Matrix Blog

I’ve discussed the curse of stadium naming. The new Citi Field stadium name is in danger of going Enron on us. After all, the naming rights are only a paltry $400M and the Sunday’s Citi bailout was $326B.

For the past few years (for security reasons?) appraisers have been required to provide private financial information to Citi in order to consider whether the appraiser was solvent enough to work for them. Appraisers I know fought tooth and nail against this. In our case, we had been working for them for more than 20 years and now they want to know how much money we make? In other words, they wouldn’t want an appraiser to go under during the middle of a $400 appraisal assignment. It would be (apply sarcastic tone here) devastating to the entire financial system I would think.

The irony here is amazing given Citi’s need for a bailout.

Don’t get me wrong, we work for other areas of Citi which are sophisticated and professional. I am simply fed up with the “efficiency” theory of banking as it applies to backroom operations of large retail banks. They have lost their way. Incidentally, nothing has changed in this regard since the credit crunch began in the summer of 2007.

A few months ago, Citigroup’s retail banking appraisal group based in Missouri put my appraisal firm out to pasture (demoted to backup) in favor of appraisal management companies (those big national companies known for high speed, low costs and virtually zero quality (aka “army of form fillers”) aka AMCs and high volume appraisal shops/factories.

Of course, Citigroup gets a bailout.

Here’s a sampling of our former clients who are national banks that went with appraisal management company factories and ended up getting into financial trouble.

• Citigroup – went with AMCs
• Washington Mutual – Residential mortgage lending gone – went with AMCs – NY AG tried to sue them for collusion with eAppraisIT to pressure appraisers (an AMC)
• Countrywide – absorbed by Bank of America – lots of litigation in the future
• US Trust Company – went with AMCs – such a disaster they actually came back to their appraisers only to be purchased by Bank of America and then we were dumped again
• Bank of America – went with AMCs – rumors that it was such a bad experience, returning to appraisers
• Wachovia – created their own AMC, Bought by PNC.

Coincidence?

Not really. Like the stadium naming deal, the shift to an AMC symbolizes the point when a mortgage lender goes too far and loses touch with it’s understanding of risk. The corporate culture loses the ability to understand the importance of assessing the value of the collateral to which they are lending. Common sense evaporates.

For the most part, the individual review appraisers that worked at these lenders were professional and competent and could see the issue at hand, but they just didn’t have the political weight, so to speak.

Hopefully those institutional politics will be crushed by the time we reach seventh inning stretch (at US Treasury Field).

This just in: Tiger Woods now needs to rustle up lunch money.

Tags: Appraisal Management Companies, Bailout, AMC, Bailout Nation

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In many ways, the free market financial/mortgage system, without regulatory oversight could be described as Nasty, brutish and short:

Nasty, brutish and short aren’t a firm of particularly unpleasant lawyers but a quotation from Thomas Hobbes’ Leviathan, or the matter, forme, and power of a commonwealth, ecclesiasticall and civill, 1651. The fuller quotation of this phrase is even less appealing – “solitary, poor, nasty, brutish, and short”. Hobbes described the natural state of mankind (the state pertaining before a central government is formed) as a “warre of every man against every man”.

I was struck by a recent case of massive number numbness that was inflicted upon me when I saw the Fannie and Freddie losses for the 3rd quarter:

Fannie Mae: ($29B)
Freddie Mac: ($25B)

For perspective, Fannie Mae and Freddie Mac each averaged a $2B loss per quarter in the preceding three quarters. The GSEs were bailed out in early-September and represented the last 3 weeks of 3Q. I know the Freddie loss just reported included a $14B non-cash charge so it lost about $12B cash-wise.

The current administration is leaving still advocating free markets, which a disconnected concept when compared to the situation we find ourselves with – day late and a few trillion short. Dismal Scientist calls it right.

I remember when President Bush decided to call a summit 3 weeks ago, during a crisis which needed daily attention:

The first decision I had to make was who was coming to the meeting. And obviously I decided that we ought to have the G20 nations, as opposed to the G8 or the G13.

hmmm…what flavor of free market thinking will work going forward that didn’t work before?

One of the things we did, we spent time talking about the actions that we have taken. The United States has taken some extraordinary measures. Those of you who have followed my career know that I’m a free market person — until you’re told that if you don’t take decisive measures then it’s conceivable that our country could go into a depression greater than the Great Depressions. So my administration has taken significant measures to deal with a credit crisis. And then we worked with Congress to deal with the credit crisis, as well.

Call me crazy, but how about simple common sense oversight? Despite the actions of the administration, I find that Congress is finally starting to make some sense.

Here’s a series of plans to fix housing summarized by Capital Commerce.

What worries me about much of this is that government has a hard time “thinking big” which should not be confused with “spending big.” Evidence of this is found with Treasury’s foreclosure plan versus FDIC’s Blair. Bair wants to think big.

Tags: FDIC, GSE, Bailout, Bailout Nation

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Let’s try something different, take another path through the forest….

Close your eyes for a minute and imagine a Congress that will vote for its constituent’s behalf and their conscious. Imagine they will vote on the issue and not worry about the election in a month.

