Obama Moves Closer to Principal Reduction Mandate

Editor’s note: This is red meat for investors and borrowers seeking restitution for losses caused by improper appraisals, ratings and representations concerning loan and property values, loan viability, securities fraud, deceptive lending practices, TILA violations etc.

Obama Bank Policy Signals $1 Trillion in Writedowns

April 3 (Bloomberg) — U.S. regulators may force Bank of America Corp., Citigroup Inc. and at least a dozen of the nation’s biggest financial institutions to write down as much as $1 trillion in loans, twice what they’ve already recorded, based on Federal Deposit Insurance Corp. auction data compiled by Bloomberg.

Banks failing Federal Reserve evaluations of loans this month may be ordered to make sales worth as little as 32 cents on the dollar, according to FDIC data. That would be less than half of the 84 cents on the dollar the Treasury Department suggested was a possible purchase price. Some of the bank- insurance agency’s auctions brought 0.02 cent on the dollar.

Lower valuations would lead to new writedowns and capital injections from the $134.5 billion remaining in the Troubled Asset Relief Program, Nobel Prize-winning economist Joseph Stiglitz said.

“The only way banks will sell is under duress,” the 66- year-old professor at Columbia University in New York said in a phone interview.

Asset sales are the latest step in President Barack Obama’s effort to restart the U.S. economy through the most costly rescue of the financial system in history. Treasury Secretary Timothy Geithner’s Legacy Loan Program and Legacy Securities Program together are targeted to start at $500 billion and may expand to $1 trillion.

Auctioning Assets

Geithner’s plan will purchase loans and be overseen by the FDIC, which will offer debt guarantees while the Treasury invests capital alongside investors.

The FDIC would auction assets after the Office of the Comptroller of the Currency, Office of Thrift Supervision or the Fed signals that a bank is in danger of failing.

“If we thought that was the right decision to address their situation, we would certainly tell an institution to move in that direction,” said William Ruberry, an OTS spokesman in Washington.

Geithner’s plan to buy loans and securities “can be very useful,” Comptroller of the Currency John Dugan said in a Bloomberg Television interview today. “It’s one more arrow in the quiver to address problems with assets on banks’ balance sheets.”

Treasury spokesman Isaac Baker said in an e-mail that the program is voluntary and the government expects banks will want to sell assets to clean their balance sheets and make it easier to raise capital from investors, he said.

Financing Help

“Past auctions cannot reliably predict asset prices in the Public Private Investment Program, as we are creating a new market that has not previously existed to help value these assets, and offering financing to help investors purchase them,” Baker said.

Setting up a facility to purchase distressed loans will allow the FDIC to put a bank into “a silent resolution,” said Joshua Rosner, a managing director at investment-research firm Graham Fisher & Co. in New York.

“This is a way to functionally wind down a bank as big as Citi without the world realizing that they’re essentially in resolution,” he said. “The real value of this is a tool to resolve a too-big-to-fail institution.”

The FDIC is considering allowing banks to share in future profits on loans sold to public-private partnerships to encourage healthier lenders to participate, according to Jim Wigand, the agency’s deputy director for resolutions and receiverships. The regulator is seeking comments through April 10 on the program, said spokesman David Barr.

Assets sold under the Legacy Loans Program may be worth an average of 56.3 cents on the dollar, based on the results of FDIC auctions at failed banks over the past 15 months.

‘Large Amounts’

Writedowns would total $1 trillion if the program buys $500 billion in loans at 32 cents on the dollar, the average for non- performing commercial loans in the FDIC sales.

Geithner said March 29 that some financial institutions will need “large amounts of assistance.” He’s trying to avoid bank nationalizations by wooing investors to purchase loans with taxpayer-guaranteed financing to protect them against loss. The U.S. move to clear away distressed assets contrasts with Japanese financial authorities’ reluctance to do so in a 1990s financial crisis, which led to a decade of economic stagnation.

“This is going to be our Yucca Mountain right here,” said Joseph Mason, an associate professor at Louisiana State University in Baton Rouge and former FDIC visiting scholar, referring to the proposed radioactive-waste storage site in Nevada.


“You can put it in a train car and ship it across the country. The half-life of this stuff is real long, but it has to burn off,” he said.

The FDIC’s average auction value of 56.3 cents on the dollar for residential and commercial loans is based on 312 sales worth $1.1 billion since Jan. 1, 2008, according to the FDIC. The average for 348 commercial loans for which borrowers stopped paying was 32 cents on the dollar. Auction prices ranged from 0.02 cent to 101.2 cents on the dollar, according to the FDIC.

In announcing its loan-sale program last week, the Treasury provided an example of a purchase price of 84 cents on the dollar, with taxpayers putting up 6 cents, investors 6 cents and the FDIC guaranteeing 72 cents in financing.

“Eighty-four cents is just laughable” because the market value for loans is much lower, said Barry Ritholtz, chief executive officer of New York-based FusionIQ, an independent research firm.

