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Rumors of News. News of Rumors.

Submitted by Bruce Krasting on 08/07/2010 09:09 -0400

In the past two weeks a pair monster rumors ripped through Wall Street.
They were not like the normal rumors; these somehow gained instant
credibility and became the talk of the street. Zero Hedge, Denniger and I wrote about them. Even big shots like Pethokoukis at Reuters added gas to the fire with his piece, An August Surprise from Obama.
Morgan Stanley actually came out with a comment in support of one of
the rumors. And finally, none other than Barrons, weighed in on the rumor
mill Friday night. Randall Forsyth wrote a piece, Mortgage Forgiveness? Forget It.

So both the press and the street believe in and are fanning the rumors
of imminent changes in the $10T mortgage market. That’s pretty
impressive. The only way rumors get spread is if they are fundamentally
believable. The other reason rumors get traction is that those who are
spreading the information actually have some information to peddle.

I think I have the answers. These rumors came from Washington. This talk
was originated by one or more of our legislators (or their staffs).
Information was provided to some heavy hitters in finance by some big
shots in D.C. I can imagine how this got started:

Congressperson: “Psst, you did not hear this from me but D.C.
has something cooking that will reduce interest and principal on
mortgages. Don’t forget me when it comes time for my re-election
campaign.”

Wall Street: “Interesting. I’ll pass this on to the mortgage
desk to see if they can’t make a buck on the info. Don’t worry we won’t
forget you….”

And that is how credible rumors get started.

The rumor two weeks ago was focused on a program that would reduce
mortgage interest rates for a substantial number of homeowners. The talk
was that a new ReFi rate could be as low at 4%. The rumor this week was
that there was going to be an effort to substantially reduce the
principal balance on existing mortgages.

Both rumors are true. The US government is going to reduce the
principal balance and the interest rate for many homeowners. The
information comes directly from David Stevens at the FHA. They released
a statement Friday afternoon regarding their efforts:

FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS

In the release Stevens describes that this is a lifeline being thrown to
millions of underwater borrowers in the US. This sounds like it could
be a very big deal, but it is not. You have to look at the terms and
conditions under which a troubled borrower could take advantage of this
program. When you do that you come away with the conclusion that there
will be very few of those underwater borrowers who can slip through the
needle of the FHA requirements for principal reduction and a ReFi at a
much lower rate. Some basic points of the program:

-You have to be current on your existing mortgage.

-You have to be underwater, but not by more than 15%.

-You have to
have your existing mortgage with a third party bank and the bank has to
agree to a principal reduction of at least 10%.

-You must have a credit score of at least 500.

-The second lien holders (if any) must write off their loan.

-The borrower must be in compliance with section 1481 (d) of Fin Reg.

-The new FHA
loan can’t exceed 97.5% of the current property value. It cannot be
greater than 31 percent of gross monthly income and total debt,
including all recurring debts, cannot be greater than 50 percent of
gross monthly income.

These conditions are giant hoops for a borrower to jump through. I doubt
that many are going to be eligible for the principal reduction/low
coupon ReFi deal that FHA is offering. For those out there who have been
trying to talk with their lenders about a restructuring, the
conversation could go like:

Borrower: “Oh, hi BoA. Glad you finally answered the phone. I
have a $400,000 mortgage with you and I have been dutifully paying you
every month. I am current. I also have a job and a credit score greater
than 500. So I am a pretty good borrower. I want you to reduce the
principal that I owe you by 20% so I can do the sexy new FHA deal. So
all I need is for you to say that you are willing to take an $80,000
loss on my current mortgage. Does BoA agree to that?"

BoA: Buzz off with that idea. We are not letting you (or
anyone else) off the hook. You have to be in default for at least 90
days before we can even consider that.

Borrower: No, you do not understand. I can’t get the FHA ReFi unless I am current.

BoA: That is the catch 22 on this. Lots of people are
technically eligible for the program, but next to none are going to get
this deal.

So there you have it. The D.C. based rumors of principal and interest
relief are real. There is a new program in place that can, in theory,
achieve those lofty goals. But very few will be able to access this
opportunity. It is just a program that looks good but has no teeth. This
program was put in place for political reasons. It will be held up by
the Administration this fall as an example of how a benevolent
Washington is trying to help homeowners that are underwater. It is a
show pony only. This proposal will do nothing to get to the heart of the
problem.

A side note on this story. This from the Barrons piece:

There Ain't No Such Thing as a Free Lunch. And the Treasury denied Thursday that any such changes are afoot.

