Now We Have HAFA within HAMP to Stem the Housing Crisis

In plainer language, we have the Home Affordable Foreclosure Alternatives Program, a new program announced on November 30, 2009, which is part of the Home Affordable Modification Program courtesy of the U.S. Treasury Department under Obama Administration.

Home Affordable Foreclosure Alternatives Program (HAFA)
(National Association of Realtors)

"On November 30, 2009, the Treasury Department released guidelines and forms for its new Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of the Home Affordable Modification Program (HAMP). HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at MakingHomeAffordable.gov.

"HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which will issue their own versions of HAFA in coming weeks."

HAFA seems to be in response to the criticism that the administration's loan modification program (HAMP) is not working. The article lists the program features of HAFA in bullet points. They include:

• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

The 2nd bullet point looks like the result of lobbying effort by the realtors. But that aside, my question is: What's in it for investors?

Other than up to $1,000 for giving some scraps for the 2nd lien holders?

I think I know the answer.

Many investors who bought distressed mortgages may be already backstopped by FDIC. If a house is foreclosed or sold on a short-sale, and if the realized amount from foreclosure/short-sale is less than the amount the borrower owes on the house, the investors of the loan will receive 80 to 95% of the difference from FDIC under loss share agreement like the one FDIC has with the investors who purchased IndyMac. (FDIC is, by the way as you know, broke).

The kicker here is that these investors probably paid for a fraction on a dollar for these mortgages. If FDIC's asset liquidation is any indication, they are sold at anything from 3 cents on a dollar (non-performing) to 70 cents (performing) on a dollar.

Let's say here's a house in danger of foreclosure. The mortgage outstanding on the house is $500,000. The market value is determined to be $350,000. Now the investors agree to a short sale at that price. To compensate for the loss, FDIC will give $120,000 (80% of $150,000 loss) to the investors. But wait! These investors purchased this mortgage at $250,000 (50 cents on a dollar). So by agreeing to sell the house at $350,000, they will already have made $100,000. On top of that, FDIC will give another $120,000. Total of $220,000 profit on $250,000 investment. 88% return. The return would be much higher if they used leverage (PPIP anyone?).

With such a perverse incentive in place, investors don't have much interest in loan modification; they would rather foreclose and pocket the quick money than going through a slow process of loan modification. So now the government has stepped in again and is telling the servicers/investors to be a little less greedy; instead of foreclosing, how about short-sale? "You will still get compensated for your "loss", but it may just take a bit longer. It will make you look good in the eyes of distressed homeowners, you know, if you give the appearance of taking some hit ..."

Now, the next question is: Who are these investors?

Or put it another way: Do you know who owns your mortgage?

At this point, it is very safe to assume the bank who gave you the mortgage no longer owns it. It's been sold long time ago. Occasionally, you may get to know who owns your mortgage when there's a change of a loan servicer. Then you may get to know that your loan is actually owned by a bank other than the originating bank, Fannie Mae or Freddie Mac (the wards of the state who have just been given an unlimited ATM card by Uncle Sam), a hedge fund that manages billions of dollars, or that your loan has probably been turned into some kind of securities (MBS, CDO, squared, cubed, who knows) as you may see a combination of alphabets and numbers as the investor.

A hedge fund manager has this to say in a New York Times article ("U.S. Loan Effort Is Seen as Adding to Housing Woes" 1/1/2010) about "clearing the housing market" by allowing foreclosure and short sale:

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

Yes, that may be all true. But it is probably a good bet that his firm is invested in residential mortgages outright or in a securitized form, which they probably purchased on the cheap. He'd rather see his fat profit sooner than later, wouldn't you think?

So, again and again, the government is there for the big boys, making sure that they profit handsomely.

What will the distressed homeowners get after the short sale under this HAFA? No house, battered credit record, and $1500 for relocation. Oh and the peace of mind that the first lien holder cannot come after you for deficiency. No guarantee though of the 2nd lien holder...

Here's the link to the November 30, 2009 Supplemental Directive announcing HAFA within HAMP (27 pages of the total 43 pages are sample forms and exhibits).

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How to Stick It to the Too-Big-To-Fail Banks

Move your money.

