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Double up on national health care, end greenhouse gases, fix bridges?

Wall Street's crisis is about to become Main Street's crisis, as bank credit freezes and loans dry up. The government's fix: $700 billion to buy up the bad loans choking the system.

It's a monster plan, but there's little choice, according to White House and Federal Reserve officials. Though much of the money may return to the nation's coffers over time as the treasury sells off the mortgage-backed assets it will purchase, the bailout will severely limit what the government can afford to spend on health care, energy, infrastructure and education in the years ahead.

Let's start with the nation's infrastructure. The American Society of Civil Engineers estimates our nation's bridges need $180 billion in repairs, with our rail infrastructure in need of $185 billion in maintenance. California wants to spend $40 billion for the nation's first high-speed rail network to connect southern and northern California.

Arizona Public Service, the state's public power utility, is currently building the nation's largest solar power array in the desert near Gila Bend, Ariz. It will be able to power 70,000 homes using only the sun's rays — and create thousands of high-tech green energy jobs to boot. Construction costs will be about $1 billion, but the utility says it will pay for itself in about seven years. The project covers just three square miles. With the $699 billion left over, you could put even more southwestern desert to work in creating clean energy.

Health care and climate change are other major concerns. Kenneth Thorpe, a professor of health policy at Emory University points out that for $150 billion you could provide every American with private health insurance and create a universal automated health-information system. When you consider that the National Cancer Institute receives $5 billion a year in funding, you could multiply its budget by 10 and provide private health care to every American.

McKinsey & Co., a consulting firm, estimates it will cost the U.S. economy $150 billion per year to stabilize greenhouse gases by 2030. For three years, $700 billion could pay for the cost of both health care plans (in case one doesn't work) and cover the cost to reduce carbon emissions.

Since global trade isn't going away any time soon and America's ports are getting increasingly crowded, using the money for port expansion might be a smart idea. According to the American Association of Port Authorities, container volumes at American ports have increased by 7 percent per year over the last 20 years, far outpacing capacity growth.

 National security is also a concern. After five years in Iraq, most estimates for the war's cost tally into the $500 billion range. Unlike investments in distressed assets, paying for the Iraq War won't produce a return, but $700 billion would stem the government's future debt obligations to its creditors.

Then there's education. The U.S. currently spends some $500 billion annually on public education, yet still finds itself slipping behind many other industrialized nations when it comes to giving the next generation the skills it needs to compete globally.

The difference, of course, is that government spending for any of this would require a massive tax increase, with no chance of getting any of the money back. The upside: At least it would be a sure bet.

Former Democratic presidential candidate and New York senator Hillary Rodham Clinton pushed Thursday for a wide-spread government purchase and modification of troubled mortgages in the name of protecting borrowers and restoring credit markets, according to an op-ed published in the Wall Street Journal.

Clinton, who along with most Deomcrats has long advocated so-called “affordability modifications,” said that the nation’s current financial crisis will not be solved until homeowners are kept in their homes. Read the full op-ed.

“The solutions we pursue cannot simply stabilize the markets,” she wrote. “We must also deal with the interconnected economic challenges that set the stage for this crisis — and reverse the failed policies that allowed a potential crisis to become a real one.”

The senator suggested that the government revive the Depression-era Home Owners’ Loan Corporation, a New Deal government agency which purchased mortgages from failed banks and modified terms to allow borrowers to keep their homes.

“The original HOLC returned a profit to the Treasury and saved one million homes,” Clinton said. “We can save roughly three times that many today.”

For those looking for a history lesson, the Home Owners’ Loan Act of 1933 created the HOLC. The government agency issued bonds to lenders in exchange for acquiring defaulted residential mortgages; the HOLC would then refinance the mortgages into a “sustainable” mortgage. At the time, mortgages were amortized over much shorter horizons, so in most cases the HOLC merely extended loans to fully amortized, longer-term loans — 20 to 25 years, similar to the 30-year mortgage commonly known in modern mortgage markets.

