.  Yet we allow our political system to dictate a path to certain financial ills.  Sham stress tests, rigged accounting rules, fraudlent valuation methods all equal a clean bill of health.

If any of these (19) banks ever stepped foot on a treadmill a quadruple by pass could not save them. Why do we continue to buy this line?  Maybe we should just hire someone to tell us we are not fat and out of shape like we have done to tell us we are financially sound.

Susan, where are you?  Looks like its time for another infomercial.

Stop the Insanity - Book II.

   

What's Not Working

If I am an expert at anything, it is that I know a lot of things that "don't work."  From a Kool-Aid stand in 1958, selling Kool-Aid with no sugar to save money, to selling real estate tax shelters in 1986, the year of the infamous Tax Reform Act of 1986, to a period spanning from Q3 2007 thru Q1 2009, attempting to sell distressed loans via sealed bid, I have earned a Phd in what does not work.

Some things don't work because of our mistakes or omissions (the original sugar free Kool Aid of 1958).  Some things that once worked well become obsolete because of new rules or changed legislation (the Tax Act of 1986).  And some things that once worked seamlessly and efficiently, one day stop working at all because of market changes beyond our control (sealed bid, date certain loan sales).

Today our banking system is broken, maybe not irretrievably, but the system we knew for the past decade is not working.  The new system that will emerge will be different, it may be better, it may be worse, but certainly it will be different, but for now it does not work.   No matter what the Treasury reports, no mater what accounting standards,or  lack thereof, are enforced or implemented, the fact remains that most of the top 100 banks in the country are presently insolvent because of massive losses related to real estate loans.  The FDIC continues to close "selected" banks while the "too big to fail" list appears to grow.  New plans are trotted out weekly by the government that are touted to save both borrowers and lenders, only to be abandoned within weeks that they too will not work.

As I write this post the plan to buy toxic assets from banks is once again on the front burner.  This time it is designed to be limited to, and for the future benefit of, the billionaire's club.  The same Wall Street firms and hedge funds that brought us to the brink.  You can be certain that the latest plan will be no more transparent than past plans.  Still no plan or model has been developed that can or will indicate fair market.  Still there is no plan to assure sellers that they are not giving their assets away and still no plan to insure that buyers are not paying too much. 

For the past (20) months the loan sale industry has been mired in gridlock.  We have witnessed historic spreads between what sellers need for their assets and what buyers are willing to pay.  Industry experts agree that, with the exception of the FDIC sales, there has not been a significant public sale of loans in almost two years. 

There is no clear reporting by advisory firms as to the level of bidding and no reliable source exists as to the loan sales results.  Even the FDIC does not allow their contractors to disclose sales results.  The FDIC does publish bid results within 90 days of a sale, but only in pools and only by pool ID's.  If you were not a bidder on that exact pool and had the ability to identify the loan types and loan quality of the pool the information is useless.  Further, pooled loans can be of wide variety of collateral types, loan balances, loan quality and geographic locations that make an individual asset value impossible to determine.  The effect of this lack of transparency in loan pricing and sales results makes an entire industry a guessing game.  Imagine if real estate appraisers could  not use comparable sales as a determination of value.  Appraisals would be worthless.  What is the big secret?  Why are lenders and the government so reluctant to publish sales results?  Because we could see an accurate picture of a lender's health or the true value of their remaining assets?

In addition to value issues, loan quality continues to deteriorate at a historically rapid pace while older distressed loans that did not sell in previous attempts pile up.  We continue to talk about this "tsunami" of unsold loans or as Treasury now calls them "Legacy Loans."  I am glad they renamed it, tsunami does not adequately describe the immense backlog, it's much larger.  Legacy however, meaning multi-generational, much better describes the situation.

The single unresolved problem that continues to plague most lenders today is insufficient loan loss reserves. TARP money has not solved the problem nor will selling the loans under any machination of proposed value as the result of government financing or public/private partnerships.  The only sure way investors (the general public, not synthetic PPIF's) will ever participate en mass buying up these Legacy assets in is to sell the assets for cash, "as is" and let the market find its true bottom.  This will not happen until there is transparency in pricing and sales results.  Until the market is neutrally buoyant, without the aid of Federal life preservers, it will always be in danger of sinking further.  Can we handle the truth?

 

 

Obama Wants To Control The Banks

Opinion Coulmn

From the Wall Street Joutnal 04/05/2009

By STUART VARNEY

I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn't much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street's black hole. So why no cheering as the cash comes back?