Forsyth is relying on a statement made on CNBC Thursday that they had
spoken to Treasury and there was no substance to the rumor. That would
appear to have been misinformation. Either CNBC made it up or whomever
they were talking to at Treasury has no clue what is going on. I suspect
it was the latter. CNBC should check their sources more carefully.

Treasury is very much involved with the FHA program. They are supporting
some of the losses. From the FHA Mortgagee Letter #210-23:

To facilitate the refinancing of new FHA-insured loans under this program, Treasury will provide incentives to
existing second lien holders who agree to full or partial
extinguishment of liens effective on all case numbers assigned on or
after September 7, 2010.

In summary, there is a program to reduce principal and interest on
mortgage loans that has been sponsored by D.C. It has no substance, but
it “looks/sounds good”. Treasury is definitely involved. They are paying
a portion of the losses. And CNBC gave us a head fake on the news.

This is a small step that will take us closer to the broader discussion
of debt relief and who will pay for it. This first effort will not
accomplish much. There is more of this coming. Sooner or later a plan
for real debt relief will arrive. That can’t happen until after the
November elections. When it does happen we will probably first hear
about it in the form of a new rumor. That talk will again originate from
Washington. D.C. has become the new source of rumors/leaks on finance.
Just another example of how things have changed, for the worse.

- advertisements -

Wed, 11/10/2010 - 06:34 | 715693 cheap uggs for sale

Sun, 08/08/2010 - 08:37 | 509433 ZackAttack

This administration seems to govern by trial balloon quite a bit.

Sun, 08/08/2010 - 03:13 | 509381 Problem Is

TBTF Banks First, Amerikan Schleps Last
Nice analysis of how our political class circle jerk with their owners on Wall Street operates Bruce.

Any program to help housing or mortgage markets is first and foremost a bailout of TBTF banks...

Wanna Be the Puppet of Wall Street
One can't rise to the White House without Jamie and Lloyd et al pulling the puppet strings to lift one there...

Sun, 08/08/2010 - 00:18 | 509323 GoldmanSux

There will be many such rumors leading up to November. Increasing in intensity. Thereafter nothing. The math doesn't add up for anything to be done.

Sun, 08/08/2010 - 00:02 | 509317 Dirtt

Great work Bruce. Thanks for trying to keep the ZH readers above water and below the smoke and away from the mirrors.

These bastards won't stop raping Fannie and Freddie until they drown in their own blood. La Guillotine Shall Claim Her Bloody Prize? We can hope.

Sat, 08/07/2010 - 23:09 | 509288 JuicedGamma

Might as well be Homer Simpson running the government.

Sun, 08/08/2010 - 00:00 | 509315 Irwin Fletcher

Not nearly as good. Homer would stimulate the economy with beer and bacon. Mmm... bacon. That would shoot my consumer confidence to the moon.

Sat, 08/07/2010 - 22:33 | 509263 Oswald Spengler

Does anybody know where I can change dollars?

Sat, 08/07/2010 - 21:46 | 509209 Mercury

I can see The Administration starting this rumor, "running it up the flagpole" so to speak and not making anything official until they feel comfortable that it probably won't actually instigate widespread mob violence.

Everyone here is aware of Wall Street's contribution to the financial crisis: excessive leverage, the explosion of derivatives and byzantine structured products, the misapplication of risk metrics etc. But the federal government's culpability boils down to: facilitating too much easy credit for too long.

So what does the government suggest we do now? Start taking steps to make credit a civil right of course. Duh. How's that for learning from your mistakes? Obama is a big "Second Bill of Rights" (entitlements) guy and this kind of thing is definitely in his playbook, it's just a question of what page and whether we're quite there yet or not.

Sat, 08/07/2010 - 19:45 | 509125 QQQBall

Hahahahhaha! Sucker! Just kidding, I have no debt, F&C house and pretty financially independent, but not rich by any stretch... I'm working for 1980's fees with short deadlines and lower flow of work... I cannot collect UE, but I am definitely under-employed by 1/2.

Sat, 08/07/2010 - 18:43 | 509097 MarketTruth

ZH'ers, DC is just once again doing their 'test marketing' regime. BHO loves to have rumors float around and see the reaction before then possibly actually coming out in public about something. It is simply test marketing to see what public and business sentiment is.

Sat, 08/07/2010 - 17:47 | 509061 Astute Investor

Infinite leverage is possible as long as the interest rate is low enough....