The U.S. is structuring the loan purchases to leave the government with most of the risk, while investors stand to gain most of any profit, economist Stiglitz said.

‘Almost No Upside’

“There’s almost no upside for the taxpayer,” he said. “The government is giving a 110 percent bailout.”

How much investors offer for assets is “going to be the key” determinant of Bank of America’s participation in the government’s two asset-purchase programs, CEO Kenneth Lewis said in a Bloomberg Television interview March 27.

“If there’s an issue with the program, it’s going to be trying to get banks to sell assets,” FDIC Chairman Sheila Bair said in a speech the same day at the Isenberg School of Management of the University of Massachusetts in Amherst.

“If I have concern, it’s the pricing may not be where seller and buyer are willing to meet,” she said.

Any standoff between investors and banks over loan prices may scuttle Geithner’s plan to segregate non-performing assets and restart lending, said Bob Eisenbeis, chief monetary economist with Vineland, New Jersey-based Cumberland Advisors and a former Atlanta Federal Reserve Bank research director.

‘Really Bad Stuff’

“It’s hard to believe that the really bad stuff that’s causing all the problems are going to be offered for sale,” Eisenbeis said. “The institutions won’t want to sell them if they get a true price, because their capital would take too much of a hit.”

With preparations for auctions under way, U.S. banks are being put through so-called stress tests, which Geithner said last month are a comprehensive set of standards for the financial system’s most important lenders. The examinations of loans and their collateral and payment histories are scheduled to be completed by April 30.

Banks have almost $4.7 trillion of mortgages and $3 trillion of other loans that aren’t packaged into bonds, according to the Fed. The vast majority are carried at full value because they don’t need to be written down until they default, according to Daniel Alpert, managing director of New York-based investment bank Westwood Capital LLC.

“Just because it’s being held at full value doesn’t mean it’s not bad,” Alpert said.

Obama Effort

While regulators don’t intend to publish the details of their stress tests, the results will effectively become known once banks announce how much capital they need to raise. Regulators will then give lenders six months to obtain funds from investors or taxpayers as a last resort.

The tests are designed to mesh with Obama’s effort to remove banks’ distressed mortgage assets that have hampered lending to consumers and businesses. Officials aim to have the first loan purchases by private investors financed by the government within weeks of the conclusion of the stress tests, according to the Treasury.

Including TARP, the U.S. government and the Fed have spent, lent or guaranteed $12.8 trillion to combat the financial collapse and a recession that began in December 2007. The amount approaches the $14.2 trillion U.S. gross domestic product last year.

‘Constructive Plan’

Obama met with the CEOs of the nation’s 12 biggest banks on March 27 at the White House to enlist their support to thaw a 20-month freeze in bank lending.

Lenders undergoing stress tests include New York-based Citigroup, which has received three rounds of capital infusions valued at $60 billion, including $45 billion from TARP, according to Bloomberg data.

“The administration has put forth a constructive plan to address the critical issues facing the financial services industry, and we are committed to working together with the industry to help achieve the goals of the plan,” CEO Vikram Pandit said in a statement before meeting with Obama.

Citigroup spokesman Stephen Cohen declined to comment.

The U.S. tests also involve Charlotte, North Carolina-based Bank of America, which also received $45 billion from TARP. It bought Merrill Lynch & Co. — the largest underwriter of failed collateralized debt obligations, according to Standard & Poor’s — and home-lender Countrywide Financial Corp.

Bank of America spokesman Scott Silvestri declined to comment.

Option ARMs

San Francisco-based Wells Fargo purchased Wachovia Corp., the nation’s biggest provider of option adjustable-rate mortgages, for $15 billion. In doing so, it took responsibility for about $122 billion of option ARMs sold by the Charlotte bank.

Option ARM loans allow borrowers to defer part of their interest payments and add it to their principal. When housing collapsed, many holders of the mortgages were left owing more than the value of their homes.

Wachovia issued more than half its option ARMs in California, according to bank filings. Wells Fargo was already the biggest lender in the state.

“Wells Fargo supports any plan by the Treasury that helps financial institutions efficiently sell troubled assets while still providing an investment return to the U.S. taxpayer,” spokeswoman Janis Smith said in an e-mail.

Web Distribution

The ability to distribute loan information over the Internet will also support prices by expanding the number of buyers and allowing for sales as small as $100,000, said Stephen Emery, a managing director at New York-based Mission Capital Advisors, which brokered $3 billion of real-estate loan sales last year.

Terms offered under the Legacy Loans Program, including government-backed financing, will also help boost demand and selling prices by as much as 20 percent, he said.

“The leverage will allow buyers to bump their price a little bit,” Emery said. “But that still doesn’t mean that something that was worth 30 is now worth 60. What’s going to happen is now it’s worth 35 or 36 cents.”

