Mulligan Mortgages – The Banks’ Only Way Out, Writes Gonzola Lira

Gonzola Lira writes Mulligan Mortgages – The Banks’ Only Way Out:  “A mulligan is a golf term. It’s when your first shot pretty much sucked—so your golf partner lets you take another shot, with no penalty. It’s the gentlemanly thing to do, as it were. A way to keep a lazy Sunday afternoon game interesting.    

Mulligan Mortgages seem to be how the TBTF banks are keeping their own game alive: They seem to be chasing mortgage holders—whether in default or not—and offering them an expedited refinance of their mortgage loan. 
  
In order to convince homeowners to sign on the line which is dotted, the banks have to give them something: What they give them is lowered monthly payments of at least a couple of hundred dollars a month. The banks can offer this without touching the principal of the loan by either refinancing the mortgage at a lower interest rate, or a longer term of repayment, or usually both. 
  
In other words, though the homeowner might still be underwater after signing the Mulligan Mortgage, they’ll still get a reduction in their monthly mortgage payment. 
  
Now there are several advantages to these Mulligan Mortgages: 
  
From the banks’ point of view, the Mulligans automatically fix the chain-of-title issue by creating a new note. The whole problem with the current scandal is that a lot of home loan notes were either lost, destroyed or mishandled, or else irremediably tainted by foreclosure mills’ unsavory business practices. 
  
But all of that goes away, with a new note courtesy of the Mulligans. 
  
(There are, of course, a whole host of administrative and legal steps that must be followed, in order for this to happen. In this post as well as in my previous post on the Mortgage Mess, I skipped a lot of these legal and administrative steps for two simple reasons: One, they add no insight to the issues at hand, and in fact clutter up the view of the overall situation; and two, the administrative and legal steps are often different in each state.)
  
A new note by way of a Mulligan Mortgage clears up the issue of standing, which would allow a bank to foreclose on a delinquent borrower. So once a homeowner signs a Mulligan, the bank will have clear standing to foreclose, if the homeowner becomes delinquent. 
  
For bond holders of Mortgage Backed Securities, Mulligan Mortgages are also a fine idea: By re-establishing the chain of title, MBS holders are once again holding secured bonds—they’re not holding paper which might well be worth nothing. 
  
This is a non-trivial issue: Considering how PIMCO and the New York Fed started making noises yesterday about the bonds Bank of America sold, I’d say there are a lot of bond holders and CDS underwriters who are very nervous about how this new outbreak of America’s Herpes will affect their MBS positions. 
  
Mulligan Mortgages are the unguent that will keep bond holders happy—until they realize the cost that they’re payng (I’ll get to this in a moment). 
  
These Mulligans are also great from the Federal Reserve’s and the Obama administration’s point of view: Mulligan Mortgages mean people will pay less for their home mortgages, and therefore have more disposable income. There’ll be a bump in consumer spending. 
Mulligan Mortgages, of course, can’t fix REO’s that may or may not have been foreclosed illegally—but they’ll get the rest of the housing market back on track. 

But it’s not all sweetness and light—there are some issues with Mulligan Mortgages:
  
First of all—and most obvious of all—the homeowners the TBTF banks are targeting for Mulligans are probably the very homeowners whose original note is lost or irretrievably ruined by someone in the sausage factory that created Mortgage Backed Securities. I’ll bet a buck to a nickel that they’re precisely the ones where the bank likely has no standing to foreclose. 
  
So the banks have to do the Mulligans quickly, before people get wise. Homeowners can’t be allowed to realize what the banks are up, or why. If homeowners understand fully why the banks are suddenly so nice to them, they’ll realize that they’ve got the banks by the short-hairs—and then they’ll realize that they can have their way with them, up to and including doing the Show Me The Note, Mo-Fo!! dance. If that happens, the banks are screwed. 
  
The second obvious issue is, Mulligans represent a severe hit to the TBTF banks’ revenues. 
  
How much of a hit? Nobody knows—at least not yet—because nobody knows how many mortgages are affected by the current Mortgage Mess. 
  
CoreLogic says there are something like 11 million underwater mortgages in the United States as of late August. The Wall Street Journal says about $154 billion worth of mortgage loans could be affected by the Mortgage Mess. 
  