Sat, 08/07/2010 - 17:08 | 509032 glenlloyd

this is blatantly wrong, it again helps those who would be better off defaulting by penalizing those who did the right thing. again with the protection of the losers.

I am disgusted with this.

Sat, 08/07/2010 - 16:46 | 509021 b_thunder

Last year i paid many thousands of dollars to refi, got 30yr @ 4.25%. had to pay 2 points to get there. So now Treasury wants to refi soemone @4% at zero cost to the borrower? WTF? Where is "with liberty and justice FOR ALL" ????

Ok, so i may swallow that loss for the good of the country. But principal forgiveness? Especially "strategic" default happen much more frequently among $1+million homes than among under $150k homes, i.e. it will disproportionally help (again) the upper 10% of the population? So I bought a small house, and someone else will be paying less for something 2x my house? Or what about renters for whom the price drop is the only way to afford a house?

After TARP, bailouts, etc people are edgy. If that happens, i think people will not wait for the next elections, they will get their AR-15s and march on DC. I'll perhaps join them (but with AK47)

There is one and only solution out of this mess, however the Fed, Bush's Treasury and Obama's treasury are against it. And it is a very simple solution: to force banks and their bondholders to take the losses, and "flush out" all "shadow inventory."

that will force prices below fair value and attract all kinds of investors. Otherwise this slow bleeding (by 1000 paper cuts) will continue for decades and will for sure bankrupt the state.

But we all knwo that Timmy G and Ben B won't allow that to happen....

Sat, 08/07/2010 - 17:34 | 509053 10044

Vote'em all out in Nov, don't care which party

Sun, 08/08/2010 - 03:18 | 509382 Problem Is

"Vote'em all out in Nov, don't care which party."

10044:
Of TARP, HAMP, HARP and HUMP... your plan is the only one that will work.

VOTE'EM OUT.
We have seen the work of professional politicians... Anybody could do a better job than these worthless asshats...

Sun, 08/08/2010 - 09:50 | 509459 jimijon

If you're in, you're out!

Sat, 08/07/2010 - 16:10 | 509003 IE

Bruce... how could the debt forgiveness happen without bankrupting the banks?

Sat, 08/07/2010 - 16:17 | 509005 Bruce Krasting

When you say "banks" you have to include Fannie and Freddie. They have the ability to accept any losses the taxpayer can bare. The banks have reserves on a great deal of this. This would be a way for thme to exit from some headaches at a set cost the could absorb. Then you have mortgage pools. Who care about them?

Sat, 08/07/2010 - 16:08 | 509000 Gwynplaine (not verified)

I think Rudyard Kipling said it best:

"As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!"

[emphasis mine]

http://www.kipling.org.uk/poems_copybook.htm

Sat, 08/07/2010 - 16:05 | 508997 HedgingInfinite...

HedgingInfiniteRiskIsNotPossible's picture

Interesting. The administration will hold this up as a victory hoping to get some mileage for the midterms. Then, when the Dems lose big, they will come up with a program more in line with the original rumor, to just reset everybody to 4%, in the hopes this keeps Obama in office a second term. But it will be too late, Congressional gridlock having set in.

Which is pretty funny, when you think about it.

Sat, 08/07/2010 - 15:54 | 508994 jbar

another fail...

Sat, 08/07/2010 - 15:35 | 508990 msjimmied

The pie in the sky valuation is not going to correct itself, not for the banks, and definitely not for the homeowners. When this pile of excrement falls, down will come baby, cradle and all. How many millions of empty homes and hollowed out banks will we tolerate in preventing "moral hazard"...amazing, like there was any integrity in the system to begin with. Get off that high horse and figure this out. The loss is staring everyone in the face, just accept it. The banks have to realize that the housing sector isn't coming back anytime soon, their derivatives are toast. The jobs are not coming back. The economy is fried.

So where do we go from here? Do we wait for the foregone conclusion or do we do something about it? What would that something be? Think outside the box for a minute, and it makes sense. I would not ask the banks to give their blessings, because we know it will not be forthcoming. They have got their bailout, they are gunning for the last dime in the economy even as we speak. Giving a break with these kinds of parameters will necessarily block too many people from relief. Start with 4% interest on every residential mortgage, I don't care if it's owner occupied or held for investment, the glut is too big. Doesn't matter who holds the note. If we can lend to the banks for 0.25%, we can lend to John Q. Public for 4%. Then we look at the cram down aspect. Enough talk. Time to do.

