Shortages of Trained Staff: The shortage of qualified staff by servicers, as well as the high cost of modifying loans, has resulted in many needless foreclosures that timely modifications could have prevented. The MHA remedy is to provide financial incentives to servicers to do more modifications.
Under the program, servicers are paid $1,000 for each eligible loan they modify, provided that the modified loan remains current through a trial period of at least 90 days. In addition, the servicer collects $1,000 a year for three years if the borrower stays current for that period.
High Incidence of Redefault: In the past, many borrowers with modified loans have subsequently defaulted. Many early modifications, however, did not reduce the borrower’s payment, and in some cases the payment increased.
Under MHA, the interest rate is reduced to a level where payments for principal, interest, taxes, and insurance make up no more than 31 percent of the borrower’s gross income. In addition, a borrower who stays current will receive $1,000 a year for up to five years in the form of balance reductions.
Restriction to Borrowers in Default: For the most part, servicers have limited modifications to borrowers who are two or more payments behind. This rule assured compliance with investor requirements that modifications were allowed only to avoid more-costly foreclosures, and it also helped servicers allocate their limited staff to the most urgent situations. But it had the unfortunate effect of encouraging borrowers to default so they could get help.
The new program attempts to remedy this by establishing “hardship” criteria for eligibility that does not require the borrower to be in default in order to qualify for a modification. In addition, bonuses of $1,500 to the investor and $500 to the servicer are offered for each modification that is executed while the borrower facing hardship is still in good standing.
Multiplicity of Modification Standards: Different servicers have applied different standards to the modification process, both in terms of assessing eligibility and in establishing the type and scope of modification. The result has been vastly different treatment of borrowers, depending on who happened to be servicing their loan. The new program attempts to remedy this by setting out standards for determining eligibility, the type and amount of assistance provided, the documentation required, and other factors.
In brief, eligible borrowers must be able to document financial hardship, defined as a monthly housing expense (mortgage payment plus taxes and insurance) in excess of 31 percent of gross income. If borrowers who qualify under this rule have a total expense ratio, which includes all other debt payments, of 55 percent or more, they must agree to obtain counseling. The mortgage payment of eligible borrowers is reduced to 31 percent primarily through temporary interest rate reductions, following procedures detailed by the government.
Unfortunately, on modifications that are not MHA eligible, the multiplicity of standards will remain.
The Second Mortgage Problem: Second mortgages are a potential barrier to modifying first mortgages because of the threat that the second mortgage lender can always foreclose if the second mortgage payment is not made. Some servicers work with second mortgage lenders, while others require the borrower to make a deal with the second mortgage lender that gets them out of the way.
Under the program, “incentives will be provided to extinguish junior liens on homes with first liens that are modified under the program.” No detail is provided on this part of the program, which is one of several loose ends that await clarification. It is hoped that, in tying up these loose ends, the Treasury will also reconsider its exclusion of investors from the program, which could be easily remedied, and think about developing another program directed to the problem of negative equity.
]]>Traders said some pullback is healthy after a 5-week surge that brought the market off 12-year lows.
The Dow Jones industrial average is down 138 points, or 1.7 percent, at 7,920. The Standard & Poor’s 500 index is down 17, or 2 percent, at 842. The Nasdaq composite index is down 28, or 1.7 percent, at 1,626.
Two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.6 billion shares.Wall Street shifted into reverse Tuesday after a surprisingly weak retail sales report punctured the market’s optimism about the economy.
The poor sales data combined with an unexpectedly sharp drop in wholesale prices overshadowed better-than-expected earnings reports from Johnson & Johnson and Goldman Sachs, leading the Dow Jones industrial average down 102.27, or 1.3 percent, to 7,955.54 in late afternoon trading.
Broader market measures also lost ground after three days of gains. The Standard & Poor’s 500 index fell 12.32, or 1.4 percent, to 846.41, and the Nasdaq composite index fell 20.53, or 1.2 percent, to 1,632.78.
Financial stocks were especially weak after Goldman said it would raise $5 billion to repay government bailout money. Investors speculated that other major banks might follow suit, which would put pressure on their stocks. Citigroup Inc. and JPMorgan Chase & Co. are also due to report results this week.
Tuesday’s selling was orderly and extended a give-and-take pattern the market has followed since halting a steep slide in early March. Stocks have risen above 12-year lows since then on hopes that banks are getting through the worst of their problems and the economy might be bottoming out.
Jeffrey Frankel, president of Stuart Frankel & Co. in New York, said he would be more concerned if the market’s rally had continued unchecked given the problems facing the economy and the likelihood that any recovery will be slow.
“This is healthy. You don’t want to go straight up,” he said.
The unexpected slump in retail sales, which fell 1.1 percent in March, undermined the market’s brightening outlook for the economy. The drop was far worse than the increase of 0.3 percent that analysts polled by Thomson Reuters had been expecting and marked the biggest fall in three months. Investors watch retail sales trends closely as a barometer of consumer spending, which makes up two-thirds of U.S. economic activity.
