Barney Frank Asks Top Four Banks To Write Down Second-Lien Mortgages, Claims Have No Economic Value

Tyler Durden's picture

Full Barney Frank letter:

Mr. Brian Moynihan
Bank of America

Mr. Vikram Pandit
Citigroup

Mr. James Dimon
JP Morgan Chase

Mr. John Stumpf
Wells Fargo

Dear Messrs. Moynihan, Pandit, Dimon and Stumpf:

The mortgage foreclosure crisis that began over two years ago, and which continues to be a prime contributor to our nation's current economic downturn, burdens millions of hard-working American families. Congress and the Obama Administration have worked hard to address foreclosures by enabling and encouraging loan modification s, but the private sector's response has fallen far short of the need. Many homeowners are eager to save their homes despite being "underwater," but find that lenders and servicers are unable or unwilling to make necessary modi fications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount, deepening the crisis.

To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages. There is no more important priority for me in our efforts to restore stability to our mortgage market.

Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate
attention from your institutions.

Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.

The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.

I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.

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Rex Crotch's picture

Wells would instantly imploed along with many more banks. I can't see this happening anytime soon. It makes too much sense.

Anonymous's picture

not to mention that the servicing that they wrote up last quarter will need to be written down 20-25% this quarter to reflect the agency move to buyout delinquent loans

Careless Whisper's picture

don't worry, that fat queen will protect the bankstas. if he was really interested in giving the second mortgagees a haircut he would allow bankruptcy courts to modify owner-occupied mortgages. i call bullshit.

Anonymous's picture

I spent Friday and most of the weekend reading and analyzing the WFC annual report. Their capital position is entirely inadequate and 2009 earnings are overwhelmingly based upon "extraordinary" or one-time items.

Anonymous's picture

Yep, Wells has way too much HELOC exposure. Probably not as much dreck as BofA (with its Countrywide albatross draped 'round its neck), but very ugly. Let's face it, the top 10-20 banks are insolvent, filled with garbage and are about as helpful to society as a Hep C + AIDS patient going to give blood. He gives his blood, gets some money, and shows that he's making profits. Whoopee! Meanwhile...your friendly news agency/govt rube/bankster is trying to get everyone to come in and have an invigorating blood transfusion. If you get sick later on, it must've been from your own poor lifestyle choices.

Anonymous's picture

Nice analogy.

rawsienna's picture

Yup - Interest only strips prices of most collateral types (servicing is priced of the market price of these securities) are down 15-20%. 

Mark Beck's picture

Now this is very strange. Because these are the four banks I have at the top of my list for serious Q1 reporting problems even with the FDIC accounting change delay. 

To recognize any additional losses before Q1 reporting would be a disaster.

Now each firm has a different loan portfolio mix, but I think most agree Wells has the most 2nd Lien loss exposure.

---------

When I first read this, I though it had to be a joke. But, I searched around and it indeed looks real. My first though was the Barney was not given the Bank financial report decoder ring.

It will be interesting to hear how the banks respond. After all Barney has done a great deal for them. It's the least they can do. It seems Barney believes these banks are healthy enough to recognize additional rightdowns. 

Mark Beck

williambanzai7's picture

Not quite as springy as local government financing platforms in China.

bugs_'s picture

Who needs a second wien anyway?

hedgeless_horseman's picture

What about Piwot in the Wife of Bwian and his fwend, Biggus Dikkus?

williambanzai7's picture

Not quite as springy as pulling guarantee trousers up from local government financing platforms in China.

carbonmutant's picture

The banks had to see this coming...right?

Assetman's picture

It's very simple for Brawney... reverse the mark to market ruling (or lack thereof) on FASB to pre-2008 language and the problem is solved.

He helped create this monster of a coverup in asset values... and now he wants to "fix" it in piecemeal fashion?

How can Massachusetts keep on re-electing this guy?

 

SV's picture

Precisely - The logic of this whole situation implies he's once again lying.  He has the authority to revert the FASB, but he doesn't => jawboning a solution.  I will believe no one dare believes this fool or his jawboning.  Wake me when it's reverted.

DaveyJones's picture

"once again lying" implies there's moments you're not

SV's picture

I hear ya - In my mind, I was referencing Karl's comments on the possibility (however remote) that Bwarney was actually having a lucid moment.

tmosley's picture

Only when his mouth isn't moving.

Mr Lennon Hendrix's picture

Q:  These families were the original Massachusetts Bay Colony founders.

