Okay homeowners… want to hear about one of the dumbest ideas I've ever heard as related to the housing meltdown? I mean stupid-on-steroids? An idea that's supposed to stop people from walking away from underwater mortgages, brought to Wall Street by the guy who as a bond trader during the bubble cost Morgan Stanley $9 billion… this one you're not going to believe. It's also proof positive that the guys on Wall Street have lost it… or never had it… but it makes clear that the sum total of what they know about living in America today you could put in a thimble and still have room for your finger tip. Some guy named, and I am not making this up, "Howie" Hubler, who the Wall Street Journal says is a "former mortgage trader who was blamed for a big Wall Street loss three years ago," has a new venture that the WSJ says is "placing a new bet on housing". Hold on a sec… I need a beer… this is too good to rush through. I just realized who Howie Hubler is, and how the whole meltdown thing really happened… it was the clown-like-men with names like "Howie". One sec… I'll be right back… Okay… ahhhh… pear hard cider… that's good and cold… my favorite lately… okay, are you ready? Here goes… Want to know who Howie Hubler is? Did you read Michael Lewis' book, "The Big Short," because if you did, you might remember Lewis mentioning a bond trader at Morgan Stanley that lost the investment bank $9 BILLION… more than any single trader in the history of The Street. Lewis didn't mention Howie's name in his book, but thank goodness "60 Minutes" found him and put him on the show… his name… Howie Hubler. Here's how Lewis described Howie in his best-selling book: "A former Montclair State College football player, he's loud, headstrong and bullying, the type to react to any intellectual criticism of his trades by telling the critic to get the hell out of his face." (Sounds charming… If there's an argument for forced sterilization, I'm thinking I may have just found it. Actually, I better be careful, Howie may want to kick my ass after school tomorrow… nah… I'm never that lucky.) Well, Howie has apparently bounced back from his $9 billion trading loss at Morgan, and he's had another idea. He's started a company called Loan Value Group, whose purpose is to offer a way for banks to guard against the risk that more homeowners will decide to walk away from underwater mortgages… or in today's parlance, "strategically default". Howie calls his company's breakthrough new product the "Responsible Homeowner Reward," and according to the WSJ, "it essentially pays borrowers a small amount of money in exchange for staying current on their loan." The company is even filing for a patent on their innovative, yet entirely mindless process. According to the Loan Value Group's Website: "LVG has created a patent-pending, turnkey solution to incentivize mortgage borrowers to make consistent and timely payments." Excuse me? Come again? I could not possibly have heard that right. There must be something wrong with my hearing aid. No wait… I don't wear a hearing aid, and besides, I'm reading this, so why would it matter if I did… which I don't. Never mind, let's keep going. Now, there's no reason for me to paraphrase, I want to be word-for-word accurate here, so here's what the WSJ had to say when describing Howie's company and its new offering: "Here's how the program works: when an investor signs up, they decide how to structure and size a "reward" for the borrower. As long as borrowers make their loan payments, their reward will grow up to a certain amount. Usually, the reward, which could average 10% of the loan balance, can only be claimed when the loan is paid off." "While the size of the reward probably won't give borrowers positive equity, it's designed to change their attitude towards paying an underwater loan: it gives them something to lose (besides the underwater house)." "Loan Value Group is trying to take aim at one of the biggest unresolved problems in housing: Nearly 23% of all homeowners with a mortgage, or around 11 million borrowers, are underwater. The company is betting that more homeowners in hard-hit markets will begin to reconsider whether it makes sense to pay the mortgage-and that banks are going to take action to guard against that risk." Apparently, that worry is spreading, and the bankers and investors are more than nervous about the whole thing. It's funny too, because whenever the Wall Street crowd talks about future foreclosures, and I'm talking about numbers like 10 million or more future foreclosures, it's the more the merrier… let's get at 'em without delay. But, bring up the issue of strategic default, which after all is just another foreclosure to throw on top of the 10 million more that are essentially imminent, these guys start to itch like someone who forgot to bring mosquito repellent to Minnesota in the summer. Just a few months ago, the spectacular failure that is Fannie Mae started warning homeowners that they would be imposing stiff penalties on borrowers who decide to walk away from their underwater mortgages. And the federal government has rolled out yet another program designed to help refinance underwater homeowners that are current on their loans, have very high credit scores, but have not yet refinanced their mortgages, even though rates have consistently been lower than they have been in like 50 years for as long as I can remember. (In related