"Withdrawal Tax": How to Stick It to the Big Banks That Got Bailed Out, and Make Money While You're at It. Pass It On! (Gary North, 1/2/2010 Gary North's Specific Answers)

"The Huffington Post has come up with a nice little protest movement. Let's pull our money out the the bailed-out banks and put it in local banks that lend to locals. Who are the locals? People just like us.

"This makes sense economically. If you ever want a loan, get it from your own banker. If it's a local bank, you will be treated well.

"The FDIC insures all accounts up to $250,000. Your money is as safe in a local bank as a bailed-out mega-bank.

"The folks at Huffington are on the Left. But we can all agree when we see insider bailouts like the ones in September and October 2008.

"They have produced a video. This video is biased, mean-spirited, and simplistic I love it! The more of these low-budget YouTube videos on the Big Bank bailout, the better.

"The bankers are on the defensive. Let's keep them there."

The article continues. The Huffingto Post article is this, and the video Huffington Post created is this:

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Happy New Year!

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Holiday Gifts for Americans: Lumps of Coal

It looks like Americans got the proverbial lump of coal for the holiday gift from their government.

It started in the week before the Christmas week, but the news quietly spread on the Internet during the Christmas week.

Did Obama exempt Interpol from same legal constraints as American law-enforcement? (12/23/09 Hot Air)

The president of the United States did that on December 16 by amending Executive Order 12425 signed by President Reagan and removing the exceptions in the original Order. Mainstream media didn't report. It was bloggers who caught it.

"In Executive Order 12425, Reagan made two exceptions to that status. The first had to do with taxation, but the second was to make sure that Interpol had the same accountability for its actions as American law enforcement — namely, they had to produce records when demanded by courts and could not have immunity for their actions."

Now that's gone, thanks to the presidential signature. Interpol can do whatever it wants in the U.S., and they don't have to tell anyone why they are doing what they are doing.

Then, on Christmas Eve, we were greeted with two pieces of joyful news. First, in the very early morning,

Senate Passes Health Bill (12/24/09 Politico Live Pulse)

So now we have a new "right" - a right to health care insurance. And we don't have a right not to have health care insurance. And the right will be forced upon us with penalties and taxes and jail-time. (Much like spreading "democracy" at gunpoint.)

Then, after the holiday-shortened stock market was closed, Treasury Secretary Timmy Geithner announced that the government was going to remove the $400 billion cap on aid to Fannie Mae and Freddie Mac, two of the three wards of the state (the third one being AIG):

A Lump of Coal from Treasury (Mark A. Calabria, 12/29/09 Cato Institute)

The existing limit was $200 billion each, total $400 billion. Now the federal government will backstop the entire balance sheets of Fannie and Freddie, and that's over $5.5 trillion dollars. Cato Institute's article speculates that it is not for the support of the U.S. mortgage market but to support large holders (foreign and domestic) of Fannie and Freddie debt instruments.

On Christmas Day, a hilarity and ensuing dismay: a panty bomber struck and failed, and airline passengers get the punishment.

A son of a rich Nigerian banker was assisted by a sharply-dressed man at Schiphol airport in Amsterdam and boarded the plane without passport. Then, just before landing on Detroit, he tried to ignite explosives hidden in his underpants and failed.

As the result, all around the world, people are being subjected to lengthy and probably totally unnecessary pre-boarding checks and other potential intrusions into privacy like whole-body scan and behavioral profiling (whatever that means by this towering intellectual), and a bracelet that can zap you immobile if you are bad ("bad" defined by the panicky flight attendants?).

Then on December 30, a Bloomberg article revealed that Barney Frank's bill for financial overhaul (H.R. 4173) which passed the House include a generous help package for the too-big-to-fail banks: $4 trillion. U.S. taxpayers will have the privilege to pay for it one way (tax) or the other (inflation):

Bankers Get $4 Trillion Gift From Barney Frank (David Reilly, 12/29/09 Bloomberg)


Happy New Year.

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Geopolitical Zigsaw Puzzle You May Not Want to Solve

The U.S. was bombing Yemen at the express order from the U.S. president prior to the failed Christmas Day bomb attack.