A:  Who were the Pierces and Forbes et al.

Anonymous's picture

I agree... i can't believe I'm reading this.

knukles's picture

No economic value?  Oh yeah, just like thatFannie and Freddie paper that Barney says nobody but someone in their own vested third party detached altruisic self interest who gives a rats rump will take care of for you.

"You're in Good Hands in My Welfare State" 

Assetman's picture

You might as well give Barney the Good Soldier Award on the Fannie/Freddie statement on explicit vs. implicit guarantees.

If you tell the masses that Fannie and Freddie debt (and its debtholders) cannot be made whole, it presumes that the debt has only implicit guarantees-- thus, the liability sinkhole remains off the Obama Adminstration's budget.

Nevermind that Ben Bernanke insists that Fannie and Freddie debt has the explicit tag... or at least the stuff derviced from the MBS paper he helped buy at bargain prices.  Yeah.. just joking on the last point.

Tethys's picture

Thanks for making that puzzle piece fall into place.  Seems quite likely the initial statement by Frank was worded in such a manner as to make sure it was spread far and wide on the blogs etc.  Wonder how much more of this type of misdirection we will see - 'over the top' statements by officials for maximum viral effect to get the message out, followed by the pre-planned back-pedaling to take the sting off.

If I were to extrapolate to the letter highlighted in this post, I would say this is a message to underwater homeowners to keep them from walking away by dangling the hope of a write-off of their HELOC and a principal reduction on their primary.  Barney knows this would kill off the banks, so it will never actually happen.  It is a gambit to postpone foreclosures and loan defaults (at least until after mid-term elections) while appearing to have the public's interests in mind.

Rick64's picture

The banks have had an opportunity to write some of this garbage off with massive profits, but instead chose to give it away with bonuses and salary. Now it should be time to pay the piper, but they have too much power.

 The market would be down, but our economy would have been better off.

deadhead's picture

The banks have had an opportunity to write some of this garbage off with massive profits, but instead chose to give it away with bonuses and salary. Now it should be time to pay the piper, but they have too much power.

Ding, ding, ding.  We have a winner here folks.

chindit13's picture

Barney,

Economic value, as you so cavalierly use the term, is in the eye of the beholder.  For us bankers, being optimists about those seconds is what allowed us to pay ourselves the kind of bonuses to which we have become accustomed.  THAT, Mr. Frank, is what economic value is all about.

Jamie, Vik, John & Brian

Cyan Lite's picture

Since when were second-lien mortgages ever part of the Tier 1 ratio?

Subordinated debt is Tier 2...

Assetman's picture

The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.

Is bankruptcy a legal obstacle?

AnonymousMonetarist's picture

HEY TD,

Mailperson just dropped off the latest Grant's Interest Rate Observer...

It is a 'preliminary prospectus dated March 5, 2010, $16,000,000,000 The United States of America -%Bonds due 2040'

Jimmy G just set the bar...it's going up on the wall... 24 pages of ol' glory..

The RISK FACTORS , 'before you invest in our securities, you should be aware of various risks' alone is worth the price of the subscrip..

Y'all need to beg 'em to allow you to put it up here...

Edna R. Rider's picture

I agree.  It is a wonderful piece.  Not so much a revelation but the way he builds the piece as if it were a corp offering is quite sobering.

AnonymousMonetarist's picture

There's an old sales training chestnut that applies...

'Put the numbers up on the wall and all conversation stops.'

Cognitive Dissonance's picture

"Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible."

Isn't he in effect saying that he doesn't expect property values to return to 2006 levels for a very very long time? After all, if property values go back up, those 2nd mortgages will once again be "in the money" right?

But....but...I thought happy days were here again?

Mr Lennon Hendrix's picture

Green Chutes were last year.  If you didn't get in the balloon, you better be wearing silver slippers....snitches.

MsCreant's picture

Gentlemen,

Is the proper term "sloppy seconds?"

Anonymous's picture

They just need to nationalize those fuckers. Get it over with.

Anonymous's picture

Take a lesson from the last downturn in California Real Estate - remove the supports, the homeowners, and get the property back on the market, ASAP. Unload the underlying assets for what someone is willing to pay. Fuck these banks - jeez!

Fritz's picture

Bend over taxpayers -

Guess who will pay for this.

Anonymous's picture

thats funny. china indeed. after all they have our jobs. let them have dollops of our debt too. Its all too fair.

