Traveling on Empty for 35 Years, U.S. Government Traps Itself Into Teaser Rates Now Ready for Reset

NOW AVAILABLE ON KINDLE/AMAZON!

SEE calhoun_testimony LITANY of MORTGAGE LENDING ABUSES AND OTHER BANK ABUSES Admitted by Responsible Lending Association

Isn’t it interesting, frustrating, maddening that not only did Wall Street do it to 20 million homeowners in one form or another, they did it to the Federal Government too, which means they spread their pillage to all the taxpayers, not just the ones with mortgages.

By the way go get a copy of Nomi Prins, ex-director of Goldman Sachs, It Takes a Pillage. I saw her on C-Span “Afterwords” interviewed by Senator Bernie Sanders of Vermont (I). She’s brilliant and (2) knows the ins and outs not only of the structure of mortgage derivatives but the math too.

What annoys me and should annoy ALL taxpayers is that we have been tricked by Wall Street AND Government into accepting the losses of Wall Street’s wild ride. Teaser rates for the Federal Government on bailouts that should never have occurred, FED rates that charge banks nothing for loans so they can go out and speculate (since Glass Steagel) while the taxpayer is on the hook. At the same time the FED is paying the “banks” a little extra to make them healthier.

Why doesn’t anybody get the fact that now these monsters of financial chicanery have unfettered access to your bank deposits to go and play with it as they wish. And not only are your deposits at the “bank” being used in this way, you are also guaranteeing this behavior if ANY bank fails! Where do you think this is leading folks? Competition is in worse shape than it was over a year ago. There is MORE RISK IN THE FINANCIAL MARKETPLACE than there was over a year ago.

Economists are warning us in despondent tones that the worst is yet to come but absent from the scene is the outrage from the public which is needed to force change and break the claims and power of the incestuous relationship between Washington and Wall Street.

The following is the lead article in NY Times Today. Some snippets from it as follows:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

November 23, 2009

Payback Time

Wave of Debt Payments Facing U.S. Government
By EDMUND L. ANDREWS

WASHINGTON — The United States government is financing its more than trillion-dollar-a-year borrowing with i.o.u.’s on terms that seem too good to be true.

But that happy situation, aided by ultralow interest rates, may not last much longer.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

The surge in borrowing over the last year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of the government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates that the United States must offer to sell them. Indeed, the government paid less interest on its debt this year than in 2008, even though it added almost $2 trillion in debt.

The government’s average interest rate on new borrowing last year fell below 1 percent. For short-term i.o.u.’s like one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

“All of the auction results have been solid,” said Matthew Rutherford, the Treasury’s deputy assistant secretary in charge of finance operations. “Investor demand has been very broad, and it’s been increasing in the last couple of years.”

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

The current low rates on the country’s debt were caused by temporary factors that are already beginning to fade. One factor was the economic crisis itself, which caused panicked investors around the world to plow their money into the comparative safety of Treasury bills and notes. Even though the United States was the epicenter of the global crisis, investors viewed Treasury securities as the least dangerous place to park their money.

On top of that, the Fed used almost every tool in its arsenal to push interest rates down even further. It cut the overnight federal funds rate, the rate at which banks lend reserves to one another, to almost zero. And to reduce longer-term rates, it bought more than $1.5 trillion worth of Treasury bonds and government-guaranteed securities linked to mortgages.

Those conditions are already beginning to change. Global investors are shifting money into riskier investments like stocks and corporate bonds, and they have been pouring money into fast-growing countries like Brazil and China.

The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March.

Eventually, though probably not until at least mid-2010, the Fed will also start raising its benchmark interest rate back to more historically normal levels.

The United States will not be the only government competing to refinance huge debt. Japan, Germany, Britain and other industrialized countries have even higher government debt loads, measured as a share of their gross domestic product, and they too borrowed heavily to combat the financial crisis and economic downturn. As the global economy recovers and businesses raise capital to finance their growth, all that new government debt is likely to put more upward pressure on interest rates.

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee, a group of market experts that provide guidance to the government, on Nov. 4.

“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”

10 Responses

  1. From Wikipedia:

    [Washington Mutual] Chairman and CEO Kerry Killinger had pledged in 2003:

    “We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs, Costco did to theirs and Lowe’s-Home Depot did to their industry. And I think if we’ve done our job, five years from now you’re not going to call us a bank.”

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

  2. Deontos,
    Nice find. I may be dreaming up numbers, but others are making them reality. Their will always be those that will pick up deals for pennies on the dollar. These guys are doing it but I would say they are still paying too much. We are at the edge of another dramatic crash and those who take a toxic deal and make it reality (at about 60%?) with what still looks like a high interest rate, will not be able to make it. But hey, it might work for some people. I think you could probably consider them 3rd party debt collectors though. The entire purpose for what they are doing is to collect on a delinquent debt.

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

  3. Sounds like Penny Mac to me.

  4. Dan Edstrom,

    I JUST PULLED THIS UP ON CRAIGSLIST

    ———————————————————————————

    Agents to Work New Hedge Fund Principal Reduction Program (sunnyvale)
    Date: 2009-11-18, 4:02PM PST

    Reply to: see below

    Now hiring agents to work our new hedge fund principal reduction program

    Our office is now offering a Principal Reduction Program that will replace loan modifications. The State of California has shut down all the attorneys who were doing loan modifications who were charging an advance fee. The banks were not cooperating very well doing loan modifications. You do not need a real estate license to do this program.

    We are working with a Hedge Fund which buys loans. They have $5 billion in private funds allocated for this program. They purchase notes at a discount, based on market value, which are then liquidated for a profit.

    They will purchase the loan from the bank along with 30-50 other loans at 65% of the value today. The bank can not pick and choose the loans. They will do a new loan with the owner at 90% to the value today and give them a 30 year loan at prime + 3 or 4 points depending on their credit rating with a 3 year prepayment penalty.