We could extrapolate ‘til the cows come home, but simply put, there is no way to know how many mortgages might be getting a Mulligan. The TBTF banks are completely opaque, ever since the Fed basically rescinded sane accounting rules in March of 2009; when the banks officially turned into zombies. 
  
But any way you look at it, the Mortgage Mess—even with all the Mulligans needed to fix a lot of this mess—is going to take a bite out of revenues— 
  
—and not just on the balance sheets of the TBTF banks: On the MBS bond holders too. 
  
Nobody ever said Bill Gross was stupid: Regardless of how effective the Mulligans are, the Mortgage Backed Securities—and the CDS’s written on them—are all going to take a hit. That’s why PIMCO started making noises, trying to bully BofA into taking back the mortgage bonds: Even with the best solution to the Mortgage Mess, bond holders are going to take a forced haircut. Or a buzzcut, as the case may be. 
  
Since the Federal government really does not have the political will or inclination to go for yet another round of bank bailouts, and since the bond holders have the political muscle in this corrupt system to get their bacon saved (where’s all that bullshit talk about “capitalism’s creative destruction” now, huh?), it’ll be up to the Fed to make MBS bond holders whole—just like they did the last time. 
  
So although a lot of people are predicting that the Fed will start buying Treasuries when QE2 is anounced, I beg to differ: I think they’re going to load up on even more Mortgage Backed Securities. In fact, I think a big piece of QE2—maybe a trillion dollars’ worth—will be directed at Mortgage Backed Securities. And I think the Fed is going to pay top dollar for that garbage. 
  
I think the way the Fed is going to do it is, they’ll go for another round of Stealth Monetization: Buying MBS and other toxic assets off the banks for newly conjured cash, the banks then taking that cash and parking it in Treasuries, thereby funding the Federal government’s deficit. 
  
Because of the Currency Wars going on around the globe right now, I don’t think the Fed wants to be perceived as accelerating any weakness in the dollar. I think Bernanke and the Lollipop Gang at the Fed want to weaken the dollar, sure, but I don’t think they want the perception to linger that they are out-and-out trashing the dollar. 
  
Also, I don’t think Bernanke has the votes on the Federal Reserve Board anymore. I think a lot of Board members are discreetly coming to the conclusion that Benny Boy’s strategy of ZIRP, propping up assets, and extreme market liquidity, is a losing one. 
  
But they’ll be forced to vote in favor of a massive MBS buy, in order to keep the American Zombie banks on their feet. As predicted back in 2008 when they were saved rather than allowed to fail, the TBTF banks really have become “too big to fail”—because they’ve grown, like a cancer. 
  
So you see, it all goes back to the Mortgage Backed Securities. America’s herpes. See, the problem with herpes is, once you get it, you can never be cured. At best, you can alleviate the symptoms—but the disease is always there. 

Commentary
 
I relate that the distressed securities mutual fund, FAGIX, the mortgage laden intermediate mutual bond funds, such as GSUAX, and the mortgage-backed bond ETF, MBB, rose stunningly the week ending October 22, 2010, giving credence to the concept that the Fed is going to not only be buying short term bonds, SHY, and those in Pimco’s Mint, MINT, but the mortgage-backed bonds as well, in its QE II. That to me is a big wow.
Gonzola Lira writing in article Mulligan Mortgages – The Banks’ Only Way Out summarizes: “I don’t think Bernanke has the votes on the Federal Reserve Board anymore. I think a lot of Board members are discreetly coming to the conclusion that Benny Boy’s strategy of ZIRP, propping up assets, and extreme market liquidity, is a losing one.  But they’ll be forced to vote in favor of a massive MBS buy, in order to keep the American Zombie banks on their feet. As predicted back in 2008 when they were saved rather than allowed to fail, the TBTF banks really have become “too big to fail”—because they’ve grown, like a cancer.”

I take Gonzola Lira concepts one step further … I believe in the soon coming future, we will see a dramatic combine of the institutions of banking and government …. The Dodd Frank legislation established a Federal Financial Regulator, that being the Treasury Secretary, and granted him wide discretionary power of the economy.