Home equity loans have no value after all. hahaha flub just made my day !!

Anonymous's picture

This is not good for Gold, at all. This is dollar positive, and it is also never gonna happen.

bingaling's picture

Karl Denninger recently noted this "Remember FHLB Seattle again?  Their "at market" losses on a portfolio of trash, er, loans was some $300 million.  They claimed that the real loss to be realized over time was in fact $12 million, using model-based accounting.  After all, these loans, while deeply underwater, weren't really impaired.

Or so they told Congress.  I remember the testimony well.

But now, one year later, they are suing the banks that packaged up all this dog squeeze.  Among the pieces of trash being sued over are the very same securities against which they said that a model-based valuation system showed a tiny $12 million loss.

Are they suing for $12 million?

No.

That "tiny $12 million loss" in fact is some $311 million - almost exactly what the market price predicted it would be."

Since every bank that failed and taken over by fdic has had marked to myth at over 30% -40%.  You can be assured that every bank operating today has the same .Why are regionals like FITB  top performing off the lows is anyones guess . You have wonder how banks that are operating are still open with this kind of book cooking going on .Is the FDIC only closing banks that are close to zero liquidity because they are poorly funded ? Is the FDIC going to "fail" at some point when to many banks cross the threshold and and haven't got the funding to pay depositors or bills due ? At some point I believe banks will be lining up to get -reorganized if not already .

deadhead's picture

 

since every bank that failed and taken over by fdic has had marked to myth at over 30% -40%.  You can be assured that every bank operating today has the same .

Yep, you're right.

Why are regionals like FITB  top performing off the lows is anyones guess

It's called moral hazard.

You have wonder how banks that are operating are still open with this kind of book cooking going on

It's legal and that is what the FASB FAS 157 revisions did, i.e. mark to model (menagerie)

Is the FDIC only closing banks that are close to zero liquidity because they are poorly funded ?

Yep.

Is the FDIC going to "fail" at some point when to many banks cross the threshold and and haven't got the funding to pay depositors or bills due ?

Nope. The US government and Fed will print as many dollars as it takes.

 

 

Reggie Middleton's picture

It's not just them (Seattle). If you drill down it's many banks and insurers. See About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules

 

If the engineered bear market rally is running off of the FASB generated lies, then we certainly do have another crash coming, don't we?

...

 

As you can see from my table below, FHLB Seattle execs were obviously enganged in one of those wicked sensimilia sessions when they came up with that $12 million dollar loss figure, and over the entire loss of the securities may I add, not even for just one quarter.

This is the question of the day. How in the hell can FHLB Seattle accuse GS, MS, et. al. of wrongdoing when they themselves stated that they expected minimal losses on these securities/loans and the blame for the losses belong to mark-to-market accounting and not to buying leveraged real estate products at the top of a bursting real estate and credit bubble???!!!! Hey, if you allege that the investment banks lied, that probably means you lied as well - and we all know you LIED! Of course, you could have just made an error, but then again so did the crooks banks that sold the trash products to you. Back to the article, because it gets better...

...

 

I feel the need to elaborate...

Even before the estimate, it was evident that the bank felt the need to declare more losses permanent and to recognize more losses in earnings. Translation, even they realized the jig was up. But what happened to the $44,000 loss estimate? They only expected ONE house to be foreclosed upon, right???!!!

...

 

So, I had the team pull the data for other than temporary impairments for FHLB and other banks from 1Q08 till there latest reported results. Since the accounting change was applicable for periods after March 2009, we have information for first three quarters of 2009 and the corresponding quarters in 2008. Since many of the banks have not reported 4Q09 figures, we don’t have figures for 4Q09 and corresponding figures for 4Q08.

In April 2009, the FASB issued guidance revising the recognition and reporting requirements for other-than-temporary impairments of debt securities classified as available-for-sale and held-to-maturity. As explained in Mr. Weill's article above, the FAS gives significant discretion to the banks in bifurcating other than temporary impairments (OTTI) in the investment value into a) related to the credit loss (charged to the income statement) and b) related to other factors (charged to other comprehensive income). Equipped with the new rule which was effective for periods ending after March 15, 2009, the banks have appropriated significant portions of other than temporary impairments to other comprehensive income which prior to the rule, was entirely charged to the income statement. However, the trends are showing that the proportion that was being transferred to the comprehensive income is declining with many banks and insurersforcibly through fear of being accused of fraud voluntarily reversing the accounting entries made in the previous periods. The same shows how the banks' assumptions about the credit losses on these securities have been changing off late. Do you wonder why? Let me explain it to you with a few pictures from A Fundamantal Investor's Peek into the Alt-A Market...

