Mike Mueller, Social Media.ist

The important take away is that the company that you think might own the mortgage is in fact only the servicer of the mortgage.  The actual loan has been split into five different pools with any number of different investors buying portions of those pools.  There is no ONE owner to modify the loan.

BACK TO ARNOLD'S

Although it's hard to find the actual details of "the deal", here's what I can determine for Arnold's plan to be effective...

• The Lender will have to have NOT sold the loan.  This does happen.  Portfolio lenders have a better chance of keeping their loans, but none of the 4 mentioned are portfolio.
• The Borrower must not have ever fallen behind.   This happens too.  I have to wonder though how often.  I've seen reports that up to 70% of homeowners that lose their homes thru foreclosure NEVER contact their lender.  How many of these resets will fall behind first, then decide to call their lender, only to find out they are too late?
• Primary residence only, no investment properties.   Nobody invests in CA Real Estate do they?  While the majority might be primary homes I also imagine we have a high number of Investment homes in trouble.
• Only those that lenders determine cannot make the reset payment.  Isn't this another arbitrary rule putting the final determining factor in the hands of the those that made the decision to give this loan to someone who can't afford it in the first place?

Once again, real facts are very hard to find.  Much of this is conjecture and speculation.  While they specify "Reset" I also have to wonder about the other R word, "Recast".  Does this plan not include those that have a Payment Option ARM?  I see these as being the real toxic loans out there.  Remember, I used to have an Option ARM Factory on the same floor as my building.  I know there's plenty of Option ARMs out there.   They have to include those loans right?  Don't bet on it.

As toxic as you might think the dreaded Payment Option ARM is, they were never classified as Subprime.   That's right.  They are an Alt-A product.  Does that mean they are not included in the Arnold Plan?  He specifically called it a Subprime Plan.  Once again, nobody knows.  Personally, I wouldn't bet on it.

THIS ISN'T HAPPY DAYS

I found plenty of real estate blogs touting the good news.  "We're Saved!", they said putting the Gov up on a shiny marble column.  Many of the comments on those blogs have also been of the same voice.  "It's about time!"  and, "Arnold will force these no good Lenders into doing the right thing", and "What a great post for Sacramento, For Californian for the whole country.  Accurate in all the details. And it sounds live the Governor heard it, and shared it with the top lenders... now if the others will just follow."

The mainstream media followed suit or visa versa.  Here's a sampling from San Diego, MSNBC, San Jose, and Stockton.  Granted, reporters and blog writers are not financial experts.  Arnold (the Gov.) might run the state, and we might be a pretty big state (GDP), but there are realistic limits to what he can really do. 

I did find just one differing opinion outside the typical bubble bloggers.  The Modesto Bee (geographically close to the Foreclosure Capital of Stockton, CA) reported a slightly different story than the rest.  "Those four lenders, however, told The Bee on Wednesday that their lending policies haven't changed and the governor didn't get them to agree to anything new."

I like reporters that dig a little deeper than the press release for a story.   

The list of politicians raging against the lending machine grows daily.  Barney Frank, Chuck Schumer, Eliot Spitzer, Hillary Clinton, and on and on...  Which leads me to ask the question, Is this all just Political Posturing at it's best?  Not just by Arnold but by the Loan Servicer's as well? I hope not.   Only time will tell. 

One thing is clear.  If you are homeowner in trouble now, or heading into trouble soon.  Do something yourself now - don't hope and wish and pray that somebody will come and rescue you.  Start talking to a real mortgage professional now!  The Terminator isn't coming to save you - this isn't an Arnold Movie.  It's real life and your home is at stake. 

Last week, Gov. Arnold Schwarzenegger announced he had struck a deal with four subprime lenders.  While you've heard of the first two, Countrywide and GMAC, they are originators of some subprime loans.  The other two might need a little introduction, Litton and HomeEq.  Litton and HomeEq are both Subprime Servicing Companies.  Combined, these four service nearly one quarter of all subprime loans in California.

SERVICERS ARE DIFFERENT 

Although they lend some money, their primary function is NOT originating loans.  They are not Lenders.  They make money by sending out the bills, collecting the payments and if need be calling the borrowers to see when they might be making their payments. 

LENDING VS. SERVICING

When you applied for a loan there was a form that explains that while ABC Bank might lend you the money, they can and probably will sell your Note in the future to someone else while continuing to service your loan.  You remember that form, right? 

