The Politics of Gold

On June 18, I wrote a piece on gold. At the time I thought the Iranian election story could lead to an unanticipated source of demand for the yellow metal. I thought there were three possible outcomes. Either (a) peace and harmony would break out, or (b) the police and military would fail to shoot at the protesters and the Regime would fall or (c) the protesters would be crushed and talk that Israel would bomb Iran would come on the table. I guessed (c).

Approximately one month ago a leading Israeli newspaper, Haaretz, published portions of a report produced by Center for Strategic & International Studies (CSIS) titled Study on a Possible Israeli Strike on Iran's Nuclear Development Facilities. This link will take you to a page where the full report is available for download.

This 108-page report provides a detailed plan of attack. It contains aerial photographs of the likely targets, a description of the anti-aircraft defense capabilities by site, bomb payload requirements and even an estimate on direct and indirect death tolls. Not a summer read.

The report is from March 2009. I have no idea if the information and conclusions are accurate. It certainly appears to be. Two observations from the study:

I) The timetable for achieving bomb grade fissionable material is 2010.
II) The Iranian air defense systems are inadequate to protect the critical sites.

Iran has been attempting to purchase Russia’s very effective missile defense systems for some time. The deal was never consummated. Pressure from European leaders saw to that.

However on 5/15/2009 (the same day the study from CSIS appeared in the Israeli press) China agreed to provide Iran with its S-300 anti-aircraft missile system. This is considered to be one of the most advanced systems available. Once delivered to Iran the outcome of an assault becomes much less clear.

The results of the Iranian election will potentially alter the timing of the Chinese missile sales. This sets up a US/China issue. Regardless of that resolution, the 2010 time frame for achieving bomb capability is not far away.

The price action in gold shows that it is marching to a different tune than the events in Iran. Like most things, this is a ‘timing’ trade. This story is not going to go away.

FHFA's Lockhart on CNBC

James Lockhart the Director of FHFA was on CNBC this morning. I thought he did a pretty good job of representing the FHFA perspective on things. He certainly did not do a good job speaking as an advocate for the taxpayers who are supporting the $10 billion per month of losses at his Agency.

Mr. Lockhart referred to the commitment by the Fed and Treasury to purchase $1.25 Trillion of Agency MBS as a, “pretty significant commitment". Like that was not such a big deal and maybe that number should be upped. A little perspective, this ‘pretty’ significant effort is the largest single commitment every made by our country. It is equal to 10% of the National Debt and 10% of our GDP. It is a biblical sized commitment that runs the risk of destroying our financial system if we are not very careful. Mr. Lockhart should not trivialize what is happening. He most certainly should not be looking for an extension of the Fed’s largess.

On Agency credit standards he remarked, “The standards of two years ago were appalling."

On capitalization he said, “The Agencies were allowed 100% leverage. Even a flawless portfolio was a risk.”

Mr. Lockhart became the Director of OFHEO in June of 2006. He is a very smart man who knows D.C. from the inside. In 2006 there were dozens of warning signs that the Agencies were running amok in both the size of their portfolios and the credit quality of assets they were acquiring. The Agencies bought over 1 trillion of Sub Prime and Alt A mortgages during that period. They did that using the excuse that the wanted to ‘expand market share’. This proved to be one of the all time worst decisions. We need to understand that those “appalling’ credit standards were in place while he was the top cop.

Mr. Lockhart knows his numbers. He knew them in 06 when the Agencies were running that 100% leverage he referred to on television this morning. Where was OFHEO, the predecessor regulator to FHFA, while this ludicrous level of leverage was being created? There were many observers in that period that saw the writing on the wall. No doubt but that Mr. Lockhart saw it as well. Two months before the Agencies went into receivership he said they were ‘adequately capitalized’. Today he says they were running on 100% leverage.

He made several references to the broad housing market. He referred to the market as bumping along the bottom. It was his view that there may be some “choppiness” ahead but he was clear that the worst was behind us. The chief regulator of $6.5 Trillion of mortgages should not be a cheerleader. He should be protecting the downside, not forecasting the upside. The biggest mistake by D.C in the past twenty-four months is that they have consistently underestimated the severity of our problems.

In support of his position that the RE market has stabilized he pointed to FHFA’s own tracking system for measuring home prices that has showed no change for months. That was a mistake. FHFA’s price measuring system is flawed. At this point just about everyone knows it. Treasury did not use it in the stress test process. They chose to use the more credible Case Schiller index. The FHFA price survey has grossly understated the fall in home prices in the real economy. Mr. Lockhart is aware of that fact.

In response to a question Mr. Lockhart stated, “The Agency Charter prohibits FNM and FRE from acquiring loans that exceed 80% loan to value." That is a true statement, but what he failed to say is that insurance lobbyist created a carve out where non-conforming loans with up to 100% debt to equity are permitted provided an insurance company stands for a first loss of 20%. Mr. Lockhart failed to mention that over 20% of the Agencies portfolio is filled with these over leveraged loans. He failed to mention that none of the insurance companies that provide the enhancements meet the credit ratings that are required by that same Charter he refers to. He failed to mention that this category of his portfolio is producing 3 times the default rates as 80/20 mortgages do. He also failed to clarify that under his regulatory responsibility is the Federal Home Loan Banks. These banks have no limitations in their charter on loan to value. Anyone who watches television knows FHLB is pumping out $100billion per month of 97.5% LTV loans into the market.

The Agencies gambled with the people’s money. They arbitraged the countries AAA rating. They represent the greatest systemic risk that we face. They have not changed a bit since going into receivership. They are still running 100% leverage. They are losing $10 billion per month. They are still making high-risk mortgage loans. They still are 85% of the new mortgage market. There is no exit strategy in place to end this nightmare. A new cop is required to re-establish the confidence we need.

FHFA On Loan Modifications - They're Doing a Heck of a Job

FHFA released a report today. Another positive headline regarding the progress being made on loan modifications at Fannie Mae and Freddie Mac.


I reviewed the report and did not see much to shout about. A more appropriate headline might have been:


In the last bullet point on page two FHFA reports that 3.6% of their borrowers are 60 days delinquent. They have 30mm customers. Hidden in report is the information that 1.1mm of their creditors are in default. In the same period they managed to deal with only 3% or 37,000 of this number. FHFA is swamped with delinquent borrowers.

The report states:

FNM/FRE own or guarantee 56% of all mortgages but only 22% of all seriously delinquent loans.