From the Robert Wenzel, EconomicPolicy Journal article Secret SEC Meeting with Goldman Sachs and JP Morgan, I conclude that in the US, through an October 6, 2010, meeting of bankers, investment bankers and SEC officials, that an elite group of stakeholders has arisen to act as a “banking, lending, credit, and investment Regulatory Council”, supporting the Financial Regulator in overseeing the US economy.

I believe that the Dodd Frank legislation, empowers the Federal Financial Regulator, to intervene in today’s foreclosure and mortgage securitization issues. And that at some point in the future he will provide a solution that integrates the banks with the Government in state corporate governance over housing, banking, and mortgage securitization.

Perhaps this “solution” will involve purchase of mortgage-backed securities, debt forgiveness, resolution of securitization issues, and leasing of bank owned properties so the banks have some income coming in, and so the US Government has some income too, as it also owns well over a Trillion of Mortgage Backed Securities stored now at the Fed.  Leasing, of properties, if it takes place would end the entitlement that millions now enjoy to payment free-living, an entitlement, that came through the GSE/Banking Housing Cartel and the SEC/AICPA’s FASB 157, which enabled banks to mark properties to the manager’s best estimate rather than mark to market.

And of course, when all this gets underway, the US Dollar, $USD, will go down in flames, which I believe would not bother Mr. Bernanke as he is a banker and is focuesd primarily on the value of banking assets, which is comprised significantly with mortgage backed securities. 

There are some interesting reads, that I recommend for insight into QE II.

1) Tyler Durden’s Zero Hedge article … Goldman: The Fed Needs To Print $4 Trillion In New Money

2) Tyler Durden’s Zero Hedge article … U.S. Financial Markets: The Well Has Been Poisoned (Anger of the Honest Part II) …. “One of my most astute correspondents made a critical observation that I’ve seen nowhere else …. Without institutional trust and participation, the market then withers on the vine – exactly what has happened to the U.S. mortgage securities market. The market for mortgage-backed securities has vanished, except for one player: the Federal Reserve, which has bought a staggering $1.2 trillion in the past 18 months to create the facsimile of an active market.”

3) JohnM writing in Housing Doom article Foreign Cenbank Holdings Of US Obligations Update to October 20, 2010 … references the report … Federal Reserves’s Factors Affecting Reserve Balances as of October 21, 2010 …. which presents the amount of Fed’s holding of mortgage-backed securities in footnote (4) as 1,067,874 – 10,665 + 301,331 … 1,065,751. …. That to me is a stunning number. Even more stunning is the way the ETF, MBB, has risen since October 7, 2010 while the ETF, TLT, has fallen since that date. The Fed in its coming QE 2 wild printing money of program has inflated the GSEs mortgage-backed securities, while destroying US Sovereign Debt.

The International Treasury Bonds, BWX, have now turned down. The US Federal Reserve’s program of renewed easing with QE 2 has monetized sovereign debt globally. The interest rate vigilantes called interest rates higher globally on October 15, 2010, turning BWX down to 61.56 from 62.04.

And the currency vigilantes did likewise in response to the approaching Ben Bernanke Death Star, by selling the world’s major currencies, DBV to 23.42 from 23.46 …. and by selling the world’s emerging market currencies, CEW, to 23.37 for 23.39.

The Euro, FXE, which seems to be the landmark currency these day, the thing by which things are measured, turned down October 15, 2010 to 139.25 from 140.22.

Debt Deflation is underway as World Stocks, ACWI, turned down October 15, 2010 to 45.00 from 45.13. China shares, FXI, gave in to debt deflation by closing at 45.67 on October 22, 2010.

QE II Is monetization of debt and that’s inflationary for somethings and deflationary for others …. the short term US Government bonds, SHY, have gone up in value and the mortgage backed bonds as well …. but the longer out sovereign debt bonds, and the currencies, and the stocks have lost value as well, as the US Dollar, as traded by the ETF, UUP, has gone up in value from 22.21 to 22.47. Gold has gone down, but as the Fed starts up its printing press, there will be an investment demand for gold, GLD, and probably for food commodities, FUD, and agricultural commodities, RJA. All I can say is …. “Got gold?” 

Keywords
foreclosuremoratorium, financialregulator, mortgagemess 
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