22 October, 2010

John Robb explains the mortgage crisis

From Global Guerrillas.  I think he's on to the essence of things here.

The reason I spent the time to explain this, is that this could be one of the factors (along with currency wars and sovereign defaults) driving a massive financial crisis over the next year or so.


Here it is.  Traditional mortgages are simply contract between you and your local bank:

  • You agree to pay a certain amount every month (principal + interest) until the loan is paid off.
  • Your home (the title) is collateral on that loan.
  • If you don't pay the amount specified, your home is forfeit.

However, global banks wanted to take these dull mortgages and turn them into something institutional investors could purchase.  So, they developed a complex process to do this.

First, they sold the loans to the institutional investors (as securities that they are allowed to purchase according to their charters) by removing the collateral, your home's title, from the loan. 

Second, they put the title in a special pool that "simulated" the effects of collateral on the loans they sold.  To accomplish this, the banks had to a create a complex process to comply with the myriad rules controlling real estate transactions (state, interstate commerce, etc.) and federal tax laws.  Further, this process was very rigid.  It to be completed in a specified time (within the year of the securitization) and in a specified way in order to be legal.

However, and here is where things went really wrong.  The banks, and their representatives didn't do the paperwork, as required by law, on millions of mortgages.  Why?  In some cases the process of filing the paperwork was considered too expensive and was put off.  In other cases, it was avoided because it could trigger unwanted liability given the claims made by the sellers of the loans to investors (as in:  the quality of the loans was very high, when they had reason to believe this was otherwise).  

In any case, the collateral was never actually transferred properly.  So, the loans that were sold to investors became simple contracts:

  • You agree to pay a certain amount every month (principal + interest) until the loan is paid off.

Note that there's nothing more to this loan.  No collateral.  No foreclosure for non-payment.

Let's make this very, very clear: there's no real collateral for the loans.  No collateral, and if you don't pay the mortgage your home is NOT at risk.  As people figure that out, all hell will break loose.

Note: I'm not an attorney, and I'm not giving advice.  But can anybody tell me what's wrong with this argument?

16 October, 2010

Louis Henkin

Louis Henkin, the name at the intersection of Constitutional Law, International Law, and Foreign Policy, has died.  If you have anything  to do with any of those fields, anything I could say would be unnecessary.  If you don't know him, look here and here.  The world's a better place because he lived, and it lost something with his passing.

12 October, 2010

On predicting the future--not bad for 1964

From Arthur C. Clarke:

If anything, still a little conservative. Also tends to emphasize the lives of people like himself. But really good for 1964.

02 October, 2010

To get away from it all--try an earthlike exoplanet

Might I suggest Zarmina?  Officially Gliese 531g, the unofficial name is in honor of the discoverer's wife (a very bright husband, if you ask me).  Tidally locked in an orbit around a red dwarf, Zarmina sits in the middle of the life-supporting zone where water remains liquid.  It's a bit larger than our home, with at least a 50 percent greater surface gravity, which is more than enough to hold an atmosphere.

Setting up a station/colony/resort at the terminator near the equator promises "shirtsleeve" temperatures and weather, as well as an amazing view of a red dwarf (with a disk much larger than the sun is to us) always on the horizon.

How long till Sir Richard Branson starts selling reservations to visit?  And where do I go to buy the tickets?

A race to the bottom

I don't always trust Ambrose Evans-Pritchard (he has a tendency to see doom, and something of a conspiratorial mindset), but I fear he's on to something here:

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

In particular, nations are threatening to get into the mindset of zero-sum economics ("beggar-thy-neighbor" was the old expression), which just means the whole system can collapse so much more quickly.
The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

And who decides on what constitutes unfairness, or what is remedial?  No Smoot-Hawley bill yet, but the trend concerns me.

01 October, 2010

The law of unintended consequences

 See When architecture attacks: The Las Vegas death ray.
The curved glass facade of the Vdara Hotel in Las Vegas promises a world of climate-controlled luxury. Except if you are poolside, where sunlight reflected and intensified by the building's shape has been melting plastic and burning people's hair.

Wasn't anyone paying attention?

Ireland has reported that it expects the cost of cleaning up the Anglo Irish Bank will come to 21% of GDP, and the total cost of the bank bailouts looks as if it will be well over a quarter of Ireland's GDP.  German and British banks have each extended credit to Ireland greater than the entire GDP of the country.

The credit markets want proof that Ireland is serious about managing its debts.  How much austerity can one country take?  Keep watching.  And expect talk about defection from the Euro, with all that implies for the EU.