Read this differently. The government holds 22% of all bad loans. The workout implications of this are gigantic. It will take a long time to resolve this problem if ‘success’ is defined by modifying 10,000 loans per month. Based on the modification rate in the quarter it would take 10 years to work through the current backlog.

The most troubling comment from the report:

Home retention actions accounted for 90 percent of their activity.

This sounds good. It is in keeping with statements by the Administration and Sheila Bair of the FDIC on how we should be managing the problem mortgage credits. In this case FHFA is doing exactly what they said they would be doing. While this effort is to be applauded, it is applying too much emphasis on one aspect of the problem.

We have a big social issue. The government can’t be seen chucking families out of their home. It is not the way things get done. The approach has been to give the borrowers meaningful but temporary relief on monthly bills. These reductions have been significant, as much as 20% in some cases. These efforts are clearly helping those people who are desperately trying to stay in their homes. Those efforts will and should continue.

But, the approach by the FDIC/FHFA is missing the reality of what is going on. 99% of all delinquent borrowers are today upside down on their mortgage. The loan modification process adds to the amount of the principal in most cases. The result is that the borrower is more upside down after modification then before. Upside down borrowers are bad credits. They have no incentive to pay. So they re-default after a short period of time following modification.

I talk to a lot of people who are underwater. My view is that at least half of them just want out. They want to move someplace and can’t. They can’t afford the modified mortgage numbers, but they sign the papers anyway because no other option is available. On a personal basis it is tearing people up inside.

The private sector is working against the government’s efforts at this point. From every State I am now hearing of a more receptive position by the banks. They will take short sales. They are taking losses in the process. They are clearing up the problems. Yes, many of these people are now renting versus owning. But the longer-term impact to their credit rating is negligible and they are able to resume their lives. The ‘ownership nightmare’ is over for them.

The monthly housing numbers clearly show that a significant amount of the sales in the past few months have been from banks who are selling properties that have been acquired though deed in lieu transactions. An increasing percentage of this activity is voluntary. People simply want out. As this process unfolds more downward price pressure on housing will be the result. Those with FNM/FRE mortgages who were given no choice but to modify their loans will be more upside down than ever, and therefore much more likely to default.

In the process of cleaning up the mortgage mess the banks have been given significant incentives to settle with creditors. FHFA has none of these incentives, nor do they have the capital to absorb the losses. The end result will be that an increasing proportion of the bad loans will be held indirectly by the taxpayers. The worst possible outcome.

Systemic Risk and The Mortgage Agencies - It's All Connected

The Administration’s efforts to provide a new regulatory framework for financial institutions is an important step in repairing the damage that was done to our economy and society in 2008. Today there is still a great deal of mistrust in our banking giants. When American’s can again say to themselves, “Our banks are sound, they are lending again. Our financial system is safe. I am going to take some risks”, then the economy will begin to grow on its own.

I, for one, am not going to feel good about things regarding systemic risks to the system until the issues of the Agencies and FHFA are addressed and resolved. We have three questions facing us:

(A) Are the private sector financials adequately capitalized/regulated to minimize their risk?

(B) What about the mortgage asset side of the federal government?

(C) Can we borrow as much money as we need at an affordable cost?

(A) is in the process of being addressed. Let’s hope for the best.
(B) was specifically excluded in Mr. Geither’s presentation.
(C) is an open-ended question.

We simply do not know if the incremental $2-3 trillion we need to borrow is going to be available at a cost our economy can afford. This three-legged stool is wobbly. It is unlikely that (C) is going to be achieved unless confidence is our system is truly restored. For that reason a credible plan to deal with the government’s involvement in the residential mortgage market is an essential step in re-establishing the financial integrity and confidence we need. To avoid (B) at this time will weaken the chance of achieving (C). If we fail on the issue of funding our debt, then any efforts we have made regarding (A) will have been wasted. The lights will have gone out.

The backdrop:
FHFA’s total book of business is $6.3 trillion (through Fannie Mae, Freddie Mac and FHLB’s). Ginnie Mae is up to $600 billion in guarantees. Of the total of $12 trillion of mortgages outstanding the government is responsible for $7 trillion or 60%. The government’s involvement in the new mortgage market is equal to 85% of the total. That is textbook systemic risk. Some broad strokes on issues that should be considered:

-There has to be a new regulator.

FHFA is no different than the old regulator, OFHEO. It still has the same leadership. It is still funded by Congress. It is still beholden to Congress. The record is clear. OFHEO failed us. At the peak, the Agencies had $1.4 trillion in sub prime/Alt A loans. 20% of their portfolios consisted of ‘enhanced’ second mortgages. There was no one looking after the taxpayer’s interests in the 2000-2008 period.

I think Treasury should have a principal role as a regulator. I would like to see the Fed involved in oversight and planning as well. I want to minimize the importance of Congress in this equation. I want private sector involvement in the process.

-We need a New Mortgage Agency.

This should have done already. New Mortgage Agency (“NMA”) is the Good Bank, the old Agencies assets would be combined, and they would be the Bad Bank. NMA does the following:

It writes new conforming mortgages to qualified borrowers.

Just that. Nothing more. A conforming mortgage is and always has been one where there is 20% equity and the loan is to a documented individual who has a reportable source of income. NMA will make/acquire good loans. Only good loans. No exceptions. Not one. Ever.

This means no second mortgages, LIAR loans, NINJA loans, loans enhanced by insurance companies that avoid down payments or anything else that could be invented to avoid the traditional obligations of a borrower. This is so simple. It just requires adherence to the rules.

In my rule book the borrower, the lender, the broker, the appraiser etc. who participate in a fraudulent loan that is sold to NMA will be faced with significant legal action. If you want to originate and sell junky loans, sell them to Wall Street. Do not sell them to Uncle Sam. If you do, you are looking at jail time.

Of course there will be loan losses. People get sick, die or lose their jobs. It is both predictable and unavoidable. However, a pool of truly conforming mortgages as I have described them is money good. That pool of mortgages does not constitute a systemic risk.

-There has to be some rationality in the pricing of NMA mortgages.

The objective of these two suggestions is to reduce the interest rate risk that the Agencies face when they write fixed rate mortgages.

*There should be a 30 year fixed rate mortgage. However there should be a pre-payment penalty if the loan is paid off in the first three years. Stop the flipping.

*Collard Floaters should be attractively priced vs. fixed rate mortgages. The borrower should absorb some of the risk of interest rate changes. Not all of the benefit of lower interest rates should accrue to the mortgagor. In exchange, the borrowers face no pre-payment penalties; a capped rate and they achieve a lower spread over funding costs.