The so-called Christmas Day panty bomber says there are more like him in Yemen. The Yemeni government says 300.

That bomber may have been aided by an Indian to board the plane in Amsterdam without a passport.

Another Indian was detained after the plane landed in Detroit.

A U.S. analyst contends that the American who aided the Mumbay bombing terrorists in November last year was a double agent of CIA.

Pakistan has arrested 5 Americans who allegedly tried to blow up a nuke plant in Pakistan.

The U.S. is probably fighting in the Central Asia "-stans" - Tajikistan, Uzbekistan and Kyrgyzstan as Afghan refugees flee to these countries.

On the Caspian Sea, Azerbaijan is threatening Armenia with war. To the north of these countries sits a U.S. ally, Georgia. To the south, Iran. North of Georgia is Russia.

Information that Iran was developing "neutron initiater" was determined by the U.S. intelligence to be a forgery concocted probably by the Israeli intelligence agency.

Israel is having the first-ever meeting of all Israeli envoys to discuss the country's options.

By the way, Yemen has been in a civil war between northern Shi'ites and southern Sunnis. In other words, it's a proxy war. (Iran is Shia. Saudi Arabia is Sunni. Mostly, that is.)

Iran is said to be getting (or trying to get) uranium from Kazakhstan.

Russia says it will develop a new set of nuclear weapons, in response to the sea-based missle shield by the U.S.. It also says it needs more weapons to deter the U.S. from doing whatever it wants in the world.

All these commotions - where are they being directed? I don't think the president of the U.S. has a clue. Vladimir Putin and Hu Jintao may.

Only 29% of Americans think the country is going in the right direction, and this newsletter writer says that's a real good sign of a prolonged bull market in the stocks.

I can't shake off the unsettling feeling that something bad and wicked is coming our way. Maybe it's just Mercury Retrograde.

There were two events which I thought would never happen in my lifetime. One was a severe stock market crash that would trigger a severe recession. The other was a world war. The first one happened.

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Bloomberg: French Constitutional Court Rejects Carbon Tax

After the disaster in Copenhagen, global warmers seem to have gone awfully quiet around the world. Now, the French constitutional court rejected a carbon emission tax as inequitable.

French Constitutional Court Rejects Carbon Tax
(12/30/09 Bloomberg)

"France’s constitutional court rejected a proposed tax on carbon emissions, saying a web of exemptions violated the principal of equality and rendered efforts to cut greenhouse gas emissions ineffective.

"The government said it will make new proposals on Jan. 20.

"The tax, which would have started on Jan. 1, was set at 17 euros ($24.38) per ton of carbon-dioxide emissions, President Nicolas Sarkozy said in September. To make the tax more palatable, he partially or fully exempted power plants, public transport, airlines, farming and fishing, as well as 1,018 older cement, steel and glass factories.

"In all, 93 percent of all industrial carbon emissions in France would have avoided paying the full tax, the constitutional court said in a decision published on its Web site. The tax would have fallen disproportionately on fuel for heating and cars, it said.

"“The court ruled that the system of exemptions, due to their extensive nature, were contrary to the objective of fighting global warming and contravene the principle of equality before the tax system,” the court said.

"The court rejected all the articles relating to the carbon tax in the government’s 2010 budget."

According to the article, it is the Socialist-led opposition who opposes the carbon tax in France, as hurting the poor and handicap employers.

The cap and trade scheme advocated by the U.S. administration and Democratic Congress is even worse. Polluting industries get to pass the cost of carbon credit to the consumers almost entirely, and the middleman (i.e. the government) get to skim off of the consumers by taking from some and giving it to others as subsidies and credits.

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Ben Stein's New Definition of Anti-Semitism

Anyone who opposes the U.S. government's interventionist foreign policy is anti-Semitic, according to Ben Stein, who appeared in CNN's Larry King Live. He did his best to smear the word over Ron Paul, who has always opposed the U.S. government's interventionist foreign policy.

Ben Stein Says Ron Paul Uses “Anti-Semitic Arguments”
(Thomas R. Eddlem, 12/29/09 New American)

The video of the show's segment is here:

Now, if being against the U.S. government foreign policy is anti-Semitic, as Mr. Stein says, does that mean the U.S. government is ... Semitic?

