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Some Investors Fault Plan to Aid Home Borrowers
Wall Street Journal ^ | 1 December 2007 | DEBORAH SOLOMON, JAMES R. HAGERTY and LINGLING WEI

Posted on 12/02/2007 5:14:51 PM PST by shrinkermd

As much as $362 billion in U.S. subprime home mortgages with adjustable interest rates are due to reset at potentially higher rates in the coming year, according to Banc of America Securities, risking a wave of defaults by borrowers unable to afford the new monthly payments. That in turn could exacerbate a wave of write-offs by investors who now own those mortgages. Losses related to bad mortgages already have reached the tens of billions of dollars and have led to turmoil in the world's financial markets.

Fears that the problems could accelerate have led the U.S. Treasury and the mortgage industry to develop a plan that would postpone the higher rates for some borrowers.

The success of the plan, details of which are still under discussion, may hang on the many investors in securities backed by mortgages. A coalition of lenders negotiating with the administration includes investor representatives, but the securities are held world-wide and it would be impossible to get everyone's approval. A deal could also spark lawsuits from investors who believe they're being cheated out of their money.

Unlike in years past, when just a bank and a borrower were involved in a mortgage, today's loans have been bundled together, sliced into securities and sold to investors. That has created problems for officials trying to help borrowers, because so many parties are involved.

Alan Fournier, a fund manager at Pennant Capital Management LLC, Chatham, N.J., predicted that the plan being pushed by the Treasury Department will prolong the pain of the housing slump. He said it would merely delay inevitable foreclosures for some people who can't afford their homes, while allowing holders of mortgage-backed securities to put off marking down their assets

(Excerpt) Read more at online.wsj.com ...


TOPICS: Business/Economy; Constitution/Conservatism; Politics/Elections
KEYWORDS: freeze; mortgage
Navigation: use the links below to view more comments.
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1 posted on 12/02/2007 5:14:53 PM PST by shrinkermd
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To: shrinkermd
Unlike in years past, when just a bank and a borrower were involved in a mortgage, today's loans have been bundled together, sliced into securities and sold to investors. That has created problems for officials trying to help borrowers, because so many parties are involved.

Bottom feeders on society. They should fell the pain not the American taxpayer!

2 posted on 12/02/2007 5:18:28 PM PST by rocksblues (Just enforce the law!)
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To: shrinkermd
Alan Fournier, a fund manager at Pennant Capital Management LLC, Chatham, N.J., predicted that the plan being pushed by the Treasury Department will prolong the pain of the housing slump.

He is correct and the government needs to get out of a market correction.

3 posted on 12/02/2007 5:19:17 PM PST by org.whodat (What's the difference between a Democrat and a republican????)
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To: rocksblues

fell = feel


4 posted on 12/02/2007 5:19:21 PM PST by rocksblues (Just enforce the law!)
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To: shrinkermd

The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.


5 posted on 12/02/2007 5:19:37 PM PST by PAR35
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To: shrinkermd

Let the banks fix the problem. They made the loans. They certainly don’t want the houses back. What in hell would they do with them? I am sure they would rather have some monthly’s coming in than a few hundred/thousand empty tract houses sitting out there being vandalized.


6 posted on 12/02/2007 5:24:26 PM PST by Don Corleone (Leave the gun..take the cannoli)
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To: PAR35
The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.

Not arguing with you. Just trying to understand what's going on here. Are they talking about lower rates than the homeowners are now paying, or lower rates than what they would otherwise adjust to.

If homeowners can stay in their homes with reasonable rate adjustments is that not a win for both borrower and lender?

7 posted on 12/02/2007 5:24:55 PM PST by Bahbah
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To: shrinkermd

Let’s be clear...what is being discussed is unprecidented, in that the legislation would essentially order banks to continue to carry bad debts for up to 2 years, in the belief that will be sufficient time for the borrower to get his act together and refinance to a better rate.

The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.

Many of these mortgages need to be foreclosed immediately. And many of the lenders who are holding this bad paper, like Washington Mutual specifically, put themselves in this position in the first place, and do not deserve to benefit from their own misconduct.