-Availability of NMA mortgages should be restricted.

Some suggestions:

*Only available for owner occupied residences. No speculators.

*A borrower and or family are permitted only one mortgage with NMA. No multiple financings.

*No vacation homes. This should not be a burden and or a risk of the taxpayers.

*No mobile homes. Only properties with an anticipated life of +50 years should be financed with public money.

-Financing NMA.

*NMA should be capitalized with a nominal amount of equity. The government should own all of the equity. No GSE structure - half private/half public. That did not work. It should never be done again.

*NMA can finance its book of business with debt that is fully guaranteed by the Treasury. This debt would not be secured. The quasi-guaranty on old Fannie and Freddie debt has turned into a ‘dirty’ guaranty today. This murky status is confusing to investors. The guaranty on the NMA securities should be explicit.

*NMA should issue over collateralized MBS. The MBS should be secured with only the new high quality loans described above. This new MBS will not have a government guaranty. They will stand on their own. These new securities will be reviewed by the ratings agencies and will be rated AAA based on the excess collateral. I would like to have some involvement by academia in the original construction of the new securities. There should be an ongoing review process of the MBS. They must be ‘money good’ at issuance.

The marketplace will drive the balance between guaranteed debt and MBS issued by NMA. If the market ‘charges’ too much for the MBS then more guaranteed debt will be required. The objective over time is to “privatize” the mortgages by creating a significant market for the un-guaranteed MBS.

Example: Assume NMA has $1 trillion of good mortgages. Assume that the ‘haircut’ or over collateralization is 30% in order to receive the AAA status and appropriate market pricing. This would mean that the guaranteed debt would be $300b and the MBS $700b. This would significantly reduce the government’ s involvement and diversify the underlying systemic risk.


-The Agencies need to manage their interest rate risks differently.

Fannie Mae and Freddie Mac have spent hundreds of billions of dollars in derivative costs protecting themselves against interest rate risks. I want all of the Agencies including NMA to be out of that business. They have done a terrible job. They have made Wall Street rich with their strategies. From time to time their involvement in the market has proved disruptive because of the large size of their positions. The suggestions made on prepayment penalties/collared floaters will help address the problem. There is still residual risk. That must be addressed to insulate NMA from significant changes in interest rates.

I want to structure the Mother of All interest rate swaps. The Agencies have a book of $2 trillion of fixed and floating rate mortgages. They pay interest on their debt. The Social Security Trust fund has assets of $2.4 Trillion. They receive interest income on their assets. We have two, $2 trillion government entities. One a ratepayer the other a taker. One is hurt when rates rise; the other is negatively impacted when rates fall. There is a swap in there. The Agencies are buying derivatives in the market to protect against convexity, while the SSTF is extending its duration in an effort to offset falling interest rates. These apposing economic interest need to be ‘netted out’.

I am not suggesting that this is an easy exercise. For starters, we are dealing with two of the largest government entities. They would hate this idea. Crafting a durable agreement would be difficult, but deals like this are struck everyday in the private sector. They just have a few less zeros. Wall Street would be very unhappy. Arbitraging the Agencies market timing strategies has made the Street a bundle. The argument will be made that SS rules are sacrosanct and that the Agencies have to manage their own market risks. That kind of thinking can’t be tolerated anymore. This is too easy a ‘fix’ to ignore. There are real savings that could be accomplished.

The 15% problem.

85% of the outstanding mortgages are good. We have a 15% problem. I want to provide incentives for the ‘good’ borrowers to refinance with NMA. To do so they will have to meet the standards previously set forth. Over a period of years I want NMA to become the Good Bank with $1.5 trillion in loans. The old Agencies will be stuck with the troubled assets. We have the resources to deal with the 15% problem. That cost will not kill us. We need some closure on the bad loans. We need to re-affirm that there are a lot of good loans.

Conflicts of interest with social/economic policy objectives.

My construction of NMA provides that neither Congress nor the Administration can use the New Mortgage Agency for any policy objectives. That will not work. Our leaders need to provide stimulus in certain areas of housing. It is too important a segment of the economy for D.C to lose its control. It is likely that a number of tailored stimulus measures may be required as the old Agency credit standards are replaced with the higher standards of NMA. I think D.C. should have the ability to influence the direction of housing and home ownership. However, if there is something that should be done, let them draft legislation that achieves these goals. Let that be debated publicly. If the legislation passes, the taxpayers will fund the objectives. We can never again afford to mix mortgage credit quality with social policy. The golden rule should be that NMA is as solid as a rock. To do that you have to keep the politicians away from it.

There are compelling reasons to put D.C.’s role in the mortgage market under a microscope and scramble the eggs. It is unlikely to happen. The interests involved are deeply entrenched. At the end of the day they are more powerful then the Administration or the Treasury. If D.C. does not step up to address it’s own systemic risks it is likely that the market will force them to do so. Absent a credible plan, the market will come to distrust us. We will be unable to fund our deficit at an acceptable cost. In my view Mr. Geithner missed an opportunity to put this issue on the table.

Gold - Three Times to the Alter

It is possible that gold may get interesting in the next week or two. Just a hunch. Look at the chart for the last year or so. Three miserable fails at the $1,000 mark.



In July of 08 and again in February of 09 were the first two efforts at $1,000. Those were tough months. In 08 half of Wall Street was going out of business. In March of 09 Citi was looking like a goner and so was the global economy. Of course none of that stuff came true.

I was scared during both of those periods. You would have been nuts not to have been. The fear was about deflation. 30’s style. Gold was breaking to record highs while every other asset class was collapsing? The rapid decline in demand created a big pool of workers and the economy quickly fell well below capacity. There was no inflation forecast in the gold price. It was all fear of deflation.

I did not understand that move in gold back then. It was counter intuitive. It was just one of the many market dislocations that occurred during the period.

The more recent high on June 1, was based on some more traditional assumptions about gold and its relationship to other currencies. In a very short period of time there appeared to be a sharp turn in global economic activity. China was buying everything were the reports. The dollar was returning to weak pre-crisis levels as the fear trades unwound. Most importantly there was a growing perception that just maybe we had printed too much money and that things were about to get out of hand in the direction of inflation.

Funny how quickly perceptions change in the market.

No sooner did that notion take hold, it was lost. Some reality set in and rained on the party. Gold and many other stocks/commodities that had been benefiting from the ‘Growth Trade” just faded. The talk on TV has been that gold is a three time loser and is dead. The yellow metal is faced with a 60 year low in inflation and we are not going to have an economic collapse. Where is the upside in gold in that story? I think a lot of weak longs left the gold market in the past few days. The market is not set up for a new source of demand.