(Remember also, if you are against the government's domestic policies now, you are a racist.)

Or maybe Mr. Stein doesn't know what he's talking about. The last I remember seeing him was on a video from August 2007. He was one of the merry crew ridiculing Peter Schiff's "gloomy" view that the housing bubble was about to burst and investing in the financial firms would be a disaster. He was recommending buying Merrill Lynch at $76, such a bargain for such a well-run company.

By the way, there's a Facebook page set up to demand apology from Ben Stein.

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Bernanke's Exit Stragegy: Term Deposits

The Federal Reserve wants to create a term deposit facility as part of so-called "exit strategies" as outlined by the chairman Ben Bernanke.

Fed proposes term deposits to drain excess bank reserves
(12/28/09 AFP via Google)

"WASHINGTON — The US Federal Reserve proposed Monday the creation of a term-deposit facility for banks to drain some of the more than 1.0 trillion dollars in excess reserves from the banking system.

"The Fed said it was seeking public comment on proposed amendments to the reserve requirements for institutions eligible to receive earnings on their accounts at Federal Reserve Banks.

""Under the proposal, the Federal Reserve banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism," the central bank said in a statement.

""Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy," it said.

"Institutions holding term deposits would "receive earnings at a rate that would not exceed the general level of short-term interest rates," according to the Fed proposal." [The article continues.]

Offering financial institutions interest-bearing term deposits is one of Ben Bernanke's "exit strategies". (For more, please read my post from July, when Bernanke outlined his thinking in Wall Street Journal.)

The Federal Reserve has been paying interest on the banks' excess reserves since October last year. All this term deposit facility will do is to lock up the excess reserves for a period of time, instead of having them as excess reserves (which is good as cash, a demand deposit).

According to the attachment to the Federal Reserve's press release today,

• Term deposits will be made available by auctions.
• No early withdrawal allowed.
• Term deposits will be open to the branches and agencies of foreign banks.
• Maturities will not exceed 1 year, with majority from 1 month to 6 months.
• Institutions can use term deposits as collateral for the Fed discount window.
• Term deposits would receive a zero risk-weight for risk-based capital purposes.

The facility may temporarily transfer the excess reserves into the term deposits at the Federal Reserve, but that will do nothing to shrink the size of the Fed's balance sheet. The term deposits will sit on the Liabilities side of the balance sheet, the same side as the excess reserves.

I find it ironic that the term deposits would receive a zero risk-weight when the Federal Reserve is loaded with agency bonds and mortgage backed securities. That's one advantage of being a central bank, who can print money and who is effectively backstopped by the government (i.e. taxpayers).

What if the financial institutions decline the offer and would rather take the money out of the excess reserves or keep the money in the excess reserves? I suppose that's why the Federal Reserve is seeking comments from the very institutions whom it wants to use this facility and help manage the excess reserves lest they spill over into the real economy (aka Main Street). It is asking the financial institutions what it will take for them to continue to park their money (excess reserves) with the Fed.

Well I have to say, regardless of whether this can be considered as an "exit strategy" (I personally think this should be called "kicking the can further down the road"), the existence of the excess reserves at the Fed is real, not fictional, and the Fed is scared enough of its inflationary implications.

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And in Another Corner of Middle East...

I came across this curious bit of news. The website reporting this is an Iranian news site.

Israel summons envoys from all over the world (12/26/09 Presstv.ir)

"Israel's ambassadors and consuls generals from all over the world have been summoned to attend a conference to be held over global challenges facing Israel.

"The meeting to be attended in Jerusalem Al-Quds on December 27-31 is hosted by the Ministry of Foreign Affairs, headed by Deputy Prime Minister and Foreign Minister Avigdor Lieberman, the ministry reported on its website.

""The idea is to facilitate direct dialogue with the country's leaders, mutual updates on major diplomatic issues, and a discussion of action plans to deal with the challenges awaiting Israel in the international arena in the coming year, including the Iranian threat," it said." [The article continues.]

The Ministry of Foreign Affairs of Israel does indeed have such an announcement. The Ministry says this will be the "first-ever" conference of this nature.