The idea was that lenders would at least have a marketable bond earning them interest, even if that interest was less than the mortgage; the option was clearly better than a non-performing asset. But some scholars have argued that what made the program work was a simple modification path for most troubled borrowers (i.e., simply lengthen the term) that didn’t put home prices at further risk of decline, and that no such simple path exists for many of today’s troubled borrowers.

Clinton’s op-ed didn’t delve into that sort of debate, of course; it spoke in general terms, as most politicians do. “If we do not take action to address the crisis facing borrowers, we’ll never solve the crisis facing lenders,” she said. “These problems go hand in hand.”

Congress is expected to pass some form of bailout package, including as-of-yet unknown provisions surrounding mortgage relief, sometime this weekend. But it’s clear that politicians are reaching back to the last great financial crisis our country has seen in a search for solutions.

Pressure continued to mount Thursday for troubled thrift Washington Mutual (WM: 1.69 -25.22%) as it remains under-the-gun to find a buyer, or reportedly face regulatory action. The thrift was reportedly considering a deal with private-equity buyers, according to a report Thursday morning in the Wall Street Journal.

WaMu’s exploration of potential money players willing to do a deal reportedly turned up Carlyle Group LLC and The Blackstone Group (BX: 16.60 -1.31%), according to sources that spoke with the Journal. The story suggested that the two firms would team with long-time bank investor Gerald J. Ford. In 2002, Ford made a small fortune selling Golden State Bancorp, a California thrift, to Citigroup Inc. (C: 19.41 +2.37%).

Speculation of a potential deal sent WaMu shares sky-rocketing early Thursday, up 12 percent to $2.65 immediately upon market open, but the buzz didn’t last; shares were at $1.70, down nearly 25 percent, when this story was published.

Earlier this week, a source close to the FDIC suggested to HW that regulators at the OTS were putting pressure on WaMu to find a deal before Friday of this week. “Either a deal gets done this week in the private market, or a deal will get done via the FDIC,” our source said. Such rumors about WaMu’s future, however, have been common in recent weeks.

Under such pressure and with no clear deal in the works yet, a split-sale is looking like an increasing possibility. That increasingly likely scenario led every major ratings agency to slash its ratings on the bank holding company earlier this week. See HW report.

Potential purchasers are likely to want to see an FDIC takeover of the bank, sources say, which would allow a purchaser to acquire branches and deposits — the “good” part of WaMu — while leaving the government to manage the liquidation of the more troublesome loan portfolio.

WaMu’s $231.1 billion loan portfolio includes $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit. Total nonperforming assets jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier.

“Washington Mutual Inc. is kind of like that milk in the refrigerator that’s a couple of days past its expiration date,” wrote David Weidner, editor at MarketWatch.  “It may be fine or have gone past the point of no return. Either way, it’s not long before it will be gone.”

As Congressional leaders debate the merits of a historic bailout proposal being pushed by the Bush administration, and Democrats look to tack their own social agenda to the back end of the proposal – free homes for everybody! – perhaps it’s time for all of us to admit something: this is a complex mess.

As someone well versed in both real estate finance and capital markets, and who is lucky enough to know some of the smart people that play in the distressed asset space, the truth is that we’re facing a mess that has many moving parts, and many known and unknown variables. Mortgages are a central cog, sure, but far from the only one.

With that in mind, I’ll admit something publicly few others will: how to solve this mess is anyone’s guess. Anyone suggesting they know precisely how to do it is either listening to their ego or missing a critical angle – or both.

All of that said, I do know one thing: for all of the myriad of factors that got us here, only one now matters, whether or not there is a government bailout. That factor? Pricing. And what we’re hearing from our leaders in this area has me very, very worried.

Both Fed chief Ben Bernanke and Treasury chief Henry Paulson have sought to sell their plan to Congress by suggesting a dichotomy between current “fire sale” prices and the long-term “fundamental value” of an asset; the argument is that a lack of market transparency and investor fear have driven the prices of whole loans and ABS/MBS/CDO issues to levels that no longer reflect their fundamental value.