Possibly gold will catch a bid the old fashioned way. Some global political chaos could do the trick. Certainly the pieces are in place for something like that to happen. The Iran story is impossible to predict. Some possible outcomes:

-In the next few days a new coalition government is formed. Stability is re-established. Reason and the rule of law prevail. Peace spreads throughout the Middle East.

-The opposition continues to grow. There is violence in the major cities. The military forces refuse to fire on the citizens. Chaos and a vacuum of power will be the result. The likelihood of a soft landing in this scenario is remote.

-All media is censored. There are house arrests for all politically active individuals. Those that participate in street protests are beaten and arrested. With no press to watch, the protests stop. A repeat of 1979. In this scenario the talk will quickly turn to, “When is Israel going to launch an air attack”?

Anything is possible. Of the foregoing the first is the least likely outcome. My guess is on some variation of the third. Either the second or the third will be reflected in the gold price. We have not had global politics impact gold prices for some time. We might be due.

High Cost of Carry Trades - Their Impacts on Markets

On January 12 2009 I made note of the oil futures opening prices. The February contract was at $38.49. The July at $52.37. This was the largest contango in the oil market that I had ever seen. The price difference between these futures contracts was $13.88. That put the cost of a six-month rollover of a long position equal to 36%. That will kill any long.

The causes of this exceptional premium for ownership were varied. The credit crunch, the shortage of storage capacity and the broad market chaos back then were the primary factors. I hate negative carry trades. Getting charged 36% to own something just does not interest me. That is not to suggest that there is not money to be made. You just have to be a very good trader to succeed. The big contango scared out the longs back then. That liquidation is one of the reasons the price of crude has doubled since January.

On Friday the crude futures closing prices were:

July Delivery……….73.56
January Delivery…...75.47

The cost of the six-month roll today is $1.91. This cost of ownership is a much more modest 3% a year. This transaction cost is no longer a factor in the decision, “Should I be long oil?”.

I do not think that looking at these ‘costs’ have much predictive value. The are just another part of the puzzle. It is my observation that when the ‘cost of carry’ gets to extreme levels the underlying (stock/bond/commodity) gets illiquid. Risk takers back off, pricing for longer-term maturities becomes hard to find. Volatility increases in the short term.

Oil has doubled in the past few months because of some green shoots and a growing reality that the global economy was in fact not going to fall apart. The collapse of the contango since January has helped support this price move as well.

I look for high cost of carry trades. They’re others out there.

Not in the S%P or the gold futures. S%P’s naturally trade at forward discounts. Gold is essentially flat. However, within the stock market there are some interesting negative carry trades.

If you want to be short a stock you have to borrow it. That has to be done before you get short if you plan to put a position on for awhile. The cost of borrowing stocks is all over the lot. If you need to borrow Bank of America you can borrow as much as you want for next to nothing. That is generally the case for big caps. However is you want to borrower Sears’s stock to get short you will pay north of 20% per annum. About 2% a month. That might not dissuade you from taking a position if you believe the stock will be 10% lower in that month. However, if you were looking for a strategic short in the retail space to balance a net long position you would probably stay away from Sears. 20% a year is after all, 20% a year.

Another example of ‘high borrow’ costs is in the solar space. To borrow either Suntech Power STP or Sun Power SPWRA look to pay about 1/2% per month. Not too bad. But if you are looking to short Canadian Solar CSIQ you are looking at a cost of nearly 3% per month, more than 30% per year. That is an expensive short. The timing and execution has to be near perfect for this to be a winner,

Treasury Bond futures have very big forward discounts currently. This is a reflection of the steepness in the curve. Friday’s numbers:

June………..116
December.…113

If you are long bond futures and roll for six months you earn 3. Sounds like peanuts. Now lever it twenty times and you have a 50+% returns on equity. Of course if bond prices go down this positive carry can be lost in a few hours. In bond land this carry trade is pretty compelling. The flip side is if you believe that interest rates are going higher you have to pay this price to be short. Only very good traders will profit from this. This poses a dilemma for the bond crew. They are convinced that rates have to go higher but at the same time the leveraged long returns are the best they have been in 20 years.

When a compelling short is confronted with a very high cost of carry the market avoids taking long-term positions. The market expresses its views on a very short-term basis. The consequence is a higher degree of volatility and less liquidity. It is not of great significance in the share price of Sears or Canadian Solar. It is of great significance if it were to impact the government bond market.

The price action in the bond market over the past two months has been as fast as I can remember. Treasury/Fed have engineered the steep yield curve. It is necessary to repair the balance sheets of the battered financials. It is possible that the steep yield curve will result in less liquidity and more price volatility in the bond market. With $1 trillion of coupons to sell it could not happen at a worse time. Possibly this is another of those unintended consequences we keep hearing about,

The solution is at hand. Raise short rates. That is the one thing that is not going to happen any time soon.



Note: To my knowledge there is no public information source on the cost of borrowing stocks. I got the information in this piece regarding Sears and the solar stocks from my broker. They do not give this information out. You have to ask, “What will it cost me to borrow 10,000 shares of ABC stock”. This price could be double what I could have gotten it for elsewhere. There is nothing to compare that price to. There are reasons why these borrowing costs vary so widely. My guess is that supply and demand driven by investor’s interests are the primary factors. Manipulation of this would be relatively easy to accomplish in the smaller cap names.

Does anyone have a good source for these costs? Should there be some public pricing here? This is investor information that could be significant. It is just not in the public domain.

A Tale of Two Mortgages - What Does it Mean?

These are two stories of people I know. They represent the extremes of how the mortgage industry is unwinding the mess it created.

(I)

A couple in Florida wake up one morning in January 2009 and decide to get divorced. They own a home with a $235,000 mortgage from First Franklin (“FF”). It was a LIAR loan. They have no money and no interest in the house. They call FF. A day later someone shows up, looks the place over and asks, “You ready to vacate the premises?” They say, “Yes”. The guy says, “We will take it from here on”.

The next day there is a For Sale sign up. The pricing is aggressive. In two weeks an all cash buyer at yet a lower price emerges. The sale price is $160,000. With expenses this comes to just $150,000 to pay back the debt. The short sale deal closes in less than a month. The borrowers walk away with a modest blemish on their credit. Story over.