http://www.youtube.com/watch?v=JQWFugNFCVw&feature=player_embedded

Sat, 08/07/2010 - 16:45 | 509019 Pondmaster

4% !!!!!!!!! Thats ursury . How bout No interest loans .( Wow man ! Too late dudes the car makers offer that , but you have to raise the price of car 25% to get it ) or No Interest for 24 months ( oh the appliance ( Best Buy creeps), furniture stores ( take yer pick )already do that , and aren't selling spit , the scum also add all interest if you are one second late paying after 24 months ) "We gotta move these McMansions , We gotta move those Condos in the Keyeyeys" - "That aint mortgage , thats the way you do it , Money for nothin and your house for free"

Sat, 08/07/2010 - 20:08 | 509144 StychoKiller

Hitchhiker's Guide to the Galazy: "What to do if you find yourself trapped under a large boulder with no hope of rescue: Consider how lucky you are that life's been good to you so far. If, alternatively, life hasn't been good to you so far -- which given your present circumstances seems more likely -- consider how lucky you are that life won't be troubling you much longer!"

Sat, 08/07/2010 - 15:12 | 508968 seventree

It is inconcievable that any bank would agree to a 10% principle reduction for someone in such good financial shape as to meet the other conditions.

If implemented, the administration could brag about their "plan" at election time, until some killjoy points out that zero homeowners were helped.

Sat, 08/07/2010 - 16:34 | 509010 banksterhater

Hey, wait a minute! We played by the rules, 20% down, lost our business, went back to job I had 20 yrs ago, got laid off, but have enough cash because we are prudent, responsible savers, to pay off mortgage, and thus not a chance in hell Wells Fargo will adjust our 6.25% fixed rate.

What do you say about that? And we paid our own out-of-pocket health insurance for 35 years!

Sat, 08/07/2010 - 17:12 | 509035 seventree

I'd say you are a responsible person who has had some bad breaks and is trying to deal with them.

But what are you saying? That the bank should give you a rebate on the purchase price of the house?

I paid off my previous mortgage early, later sold the house and built another for cash with the proceeds.

Now I couldn't sell this place for much more than half what I paid for it. I wish someone would help me out but I doubt anyone will.

Sometimes it sucks to be one of the good guys. Actually these days it mostly does.

Anyway, if you can get something back from this or any other government plan, do it. I just can't see the logic of this proposal.

Sat, 08/07/2010 - 14:30 | 508932 Wilderman

Thanks for the update on this, Bruce.

This is one of the worst ideas I've seen come out of an already decrepit administration. At least W. just passed out money to everyone (remember the stimulus checks?). Hi, here's a little reward for being an American, please go buy a new TV.

If they're going to wreck the currency I'm obligated to use, I at least want something out of it.

Sat, 08/07/2010 - 15:33 | 508988 breezer1

the best way to get the bastards is to buy physical gold and silver. we will all be paper millionaires soon enough. ( whats the good of being a millionaire if everyone else is one too).

Sat, 08/07/2010 - 23:01 | 509280 DoChenRollingBearing

+ $1200 Breezer1

...

I hope all of my friends here at ZH will join the lines next Thursday (12th) at the ATMs to pull out $500 (or your local currency if you are outside the USA). If enough us do that, .gov and the banksters will receive the signal that there is a vanguard of us who ARE prepared to ACT.

If you are pissed off that they have screwed the economy, this is is a great opportunity to send them a signal...

Get there early, lines might get long! Hope to see lots of you there.

Sat, 08/07/2010 - 23:27 | 509301 SheHunter

I got a good grin out of someone's response yesterday in response to this suggestion so I'll post it again for those who missed it.

Great idea. Now, would you mind lending me $485 so I have the $500 to withdraw?

Sat, 08/07/2010 - 20:04 | 509140 StychoKiller

Reminds me of Dan Akroyd as Jimmy Carter, explaining what the Govt was gonna do about inflation: "Our solution is 'print more money.' Don't you want to be a millionaire and drive a $100,000 car? I know I would." Or something to that effect.

Sat, 08/07/2010 - 14:27 | 508925 banksterhater

Here in CA the homeowner's tax credit for ALL resale/new ends this weekend, but how the hell did the homebuilder's lobby get another $100million for NEW HOME TAX CREDIT to Jan 1, 2011, this is criminal. We are broke and inventory is suicide for builders, these homebuilders are scum of the EARTH, literally.

Sat, 08/07/2010 - 14:56 | 508953 jakoye

It's true. The homebuyers' tax credit (both federal and state) was an absolute joke.