 

See"If Anybody Bothered to Take a Close Look at the Latest Housing Numbers...", and in particular the shape of the bubble peak.

 

The average origination of the Alt-A loan in the use sits right atop that crest. You see where we have went from there...

  

  As if the Case Shiller graph doesn't drive this point home hard enough, the average and mean CLTVs for Alt-A loans AT ORIGINATION hover around 82% to 93%. Those are loans written at the top of the bubble. What do you think happened a few years later???

This is the state of Alt-A loans as of November! Nearly all of them are underwater. Some are totally sunk! We're talking 150%, 175% LTVs. and that is statewide, not anecdotal high end cases!!! If you are not familiar with Alt-A loans, they have a subset known as option ARMs that allow you to pay less than the amount necessary to amortize the loan, resulting in negative amortization. That means as time goes on, your outstanding principal gets bigger, not smaller. Many loans have a cap on this neg am amount wherein if it hits a certain level, the loan goes fully amortizing. What are the chances of this happening??? Well, you tell me.

 

Current reporting trends show that:

1. All FHLB banks reported the majority of their credit losses (more than 70%) for 9M09 to comprehensive income, with only less than 30% being charged to income statement.
2. Fed Home Loan Bank of Seattle, Federal Home Loan Bank of Atlanta and Federal Home Loan Bank of Chicago transferred majority of their credit losses to comprehensive income during 1Q09 and 2Q09. However, they made a reverse transaction by charging more than 100% of their credit losses to income statement in 3Q09.

3.  Fannie Mae only charged 5.4% ($423 million) of its total credit losses for 9M09 to comprehensive income, while Freddie Mae charged 51.6% ($11,928 million) to its comprehensive income for 2009.
4. MBIA transferred 44.4% of its total credit losses ($349.6 million) to its comprehensive income, while AMBAC did not transfer any of its credit losses to comprehensive income over the same period. For those of you who have been following me for a while, I clearly demonstrated how MBIA and Ambace were done for. See 

 

There is absolutely no way in the world they shouldn't have recognized severe losses early on. The insurers are suing the originating banks for fraud and misrepresentation too. Why? After all, it was mark to market accounting that was causing all of your problems, right? 

For the record, FHLB Cincinatti and Des Moines feel that all of the mark downs on their available for sale securities ar temporary thus, there were no other than temporary impairments. Sure fellas. As soon we climb right back up to the peak in the graph below...The bubble peak, all will revert back to normal.

 

 One would think the word fraud should come into play here. For all of those that think I was simply lucky for two years in a row on the banks (unlikely) apparently easily believe what you are told by your dear government or are severely balance sheet challenged when it comes to reading said statements. Do any of you really think that the loans sitting on PNC's, Wells Fargo's or JP Morgan's balance sheets are somehow magically different than that of Fannie's or Freddie's?

It appears as if the truth may be forced out at a time when credit makets may be roiled by sovereign debt issues. If so, maybe FASB and certain elected officials should have decided to stop selling their asses to the highest financial bidder and mayhap do the right thing. If losses bust out when the world's credit markets lock up, then we have some serious issues that just weren't worth that damn campaign contribution.

Reguired reading:

See the article link above for more...

 

 

 

 

 

Mr Lennon Hendrix's picture

plus an article by Reggie!  nice...Reggie!  Reggie!

deadhead's picture

Reggie...i hope you will write a piece on this as it seems to represent a real paradigm shift by the Obamas and Dems....i do understand that it might be campaign talk to set up the banks as the "bad guys" who are holding back the housing market.  i don't think we will see "permanent principal reductions" as that will likely kill the zombies.

I do view Obama's new short sale item (which is permanent principal reduction, same as what Frank is talking about) as an admission of failure over policies that most of us knew would not work well to begin with.

assumptionblindness's picture

Does anyone have a feeling that the words spouting from the mouth of Barney Frank are market reaction "tests" for a yet-to-be-declared exit strategy for the Treasury and Fed?  It just seems like a little Stress Test deja vu to me.

ReallySparky's picture

FT.com is reporting that Beijing studies severing peg to US Dollar.  The end is near my friends.  Better stock up and settle in the future doesn't look to bright.  (Sorry off topic)