My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell 'em what to do. Control. Direct. Command.

It is not for nothing that rage has been turned on those wicked financiers. The banks are at the core of the administration's thrust: By managing the money, government can steer the whole economy even more firmly down the left fork in the road.

If the banks are forced to keep TARP cash -- which was often forced on them in the first place -- the Obama team can work its will on the financial system to unprecedented degree. That's what's happening right now.

Here's a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He's been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with "adverse" consequences if its chairman persists. That's politics talking, not economics.

Think about it: If Rick Wagoner can be fired and compact cars can be mandated, why can't a bank with a vault full of TARP money be told where to lend? And since politics drives this administration, why can't special loans and terms be offered to favored constituents, favored industries, or even favored regions? Our prosperity has never been based on the political allocation of credit -- until now.

Which brings me to the Pay for Performance Act, just passed by the House. This is an outstanding example of class warfare. I'm an Englishman. We invented class warfare, and I know it when I see it. This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration's goal of controlling the financial system.

After 35 years in America, I never thought I would see this. I still can't quite believe we will sit by as this crisis is used to hand control of our economy over to government. But here we are, on the brink. Clearly, I have been naive.

Hope for Homeowners Program Has Helped Just One (1) Borrower

From: Thetruthaboutmortgage.com

The Hope for Homeowners program introduced by the Bush Administration and HUD last year continues to be a major flop, as evidenced by a report from CNN.

The foreclosure prevention program, which aims to put borrowers into more affordable loans via principal balance reductions, has resulted in just a single conversion since its inception in October.

“As it stands now, we’ve only gotten 752 applications,” Federal Housing Authority spokesman Brian Sullivan told CNN. “And only insured one loan. Needless to say, the program isn’t working terribly well.”

Amazingly, Congress had made available $300 billion for the loans, anticipating as many as 400,000 families would benefit from the program.

Unfortunately, the original program gained little support as it called on banks and lenders to voluntarily refinance delinquent mortgages by lowering principal balances to no more than 90 percent of the new appraised value.

After an outright fail, HUD raised the maximum loan to value to 96.5 percent so long as the borrower’s debt-to-income ratio didn’t exceed 31 percent for the housing payment portion.

Additionally, HUD dropped the 3-month trial modification requirement, expanded the amortization to 40 years, and offered upfront payments to subordinate lien holders, but the program has still seen few takers.

However, Senator Chris Dodd, one of the key minds behind the program, wants a new version included in the impending bankruptcy bill, and believes new tweaks could prove beneficial.

The latest version will drop the condition that would force borrowers to split any future profits from the sale of the property with the government, while providing incentive payments to servicers, similar to the Making Home Affordable plan.

However, it’s hard to see many lenders fully dedicated to a plan that guarantees a loss, especially with other options like record low interest rates floating around, which promote affordability without sacrificing much in return.

It is now estimated that 25,000 borrowers could receive assistance via the program over the next decade at a cost of $675 million.

If you’re looking to stay abreast of the latest mortgage industry news, consider my free e-mail updates!

Related Topics:

1. Hope for Homeowners Program Launched
2. Hope for Homeowners 2.0
3. Obama Foreclosure Plan Aims to Help up to Nine Million Homeowners
4. Hope Now Initiative Launched to Aid Homeowners
5. Making Home Affordable Mortgage Program Launched

A Fed Chief Urges Agressive Seizures

American Banker  |  Monday, March 9, 2009

By Steven Sloan

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Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, rejected the notion Friday that some financial institutions are "too big to fail"; the government should be more aggressive in taking over troubled banks, he said.

"Many are now beginning to criticize the idea of public authorities taking over large institutions on the grounds that we would be 'nationalizing' our financial system," he said in a speech in Omaha. "I believe that this is a misnomer, as we are taking a temporary step that is aimed at cleaning up a limited number of failed institutions and returning them to private ownership as soon as possible. This is something that the banking agencies have done many times before with smaller institutions and, in selected cases, with very large institutions."

His comments came the same week that Federal Reserve Board Chairman Ben Bernanke told a Senate panel that some companies, such as American International Group Inc., are so large that the government must do whatever is needed to prop them up.

Hoenig also criticized the rushed nature of many government bailouts. "Our recent experience with ad hoc solutions to large failing firms has led to even more concentrated financial markets as only the largest institutions are likely to have the available resources for the type of hasty takeovers that have occurred," he said.