Did you seriously listen to me? Kick yourself for being so darn naive…

One of the great things about technology, is the trend toward transparency. According to MapLight.org, a public database used to provide more political transparency through the tracking of donations, found a clear pattern in the votes cast in the bailout bill H.R. 3997, the Emergency Economic Stabilization Act of 2008.

House Democrats split their votes on this bill, 140 voting Yes and 95 voting No. Democrats voting Yes received an average of $212,700 each, about twice as much as those voting No, $107,993.

House Republicans also split their votes on this bill, 65 voting Yes and 133 voting No (and 1 not voting). Republicans voting Yes received an average of $273,181 each, 50% more than those voting No, $181,688.

About a 50% vote spread with the takers dominating the takees.

From McCain pulling that last minute ride in and save the day to Obama using this turmoil to aggressively raise funds, it sure seems like the impending financial crisis has gotten lost in the politics.

The US Senate is voting on a revised bailout bill today:

would also raise federal deposit insurance limits to $250,000 from $100,000, as called for by the two presidential nominees only hours earlier.

The move to add a tax legislation — including a set of popular business tax breaks — risked a backlash from House Democrats insisting they be paid for with tax increases elsewhere.

Here are some thoughts on the bailout at Politico

This morning I listened to the president’s commentary on BBC about the failure of Congress to vote for the bill (after he touted the strength of the economy as recently as 2 months ago), this address probably fell on deaf ears and that’s a shame. He’s a lame duck with a 70% disapproval rating. The administration didn’t appear to be aware of the extent of the crisis until the GSE bailout.

Here are some less hyped thoughts on a bailout.

Tags: GSE, Bailout, Bailout Nation

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It finally happened. The GSEs are no longer private corporations. The bailout is finally here.

I called this bailout on October 5, 2005 and was teased or ignored. History teaches us we forget history.

I have been lamenting (whining) for the past several months that nothing has really changed since last summer when the credit markets imploded. Sure, we had the stimulus plan and the housing bill became law, NY AG wrangles a deal with the GSEs to change the way with mortgage brokers and appraisal management companies were involved in the mortgage process. The housing bill created the FHFA which was a new and improved OFHEO, which had been in charge of GSE oversight before the seizure.

GSEs have been taken over and we are in bailout mode. Its fair to say this is the worst mortgage crisis in history.

Why the GSEs were doomed

They had an unfair advantage over competitors because they were protected by the federal government. Thats the very same government that was forced to bail them out. It makes a strong argument for promoting fair competition.

You can’t serve two masters:

the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The irony about the GSE set up is that was consistent with most members of the mortgage pipeline. Appraisers served the mortgage broker and the lender. Mortgage brokers served the borrower and the lender. Banks served the investors and their shareholders.

Fannie Mae continued to play with their spreadsheets even after the accounting scandal.

Fannie Mae did not have a grip on their accounting practices, OFHEO/FHFA was ill equipped to keep them in check, or they were simply incompetent. Remember FNMA kept revenue off the books in the original accounting scandal a few years back so they would not draw attention and be able to show better results the following year. Now they didn’t meet capital requirements to offset their mortgage market exposure.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

Despite all the confidence telegraphing by Lockhart (OFHEO), Mudd (FNMA) and Syron (FHLMC), few really believed the GSEs had a grip on the extent of the situation. After all they were part of the process.

They hold or back 5.3 trillion in US mortgages which is about 50% of the mortgages out there. The GSEs accounted for about 80% of new mortgages being issued since last summer’s credit crunch. With investor confidence fading fast, the Treaury department could not let the last pillar left in the mortgage market crumble and it appeared to be headed that way.

What does this mean to housing?

Its not clear until this all shakes out, but probably not much initially.

However, if the investors see the faith and credit of the US in action and this brings them to the table, it may eventually bring more liquidity to the credit markets and that may bring some of the risk down, lowering rates or tempering their rise. However, housing still has a lot of shakeout with foreclosures and inventory, but at least this is a step in the right direction.

It’s actually the first constructive step towards recovery. If we are going to pay through the nose, it might as well be towards something positive, as painful as that is. The stimulus plan and the housing bill are painful, but don’t do anything about solving the financial crisis.

“I would view it as the beginning of the markets recognizing and accepting the reality of our financial problems, which is the beginning of fixing them,” said Mr. Rosner, a managing director at Graham Fisher, a financial research firm.

In other words, perhaps there is hope credit markets will get a grip in the next couple of years.

An aside
It has always been my observation that Freddie Mac was the step child of Fannie Mae. It stemmed from my appraisal background. Freddie Mac let Fannie Mae design their forms. Freddie Mac was essentially created after Fannie Mae to provide competition for it yet it nearly always let Fannie Mae take the lead. Even its stock price seemed to mirror Fannie’s. But Freddie didn’t get into hot water in the accounting scandal and Freddie Mac was agreeable to the Treasury take over before Fannie Mae because they had more of a handle on how short their capital was. In fact one could suggest that when it counted, Freddie Mac was the leader all along. Of course, that doesn’t matter any more. CORRECTION: It was Freddie not Fannie…nevermind.

Inter-office announcement
Its a time for change: I win the office pool on the WAMU bet. Good grief, he should get an award for outstaying his welcome.

Tags: FHFA, Fannie Mae, GSE, OFHEO, Bailout, Freddie Mac

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