Monday, June 28, 2010

Las Vegas Developer Blasts Washington on CNBC

Speaking on CNBC, Las Vegas hotel owner Steve Wynn excoriates the lack of common sense in Washington and blast politicans for insane spending, regulatory policies and legislative initiatives. He says Washington has created a terrible environment of uncertainty for business in America -- worse than in China, which is more stable. "The shocking unexpected government is in Washington," he says. "Everything is cuckoo and God knows what's coming next."

In particular, he attacks FHA for backing $20 billion a month in subprime lending. He blasts Obamacare and says it will drive up costs and faults Washington for failing to do anything about frivolous lawsuits that drive up the cost of liability insurance for doctors.

Monday, June 14, 2010

Moody's: Loan Performance Improves for Subprime Mortgages in Private Mortgage-Backed Securities

By Robert Stowe England
June 14, 2010

Subprime loan performance of mortgages held in private label residential mortgage-backed securities (RMBS) has finally improved for the first time after rising steadily for nearly four years.

Delinquencies in RMBS vintages from 2005 to 2008, which peaked at 54.4 percent in January 2010, began to decline over the last three months and fell to 51.5 percent as of April 2010, according to Moody's Investors Service.

"Subprime mortgage loan performance appears to have turned a corner over the past several months," writes Peter McNally, vice president and senior analyst at Moody's in the credit rating agency's Weekly Credit Outlook for June 14.

McNally notes that other classes of RMBS, jumbo prime and Alt-A and home equity, have also shown improvement, "though somewhat less pronounced."

McNally is crediting the Home Affordable Modification Program (HAMP) as "one contributor" to the improved loan performance for subprime mortgages underlying subprime RMBS.

"As HAMP ramped up in 2009, the number of seriously delinquent loans increased because loans that would otherwise have been foreclosed on and liquidated, instead waited for their placement into trial modifications," McNally writes.

The Moody's analyst notes that the number of active permanent modifications has more than doubled, rising from 117,301 in January to 299,092 in April.

"Each permanently modified loan improves the aggregate delinquency rate because upon modification the loan's stauts changes from delinquent to current," explained McNally.

Moody's reports that loan-level analysis of 641 subprime RMBS transactions issued in 2005 to 2008 shows that fewer loans have moved into delinquent status while more have moved from delinquent to current status.

Moody's analysis found that 24 percent of borrowers that were 30 days delinquent in February were current in March. By contrast, only about 15 percent of borrowers in a given month became current on their loans 30 days later during most of 2009.

McNally predicts that HAMP 2.0, which focuses on principal forgiveness for homeowners with underwater mortgages, may further reduce delinquency rates.

Despite these improvements, not all is rosy. Moody's currently expects that 50 percent to 70 percent of permanent modifications will eventually re-default. To the extent HAMP 2.0 can implement principal reductions, the re-defaults can be reduced, McNally concludes.

Monday, June 7, 2010

CBO's Low Cost Estimate of the Fed's Crisis Actions

At the request of Senator Judd Gregg, New Hampshire Republican and ranking member of the Senate Budget Committee, the Congressional Budget Office has completed a report titled The Budgetary Impact and Subsidy Costs of the Federal Reserve's Actions During the Financial Crisis. See the report at this link:

The report, written by Kim Kowalewski and Wendy Kiska of CBO's Macroeconomic Anlaysis Division, comes up with what most willl surely think is a low ball estimate of the subsidy cost of the extraordinary actions during the financial crisis of 2007 and 2008.

From July 2007 to the end of 2008, the Fed's balance sheet grew from $790 billion to $2.275 trillion. Of that total, loans and other types of support extended to financial institution made up $1.686 trillion.

By the end of 2009, direct loans and other support had fallen to $280 billion, but the Fed held just over $1 trillion in mortgage-related securities (which continued to rise through March 2010 to $1.25 trillion).