“The choppy data that we’re seeing, whether it’s economic or earnings, reminds us that we’re still not out of the woods,” said Sean Simko, head of fixed income management at SEI Investments in Philadelphia. “The market always has a tendency to go too far too fast.”
Investors took little comfort from speeches by President Barack Obama and Federal Reserve Chairman Ben Bernanke that there have been hopeful signs about the economy and that a sustained recovery won’t arrive quickly.
A separate report on wholesale prices released Tuesday gave another poor reading on the economy.
The Labor Department said wholesale prices tumbled 1.2 percent in March as the cost of gasoline, other energy products and food fell sharply. Falling prices fan worries about a spiraling effect where consumers and businesses would halt spending out of fear that they would pay too much for something today that could be worth less tomorrow.
The drop in stocks followed more signs that companies reporting earnings for the January-March quarter might be able to top Wall Street’s modest expectations.
Johnson & Johnson said its first-quarter profit dipped, but not as much as expected. The health care products maker earned $3.5 billion, or $1.26 per share, above analysts’ estimates of $1.22 per share. J&J, one of the 30 stocks that make up the Dow, rose 52 cents, or 1 percent, to $51.67.
Goldman released its results a day early, reporting after the closing bell Monday that it earned $1.66 billion in the quarter, well above what analysts were expecting. The company said it would raise $5 billion in stock in hopes of repaying the $10 billion investment it received from the government last year.
Goldman shares fell $12.02, or 9.2 percent, to $118.13 after its stock offering was priced at $123 per share, a discount of 5.5 percent to Monday’s closing price.
Some other financial stocks also slid. JPMorgan fell $1.78, or 5.3 percent, to $31.92, while Morgan Stanley fell $2.69, or 10 percent, to $24.20.
Retailers fell after the sales report. Macy’s Inc. slid 85 cents, or 6.6 percent, to $12.08, while Best Buy Co. Inc. fell $2.37, or 5.8 percent, to $38.54.
In other market moves, the Russell 2000 index of smaller companies fell 11.22, or 2.4 percent, to 456.83.
Two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.2 billion shares.
Bond prices rose after the weak economic readings. That pushed the yield on the 10-year Treasury note down to 2.78 percent from 2.86 percent late Monday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 58 cents to $49.47 a barrel on the New York Mercantile Exchange.
Overseas, Japan’s Nikkei stock average fell 0.9 percent. Britain’s FTSE 100 rose 0.1 percent, Germany’s DAX index gained 1.5 percent, and France’s CAC-40 rose 0.9 percent.
]]>Already saddled with the country’s highest unemployment rate, Michigan faces “an economic Katrina” if GM or Chrysler file for bankruptcy, says Representative Thaddeus McCotter (R-MI).
Last month, President Obama rejected the automakers’ proposals that included combined job cuts of 50,000 workers. McCotter now fears job cuts beyond that level will result, as well as the potential for a “cascading effect” in auto suppliers (which have been given a $5 billion TARP lifeline) and other related industries if either GM or Chrysler files for bankruptcy.
Staring March 30, GM has 60 days and Chrysler 30 days to come up with new viability plans. McCotter says GM is striving to come up with a new restructuring plan, but also must prepare for the possibility of a bankruptcy filing. Meanwhile, the proposed Chrysler-Fiat deal is “doable,” he says, but the devil is in the details.
Beyond the human toll, McCotter’s main concern is twofold:
The Obama administration had laid out “policy goals” but no clear-cut guidelines for what kind of restructuring they will accept.
GM doesn’t have a lot of time to negotiate with stakeholders, including the UAW, retirees and its bondholders.
On a related note, McCotter has petitioned the White House, Fed and Treasury to determine whether any GM bondholders have credit default swaps with AIG. Considering AIG’s counterparties have been made whole to date, such CDS holders might favor a forced GM bankruptcy, as we discuss in more detail in part 2 of our interview with the Congressman.
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Operating loss for the fourth quarter was $8.2 million, which resulted from $95.1 million of cost of goods sold, including $65.7 million for corn. The Company also had $4.2 million of interest expense in the fourth quarter, which resulted in the aggregate loss of $12.3 million. For the full year, operating loss was $37.7 million, which resulted from $199.2 million of cost of goods sold, including $140.5 million for corn. Also included in other operating expenses were $1.1 million of costs representing the write off of all remaining site development costs associated with prospective plants. During the year the Company had $5.8 million in interest expense, $39.9 million of losses on corn hedging, and $1.8 million in other non-operating expenses, offset by $1.1 million in interest income. In summary, a net loss of $44.2 million before minority interest would have been recorded in the absence of hedging losses.
The fourth quarter of 2008 was the second quarter of operations for the Company. As previously reported, both of the Company’s plants achieved project completion in December, which was the final test under the Company’s construction contracts. The plants ran at 100% of their nameplate capacity in December and continue to do so.