8 posted on 12/02/2007 5:26:30 PM PST by Bean Counter (On a long enough timeline, the survival rate for everyone drops to zero...)
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To: PAR35
The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.

So investors should be happy getting a negative return because of all the defaults? This is a win-win if someone is actually able to pay off his loan somehow.

9 posted on 12/02/2007 5:30:39 PM PST by Always Right
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To: Bean Counter

I am not sure that Bush is proposing legislation. I think that the Treasury Department is trying to negotiate a deal to stave off bad legislation. If these private parties want to extend the teaser rates and prolong the inevitable, it is their choice. However, legislators are threatening action so I am not sure any deal is an arm’s length transaction. Legislators are having trouble with their strong arm tactics because of the diverse parties involved. This proposed deal will undermine investor confidence in mortgage backed securities. It seems that investors may prefer defaults to prolonged pain.


10 posted on 12/02/2007 5:36:48 PM PST by businessprofessor
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To: Bahbah

Somewhere between the low rates that they are now paying and what they will be paying when the rates go up.


11 posted on 12/02/2007 5:44:11 PM PST by expatpat
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To: Don Corleone

you miss the point — the banks don’t own the debt anymore.


12 posted on 12/02/2007 5:46:51 PM PST by The Old Hoosier (Right makes might)
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To: Always Right
So investors should be happy getting a negative return because of all the defaults? This is a win-win if someone is actually able to pay off his loan somehow.

On casual review..., possibly. In actuality this whole "bailout" furor merely is a vain attempt to "kick the problem down the road" (hint..., past election time)!

The economic "Piper" WILL be paid, in time!

13 posted on 12/02/2007 5:47:35 PM PST by ExSES (the "bottom-line")
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To: org.whodat
He is correct and the government needs to get out of a market correction.

The government (the Fed) shouldn't get in the way of a growing economy either.

14 posted on 12/02/2007 5:50:26 PM PST by Moonman62 (The issue of whether cheap labor makes America great should have been settled by the Civil War.)
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To: Bean Counter

Yes, it will hurt the contruction and retail industries for a longer period in the areas where there’s lots of foreclosures if the banks are required to carry loans from unqualified buyers.


15 posted on 12/02/2007 5:50:31 PM PST by B4Ranch (( "Freedom is not free, but don't worry the U.S. Marine Corps will pay most of your share." ))
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To: shrinkermd
"There's a part of this that's just morally repugnant. The problem is that the policy makers are talking to servicers about giving away other people's money," said Mark Adelson, a principal of Adelson & Jacob Consulting LLC, which consults on securitization and real-estate issues. "It's not the servicers' money, but shareholders' and investors' money."

I think that wholesale modifications to existing loan terms are going to face strong resistance from at least some of the people who have invested in securities derived from those loans.

16 posted on 12/02/2007 5:53:07 PM PST by snowsislander
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To: Always Right
This is a win-win if someone is actually able to pay off his loan somehow.

For the folks who own the tranche covering the principal, perhaps, but for the folks who bought the interest based tranches, it certainly isn't a win.

17 posted on 12/02/2007 5:53:48 PM PST by PAR35
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To: rocksblues
Bottom feeders on society.

Investors who make more money available for mortgages are bottom feeders?

18 posted on 12/02/2007 5:55:47 PM PST by palmer
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To: Bahbah
Are they talking about lower rates than the homeowners are now paying, or lower rates than what they would otherwise adjust to.

Most of the plans I've seen floated call for converting the loans to fixed rates at about the original teaser rate, which was below market when offered, and well below market now, and very far below the contract rate to which the loan was to adjust.

If homeowners can stay in their homes with reasonable rate adjustments is that not a win for both borrower and lender?

Perhaps in the old days, when the lenders were lending their own money. Now the loans are aggregated, and the packages split up. You might buy the rights to repayment of the principal. I might buy the interest payments from year 5 to year 10 of the loan. You'd come out ok if the loan was modified; I'd lose. On the other hand, what if we modified the loan so it would pay above market interest, but cut the principal of the loan in half. The payments remain the same, but now you only get half of your money, and I get all of mine. Would that be a win - win for everybody?