breaking news… Mandelman Matters has learned that all of the 37 people in this country that fit this description are said to be eying the program closely, although two have reportedly lost jobs, one missed a VISA payment due date by 11 days, thus rendering himself ineligible for the program, and a fourth decided to strategically default now just because they thought it would be fun.) Dear Lord, I do hope at least 30 of the people that have a shot at qualifying for this program get the help they so desperately need and richly deserve. I can't stand the thought of having to write about another failed attempt by the Obama administration having to do with the housing market. As it is, it's starting to feel like beating up on the kid at summer camp who wore a cape, never washed his hair, and somehow managed to contract poison ivy every time he was outdoors for more than a minute or two. I'll tell you what… whenever there's a non-issue, the Obama administration or Wall Street steps up to address whatever isn't a problem introducing programs that have about the same potential to succeed, as my stationary exercise bike has of winning the Tour de France. So far, according to the WSJ, three hedge funds have signed up to offer the "Responsible Homeowner Reward" program, and two of those firms have expanded their use of the program since their initial foray into pointlessness. Loan Value's Website says it has offered $107,393,922 in rewards on loans on behalf of the three participating investors. As quoted in the WSJ story… "The cost of doing it is significantly less than the cost of a few defaults," said one distressed loan investor that began using the product on performing loans earlier this year. Look I'm sorry to have to come off this way, but are these people completely stupid, or am I not understanding something here? So, let's see… my $600,000 mortgage is $300,000 underwater, but I'm making my payments no problem, and I have a bitchin' credit score to show for it. If I'll continue making my payments until I pay off the loan, these guys want to offer me a reward amounting to 10% of my mortgage balance, in this case $60,000. I'll be paying $300,000 (plus interest) more than I have to were I to buy the house today, but once I pay off my 30-year mortgage I'll get $60k? Whew, well that's certainly a relief… only 26 more years to go and I'm all lined up to receive that $60k reward. The man, the myth… Howie Hubler! And, the best part is that the Loan Value Group won't even charge me for participating in the program, it's free! All I have to do in this example is pay off $300,000 worth of air. Is that about right? Such a deal. And some people say that Wall Streeters are incapable of selfless generosity. Okay, so that's supposed to accomplish what, exactly? I'm being serious here… someone write in and tell me that the geniuses that came up with this idea were not taking really loopy drugs at the time… because I just don't see it. Will it stop strategic defaults? Don't be silly, no. Not even one of them. Can you dig what I'm saying here? Here's what Loan Value Group's Website says about why people default on their mortgages: Once home equity becomes hopelessly negative, it is no longer in the borrower's interest to continue paying, even if he or she can afford the payments. Some of these borrowers then default. Today, 29% of all US mortgages, 15 million homes, have negative equity. Analysis suggests that over 10 million mortgages are at significant risk of strategic default. Boy, I'd love to take a look at that "analysis" that "suggests that over 10 million mortgages are at significant risk of strategic default," mostly because that analysis would also have to simultaneously suggest that far fewer people are at risk of foreclosure because they can't afford their mortgages, which is what President Obama has said is stopping him from offering more help to stabilizing the housing market. The WSJ story quoted a guy by the name of Daniel Alpert, the managing director at Westwood Capital, a company that buys distressed loans and then presumably attempts to shake down the borrower using just about any means necessary, safe in the knowledge that the courts probably won't do anything to punish them because, after all, the borrower didn't pay his or her agreed to payment. It seems that, as a practical matter, too many judges view whatever happens to borrowers after they've defaulted on loans as bordering on irrelevant. Daniel wasn't all that thrilled with Loan Value Group's responsibility reward, basically saying that it had a long road to hoe at best. In his own words: "In our experience, giving people cash incentives to do the right thing doesn't really play out as powerfully as the incentive of a principal adjustment, if they agree to a new payment and make it." I wonder if Daniel has some data that proves out his theory about principal reductions, or whether he's just talking out of his hindquarters? Actually, no I don't. Now, here's what the WSJ story says about the rationale behind the new product: "… Loan Value Group sees an opportunity because many investors are reluctant to take that drastic step and write down loan balances, especially for borrowers that are current on their loans. Principal reduction is expensive and can be tricky to implement." OKAY, REF… I'D LIKE TO CALL FOR A TIME OUT… Go back and re-read that pair of sentences just above. Investors are "reluctant" to reduce balances on loans that are current and being paid as agreed, because if they weren't "reluctant," they'd just write down the principal balance on every loan they hold and that would be way past stupid. And, as to principal reduction being "expensive" and "tricky" to implement, well… oh, what can I say that won't sound bitter and angry? Hmmm… I guess nothing. Principal reductions aren't "granted by the bank," they're the result of market forces and in this case, by "market forces" I mean massive fraud on the part of the banks. What I mean to say is that if the bank holds your $500,000 mortgage, but the property is now worth $250,000, half the amount of your mortgage, then someone is getting a principal reduction if you walk away, and the bank will be writing down the value of the loan, assuming of course, that banks one day will have to return to following at least some of the generally accepted accounting principals. So, it might be the bank or perhaps a new owner of the property, but the value of that loan's security just got cut in half. ONE INTERESTING THING… Although I can't imagine why, the WSJ story compares Howie's new reward program to a loan modification, but, the program proclaims proudly, without the ubiquitous resistance from servicers, which is due to the company's refusal to work with servicers! That's at least interesting, don't you think? It's like an acknowledgement from a Wall Street insider that servicers ARE in fact the problem when it comes to loan modifications. The company says it deals directly with the borrower on behalf of the investor, servicers be damned. I guess you could look at Loan Value Group's responsibility reward like a loan modification for people who don't have cash flow problems. Like… it would be prefect for a publicly traded homeowner. You'll get your modification reward but in 26 years, assuming everything goes well on your end. And this is why I say that Wall Streeters are hopelessly and incomprehensibly out of touch with the real America… the America I live in. The truth is, I don't know anyone that wouldn't laugh at this deal. Most of the folks I know that are trying to get their loans modified aren't really interested in waiting 28 weeks, let alone 28 years. Just the fact that Howie thought of this program and then others bought into the idea is indicative of what's wrong in this country today, and why we are unable to understand, let alone solve the foreclosure crisis. I wonder how the call from Loan Value Group to a homeowner would go. Let's listen in… it's a crisp Sunday afternoon in November when the phone rings at the McHenry residence… Howie: "Hello, is this Mr. McHenry?" Homeowner: "It sure is. Who's calling?" Howie: "Oh good… well my name is Howie Hubler and I'm representing the investor that holds your mortgage. I see that you've been making your mortgage payments on time and as agreed and I'm calling to thank you for being such a wonderful customer." Homeowner: "Well, aren't you nice for saying so. Listen, I've been meaning to give you guys a call, but right now I'm watching the game and…" Howie: "Well, perfect timing then… I saved you from having to spend hours finding out that we don't have in-bound telephone lines. The reason I'm calling is that I noticed that your home is now worth quite a bit less than you owe on your mortgage, and I wanted to let you know that if you'll keep paying your mortgage as agreed, we'll be giving you a reward equal to 10% of your outstanding balance." Homeowner: "Um, well… okay." Howie: "The best part is that there's no charge to participate in the program, all you have to do is continue paying your mortgage as you always have. Once you've paid off your loan you'll receive your Responsible Homeowner Reward, which in your case appears to be roughly $60,000! Doesn't that sound terrific?" Homeowner: "Wait, what? After I pay off the loan… you mean 26 years from now? But I'm 62. Are you saying that I'll get my check for $60k when I'm 88 years old? And you're calling me now to tell me about it? Why bother calling me now?" Howie: "Well sir, we're calling to tell you about it now because we wanted to tell you about it while you're still young enough to enjoy hearing the news." Homeowner: "That's nice. Why don't you send me my check while I'm still young enough to enjoy spending it? Hey, while I've got you on the phone, how much less is my house worth than I owe on my mortgage?" Howie: "(laughs…) Sir… that's not really important now, you just keep paying as agreed and we'll be sending you your 10% reward in only 26 short years, isn't that wonderful?" Homeowner: "Well, I'm not sure I'd describe it as being wonderful. Wonderful would be if you were sending me the check sometime in the next decade… but, seriously, how much more do you fellas figure I owe than the house is worth?" Howie: "Sir, let's not focus on that right now. The important thing is that you'll keep paying us the amount you promised to pay. That way, you'll get your reward before you know it. Sir, 26 years may seem like a long time, but it's really right around the corner." Homeowner: "Right, if you live on a block that's 9,000 miles long and you're walking around it, I suppose that's true. Now how much more do I owe than the home is worth? Are you going to tell me or what?" Howie: "Well, sir… right now, we show your home to be worth right around $300,000, and you owe about $600,000 on