The other two companies, Countrywide or GMAC are not in the business of holding mortgage paper either.  Most every loan they can sell - they will.  In this way they have more money available to lend the next person.  That's a good thing.  We want them to have money available to lend.

THE DEVIL IS IN THE DETAILS

Here's where I have a problem with Arnold's deal.  He's not talking to the right people.  Chances are that these guys don't own the loan anymore.  To modify or change the terms of the loans the Owner of the Note will have to agree to the new terms.  But who is that new owner?  If the loan has been securitized it might not be a single entity but a myriad of tranches that own the loan.

Back in July I found a great explanation as to how these loans are sold and divided.  Watch this video by CNBC.  Halfway through Steve says,  "Jane is actually in all 5 pieces here".

So Jane's loan is owned in part by 5 different hedge funds or investors. 

Part Two tomorrow...

Really?  That's the line from the Citi issues press release.  Does that mean it really happened?  I can't say.  Is this just another large company pumping out pseudo propaganda in an effort to bolster it's image?  Maybe. 

I tend to be a little cynical when it comes to the big guys.  Instead of throwing out wild accusations I'll report on what I actually witnessed.

The stage was set.  Saturday at dawn, we were to meet at down at the old High School.  The Kids were warned.  The Parents and Teachers were notified.  Would Citi even show?  Only time would tell.

The plan was to band together to clean up the school.  55 Acres, 1,500 students, 2 district paid Custodians during the day.  Outnumbered.

"If a piece of paper falls to the ground, and no one is there to pick it up, does it make a sound?"

 Well...  We brought our kids, our parents and teachers.  Citi did show up.  They showed up in spades!  They brought Bank Managers (yeah Scott Sachs!), Tellers, Administrators, Personal Bankers, and even the Securities Guys!   They even brought Breakfast and Lunch!  We banded together with the Citi employees, separated into groups and went to work.

We picked up trash.  We steam cleaned.  We pruned. in the end, we made a real difference.  We also learned along the way that sometimes it's not all about the  company.

Financial statements , Dividends and Stock Prices all have their place in the world.  But sometimes it's bigger than that.  Sometimes it's all about the people. 

My Picasa Album

Thank you Citigroup!  You were wonderful!   Absolutely Wonderful!

See   ===============>      

But when it comes to the Equity and Bond Markets, I consider myself a just a student. 

Every now and then, I look and see who has linked to my blog, or re-posted something I've written.  Most of the time it's other real estate professionals.  I wrote a piece the other day that I hope explained why a new accounting rule (FASB 157) was important and how it was going to change the books on the big hedge funds, mortgage pools, and other equity derivative houses.  I used the power of metaphor in hopes to better deliver the message.

Tim Abbott at "A Better Mortgage" thought it was worthy enough in the judging for the Carnival of Real Estate...

"Last but not least, the grand champion of them all:

The Busiest Beaver Award - Mike Mueller puts on his metaphor hat to explain some new accounting rules that will play a significant role in the coming days on Wall Street, and some of the firms to watch."

WOW! Thanks Tim!  Obviously, Tim's a mortgage guy too.  Was it really worthy of Grand Champion status?  I humbly didn't think so.    But I love the Dundie!  LOL

What really surprised me was to find the Finance Guys thought it was something of value too:

"Exodus" on the Market Ticker Forums thought it was a "decent explanation of Level 3 and FASB stuff for the average Joe."

"dasweise" on Yahoo's Message Boards said, "Check out this link for the basic understanding.  http://www.patagoniafinance.com/2007/11/..."

I know, they used words like decent and basic, but coming from Finance Guys - Those are pretty strong words! 

How cool is that?

So now, when you see news reports like yesterdays, "Citigroup faces $15 bln writeoff",  and you read quotes like "Banks have announced more than $50 billion of write-downs tied to the U.S. housing slump, as defaults soared and the value of mortgages that investors deemed too risky plummeted."  You too can sound cooler than snot around the water cooler. 

"Yeah, that was due to the recent FASB 157 ruling, don'cha ya know..."

File this under "HARD TO BELIEVE" (but true!)

Do you have a Home Equity Line of Credit on your home? 

How about on your rental home? 

A HELOC can be a great way to tap into your home's equity.  A HELOC is based on the Prime Rate.  Some banks offer the ability to "fix" a portion of what you borrow at a specified rate.  Remember, with a HELOC your payment is based on what you have borrowed not your limit. 

 

 

Are you getting ready to start on that kitchen remodel?
Already picked out the appliances?
The Contractor is coming on Monday and wants a check for half?
No problem - Your HELOC gave you a Checkbook and a Debit Card.