19 posted on 12/02/2007 6:00:05 PM PST by PAR35
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To: Bean Counter
Let’s be clear...what is being discussed is unprecidented, in that the legislation would essentially order banks to continue to carry bad debts for up to 2 years, in the belief that will be sufficient time for the borrower to get his act together and refinance to a better rate.

The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.

This particular plan is not based on legislation, but by the Bush administration using the presidential podium to advocate changes by the largest mortgage holders. What he wants is to keep the teaser rates going for a while longer before they adjust, and stagger them out so they don't happen all at the same time. It is a free market solution, but it means that the lenders and bond holders accept that they must accept a lower return on their investments. This is possible if they understand that their return would not be higher if they had to deal with all of the forclosures in the market.

Also, there are other proposals in Congress, by the Democrats, which are intrusions into the market, and will have serious effects. They are proposing changes to forclosure laws which will allow a judge to unilaterally reset the interest rates in court. What kind of business climate would that create?

We also have the serious case of a judge throwing out flrclosure proceedings because the investors could not prove they held the mortgages.

Considering the options, if I were an investor or lender, I would think Bush's initiative is a lot less dangerous than the Democrat/court solutions.

20 posted on 12/02/2007 6:03:59 PM PST by Vince Ferrer
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To: snowsislander

“There’s a part of this that’s just morally repugnant. The problem is that the policy makers are talking to servicers about giving away other people’s money,” said Mark Adelson, a principal of Adelson & Jacob Consulting LLC, which consults on securitization and real-estate issues. “It’s not the servicers’ money, but shareholders’ and investors’ money.”

I think that wholesale modifications to existing loan terms are going to face strong resistance from at least some of the people who have invested in securities derived from those loans.

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

It’s quite true that these measures amount to confiscation of property from investors to protect the interests of the conduits that sold them this crappy paper.

However, there is definitely precedent for this, for example, when ownership of gold was outlawed for American citizens in the 1930’s, and the dollar was revalued from about $21 per oz to about $35 per oz once the docile public had turned in its gold.

Any idea that your property is safe from a government that has systematically trashed constitutional constraints on its behavior is delusory. For holders of the financial paper backed by these loans, one can only advise: BOHICA.


21 posted on 12/02/2007 6:19:26 PM PST by Blue_Ridge_Mtn_Geek
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To: Bean Counter
The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.

Postpone is more like it. The Bush Administration has nothing to lose by brokering this deal. If foreclosures rise dramatically and home values fall preciptuously during the election year, it will be bad for the Republican candidates. However, if the Republicans lose anyway, the damage occurs when the Democrats are in charge.

22 posted on 12/02/2007 6:23:02 PM PST by hunter112 (RootyBootyGate will save the Republican Party from its worst enemy.)
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To: shrinkermd
perhaps its better to NOT have hundreds of thousands default on their homes, and leaving banks to unload them at huge loss......

however, don't I feel silly having actually bought what we could afford, not buying every fancy car or Humvee or 4 wheeler or gone on fancy vacations because I didn't want to run up the HELOC or my cc.....

my, to just get what I could, to save, to delay purchases, to not buy that vacation home or investment home because it didn't feel right....

gee I could have had the govt step in and help me speculate up the ying yang and the wazzuuu..

23 posted on 12/02/2007 6:27:26 PM PST by cherry
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To: The Old Hoosier

To add to the mess, it’s not entirely clear who does own the mortgage. The loans were sliced, diced, cubed, quartered, etc, sold, and resold. Deutsch Bank tried to foreclose on some properties in Ohio, and a judge ruled that while DB owns the asset-backed securities (aka “ass-paper”), nobody could come up with the mortgage paperwork itself. Can’t make this stuff up.