Bank Failures and C&D Loans

by CalculatedRisk on 3/11/2009 12:45:00 PM

From James Saft at Reuters: Builder loans are the forgotten land mine in U.S. credit crisis (ht Michael)

Banks in the United States face a new source of write-downs and failures in the coming year, as loans made to developers to finance residential and commercial property development rapidly go bad.
...
Called acquisition, construction and development, or ADC, loans, they total 8.4 percent of all bank loans, just below a 30-year peak, and are used by developers to buy land, put in infrastructure and construct housing or commercial space.

[CR Note: or just C&D loans for Construction & Development]

"Everyone in the media is focused on consumer foreclosures," said Ivy Zelman, a housing analyst at Zelman & Associates. "What they're not focused on is the builder-developer foreclosures, which are only in the early innings and which will continue to wreak havoc as these assets are liquidated at depressed prices. Until they are cleared, there can't be a stabilization in home prices."

Zelman thinks the pressure will cause "hundreds of banks" to close.
...
Of particular concern is that ADC loans are concentrated in smaller banks, which tend to have deep ties to local developers. ADC loans account for 47 percent of nonperforming loans at small banks, compared with 14 percent at larger banks.

This really isn't a new topic - the FDIC issued a report on emerging risks in 2006 that clearly showed that medium sized institutions ($1-$10 billion in assets) had excessive exposure to C&D loans. And it is really the mid-sized institutions, not the smaller institutions (although plenty of those will fail too because of bad C&D loans).

Here are three key graphs concerning C&D loans based on the FDIC Q4 Quarterly Banking Profile:

Click on graph for larger image in new window.

The first graph shows the number of FDIC insured institutions with construction loans exceeding total capital.

Not all of these institutions will fail, and not all failures will be because of C&D loans, but this gives an idea of the number of institutions with excessive exposure to C&D loans.

The second graph shows the concentration of C&D loans by institution asset size.

This suggests that a higher percentage of mid-sized banks ($1 to $10 billion range) will fail from C&D losses. There were two examples this year: County Bank, Merced, California had $1.7 billion in assets. Alliance Bank, Culver City, CA had $1.14 billion in assets. Both were seized by the FDIC on February 6th.

Of course there are many more small banks. The FDIC Q4 report shows 7,629 institutions under $1 billion in assets, 562 mid-sized institutions, and only 114 with greater than $10 billion in assets. So most of the failures will be smaller banks.

The third graph shows the noncurrent rate for C&D loans. The rate is rising quickly - hitting 8.5% in Q4 - although the rate is still below the level of the early '90s (related to overbuilding of CRE and the S&L crisis).

Put together, these graphs suggest many more bank failures as the C&D noncurrent rate continues to rise. Other banks will fail because of bad residential loans (like IndyMac), and some institutions from bad CRE loans, but most bank failures will probably be C&D related.

 

FOR INTERACTIVE CHARTS AND ORIGINAL ARTICLE:

http://www.calculatedriskblog.com/2009/03/bank-failures-and-c-loans.html

Posted by CalculatedRisk on 3/11/2009

Congressional Oversight Panel (COP) A MUST Read Report!

I have attached a link to a PDF of the 38 page Congressional Oversight Panel (COP) report.  I realize this is "38" pages but this is a must read if you are a United States taxpayer, homeowner, mortgagor, lender, investor or have money in any demonination in any currency on earth.

This report  contains "10" questions to Treasury regarding TARP and EESA and Treasury's "attemp" at responding to those questions.  It is your patriotic duty to READ this report!

http://cop.senate.gov/

The initial report response  is dated January 9, 2009

A new reoprt is due on Jan 14, 2009

Adios 2008!

The events of 2008 were almost too bizarre to comment on.  This week as I read scores of lists of wrong headed predictions and the "best of" summary of events it is hard to choose a favorite.  But these two from Treasury are the scariest and are really hard to beat:

“It’s not based on any particular data point, we just wanted to choose a really large number.” — a Treasury Department spokeswoman explaining how the $700 billion number was chosen for the initial bailout, quoted on Forbes.com Sept. 23.

 

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” — the Treasury Department’s proposed Emergency Economic Stabilization Act, September 2008.

Which brings me back to my favorite quote of 2007 which also held true for 2008

"I don't want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year." ~ Donald Tomnitz, CEO of the home builder D.R. Horton

Let's hope that 2009 can break the trend. 

Happy New Year!