 Good for you!

Oh, you already have a HELOC?
You've had it for a couple of years now?
Always make your payments on time?
Even paid more towards the principal?

 Good for you!

Well it turns out that due to deteriorating market conditions, declining home values, uncertain issues in the securities division, blah, blah blah...

We at "Guppy's Seafood and Lending" have just decided to FREEZE your HELOC!
We're sorry. Keep making the payments you've been making, we like that - but we're not lending you anymore money.
Cut up that Debit VISA Card we gave you.
Shred the book of Checks we sent you.
We just don't want to play anymore.

They can't do that can they?

Yes they can.  In fact they are doing it!  It isn't a matter of a little bank (like Guppy's) that's on the verge of going out of business. 

Chase, (part of the 1.4 billion dollar JP Morgan company)  is freezing HELOC accounts right now.  Not to all borrowers, but those that they have determined are risky. 

So if the homes in your area have declined in value - don't count on having that $100,000 Equity Line available.  It might not be there when you want it.

The Financial Accounting Standards Board

These are the guys who set the rules for all accounting here in the United States.  I'm talking about FASB 157.   If you go to the website you can download the 158 Page document and read it for yourself, or I have a metaphor to illustrate what it is and why it's important.

PUT ON YOUR METAPHOR HATS...

I own a Taxi Company, Mike's Taxi Service.  I have 10 Taxis.  I bought the Taxis's over the last couple of years.  Each Taxi cost me $10,000 (they are very cheap taxis).

Using basic math skills, you can see my 10 taxi fleet cost me a total of $100,000 - right? (10 x 10,000 = 100,000)

Unfortunately, I hired the wrong cab drivers.  It seems they never checked the oil and now half of the fleet is broken down with blown motors.  If I needed to sell my broken Taxi Cabs I might get $500 each in the state they are in.  Since  they have blown motors, my Mechanic Louie has resorted to calling them  "Non Performing Assets".

Along comes Nick.  He wants to buy my company and asks to look at my financials to better gauge the true value of my company.  My books show that I bought 10 Cabs for $10,000, I have depreciated them a little bit over the last couple of years ($1,000 total) so according to my accountant, the Mike's Taxi Fleet is worth a cool $99,000!  (100,000 - 1,000 = 99,000)

Hey, I know it's not their true and realistic value, but it looks cool on the Quickbooks Balance Sheet and as a side benefit it also looks like I'm doing really well!

After Nick  reviewed my books, he bought my company for full book value  - $99,000.  Only problem was that a week  later he found out about Louie's "Non Performing Assets" in the back of the garage.  Boy was Nick mad.  The real value of the 5 blown up cabs was more like $2,500 - not the $49,500 I was showing.  Oooops.  Sorry Nick.

REALITY BITES

In real life my metaphoric Taxi Cabs symbolize large securitized pools of mortgages.  And as you might guess, like my Taxi's, some of those mortgages are not performing so well.  Their value might not be all they are cracked up to be.  How that value is determined was somewhat up to various levels of interpretation.  What the banks, pension funds, hedge funds used to do is dump all these broken bits into a big bucket called Level 3.  They hid the bucket in the back of the garage.  They put a value on that bucket, much like I did with my broken down Cabs.  And this used to be perfectly OK.

Starting November 15th, the rules set forth by FASB 157 change how that value is determined.  They are shining the light on these buckets and we'll now get to see what's really in there and more importantly what the bucket is worth.

SMALL BUCKETS AND BIG BUCKETS

Here's a fun little tidbit I ran into the other day.  It seems most all the boys have buckets.  According to their SEC filings (Form 8-K) some of them have pretty big buckets.  Remember when Merrill Lynch announced a couple of weeks ago that they had discovered they had a bigger bucket?   Cool.  The Merrill bucket is now at 16 Billion!

Just for giggles, here's some of the others;              

• Bear Stearns $20 Billion
• Lehman Brothers $35 Billion
• Goldman Sachs $72 Billion
• Morgan Stanley $88 Billion
• Citigroup $135 Billion  

Those are some pretty big buckets. Want a little good news?  Bear Sterns just announced the worst of the Sub Prime mess is now behind them.  No really.  They said that!  

Remember the good folks at FASB are looking out for the little people like you and me!  And on the bright side, now you know more about Taxi's, Level 3 Buckets, FASB 157, and how not to trust financial statements much more than you did before!  Cool.