24 posted on 12/02/2007 6:28:59 PM PST by Freedom4US
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To: shrinkermd

It is funny how the ‘make money in real estate’ ads are still running here. :)


25 posted on 12/02/2007 6:31:01 PM PST by P-40 (Al Qaeda was working in Iraq. They were just undocumented.)
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To: Freedom4US; The Old Hoosier

“To add to the mess, it’s not entirely clear who does own the mortgage. The loans were sliced, diced, cubed, quartered, etc, sold, and resold. Deutsch Bank tried to foreclose on some properties in Ohio, and a judge ruled that while DB owns the asset-backed securities (aka “ass-paper”), nobody could come up with the mortgage paperwork itself. Can’t make this stuff up.”

For a more clear picture of the paperwork mess, see:

http://calculatedrisk.blogspot.com/2007/11/cfc-bk-investigation-its-about-costs.html

and

http://calculatedrisk.blogspot.com/2007/11/deutsche-bank-fc-problems-and-revenge.html

and for an excellent source of ongoing commentary, check this site http://calculatedrisk.blogspot.com and its links regularly; they’re knowledgable and level-headed folks.


26 posted on 12/02/2007 6:42:01 PM PST by Blue_Ridge_Mtn_Geek
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To: Blue_Ridge_Mtn_Geek

Is “more clear picture” more comforting, or not? There’s no shortage of bad news, I don’t really need more ;)


27 posted on 12/02/2007 6:54:05 PM PST by Freedom4US
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To: cherry
however, don't I feel silly having actually bought what we could afford

I feel the same way.

28 posted on 12/02/2007 7:03:01 PM PST by Vince Ferrer
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To: PAR35
The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.

Hear hear. If I were one of these investors, I'd be looking for something else to invest in from now on, something whose return doesn't get cut by 25% or so one fine day with the stroke of a government pen.

It would follow that this would be the end of the availability of mortgages in the United States.

29 posted on 12/02/2007 7:21:18 PM PST by jiggyboy (Ten per cent of poll respondents are either lying or insane)
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To: palmer
Investors who make more money available for mortgages are bottom feeders?

The problem is that if a lot of loan money were not made available to high risk purchasers, real estate prices could not have risen to the same level that they did. Sellers would have had to sell to borrowers at rates that they could afford.

There is an entire circle of middle-men who are complicit. Real estate brokers, banks and mortgage brokers, wall street companies that packaged the debt, bond rating agencies, hedge funds who bought the stuff at enormous leverage ratios borrowing short and lending long, and the operators of penions, endowments, and other "trust" funds who were seeking to maximize returns at "zero" risk.

The entire business was a gargantuan multi-trillion dollar money-making juggernaut.

There was an enormous group of liars and frauds in the middle of it all. Sellers, builders, and brokers profited enormously.

Those who are injured are first buyers who bought at high prices on terms they could not afford because the market manipulators had gotten them there, and investors who were induced to put money into these things on the belief that it was secure.

More generally, all of us are injured. It has distorted our economy and driven it in the direction of overvaluation and overconstruction of real estate rather than putting capital into productive enterprise. The cost of the bailout and damage to our international reputation will haunt us for years. The creation of credit dollars against real estate equity has driven up costs and forced all of us to buy with some level of credit that which we would have preferred to pay for with cash. Governments have built spending plans based on the increased tax revenues from inflate tax assessments, resulting in growth in bureaucracy and regulation as well as investment in services and construction of questionable value.

So no, the "investors" made a lot of bad decisions and are in part to blame for the resulting mess.

30 posted on 12/02/2007 7:25:57 PM PST by AndyJackson
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To: org.whodat
He is correct and the government needs to get out of a market correction.

As Bob Brinker pointed out today on his radio show. This is an election year. Ain't going to happen.
31 posted on 12/02/2007 7:26:11 PM PST by Signalman
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To: cherry

Maybe, you won’t feel so silly, in a year or two. Difficult to say at this point, but clearly there are some problems down the road, to say the least. I’m not a doom-and-gloomer, but I ain’t gonna ignore reality!


32 posted on 12/02/2007 7:27:05 PM PST by Freedom4US
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To: PAR35

That could very well be true.