The report notes that there was also a big change in the composition of the Fed's liabilities. Before the crisis, the biggest liability was $814 billion in currency in circulation (as of July 2007). By the end of 2009, the biggest liability was the $1.022 trillion in bank reserves held by the Fed. At the end of July 2007, by contrast, the Fed held a mere $6 billion in bank reserves.

"In effect, the Federal Reserve financed its activities during the crisis primarily by creating bank reserves rather than by issuing more curency or increasing its other liabilities," the report concludes.

Banks moved their reserves to the Fed after the Fed was authorized to pay interest on those reserves beginning October 1, 2008, due to the passage by Congress of the Emergency Economic Stabilization Act of 2008.

Of course, all these funds placed in reserve at the Fed meant they were not available for lending to the broader economy.

The report attempts to estimate the economic costs of the Fed's actions to stabilize the financial markets. The authors use an approach they call "fair value" to estimate the value of the subsidies, which they admit often corresponds to the market value. "It is the price that would be received by selling an asset in an orderly transaction between market participants on a designated measurement date.

"Subsidies etimated on a fair value basis provide a more comprehensive measure of cost than do estimates made on a cash basis: They take into account the discounted value of all future cash flows associated with a credit obligation, and they include the cost of bearing the risk," the report states.

However, there is a caveat: OMB uses what it calls "a conceptually similar subsidy measure, as specified by the Emergency Economic Stabilization Act of 2008" to estimate the value of the TARP, the Troubled Asset Relief Program.

CBO estimates a $21 billion fair-value subsidy was conferred by the Federal Reserve on the financial system with all its activities.

Only $21 billion? How did we get to a number that low? For starters, the subsidy cost estimate incorporates the fact that most of the loans forwarded have been paid back, thus presumably reducing the value of the cost subsidy.

Of the $21 billion total, $13 billion comes from the Term Asset-Backed Securities Loan Facility (TALF). This seems tiny compared to the $1.25 trillion in exposure to mortgage securities that is still in place.

What about other subsidy costs? Whout the Fed's intervention, Goldman Sachs would no longer exist in its present form. How does one calculate the fair value cost of that subsidy? Morgan Stanley would conceivably no longer exist in its present form. How does one compute the fair value cost of that subsidy? For the Fed, in both instances, it's zero.

The CBO estimates zero fair market subsidy cost for the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF) that provide primary dealers with access to short-term liquidity. That's the facility that kept Goldman Sachs and Morgan Stanley from going down -- not to forget the subsidy from the AIG bailout that went via the back door to Goldman Sachs and other investment banks.

What about all the losses that may be forthcoming from AIG? (CBO estimates the present fair value subsidy cost is only $2 billion) What about the fair value cost to Citigroup of the Fed's subsidies? (CBO estimates it's only $2 billion) What about Bank of America ($1 billion)? The estimates for AIG seems beyond rosy. And Citigroup is still just a step above being a penny stock ($3.79 as of June 3), even with the subsidy. What is the fair value subsidy cost to the Fed of salvaging Citigroup from bankruptcy and ruin?

The report does concede a bit of the obvious in the following sentence:

"It bears emphasizing that CBO's fair-value estimates address the costs but not the benefits of the Federal Reserve's actions. In CBO's judgment, if the Federal Reserve had not strategically provided credit and enhanced liquidity, the financial crisis probably would have been deeper and more protacted and the damages to the rest of the economy more severe."

Setting aside the value of the broad economic benefit, however, surely the CBO estimate does not capture the full fair value cost of the subsidy. What's missing from the estimate is any sense of "fair value."

Maybe what we need is a new definition of fair value subsidy cost.

Or, maybe what we need is a measure of the fair value benefit of each subsidy, focused on its impact on the intended financial recipients of each benefit and not considering the broader economic benefit.

From a common sense view, that's the real value of the Fed subsidy. Surely that would be in the hundreds of billions, at minimum.