If you're financially secure enough to buy a house in the midst of a recession, then you certainly do not need a goddamned helping hand from the government.

Sat, 08/07/2010 - 14:17 | 508915 SimpleSimon

Why don't they just build and give houses away for free? That would take care of mortgage, payment, underwater, abovewater etc. issues for all and once for all.

And while they are at it, maybe park a couple of GM Volts in each driveway and a year's worth of food stamps on every counter as well?

Sat, 08/07/2010 - 14:31 | 508930 banksterhater

Volt $44K, there's another crime. America is all based on fraud now, and violence. Truthout reporting in the guise of "drug war" the US is sending tropps to COSTA RICA, a peaceful non-military country.

A military base is next, must be plotting vs Chavez no doubt.

Sat, 08/07/2010 - 14:09 | 508910 win

Politics and we all get sucked in.

Float the trial balloon - "Forgive the debt"

If it goes - "we get votes"

But we know it won't,

So when it doesn't, we say
"well, we were going to forgive yer debt
but the evil bankers said no,
republicans said no."

And we get the votes anyway

Sucker born every minute

Sat, 08/07/2010 - 23:57 | 509314 Dirtt

Yes and no. They could stand to lose as many votes too. Most who would fall for this "trial balloon" are probably the 40% who still "approve" of this Administration.

And people who are pissed off are far more likely to show up at the voting booths over those who are living in the shame of being a dead beat. And the unlucky ones who tried to do it right and got sucked into the rip tide are more than likely out of work.

I guess we'll see who are the suckers in November. Either way it's going to suck for a long long time for Middle America.

Sat, 08/07/2010 - 16:10 | 509002 IE

The failed (not evil) bankers can't say yes, can they? Wouldn't that cause the entire mark-to-fantasy house of cards to tumble?

Sat, 08/07/2010 - 14:22 | 508919 banksterhater

+100

Sat, 08/07/2010 - 22:30 | 509261 Oswald Spengler

+1T

Sat, 08/07/2010 - 14:02 | 508904 jakoye

We already have a way for these people who are underwater on their mortgages to get debt relief: it's called filing for bankruptcy.

I really don't understand why there is this rush to bail out people who bought more than they could afford. It's lunacy and only encourages people to enage in such risky behavior in the future.

Oh wait, I figured out why they're doing it: to buy votes! If a Democratic government relieves you of your debts, guess who you'll be voting for?!

Sat, 08/07/2010 - 15:27 | 508984 breezer1

its not votes. the system is rigged and completely corrupt. its all about giving the country to the foreign owners of the fed. the parts that they don't already own.

Mon, 08/09/2010 - 00:37 | 510170 Eric Cartman

This is not a political website. This website's purpose is to inform us on the important issues that are happening in the world regardless of which party is responsible. Republicans and Democrats are both the same anyway.

Sat, 08/07/2010 - 10:50 | 508806 A_MacLaren

Thanks Bruce. This program brings to mind images of Charlie Brown running up to kick the football, only to have Lucy pull it away at the last second. Poor Charlie Brown once again ends up flat on his back in pain.

Sat, 08/07/2010 - 10:40 | 508801 Eric Cartman

"It is just a program that looks good but has no teeth."

What part of this looks good? This looks horrible! Moral hazard, higher taxes, inflation are just a few words that come to mind when I hear this kinda rumor.

Sat, 08/07/2010 - 23:52 | 509312 Irwin Fletcher

by 'looks good', I think he means it looks good to voters who see headlines announcing that Democrats have come to the rescue of Main Street, and don't think much more about it.

Mon, 08/09/2010 - 00:33 | 510165 Eric Cartman

I guess if the headlines are all that ambiguous and Dem's don't read the article below than yes it might sound good. More than likely a simple heading like this will work on most voters. Can't spend to much time learning, gotta catch up to the latest gossip on facebook or watch their reality tv shows.

Sat, 08/07/2010 - 23:10 | 509292 mark mchugh

I think there's only one part of this that looks good (and it's only good for bankers) - floating a rumor that to qualify for help, you must be current on the mortgage. Seems like a great way to squeeze a few more payments out of people that should probably cut their losses, default and start over.

They've already got way more houses than they can sell. Reggie Middleton thinks they're holding even more off the market (and I think he's right). People are figuring out that you can stop paying, because taking the house is a money losing proposition for the bank, and save up some cash for when the bank finally moves in.

These "rumors" of rescue can only help banks...

Rumors of News. News of Rumors.

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