(I will hold on to my call options on a double-long crude oil ETF, just in case.)

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Wag the Dog, for the Nth Time?

Yemen...., where did I read about the country just recently? In an obscure piece of news that got little publicity at that time (about 10 days ago, I believe), but it struck me as odd. Yemen? The news was that the U.S. military was bombing Yemen by the direct order from the U.S. president, killing civilians (but claiming the bombing killed a dozen Al-Quada leader, as usual).

This is what was reported in the semi-official White House PR organ, aka ABC News:

Obama Ordered U.S. Military Strike on Yemen Terrorists (undated, my best guess is 12/18/09, The Blotter from Brian Ross, ABC News)

"On orders from President Barack Obama, the U.S. military launched cruise missiles early Thursday against two suspected al-Qaeda sites in Yemen, administration officials told ABC News in a report broadcast on ABC World News with Charles Gibson.

"One of the targeted sites was a suspected al Qaeda training camp north of the capitol, Sanaa, and the second target was a location where officials said "an imminent attack against a U.S. asset was being planned."

"The Yemen attacks by the U.S. military represent a major escalation of the Obama administration's campaign against al Qaeda."

Reporter Brian Ross, in a video clip on the linked article, emphasizes the order came directly from Oval Office.

(Perhaps President Obama is getting ready for the next year's Nobel Peace Prize by further expanding the war on terror.)

Then, right on cue, the Christmas Day bomber, a son of a wealthy Nigerian banker, materializes, and says there are more like him coming from Yemen.

Curiously, two attorneys (husband and wife) who were on board the plane the Nigerian was trying to blow up claim they witnessed the bomber being assisted by a sharp-dressed man at the boarding gate in Amsterdam so that he could board the plane without a passport.

Something doesn't quite add up.

I'm not yet sure who benefits from all this or what agenda is being promoted while they wag this dog, but it is very clear who the immediate losers are: air travelers worldwide who are now being subjected to ridiculously lengthy and probably unnecessary pre-boarding screenings to prevent them from lighting up a firecracker or two in their pants.

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Short-Term Treasury Bills Lacking Interest Among Foreigners

if 13-week bill auction is any indication.

The U.S. Treasury Department will auction away the last big batch of Treasury bills and notes in the final week of this year. The total amount will probably exceed $200 billion (4-week bill amount yet to be announced), of which $118 billion will be Treasury notes of various durations.

I was making a mental note as I went through the recent auction results, and something felt disturbing (from Treasury Department's point of view, I suppose). So I checked the numbers. And here's the chart of 13-week bill auctions since October, plotting the Indirect Bidder (foreign buyers) Percentage and Bid to Cover Ratio.



13-week bill is a run-of-the-mill Treasury bill. The Treasury Department auctions this bill every single week along with 26-week bill and 4-week bill, to the tune of $30 billion in each auction. No one pays particular attention to the auction results of these short-duration bills. They are continuously rolled over to fund the operation of the federal government.

What I noticed was a rather steep, consecutive decline of the Indirect Bidder Percentage in 13-week bill auctions. Bid to Cover Ratio has also started to decline. Now, both Indirect Bidder Percentage and Bid to Cover Ratio sit below their respective 2-plus month support (dotted lines).

Foreign buyers of Treasuries have shifted to the shorter end, or so we have been told. They now seem to be also deserting the short maturity bills. Treasury Secretary Timmy Geithner has announced the Treasury's intention to increase the average maturity of all Treasuries from the current 49 months to 72 months. That means 7-year note, 10-year note, and 30-year bond issues will be significantly increased. The prices will be pressured. Will foreign buyers increase buying the longer-dated notes and bonds for better yields? Or, seeing that there may be no end in sight for the U.S. deficit spending, will they further decrease the long-term Treasuries holdings?

In the worst case, there will be few foreign buyers to be found for both short-term and long-term Treasuries. The vice chairman of the Chinese central bank has recently said, in no uncertain terms, that the world does not have money to continue to buy the U.S. debt.

Who is going to absorb the avalanche of long-term Treasuries, by the way? This immediately comes to my mind. I hope I'm wrong, but I have this sinking feeling that my hope is ill-founded.

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