First Franklin was a sub-prime loan originator that was acquired by Merrill Lynch from National City Corp in 2005. They paid $1.3 bil for it back then. As it turned out it was a good sale for NCC and a very bad buy for MER.

One can safely assume that MER securitized the original loan from the Fl. couple and it is part of that ‘toxic asset pool’ we keep hearing about. The value in the market for these assets ranges from just a few pennies for some tranches to 50% of par for others. Broadly valuing this stuff at 30% is generous. In this example if one looks through the MBS to the actual loan there is an arbitrage. The settlement resulted in a return to the MBS holder of 64% of par after expenses. If this were the case with all the other mortgages in the MBS package it would result in a 100%+ return from the 30% market/book value.

The market is solving the problem here. My guess is that the Merrill Lynch legacy securities that cost Bank of America a bundle in the 4th Q (and the spat with Bernanke and Paulson) are now turning out to be worth more than what they had them booked at. That makes BAC very motivated. That is why this problem loan was made to disappear in less than one month.

(II)

Outside of NYC a man owns a home with a mortgage from Indymac Bank (“IM”) This fellow is middle aged and is a small business/real-estate sales guy. He had a fairly predictable income until 2008. Then he had next to none. His story. (Sorry for the details)

-July 2008
He sees the writing on the wall and puts the house on the market hoping for an offer. He remains current on the mortgage.

-September 2008
There is no action on the house. He is going broke and informs IM that he can no longer pay the mortgage.

-November 2008
IM offers to modify his loan. He responds, “Thanks but no thanks, I have no income to pay the modified number either. I am trying to sell the house instead”.

-November 2008
An all cash buyer emerges with an offer of $302,000. The sale price net of commissions results in cash to IM of $284,000. The outstanding loan principal balance is $292,000 so the loss to IM is just $8,000.

-December 2008
Sale contracts signed on the house.

-January 2009
IM requires detailed information from both the seller and buyer. This information is gathered and returned to IM.

-January 2009
A letter is written to IM urging that they accelerate their effort.

-February 2009
IM requests a new document. An Affidavit from both seller and buyer that they are not in anyway related. This document is executed and returned to IM. On a phone call IM promises a closing with a short sale in less than four weeks.

-March 2009
IM advises the owner that the minimum they are willing to accept in a short sale is now $290,000 net to them (they now want to resolve the arrears). This represents a shortfall of $6,000. The owner says, “I have no money”. IM says, “We will have to get back”. They never do.

-April 2009
The buyer walks. The house goes back on the market.

-April 2009
IM sends the borrower a computer generated form letter. The letter states that he is about to lose his home. There is no reference to the mountain of prior documents and all the failed steps that have been taken.

-May 2009
There are no buyers for the house. The owner sends the keys and a letter to IM. His attitude is that he tried and failed to fix this problem. It did not get fixed because of the endless delays from IM. His view is that it is an IM problem now.

-June 2009
The house is empty and uncared for. There is a For Sale sign in the front yard; the weeds obscure it. No one comes. The taxes are accruing. The insurance has run out. It is now nine months since IM first received notice that the borrower was unable to pay.

Indymac Bank was taken over by the FDIC in July of 2008. It continues to be in receivership. Sheila Bair who runs the FDIC has been very outspoken on the need to restructure mortgages and solve problem loans. It is clear that in this situation her Agency has done a terrible job.

I present one situation where a market-based solution is applied. While it is not a ‘happy’ resolution for the original lenders, it is now in the past. Where it belongs. The other is an example of a government solution that does not work. There is no resolution in sight for that saga.

There are approximately $12 trillion of residential mortgages outstanding. More than half that amount is owned/guaranteed by the various Federal Mortgage Agencies. Extrapolate from this that the government similarly owns half of the problem loans. It implies that the restructuring process in the mortgage market will take a very long time.

With the benefit of hindsight it is easy to say that the government's involvement in the mortgage market should never have been 60% of the total. With the benefit of those same hindsight's it is very easy to conclude that the government’s role in the mortgage market should be dramatically reduced in the future. It is currently 85% of the new mortgage market.

CITI TARP Convert and the Indiana Bond Holders

A big sigh of relief for the Citi convert transaction. The resulting dilution puts a cap on the stock price forever. The Preferred holders took a bath. The end result is that Citi’s balance sheet looks a lot better. Net-net call it a Green Shoot.

Treasury was a big part of the deal. They converted $25 billion of TARP pref into 36% of the common stock. That is not a Green Shoot. That is a loser.

As of this writing C’s market cap is a tad over $19 billion. 36% of that is $7 billion. Therefore the Treasury convert cost the taxpayers about $18 billion. It will be interesting to see if Treasury recognizes this loss. It is quite likely this will stay on the books at the original cost of $25 billion. Mark to market has not caught on in D.C. yet.

Sadly, I have been in this position before. The cram down solution stinks for the investor. The State Treasurer for Indiana will confirm that. The other holders of GM and Chrysler bonds know how it feels also.

Corporate bond defaults and busted Pref stock are as old as Wall Street. But we are setting some new records for the Guinness book. The business with the Supreme Court and Chrysler turned out to be just a head fake. Having said that, when was the last times the Supremes got involved in a case like this? Look for more of this as the Government's involvement in the private economy grows. Brown Shoot.

To some degree we seem to be following the paths set by the bankruptcy courts. Equity and subordinated creditors get crushed. Senior creditors become junior creditors and stockholders. From this process new life can be formed. It is painful but it works. Generally speaking there is an ‘equitable’ resolution.

The Indiana bondholder suit had me going. I thought they had a case. No bankruptcy court would have subordinated the rights of secured bondholders to end up behind the UAW. It does not work like that. But it did. The conclusion reached is that the theory of “The Greater Good” has prevailed against the rule of law. There is a lot of that going around.

I see two situations today where the idea of a restructuring is going to be focused. One is in mortgages in general; the other is the Federal Agencies, Fannie Mae and Freddie Mac.

There has been a great deal of noise from the financial community and the Feds about what a great job they are collectively doing about helping underwater homeowners. The lenders have been providing better terms to a lot of borrowers. They lower the rate and defer principal payments. But they tack on a bigger principal amount and the loan modifications are only good for a few years. The end result is that borrowers are more upside down then ever. Sure they can afford to be there a little better as a result, but there is no longer an upside to their ownership. On a macro basis, upside down borrowers are by definition bad credits. The Modified Loan default rate of 50% proves that. Borrowers have no incentive to pay. That obvious conclusion must be staring at everyone in Wall Street and in D.C. If you apply the resolution of the Chrysler/Indiana bond holder suit where senior creditors fall to the back of the bus, then you have set a very dangerous precedent for secured 1st mortgage holders.