    An example of how it works:
    House purchased for: $500,000
    Financing 100%
    Value today: $300,000

    Current loan of $500,000 @ 6% or $2,983/Month
    New loan of $270,000 (90% of $300,000) @ 7.25% $1,831/Month
    Net savings $1,152/Month

    We will make 1 to 2 points on the new loan amount.

    This is a WIN, WIN Program. There is very little down side with this program. They also work with non-owner properties.

    If you are interested in this program call Bruce Martin at (408) 350-4501. You must become a Century 21 El Camino Agent to participate.

    Benefits of being with Century 21 El Camino:

    * Training, Training and more Training!! We offer more than any other office
    * Unlimited Opportunities to work in all areas of Real Estate
    * Great Commission Structure offers Profit Sharing and Retirement Income
    * CENTURY 21 is the most recognizable name in Real Estate
    * Century 21 El Camino is ranked in the top 2% of all offices in CENTURY 21
    * Professional Century 21 Marketing Materials
    * Office established over 26 years
    * 25 years as an award winning office for CENTURY 21
    * Cover 23 counties in Northern California
    * Cover the entire State for Commercial and Businesses
    * No desk fee
    * No monthly fees
    * No upfront E&O insurance fee
    * E&O insurance fee is $100 per closed transaction
    * In-house marketing department
    * Design and print materials in-house
    * Color copies on high quality paper for 10 cents a copy
    * Office escrow coordinator
    * Good central location

    Each Office Independently Owned and Operated.

    Century 21 is a registered trademark licensed to Century 21 Real Estate LLC.
    An Equal Opportunity Company. Equal housing opportunity.
    Each CENTURY 21 Office is Independently Owned and Operated. DRE # 00971088

    —————————————————————————————

  5. Dan,

    I had seen this news report also.
    You give me other Food for Thought.

    I am going to DIG a little deeper on this
    see what comes up.

  6. zurenarrh,
    I forgot to answer your basic question. YES! They had prior notice that payments were dishonored and yes the presentment UCC is an excellent defense – if it has not been waived.

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

  7. Why would anyone buy non-performing loans you ask? Well let’s do an example (purely hypothetical, of course).

    Current pool value if everyone in pool was paying as (allegedly) required: $100,000,000.00

    Pool loans behind 1 or more payments: 35%

    Original appraised value of all pool loans (that are still in the pool): $150,000,000.00

    Current BPO’s and/or estimates of loan collateral: $60,000,000.00

    Lender wants to DUMP toxic waste for twenty cents on the dollar so selling pool for $20,000,000.00

    So if the actual pmts are made they win. If they foreclose, they win. Why would they tell you they bought the pool (including your loan)? They would just have it foreclosed on by the servicer for business as usual.

    This would double or triple their investment.

    This doesn’t even consider that they could go in and do loan modifications dropping say 10% of the principal and lowering the interest rate to a better level for the homeowners. The homeowners think they got a good deal and the pool buyer makes out like a bandit.

    Of course the deal could be a bad one and the pool buyer knows he could lose money. But hey, the market already crashed big time. What’s the chance of it going down big time from here? Not likely (say the pool buyer’s advisors).

    It would behoove EVERYONE to know what deal they are located in and who the actual current owner of this deal is. That doesn’t mean you will necessarily get anything from them, but at least you will know who the players are and how much skin they have in the game.

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

  8. Great finds, Dan!

    Why would anyone buy non-performing loans? I imagine that what these hedge funds plan to do is to try to collect on the Notes. However, wouldn’t a non-performing mortgage Note be an unsecured debt?

    Can’t anyone who is contacted by these junk debt buyers simply employ UCC 3-302 against them? According to that statute (brought to my attention by Martin), a person cannot be considered a holder in due course if they took the instrument with notice that “the instrument is overdue or that there is an uncured default with respect to payment of another instrument issued as part of the same series.”

    Or am I completely misunderstanding something?

  9. November 20, 2009

    Hedge Fund Raising $500 Million to Invest in Nonperformers

    Tourmalet Advisors, a Connecticut-based hedge fund, is in the process of raising $500 million to invest in nonperforming mortgages, according to an offering circular provided to National Mortgage News. Tourmalet has already invested $460 million in nonperforming loans (NPLs) through its “Matawin Fund” and has formed joint venture partnerships with other vulture funds including Kondaur Capital, Irvine, Calif. Tourmalet was founded earlier this year by Michael Corasaniti, a former managing director of Pequot Capital. During his career he also has worked in research at Keefe, Bruyette & Woods where he served as a vice president. At press time Tourmalet’s investor relations department had not returned a telephone call about the capital raise. Hedge funds have been raising money and eyeing the NPL market for 18 months, but to date, few large sales have taken place.

    From:

    www nationalmortgagenews com/premium/archive/?ts=1258736401

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

  10. “No one wants to talk about it.”

    LoanMarket Now Selling Loan Pools

    LoanMarket.net, Irvine, Calif., which operates a website offering individual mortgages for purchase, has branched out into offering loan pools. It closed its first pool sale in August and currently has several more packages out for bid, said company principal Jeff Freud. “We hope to close a pool or two a month,” said Mr. Freud. For now, the firm is focusing on package sizes ranging from $20 million to $100 million. The company is offering both performing and nonperforming mortgages as well as commercial and residential. Mr. Freud said banks are selling nonperforming loans (usually in small amounts) but noted that none are publicizing their deals. “Deals are closing,” he said, “but no one wants to talk about it.”

    From:

    www nationalmortgagenews com/premium/archive/?ts=1258650012

    Thanks,
    Dan Edstrom
    dmedstrom@hotmail.com

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