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net;


8 Responses

  1. Obama administration to order lenders to cut mortgage payments for jobless


    “The Obama administration plans to overhaul how it’s tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday. ”


    “For one, the government will for the first time provide financial incentives to lenders that cut the balance of a borrower’s mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if it this amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years as long as the homeowner remains current on the loan. “

  2. Obama Admistration plans to help get these loans off the books with scared homeowners facing foreclosure by paying the homeowner $1500 to move and pay the lender/servicer $1,000 to accept the hsort sale.


  3. Anonymous,

    You have some really great info to share, I truly always enjoy reading your posts. Thank you, always very informative.


  4. Point of Mr. Garfield’s publication of this article is to point out what has been going. I have been emphasizing, for some time, that default/foreclosures mortgage loans are with debt buyers/hedge funds/private equity who have scooped up the loans at steep discounts. Although these entities may also purchase securities, any loan that is in default or foreclosure is no longer a security. Thus, for foreclosures, only the right to collection is sold – and these entities purchase the collection rights to default whole loans. The foreclosures are removed from securitized trusts. Although REMICS may technically hold foreclosures – they typically do not. Instead, they hold individual foreclosures until the default loan can be bundled with other loans for removal from the bank’s “off” balance sheet to distressed debt buyers – whether those buyers are hedge fund/private equity or simply debt buyers. These loans are no longer securities and there is no profit incentive for any REMIC/trust to hold them. In fact, holding them would generate a downgrade in ratings for the mortgage backed securities trust. This is where the fraud lies.

    Also, these REMICs are likely dissolved since everyone dumped the securities and the REMICs are, in effect, insolvent. And the FDIC has also been selling foreclosures to entities (such as Goldman) who purchases at steep discount. Any foreclosure in the name of the trustee for “certificate holders for ABC Trust” is simply bogus. AND – assignments exist AFTER any initial assignment to any security trust or trustee. Except no one will divulge this to you.

    The government needs these distressed debt buyers to shore up capital for the “too big to fail” banks by removing these “distressed” loans from the banks. They seem to not care about the people. It is all about politics. The politicians are trying to save their own name. They do not care that some people will suffer. My NY contact (big political connection)- even tonight – claims to me that the people are to blame – and that this message has been reiterated over and over to Congress. This is the way they want it. And they will use every power possible – including the media – to promote this terrible false premise to “save” the banks. Yet, the “banks” appear to remain in hot water.

    Your mortgage loan is not where they say it is. And fraud was utilized from the onset. In American history, I am not aware of any other period in which the American public as been so scammed by it’s own government.

    To M. Turner, and as product of the 60s/70s – that is the way things once got done!! To Abby, you are right – ethics and integrity should be more than enough to motivate attorneys to stand up for the people.

    We have become a nation dictated by the self-motivations of powerful individuals. Fight on Mr. Garfield and America..

  5. Neil has said..”We are gonna Stop this now!” Well, let me ask one question? Peace Marches helped stop the Vietnam War!
    The Million Man March helped Blacks. How come nobody has organized a MILLION MAN MARCH on FORECLOSURES in DC? That is the only way to stop this stealing of homes. Not by a Short-Sale! How frigging IDIOTIC! I guess it has not happened …cause all the “money-suckig” Lawyers want to drag it on thru the Courts and bleed everyone. A PROTEST MARCH is the answer! Here in DC, it is not EVEN MENTIONED in the papers anymore!

  6. FF, agreed I believe that the FDIC chair, Ms. Blair sort of flipped out about this recently, since the FDIC can not possibly insure the lending institution’s when the toxic assets are placed back on their balance sheet. Though there has been plenty of that going on. Will look for that article and try to post it here. I had mentioned that in another post, and in my simple mind felt that distressed home owners should be privy to that informationif there was a repurchase ,via QWR, discovery etc. as the article states…

    “Web Distribution
    The ability to distribute loan information over the Internet will also support prices by expanding the number of buyers and allowing for sales as small as $100,000, said Stephen Emery, a managing director at New York-based Mission Capital Advisors, which brokered $3 billion of real-estate loan sales last year.”

    But guess that was not ment for the average citizen , but got scarped also!

  7. This program is a huge, huge problem for home-owners. Here’s why: when the banks “sell” the Notes for 32 cents on the dollar, or less, then the bottom-feeders come out. they scoop up the Notes (some for as little as ten dollars each)_ and then can still collect for the full face amount. So those feeders have ZERO incentive to hold onto the Notes and mortgages, their ownly incentive is to cash out the Notes. They do this by foreclosing. So: 100% of all these discounted Notes will be battled for foreclosure by the bottom-feeder purchasers. 0% will be reworked into affordable Notes.

    Once again, the government does not understand the implications of what they are doing. ONLY if the government declares, by Statute preferably, that no Note can be foreclosed for more than the amount paid at the last sale, do you put a stop to the speculators feeding in the pile.

  8. You know this story is from April 3, 2009 right?


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