Assume for discussion there is an individual borrower in Indiana who is deeply in debt. They have 1st and 2nd mortgages. The value of the home is less than even the first mortgage. Assume further that there is credit card debt. Today, the first mortgage holder would get the collateral. The other creditors would have to stand in a very long line and probably would end up with little to show for it. If Justice Ginsberg were to opine on this she might divvy the assets up in a different way. As soon as she strays from the bankruptcy process the Senior lenders get hurt. Nothing like that is priced into the mortgage market today.

Fannie and Freddie would also face a different outcome if Justice Ginsberg were to opine on the fairness of the receivership structure. The preferred stock of the Agencies was wiped out. At the same time junior subordinated bondholders were made money good with a government guarantee. There is nothing equitable about that settlement. The receivership structure is precisely the opposite of the resolution for Chrysler and GM. The uncertainty that this situation creates is a decidedly brown shoot.

Approximately one month ago William Ackman of Pershing Square Capital was on CNBC. James B. Lockhart, the head of FHFA, joined him. On air, Mr. Ackman proposed a restructuring of the Agencies debt. Specifically, he proposed that the bondholders would get new debt and equity. A twist to make it work was that the equity would have a put back to the government in 7-10 years. In Mr. Ackman’s plan the bondholders got hurt, but they were money good over time. In theory it would have been possible for an ‘upside’ result. The plan made sense to me. The Agencies, like Citicorp, have to have some of their liabilities converted into equity. It is the way our system resolves these problems.

Mr. Lockhart laughed at the suggestion. I believe he may have ‘chortled’. “We would never do that to our bondholders” was his response.

Mr. Ackman and Mr. Lockhart are very bright guys. In this case, one of them is dead wrong. The resolution of the Chrysler/Indiana/Supremes story suggests Mr. Ackman’s views may be more credible than Mr. Lockhart contends.

The government orchestrated the GM and Chrysler outcomes. The consequences to bond holders in those cases are the exact opposite of the outcome for the Agency’s bondholders. This big inconstancy will have to be addressed sooner or later. The government’s feet appear to be firmly positioned on both sides of this fence. The legal status of $12 trillion in 1st lien mortgages will be caught up in the fray. A very brown shoot.


"Wheat Fields", Vincent Van Gogh

Three Wall Street Deals With Warts

When the New Money Window opens up on Wall Street there is a rush to get deals done. There are always transactions that get circulated that have flaws or problems. They do not get done. I find them interesting. Very often the flaws and warts of these deals are ‘fixed’. Then they come back in a different form. The following is a description and discussion of three deals that tried to get done recently but did not make it.

(I)


When I got the prospectus on this deal I just laughed. No one would buy new Fannie Pref. The idea of a no-dividend deal seemed nutty. So I called someone on the deal team to get the scoop. The proposal makes a lot of sense.

This transaction idea comes from the deep thinkers at Fannie and FHFA. They want to address two important issues:

-They want to retire as much of the old Pref as possible. The Pref got screwed in the receivership structure. The Junior Subordinated debt was ‘money good’ while the Pref was worthless. No bankruptcy court in the United States would have allowed that treatment. The concern was that someday someone would sue in Federal Court and the precedents for Equity Subordination would prevail. If the pref is worthless then the bonds are not money good either. Go tell that to the Chinese.

- The receivership structure requires Treasury to provide additional capital to the GSE’s if their net worth falls below zero. Internally this is referred to as Drip Equity. The Agencies are currently losing about $10 billion per month (same cost as Iraq). They are going to have to go to Congress for more money and they want to put that off for as long as possible.

The new POOP securities were designed to address both of these problems. There is absolutely no economic substance to the deal but it still achieves the objectives. The deal is designed to create swap fodder for the old Pref.

The $25 new POOP stock was to be structured as an exchange offer. A buyer could ‘buy’ a POOP and pay for it with an equal dollar value of old junk Pref. To sweeten the deal the participants got a Warrant. The Warrant was essentially a subordinated IOU from Fannie to pay 35 cents in two years.

What this means is that if one was a distressed holder of the old Pref they could now get new Pref and 35 cents. Given that the old Pref was trading at 60 cents this looks like a 58% return. On a conference call one holder said, “I’ll take anything I can get”.

For Fannie this exchange gets rid of the old, troublesome Pref. It also creates some very favorable accounting treatment. Apparently they were going to book the retirement of old Pref as a “Gain From Defeasance”. Even better the new POOP was going on the books as 'equity' at the full $25 face value. If the deal were fully subscribed it would have resulted in an increase in the equity line of $80 billion! The guys at Fannie thought that this would hold off the day of reckoning with Congress for as much as a year. Well worth the 35 cents they had to pay to get it done.

So this looked like a go. But there was a snag. Second/third hand I heard the following:

One of the big houses (Goldman?) was in touch with big slugs of the old pref that wanted to do the deal. The smart guys on the trading desk wanted to get Fannie to up the value of the Warrant. So they tried a squeeze. They put a When Issued price on the Street of –40/-30 on 10mm Warrants. This implied that the Warrants had no value.

The deal team went back to Fannie with the bad news hoping to get them to make the Warrant worth 70 cents. What I heard was that the guys at Fannie could not understand how the Street could value their promise to pay 35 cents at –5 cents. They were so confused that they decided to shelve the deal.

Look for this one to come back with a Warrant value of 50 cents. It is a compelling transaction for both sides at that price.

(II)


I loved this deal and wanted in on it. The company had a very solid business plan. They were going to open up euthanasia centers in five or six big cities to role out the concept. It was a classy set up. The lucky person would go to this place with friends and family. Say hello/goodbye, drink some hemlock and fall asleep on the couch. Meanwhile every one else got to enjoy the available amenities. Music, dance floor, appetizers (no full meals), an open bar, photographer, the works, all first class. It was all very ‘upbeat’.

After the initial build of these 'owned' centers the plan was to franchise a very big growth roll out. We are talking ‘McDonald's’ type returns here.

As a Macro investor I look for the big trends. When you consider the rapidly aging population and the chaos in Social Security/Medicare this deal looks hot. At one point I heard that Fidelity’s Senior Fund was prepared to circle the entire deal. If FIDO’s in, it means the IPO will by up 20% at the opening.