your mortgage. Of course, that picture is going to change dramatically as soon as we on Wall Street get the next bubble inflating and real estate prices blow through their 2006 highs, and if you saw the financial reform bill that Congress passed a month or so ago, you probably realized that it won't be long before that happens. Heck, could be by next year at this time." Homeowner: "Wait… what? Another bubble? And you're saying that's a good thing?" Howie: "Of course that's a good thing, sir… a very good thing. Why I personally plan on picking up my family's generational wealth during the very first year of the next bubble… yep, promised the wife that I'd buy her a title, not "Queen" perhaps, but I'd look at something in a "Lady" or even a "Duchess". She deserves it, sir. She's worked so hard these last two years, not only taking calls from the designers who decorate our homes around the world, but she also directly supervises our Nanny Supervisor, and still manages to fit in cosmetic surgery… it's not easy, sir, as I'm sure you'd readily agree. Why next month she's having her calves lifted. Don't know how she fits it all in, sir, I really don't." Homeowner: "I didn't realize that… did you say calves…" Howie: "Oh sure, sir… you can have anything lifted these days. A couple of months ago she had her index fingers reshaped… and sir, I don't mind saying that to see her pointing her finger today… well, it gives me chills just thinking about it." "So you see, sir… things are going to be looking up real soon for responsible homeowners like you and me. And next time, we won't let those irresponsible sub-prime borrowers muck it up like they did this last time. No, we learned our lesson this last time out, no doubt about that. Next time, we're going to make sure we only screw over borrowers who have jobs paying at least $3 over minimum wage who have credit scores over 400. Word on the street is, next bubble… if you can't make at least nine months worth of teaser payments, you won't be able to get the loan." Homeowner: "Actually, I kind of thought the meltdown was caused by irresponsible bankers who committed securities fraud, borrowed more than they could ever afford to repay, intentionally lent money to people who couldn't repay loans and with terms they didn't fully understand, and then profited enormously from a combination of tax-payer funded bailouts and bets against the bonds they were selling to investors all over the world." Howie: (laughs…) Oh come on, sir. Where do you get your news, the Rachel Maddow show? Look, I don't know anything about all of that… it's way too complicated for me. I just know that my neighbor is an irresponsible deadbeat for sure because he has a jet ski in his garage, a flat screen television in his den, and he remodeled his kitchen. What more do I have to say, sir? The guy's got sub-primer written all over him." Homeowner: "Okay, so your seriously calling to tell me that if I go ahead and pay you $600,000 plus interest over the next 26 years, you'll give me a $300,000 house and a $60k bonus at that time, and the good news is I don't have to pay anything to participate in the program? I will have paid something north of a million dollars for a home that's worth $300,000, but I don't have to pay to participate? You're seeing an entire team of doctors, aren't you son?" Howie: "Well, that's one way to phrase it sir… if you're a doom and gloomer I suppose you could say that." Homeowner: "Well, okie dokie then… thank you for calling. I'll give it some thought… maybe run it by my accountant to see what he thinks. I hadn't really considered it before, but now that you've brought the whole thing to my attention, I'm starting to think that maybe I'd be better off walking away from my mortgage, and waiting a few years to buy again at a much lower price." Howie: "But, sir… you signed the note… you promised… you're morally obligated to repay what you promised. You realize that, right sir?" Homeowner: "Hmmm, I'm going to have to think about that. I wasn't aware that I signed anything that had anything to do with a moral obligation. I thought the deal was that I would either make the payments or you'd get the home back. Besides, what about my moral obligation to my family to not piss away a million bucks on nothing?" Howie: "Well, now that's just crazy talk, sir. You know as well as I do that if you don't honor your commitments in life you're certain to burn in hell for all eternity." Homeowner: "Pardon me?" Howie: "Never mind that, the point is that the investor that owns your loan is counting on you to do the morally right thing and repay your loan as you promised when you signed on the dotted line. That's the only way that they can keep their promises to their families, and I happen to know that one of the executives has promised his 9 year-old son his own full-size railroad for Presidents' Day this year. You wouldn't want to be the reason that he can't fulfill that promise to his son, now would you sir?" Homeowner: "Um… I guess I'm not sure how to respond to that." Howie: "No need to, sir. No need at all. I can tell that you'd feel awful if you were to cause something like that to happen. After all, the children are our future, right sir?" Homeowner: "Um, our future… yes, well… I suppose they are, assuming we have one." Howie: "I knew you'd feel that way. So, don't forget to watch your mail so you receive your certificate entitling you