The government, they say, will buy these assets at prices greater the current market is assigning them; the idea is that in so doing, balance sheets are freed, institutions are recapitalized, and pricing discovery takes place (which, in turn, is supposed to help the prices of ABS/MBS/CDO issues recover). And thus the lending machine starts anew.

Let me make something clear, outside of the academic debate now being used to sell this bailout: if any of this junk had value, it would be trading right now. And more importantly, the lack of trading activity has little to do with a need for “price discovery,” a term being bandied about inside the Beltway with reckless abandon this week.

There is an ugly truth that Paulson is choosing to keep to himself: most already know what the prices for these sort of assets are. The problem is that there isn’t a financial institution whose balance sheet can handle selling at those prices — at least, not without putting an entire business into the side of a canyon. This is the real reason assets are clogging up balance sheets at inflated values, or put into Level 3. Or the reason that whole loans are marked at a value that in no way reflects the price that loan would receive if it was sold.

Paulson & Co. are telling Congress that the government may break even or profit from this venture, but paying an above-market price for assets valued by the market at junk levels is the pretty much the definition of how to lose money in asset management. And gobs of it, too, far more than the $700 billion figure associated with this plan.

Further, tacking on provisions to force massive loan modifications is, in a perverse way, a great way to ensure huge losses for the taxpayer. I’ll save the technical analysis for another paper, but the bottom line is that wide-scale loan modifications to mortgages underlying a securitized pool generally has an adverse effect on capital structure and cashflows. And while aggressive loan modifications can be profitable on whole loan acquisitions, that profit comes from buying loans at justifiable prices, not some phantom estimate of “fundamental value.”

It appears that the goal of this plan is to recapitalize banks to stimulate lending again; and therein lies the second problem: what is “fundamental value,” anyway? Is it the value that can recapitalize a bank and ostensibly start lending again, which is higher than current marked value? Or is it marked value, which is still above the prices assigned to an asset by the market? Or something else?

Beyond all the questions around pricing, there is a more fundamental question that has yet to be asked: has the risk profile around lending shifted irrespective of capitalization? In other words, there is little guarantee that bailing out an ailing financial institution and clearing its bad assets off of its books at inflated values will stimulate the sort of lending activity policymakers are expecting.

Think of a drunk driver crashing his car; then think of the government providing a new car to that driver, hoping he’ll hit the sauce again, and not crash the car. Hardly seems to be the best use of what may end up being trillions of taxpayer dollars.

President George W. Bush urged swift approval of a historic Treasury proposal to bail out ailing financial institutions in a primetime address Wednesday. “Without immediate action … our country could experience a long and painful recession,” he said, urging support for a Treasury proposal unveiled last week.

The administration’s plan would place $700 billion at any one time into the hands of the Treasury to buy up troubled assets; the government could end up buying troubled assets totaling far more than that, however. It’s a price taxpayers must be willing to pay, however, Bush said. He backed his plea with dire warnings of savings and retirement losses, further home foreclosures and closed businesses affecting every U.S. citizen.

“With the situation becoming more precarious by the day, I faced a choice: To step in with dramatic government action, or to stand back and allow the irresponsible actions of some to undermine the financial security of all,” he said. Read his full remarks.

The President and his administration face an uphill battle to convince not only everyday American citizens and Congressional Democrats that their proposal is critically needed — but even rank-and-file GOP members, too. Sen. Richard Shelby, R- Ala. is one critical holdout, and spoke openly of his lack of confidence in the proposed bill to the Wall Street Journal on Wednesday.

Failure to act upon this plan, Bush said, will directly affect the everyday American. ”The market is not functioning properly. There’s been a widespread loss of confidence. And major sectors of America’s financial system are at risk of shutting down,” the president said, warning of “financial panic.”