This deal almost got done. But at the last minute the SEC cratered it. Their view was that euthanasia was illegal in most states and therefore the investment may be declared illegal and subject to forfeiture. They were just trying to “protect investors interests” was their excuse. Party poopers.

Last heard, the SEC was reviewing this with ‘higher authority’. Don’t hold your breath.

(III)


The minimum subscription amount for this deal was $25 billion, so I was not invited to the party. This is a new security for Treasury. There is no maturity. It never pays back. It is also unusual in that it is a re-set floater. It will be priced at a spread over the two-year note. The amount of that spread is being hotly contested.

This deal is the brainchild of Mr. Geithner. Treasury is desperate to get the average life of its liabilities stretched out. They are currently at an average of only 48 months. The goal is to have that extended to 60 or more months. As the maturity on this deal is ‘infinite’ the average life of the Public Sector debt would be significantly extended. Nice trick.

This transaction would eliminate Treasury’s funding requirement for at least six months. It would take a great deal of pressure off of the bond market. That would solve another of Mr. Geithner’s problems.

This deal is getting a lot of support from the White House. That means Summers or Volker. My bet is that Volker is pushing the idea. He was quoted recently, “Stuff the banks. We own them”.

The problem is that the only audience for this is the big banks. The same banks that just got hit over he head with the Stress Test. The word is they are whining miserably about having to take this much paper on. The concern has been that it puts too much pressure on the balance sheet and the business is not profitable.

Those problems are being addressed. The Fed will allow the banks to take this paper on with no reserve requirements. In addition they have agreed to accept this new collateral at the Discount Window with no haircut. This way the banks have guaranteed access to 100% funding for this big buy.

The accountants have been leaned on and have rolled over. They have agreed that the proper accounting treatment will be that the banks can keep this off their balance sheets.

So it is down to pricing. Last I heard the floater was going to be set at 20BP over the current two year. The really big news was that in order to get the deal done the Treasury has agreed to a one time, this deal only, fee of 1/2% to the underwriters. In this case the Buy side is the Sell side so the fees of $5 billion will stick to the banks. The dealer community is slavering to get it done with those fees in mind.

Some of the management is getting behind it too. There was a rumor on Madison Avenue that Citi was going to build an ad campaign around this. The theme is, “You helped us, so we’re helping you”. It has a ring to it. They are going for that ‘BFF’ thing.

Now everyone is interested. Possibly the mega jump in yield on the two year note last Friday is an indication this is getting closer.


Of course I am just kidding with you about all of this stuff. Sort of….

SEC VS Mozilo - Where Does This Go?

The SEC announced they are going to take on Lee Mozilo. They have charged him with insider trading and misleading shareholders. Shocking!

Several months ago the SEC sent Mozilo a Wells letter. This a very bad letter to get in the mail. The one to Mr. Mozilo read like this:

Dear Lee,

We know you are dirty and we are coming after you. We are looking everywhere and we will find enough to indict you in the near future.

Even if the evidence is bubkiss you are going to trial. We will pick the jurisdiction and the jurors. With your tan and reputation we will get a jury to convict you. So you are looking at hard time.

Why don’t you come in with some lawyers and we can talk this over. If you are willing to write a big check, say $250mm, well, maybe we can make this go away.

Look forward to hearing from you,

Your Pal,

The SEC

It looks like Lee said no to that offer. This sets up a very interesting case. I think that the SEC is nuts to take this line. They are opening up something that should not be opened. This has potential to go in a lot of bad directions.

They are going after Lee as an insider. Well, I hope all those good lawyers at the SEC did not spend too much time on that one. One can safely assume that the Chairman/CEO is an insider. No? They say he sold stock based on that ‘insider’ information. Here again the public record says he did. So what? Lots of CEOs have programs to sell stock. So long as the details are public there is nothing wrong with that as far as I know.

It is possible that Lee did not properly register his stock sales. If so he is dead meat. I doubt that is the case. Lee was a very litigious guy. He had lawyers around him all the time. I bet that he had the necessary approvals and filings in order before the stock was sold. If that were not the case his lawyers would have told him to write the big checks after the Wells notice.

The issue of providing misleading information to shareholders is a can of worms. Earlier this year Fed Chairman Bernanke said, “There was a time in November when I was not sure the system would survive”. Well, he did not disclose his feelings to the public in the fall. Paulson and Geithner had tons of information they did not disclose either. But they are the government and are supposed to keep information from us.

Similarly there are several Freedom of Information suits outstanding against the Fed. The objective is to get the NY Fed to release a detailed list of its holdings. The Fed has resisted in court, arguing that to release this information would be injurious to the Fed and therefore the taxpayer. So far the courts have sided with the Fed. This disclosure of information issue is more complicated than it looks. It appears that there are different rules for public officials and officials of public companies. Very fine lines.

If the SEC nails Lee on providing misleading information there are at least twenty other guys who are ex financial big shots who will be looking down the barrel of the SEC’s gun. Some of them are still big shots at big banks. This is a domino problem. If they get Lee, they will go for Chuck Prince and Bob Rubin. If they go in that direction do they also go after Pandit and Lewis? Talk about a slippery slope.

A perfect example of providing misleading information to shareholders occurred last July. Here is the relevant headline:

July 8, 2008
"Mortgage financiers Fannie Mae and Freddie Mac are adequately capitalized," said James Lockhart, director of the Office of Federal Housing Enterprise, which regulates the two enterprises.

Sixty days after Mr. Lockhart made these remarks the Agencies were put into receivership. No doubt but that Mr. Lockhart was an insider at FNM and FRE. Common and preferred shareholders who believed in the words from the chief regulator of the GSE’s lost a bundle. This example is not a case where significant information regarding the health of the Agencies was withheld from the public. This was a very deliberate effort to provide misinformation to the public. In the days that followed the comments by Mr. Lockhart both Treasury Secretary Paulson and President Bush repeated his words. All three of them knew better. But, equity holders got crushed. I doubt the SEC is looking into that one.

It looks to me like the SEC wants show trials. I think the America people want to stone some of the folks who got us into this mess. The SEC charges against Mozilo have the potential to backfire.

Wells Fargo Looking at AIG-UGI?

I have been writing about the ills and problems of the Mortgage Insurance industry for some time. I have been particularly vocal on AIG-UGI (United Guaranty). It has been my view that AIG should no longer be in the high-risk mortgage business. There may be a Phoenix rising at UGI. I hear that Wells Fargo (WFC) is taking a hard look at the Company.