However, how does that compare with foreclosing on the properties if the loans are unpaid? Is there liability in that case as well?

Not being a smartass, I’m being serious.


33 posted on 12/02/2007 7:28:27 PM PST by RockinRight (Just because you're pro-life and talk about God a lot doesn't mean you're a conservative.)
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To: Bean Counter

Actually, from what I heard, if they paid on time before the adjustment and it was apparently only the increased rate that hurt them, they qualify.

If they were late even before it adjusted, no dice.


34 posted on 12/02/2007 7:29:52 PM PST by RockinRight (Just because you're pro-life and talk about God a lot doesn't mean you're a conservative.)
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To: PAR35
The investors might have a pretty good lawsuit against any servicers who agree to across-the-board lower rates for the borrowers.

First, it will not be the servicers agree, but rather the owners of the mortgage notes. Second, the servicers for the most part are a bunch of guys who open envelopes, deposit checks and call up folks who they think can be induced to speed up their payments. They don't have any assets and will quite happily go bankrupt. Third, the servicers are not the cause of any damages. Once it is headed for bankruptcy, the contract has in effect been broken and all that is left is to pick up the pieces. You can be sure that any settlement agreements in all of this will discharge all parties of any liability for the losses incurred by reaching the new accommodation.

35 posted on 12/02/2007 7:30:42 PM PST by AndyJackson
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To: ExSES

Or, it could be meant to stave off much worse legislation that a Democrat could propose.


36 posted on 12/02/2007 7:30:54 PM PST by RockinRight (Just because you're pro-life and talk about God a lot doesn't mean you're a conservative.)
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To: P-40

Well, you can still make money in real estate.

Just not the way they say on TV...but you really couldn’t make money that way 3 years ago, either.

Hint: It’s work, just like anything else.


37 posted on 12/02/2007 7:33:27 PM PST by RockinRight (Just because you're pro-life and talk about God a lot doesn't mean you're a conservative.)
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To: cherry
however, don't I feel silly having actually bought what we could afford

Nor I. What is silly, however is that the valuation of my house has more than trebbled in seven years because of this glut of easy money. I didn't do anything to earn the money, I don't believe in free money, and don't believe I will ever actually see that. What I am seeing however is the semi-annual statements from the tax assessor who thinks it is easy money.

38 posted on 12/02/2007 7:38:00 PM PST by AndyJackson
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To: RockinRight

Foreclosure risk is factored into the pricing of the tranches. You bet wrong, and you lose money, but it is a known and expected risk. Having someone change the interest rate on you, however, for political expediency, probably wasn’t part of the deal.

If the servicer carries out the foreclosure in a commercially reasonable matter, there shouldn’t be any liability. If the servicer hasn’t done the paperwork properly, there may be.


39 posted on 12/02/2007 8:00:16 PM PST by PAR35
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To: AndyJackson
Second, the servicers for the most part are a bunch of guys who open envelopes, deposit checks and call up folks who they think can be induced to speed up their payments. They don't have any assets and will quite happily go bankrupt

I don't think you are accurately describing the big mortgage servicers like Wells Fargo, BofA, Countrywide.

Once it is headed for bankruptcy, the contract has in effect been broken and all that is left is to pick up the pieces.

You are familiar with Section 1322, aren't you?
"modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence"

You can cure the default through the plan, but you have to start making the regular payments if you want to keep the house.

40 posted on 12/02/2007 8:39:56 PM PST by PAR35
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To: AndyJackson
So no, the "investors" made a lot of bad decisions and are in part to blame for the resulting mess.

Your whole statement is very thoughtful and well written.

41 posted on 12/02/2007 8:48:34 PM PST by org.whodat (What's the difference between a Democrat and a republican????)
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To: AndyJackson
Sellers, builders, and brokers profited enormously

That's bad? You didn't answer why the investors are "bottom feeders", and you didn't point the blame squarely where it belongs: the Fed. The Fed was the reason investors could borrow short and lend long, the Fed caused the low teaser rates with their absurdly low short term rates. The market simply responded, but that doesn't make them "bottom feeders".