The dire words come as the public is clearly leery that such a vast and far-reaching proposal is really needed: a WSJ/NBC poll found Wednesday that voters are evenly divided on the plan: 31 percent of voters approve the plan, while 33 percent disapprove and 28 percent have no opinion. Both the Democratic and Republican parties nearly mirrored the same approval/disapproval ratio, as well, while self-identified Independents registered the highest levels of disapproval — 45 percent said the opposed the plan.

Once such example of opposition is William Perkin III, even if he’s not exactly an “everyday American” in the traditional sense of the word. He turned a $1.25 million profit by going long on shares of Goldman Sachs Group Inc. (GS: 135.50 +1.88%) last week, betting the firm would turn the corner on its own merits; instead, the stock bumped on news that government would rescue Wall Street. Upset by a plan he told the Wall Street Journal that views as “representing the death of capitalism,” he has used his profits to take out advertisements attacking the bailout proposal.

Bush, however, defended his proposal as capitalist in Wednesday’s address. “Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised,” Bush argued, essentially taking the well-worn ’save capitalism from the capitalists’ stance.

Not everyone is convinced the government proposal will generate a loss for U.S. taxpayers. Bill Gross, the well-known chief investment officer of Pacific Investment Management Co. said this week in an op-ed published by the Washington Post that he believes Main Street will benefit from the bail out as well.

“The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street, as lending capacity and confidence is restored to our banks and the delicate balance between production and finance is given a chance to work its magic,” Gross wrote. The famed fund manager said he believes that the proposed bailout could yield 7 percent to 8 percent for taxpayers.

But profit was not the M.O. for the President in his speech; if anything, fear was. “Our economy is facing a moment of great challenge,” he said to close his remarks. “But we’ve overcome tough challenges before — and we will overcome this one.”

Discussions to hammer out the details of the Bush Administration's $700 billion financial sector bailout continue today on Capitol Hill. George W. Bush has invited both presidential nominees, Senator Barack Obama (D-Illinois) and Senator John McCain (R-Arizona), to take a break from their campaign trails and join in the debate in Washington, D.C. Thursday afternoon.

Lawmakers have managed to drum up bipartisan support to include two important measures in the bailout legislation. The new bill will establish an oversight committee to supervise Treasury Secretary Henry Paulson's dissemination and use of buyout funds. And although the Bush Administration originally said that the executives of those institutions helped should not have their salaries capped because it would discourage their cooperation, it has now agreed with Congress to limit executive compensation.

One crucial issue however, that legislators have not been able to agree upon is providing assistance to troubled homeowners in default or facing foreclosure, a problem at the root of the financial sector crisis. Earlier this week, 35 U.S. consumer, labor, and civil rights groups – including the Center for Responsible Lending, the Leadership Conference on Civil Rights, the National Community Reinvestment Coalition, and the National Fair Housing Alliance, among others – sent a joint letter to members of Congress, urging them to include court-supervised mortgage restructuring for American homeowners to allow them to save their homes. “Purchasing subprime and Alt-A private securities will not provide the government with any legal ability to modify loans and keep families in their homes, which is necessary to stop the crisis," the letter said.

The authors of the letter stated that for a year now, they have advocated Chapter 13 judicial modification relief as the most effective way, at no cost to taxpayers, to prevent foreclosures. According to Martin Eakes, CEO of the Center for Responsible Lending, 90 percent of the government's proposed securitization purchases will have utterly no impact on the underlying home loans. Eakes says that giving homeowners access to assistance through bankruptcy courts is the only solution that will actually make a real difference.

In its own letter to Congress, the Mortgage Bankers Association (MBA) said that it supports a quick passage of the bailout legislation, but “opposes adding unrelated proposals to the bill, primarily efforts to allow judges to alter residential mortgages in bankruptcy.” John Courson, COO of the MBA, said “We will continue to oppose efforts to give judges the authority to cram down legitimate mortgage debt.” Courson argues that the Bush Administration's rescue plan is not a mortgage or housing bill, and that lawmakers will be able to address these issues later, building on the work they've already done. Courson said that changing bankruptcy to include primary residence mortgage debt will raise the cost of credit and further destabilize the market.