On April 30th there was a company announcement regarding a decision to close UGI. On June 1st AIG appointed Eric Martinez to replace the current CEO William Nutt. That got my attention. AIG would much prefer to sell the business than to close it and absorb the book losses. It would be better for the taxpayers to get this division into stronger hands as well.

There are regulatory issues regarding this potential acquisition. Generally, those can be resolved. In this case, I am sure that a way can found to facility this purchase. Valuing the business will be no small task. In my opinion the mortgage insurance industry is more than halfway through the credit default cycle. There are many ‘ifs’ to that assumption but if I were to be correct it would imply that the UGI book of business has $1 billion + of additional losses in front of it.

My complaint with the PMI industry is that they abused any reasonable credit standards. They were a significant contributor to the over leveraging of residential RE that has taken place. The existing players in the industry are all walking wounded. The last 18 months killed them. Collectively they have insufficient capital to weather the storm. I, for one, would not take their guaranties to be worth much. The state of the industry creates an interesting opportunity for a new player.

Wells has the resources to make this work. The have the origination side of the business in house. Therefore they can retain the sell side revenue. They also have the capital and the balance sheet. Most importantly they have the people resources and the credit judgment to manage the risk. Everyone has been banged up with mortgage credit losses. Wells is no exception, but they have done a much better job then most of their peers. My view is that they have the savvy to price and manage the risk successfully.

If Wells decided to go ahead with this purchase I think that they could bite off a 20% market share in what was once a trillion dollar industry. They could accomplish that as fast as they wanted to. The demand for the product is there. If Mr. Kovacevich, the Chairman/CEO of WFC does decide to put his foot in this water I believe it will be a home run. There is a lot of money to be made if the economy is in fact stabilizing.

If this deal does get done I would call it another one of those ‘green shoots’. PMI is a derivative of second mortgages. This type of over leveraging compounded the problems of the past few years. That said, there is currently a need for new sources of liquidity in the mortgage market. WFC’s presence in the mortgage insurance industry would be a big plus to the housing market in general.

Disclosure: I have no positions in WFC or AIG.

Geithners Upside Down - What Does it Mean?

Mr. Geithner’s real estate headaches are part of the American economic story. LINK We built a society and an economy around housing. 75 million homes are privately owned. Now we are trapped in them. Those home sale numbers that are cheering people up are actually bad news. The majority of sales keep coming from foreclosures or deed in lieu transactions.

Mr. Geithner is trying to sell a $1.6mm home in Larchmont. I know Westchester real estate and will tell you that there are buyers. At least there are people who are interested in buying a home. There is next to no financing available for this price range. If a very solid buyer who has $500,000 per year in taxable income and no other debt wanted to buy Mr. Geither’s home he would have to put up not less than 30% ($500,000). The balance of $1.1 mm would be financed at a minimum of 7% with a ten-year amortization. That comes to $88,000 a year in debt service. Add that to the $27k in taxes and you get a fixed cost of $115,000.

One might be fortunate enough to have the $1.6mm in checking and be able to avoid the nasty bankers. If you are in that position you also know that you can earn a nice buck in the bond market these days. 6% is a reasonable rate to value cash if you’re willing to put it away for a while. That 6% translates into an ownership ‘cost’ of $123,000 when you add in the taxes.

Either way you cut it Mr. Geithner’s house will cost you about $10k a month to own. He is renting it for $7,500. The rent is 25% less than what a real purchaser would be forced to pay. No wonder he is having trouble selling it.

Mr. Geithner is not marketing his home at the wrong price. The offering price is the same as his 2004 purchase price, and he made improvements. At any other point in our history one would have expected that he could have easily walked away with a gain from the investment. Under normal circumstances this house would be sold and the Geithner’s would have purchased another nice home near D.C. The point is we are not in normal times. All green shoots aside, we still have very significant problems. The sale and subsequent purchase of the Geithner residences is a big plus to GDP. Call it $4mm of lost turnover. This loss of National Income is adding up. This type of transaction activity is very productive because of the multiplier effect that it creates. This slow down in transaction velocity is likely to keep the economic recovery at a very tepid pace.

Connected thoughts:

-Larchmont is a great town. Good schools, the Sound nearby, great golf courses, excellent transportation to the City, nice people. It is also the home of a lot of under employed financial types. This is one of the areas where the folks from Bear, Lehman, AIG, Citi, etc. settled. Not at all surprising that the head of the NY Fed would choose to call it home. Also not surprising is that there is an overhang of high-end homes for sale.

-So far this year I have had four contacts from the past requesting a ‘temporary bridge loan’. These are people who were able to pay 10G a month on living expenses and still have plenty left over. Today they are tapped out and, like Mr. Geithner, they can’t sell their homes. Unlike Mr. Geithner they have no job opportunities that will cover their old nut. There is a lot of this going around. Look for default rates on $1mm+ mortgage loans to jump in the next six months. There is more than $1 trillion of this out there today. This is not in those stress test numbers. If this plays out it will not be good for high-end home values in general.

-Mr. Geithner is trying to sell his home at 17 times annual rent. A more realistic value would be 15 times rent. If you took that multiple to high end real estate in the Nation’s metro areas it would translate into a 30% drop in values. That is not in the forecast.

-Mr. Geithner’s house is ‘off the market’. The numbers we see for housing inventory are based on multiple listings. This property, like so many others, can’t get sold for the time being. The hidden backlog of homes for sale is many times the one that is produced through multiple listing services. Housing prices, like the stock market, may recover from the depths of earlier this year. However, we are not going to 1400 on the S&P very soon. It is unlikely we will see 2007 housing values any sooner than that.

-What Mr. Geithner, and millions of other homeowners need is a three-year period where inflation rises by a modest 5% annually. This could be accomplished. While that would solve the financial and family balance sheets of America it would destroy the economy longer term. Does Mr. Geithner have a conflict of interest as he steers us through these difficult waters? I doubt it. However, he and everyone else with a hand on the tiller is leaning on the side of, “A little bit of inflation wouldn’t be a bad thing…” It is very likely they will get what they are looking for.

-Full disclosure: I also own an overpriced home in Westchester. I recently had what looked to be a legitimate offer at a fair price. There was a catch to the deal. I got my price but I had to take 90% paper. The deal was for a private mortgage. 6% interest only, a ten year bullet. I said thanks, no thanks. Two years ago if there was a buyer with 10% equity the deal would have gotten done. Treasury lists Private Mortgages (AKA seller finance) at $2 trillion, 15% of the total outstanding. There must be some terrible dogs in that portfolio.