42 posted on 12/03/2007 3:19:15 AM PST by palmer
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To: Freedom4US

“Is “more clear picture” more comforting, or not? There’s no shortage of bad news, I don’t really need more ;)”

The actual situation is the opposite of apocalyptic, but kind of funny, in that a lot of “Dilbert’s pointy haired boss”-like “cost cutting” is revealed to have been a foolish muddle that is now coming home to roost. It also means that the servicers will probably have to hire a lot of new help to sort through their paperwork and fix up the tangled chain of loan ownership that the secondary market’s “cost cutting” has created. Judges have simply gotten fed up with attempts to foreclose on houses that don’t have proof of the plantiff’s standing in the case.

It’s like the old “oil change service” commercial: “Pay me now, or pay me (more) later.”


43 posted on 12/03/2007 4:02:36 AM PST by Blue_Ridge_Mtn_Geek
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To: palmer; Toddsterpatriot; groanup
you didn't point the blame squarely where it belongs: the Fed.

You can explain your position to Toddsterpatriot and groanup. Standby for a blast of denial that the Fed has anything to do with the money suppy. It is their thesis, not mine, and I will let them defend it.

44 posted on 12/03/2007 8:30:47 AM PST by AndyJackson
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To: AndyJackson
Standby for a blast of denial that the Fed has anything to do with the money suppy.

More like a denial that Andy understands the Fed or money supply.

45 posted on 12/03/2007 9:06:15 AM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: AndyJackson
Standby for a blast of denial that the Fed has anything to do with the money suppy.

Since you felt a need to include me in that post I'll ask you to show me where I said that.

46 posted on 12/03/2007 9:17:42 AM PST by groanup (When companies fail they go out of business. When a gov't project fails it gets bigger. M.F.)
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To: groanup
Whenever we prove him wrong, he feels to need to make stuff up.
47 posted on 12/03/2007 9:19:53 AM PST by Toddsterpatriot (What came first, the bad math or the goldbuggery?)
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To: cherry
perhaps its better to NOT have hundreds of thousands default on their homes, and leaving banks to unload them at huge loss......

however, don't I feel silly having actually bought what we could afford, not buying every fancy car or Humvee or 4 wheeler or gone on fancy vacations because I didn't want to run up the HELOC or my cc.....

my, to just get what I could, to save, to delay purchases, to not buy that vacation home or investment home because it didn't feel right....

gee I could have had the govt step in and help me speculate up the ying yang and the wazzuuu..

Exactly and isn't Wall Street a gamble as surely as a Las Vegas slot machine is? Since when were investors' guaranteed any return? Shouldn't the investors and corrupt ones fight it out in court and with the SEC. And the Judge is right if Deutsch Bank did not offer proof they were the mortgage holder.

This is a bigger scandal than the Keating 5 but it is not getting the bad press. And think one of the Keating 5 is up for reelection. Are we slaves fools or what?

48 posted on 12/03/2007 9:34:54 AM PST by Snoopers-868th
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To: AndyJackson; Toddsterpatriot

Toddster would argue that the Fed doesn’t set rates, the market does. True to an extent; 1 and 3 month rates have been dropping so the Fed is responding. But a big part of the reason the 1 and 3 month rates dropped is the anticipation that the Fed would lower their short term targets.


49 posted on 12/03/2007 9:48:14 AM PST by palmer
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To: palmer; Toddsterpatriot; AndyJackson
The Fed doesn't set any rate. It targets only one rate: the overnight Fed Funds rate. It can only influence that rate by adding and draining reserves in the system. The prevailing rates on overnight money are greatly influenced by this.

Why wouldn't they be? Banks can borrow from other banks at that rate and use that money for liquidity, lending, repo etc.

Also the banks can invest money overnight at that rate, greatly influencing the banks' return on excess funds.

50 posted on 12/03/2007 10:17:04 AM PST by groanup (When companies fail they go out of business. When a gov't project fails it gets bigger. M.F.)
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