Another sticking point in the language of the bailout bill is the payment schedule of the $700 billion. Congressional Democrats are arguing for structured installment payments to be administered over a set period of time of as much as two years.

Despite a clashing of views on these points, both Democrats and Republicans have expressed confidence that the rescue plan is moving forward and a bipartisan consensus could be reached as soon as first part of next week.

Last night, President Bush broke into network television programming with a live message to the American people, in which he stressed the necessity of an immediate rescue plan that committed $700 billion in taxpayer money. Although Bush took great pangs to explicitly explain what such a buyout would mean to the common taxpayer, his words did little to quell growing dissent, and even anger, from the general population. CNN reported from the heart of Montana today, that objections are flooding into Congress representatives' offices, a sentiment that is mirrored across the country. Protest rallies are reportedly being held in 130 cities today. CNN said the protests are a strong testament to Washington's extreme disconnect from its American constituents.

National Default Servicing, LLC (NDS) has engaged Marti Anderson as SVP and director of the company's REO business channel. In this role, Anderson will be charged with the oversight of the company's REO operations and new business development.

Anderson has more than twenty years experience in the mortgage industry, with several years concentrated in REO. Prior to joining NDS, Anderson was responsible for the REO and evaluation services operations at Wells Fargo Home Mortgage. Her previous assignments included managing production and call center support operations loan underwriting and origination at Fannie Mae, managing core servicing operations & customer service at Norwest Mortgage, and managing customer support for First American’s tax service division.

“At NDS, our reputation is synonymous with integrity, professionalism, and the desire to provide our clients with success-oriented nationwide default servicing, as well as the most accurate, efficient and timely disposition of REO available in the market place,” NDS said in a press statement. The company said that Anderson shares its vision of unparalleled customer support and “Service Without Boundaries.”

NDS has corporate offices in both Connecticut and California. Anderson will operate out of the company's San Diego office.

GMAC Financial Services has agreed to sell a portion of its Residential Capital (ResCap) mortgage business to Brookfield Asset Management, Inc. of Canada, the two companies announced this week. The deal is for three of GMAC's home services divisions: GMAC Global Relocation Services, GMAC Real Estate, and GMAC Home Services Mortgage.

GMAC's ResCap unit has reported losses for seven consecutive quarters now. Earlier this month, GMAC laid off 5,000 ResCap employees, 60 percent of the units total staff. The company also closed all 200 of its mortgage retail offices.

Brookfield Asset Management is a global asset manager focused on property, power, and infrastructure assets, with approximately $95 billion of assets under management. In Canada, Brookfield provides executive relocation services, home appraisals, and property brokerage services, operating under the Royal LePage, La Capitale, Johnston & Daniel, and Centract brand names.

The acquisition will allow Brookfield’s Residential Property Services to break into the U.S. market. Terms of the deal were not disclosed, but the companies' said it will likely be completed in the fourth quarter of this year.

As the nation’s housing mess has rolled out, more than a few media reports have provided anecdotal evidence to support the idea that some borrowers are buying new homes for less money and then immediately defaulting on their current principal residence — called a “buy and bail,” most of the borrowers doing this are hopelessly underwater on their current mortgage.

And they’re having to lie about receiving rental income on their current home in order to do it, in many cases, too.

The Federal Housing Adminstration last week moved to stop the practice sayind that “FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence.” (By “vacate,” FHA officials mean “default on.”)

Under guidance set forth in a Mortgagee Letter released on Friday, underwriters may no longer consider rental income from a property being vacated in most circumstances, and must ensure that the homebuyer can manage payments on of the full debt service of both mortgages — at least temporarily, while the FHA sizes up a more permanent set of measures to address the trend. The guidance applies even in situations where the FHA has not insured the mortgage to be “bailed” on, the letter said.

There are some exceptions to the FHA’s temporary rule here: formal relocations and situations where the homebuyer has sufficient equity in the vacated property (defined as LTV of 75 percent or less).

Read the full Mortgage Letter >>

For more information, visit http://www.hud.gov.