to your Responsible Homeowner Reward, okay sir?" Homeowner: "Watch our mail, okay we'll be watching for it." Howie: "Very good, sir. I'm so glad to have been able to help. If you have any questions, feel free to write to us at the P.O. Box address that's printed in 4 point type on the back of your certificate at the bottom, right under the FDIC logo. Sometimes you may have to hold the certificate up to a really bright light to make it out. We respond to all letters within 1400 days of the next leap year. Goodbye sir. And have a great rest of your day!" CLICK! Homeowner: "Um… okay, yes, um, goodbye? He hung up on me?" Mrs. McHenry: "Honey, who was that on the phone?" Homeowner: "Someone wanting us to keep paying our mortgage." Mrs. McHenry: "But, we already pay our mortgage, don't we?" Homeowner: "Of course, dear. He wanted to tell us that they'll send us a check for $60,000 once we've paid it off." Mrs. McHenry: "Why in the world would someone call us to tell us to pay our mortgage that we're already paying, and offer us a check for $60k 26 years from now? Come on… what do you take me for? My God, can't you come up with anything better than that? What's her name, Henry? It's that tramp "greeter" down at the Wal-Mart, isn't it? I see the way she looks at you." Homeowner: "I'm really not sure, Honey, and no… there's no one but you Sugar-kisses. Besides, that greeter at Wal-Mart is 81 years-old with a hip replacement. Honey, could you hand me the remote? And do me a favor, make an appointment with Carl, our CPA for next week… maybe it's time we moved down to Florida… rent a place for a couple years and see where we want to settle down… " And… SCENE. Hey, I was just thinking… how about this for the company's slogan: Loan Value Group. Confusing Homeowners from Coast-to-Coast for No Particular Reason It's not bad, right? I'll keep working on it… Loan Value Group's executives, if you can believe this company has executives… say that they can implement their product offering quickly-within 48 hours-rather than the months involved in finalizing a normal loan modification, which should come as no surprise whatsoever. How long could it possibly take to tell homeowners who are current on their payments that they'll get a "reward" after they've paid off their loans? Of course, the investors that own the loans pay for the program, so they need to buy in to the loopy strategy and I'm thinking that might take some time, but what do I know? Maybe none of the Wall Streeters know anything about living in this country today. According to the journal, the company's pitch to investors is that they can apply the reward "while skirting accounting rules that would normally require a modified mortgage to be written down," and that rewards can also be applied on top of loans that have been modified. And… that makes absolutely no sense at all, if you ask me, so I can't even comment. Finally, the WSJ story closes by positing the following: "The government hasn't had a great track record modifying loans-do private sector solutions like these hold more promise?" Um, well… golly. I guess I'm not sure how to respond to that either. Alright already… I give, I give… UNCLE… they win, I can't fight them… they're obtuse-ness is just too strong… must – get – air – fast – throat – closing – room – spinning – getting dark – it's – really – hot – in – here… CRASH! BANG! CRACK! BOOM! Ouch, that really hurt… damn it. Well, that's the last time I buy a glass desk… BUT AT LEAST I STOPPED THINKING ABOUT HOWIE FOR A FEW MINUTES. I suppose I should head off to the Emergency Room to have the shards of glass removed from my torso… and perhaps if I explain what I've been through, the doctor will prescribe morphine as a prophylactic. I can't remember, do they serve alcohol in hospital cafeterias these days? Never mind, I'd better bring my own just to be safe. Here's a link to the story in the WSJ: Plan Offers Hedge on 'Strategic' Default. If it starts making sense to you, kill yourself quickly. You don't want your family to see you like that. And here's a link to the company, Loan Value Group, in case you feel like killing some time staring at something that makes absolutely no sense whatsoever, and you've already watched this week's episode of "Keeping Up With the Kardashians." Epilogue… "What happened to Howie Hubler?" Steve Kroft asked on 60 Minutes. "He was allowed to resign from Morgan Stanley and take with him millions of dollars in back pay," Mr. Lewis answered. "Tens of millions of dollars in back pay." ~~~~~~~~~~ Howie costs Morgan Stanley $9 billion trading bonds, and takes home tens of millions in cash. Me? I'm cashing in my change jar trying to figure out how to buy a new laptop so I can continue to scream on behalf of homeowners and fight like all get-out to bring back the country I love so that my daughter can one day travel to Europe and not feel that she has to tell those she meets that she's Canadian to avoid embarrassment. I don't know about you, but that's enough for me for today… Howie's already kicked my ass, and he didn't even have to leave his office to do it. Waiter… check please? Hey, do you guys take Chevron cards? No, it's okay… just wondering. I've got it… you don't accept two-party out-of-state checks either, I suppose? No, no… it's fine… it's only coffee… I've know I've got some change in my car… Mandelman out.
Read more detail on Recent Banking and Finance Law Posts –