Next we'll talk about other ways to hide other bad things like Herpes Sores and Super SIV Funds.

I'll be a "Band Dad" again this weekend. 

The Ygnacio Valley High School Marching Band will be loaded and on the Bus before dawn Saturday.

They'll be marching in beautiful Napa Valley in the Vintage Reserve Band Festival.  They are a small but wonderful group of kids.   I just hope it doesn't rain.

Last weekend they finished FIRST in the Lodi Grape Bowl!  Go Warriors!

 Incidentally, if you have a kid in the band, I have 500+ photos uploaded in a private website.  Call me and I'll send you the link.  (925) 639-1078

This isn't about Social Security.  It isn't about Medicare.  It isn't about the Graying of America.

 It's about a torpedo that's coming towards us.  It's silent, it's fully armed, and it's not on the radar.  But it will be very soon.

This is not a single family home.  It's an Assisted Care Facility cleverly disguised as a single family home.  You've seen them in your neighborhood too.  You won't find a sign out front.  It's a "stealth operation".  These homes are staffed by professionals and regulated by health officials.  They are owned by local "Investors"  and not by large corporations.

For the residents it offers them a great alternative to the often cold linoleum clad enclaves of the standard issue nursing facility.  Oh, and it's usually cheaper too!

Captain, I have an unidentified blip on Radar and it's closing Fast!

But here is what you don't know.  Hell, they don't seem to even know. Many of these local "Investors" bent the rules when they bought the home.  To maximize their cash flow they bought with little or no money down.  They would need their precious capital to rehab and convert the home for it's new use.  Cash flow is critical to any business venture.  To make the numbers work many of these investors used a form of the Payment Option ARM.  Since then , they've been making the minimum payment (more net income).  From a short term business standpoint there is absolutely nothing wrong with this plan.  Almost.

Emergency Evasive Maneuvers

They bought a couple of years ago.  Flash forward to today and we have a series of serious problems. 

FRAUD

They bought a SFR with the intention of running a business in it.  They committed Mortgage Fraud.  Plain and simple.  When they bought the home the application showed it as investment property.  That means a rental home.  That means collecting rent from a nice "Single Family".  (That's the important part of Single Family Residence).

It does not mean running a full time business within it's walls. 

Chances are that nobody will end up in jail for this, not the applicant , the loan officer, the appraiser, or the real estate agent.  What happened in the past is oft times brushed away.  It's the present and the future that they are more concerned with.  This time around you can bet that NO Underwriter will let this file pass across their desk.  "Not on my watch", said one underwriter I recently talked to.  You can't use a home loan for a business property.

COMPS

They bought a 3 bedroom / 2 bath home and converted it.  They split large rooms into smaller separate units in order to house more beds.  Since their residents are confined to wheelchairs they won't need to park their car in a garage.  Look, more bedrooms! 

Now they are going to have serious comp issues.  How can you compare properties accurately when this is now a 7 bedroom / No Garage 2,500 sq ft home surrounded by other tract homes that are the 3 bedroom / 1 bath and only 1,100 sq ft?

LOAN TO VALUE, STATED INCOME AND TAX RETURNS

Because they used a POA with a 5 year recast their payments are due to jump dramatically soon.   Due to declining values in even the best neighborhoods, their 10% equity that they had is probably gone.   The documentation they provided last time on their stated income loan isn't going to fly this time.  Full Doc this time.  Unfortunately there will be no hiding the fact that this is NOT a Single Family Home any longer.  They'll have to refinance with a Commercial Loan this time and that will put the kabash on their positive cash flow.

Three OPTIONS

Typically a homeowner in this predicament has the choice of options.  They can refinance, sell, or stay the course.  Unfortunately this is a business and not a homeowner.  Their future is determined by cash flow and revenue. 

A refinance is out.  They cannot refinance into a comparable commercial loan and still maintain positive cash flow.  It doesn't exist.

Sell?  Remember this is now a business and no longer a home.  They'll have a hard time selling this as a business at any price.  What would be in it for a potential buyer?

Stay the Course?  For how long?  If your business had a major operating expense jump 275% overnight how long do you think you could "stay the course"?  Not very long.

ABANDON SHIP!

When this speeding torpedo blasts a hole in the side of the ship and the Captain and his mates are rowing away, who's going to be caring for the passengers left behind? 

Where do they go? 

What kind of care can they afford? 

Who is going to help them?

My guess is that we'll be needing a new kind of Assisted Care then, specifically designed for Granny Dumping.