Scott H. Pearce, the Company’s President and Chief Executive Officer, stated: “These are obviously challenging times in the ethanol industry, yet we were able to overcome significant obstacles during the second half of 2008. This was possible because of the strength of our management team, to whom I am grateful for their dedication and professionalism. We also continue to benefit from our close working relationship with Cargill. Although our plants continue to operate at or above their nameplate capacity, gross margins, based on the crush spread, continue to exert significant pressure on operating margins in 2009. In addition, we anticipate having to make a principal payment on our bank facility by the end of the second quarter. We have begun a company-wide cost cutting program, and continue to execute on our operational efficiency initiatives at our plants. However, if margins do not improve significantly we may have to restructure our debt or seek other accommodations from our lenders in the coming months, in order to continue operating as planned.”
In the fourth quarter, the Company borrowed $1.7 million under its construction loan and $7.0 million under its working capital facility. At December 31, 2008, amounts outstanding included $181.2 million drawn under the construction loan and $17.0 million borrowed on the working capital facility. Of the $28.8 million still available under the construction facility at December 31, 2008, $9.4 million was used to pay retainage in February 2009 and $10.8 million is reserved to fund a debt service reserve account. At December 31, 2008, the Company held $12.3 million of cash and equivalents, stockholders’ equity totaled $80.7 million and minority interest totaled $14.1 million.
The Company also reported that, because of the significant losses realized in 2008 and the poor operating margins resulting from the relative price of corn and ethanol, its auditors had included an explanatory paragraph with its audit opinion on the Company’s December 31, 2008 financial statements, expressing substantial doubt about the Company’s ability to continue as a going concern.
The Company plans to host a conference call on Monday, March 30, 2009 beginning at 11:00 a.m. (EDT) to discuss the results. To participate, please dial (800) 944-8766. The participant code for the call is 62291. Approximately 90 minutes following the call, a phone playback will be available for 30 days by dialing (866) 281-6782. The access code for the replay is 161139.
This release contains certain forward-looking statements within the meaning of the Federal securities laws. Such statements are based on management’s current expectations, estimates and projections, which are subject to a wide range of uncertainties and business risks. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Factors that could cause actual results to differ from those anticipated are discussed in our Exchange Act filings and our Annual Report on Form 10-K.
BioFuel Energy currently has two 115 million gallons per year ethanol plants in the Midwestern corn belt. The Company’s goal is to become a leading ethanol producer in the United States by acquiring, developing, owning and operating ethanol production facilities.
]]>Today, it’s a report by Cambridge Energy Research Associates (via NYT), that said the drop in oil investment and production will cause a “powerful and long-lasting aftershock following the oil price collapse.”
When demand picks up again, there won’t be oil in place to support the expansion of the economy and we’ll probably see another spike in oil prices.
It’s just another alarm bell ringing on oil. The IEA warned in February that a lack of oil exploration would lead to a big spike in price once the economy gets going again. We said it again in March. Then Barclay’s using a technical trend analysis said oil would definitely hit $57 soon, and would probably go to $60. And, of course, T. Boone Pickens clangs the bell every opportunity he gets.
Earlier this week McKinsey released 150 page PDF detailing why oil would run right back to $150 unless we changed a few things. Mckinsey suggested that we implement government policies so we can reduce the demand for oil, as it will be more difficult to control supply than demand.
Some of their suggestions:
In light vehicles we can apply more stringent efficiency standards which would cut oil demand by 2 million barrels a day.
Increase building and industrial efficiency could save 6 million barrels a day.
Remove trade barriers to sugar-cane ethanol, could abate oil-demand. Along with that require all autos to be fuel-flexible so they can take advantage of biofuels.
Reverse the shift to diesel passenger vehicles will save .5 million barrels per day of diesel.
Substituting boiler fuels, could abate 8 million barrels a day.
We are skeptical of any plan that calls for an increased reliance on biofuels. Maybe the government should consider subsidising oil production? We’d like to see the public reaction to that idea. As of right now, crude oil for May delivery is at $53.33 a barrel on the NYMEX.
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.
I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.
I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.
But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.
My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.
That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”
That may also be why you authorized the balance of the payments on March 13.
At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.
I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.
You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.
As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.
Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.
The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.
So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.
That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.
On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.
This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.
Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”
Sincerely,
Jake DeSantis
]]>The 1981 recession is thought to have been caused by the tight-money policy adopted by Paul Volcker, chairman of the Federal Reserve Board, before Ronald Reagan took office. Reagan supported that policy. Economist Walter Heller, chairman of the Council of Economic Advisers in the 1960s, said that “I call it a Reagan-Volcker-Carter recession. The resulting taming of inflation did, however, set the stage for a robust growth period during Reagan’s administration.
It is generally assumed that government activity has some influence over the presence or degree of a recession. Economists usually teach that to some degree recession is unavoidable, and its causes are not well understood. Consequently, modern government administrations attempt to take steps, also not agreed upon, to soften a recession. They are often unsuccessful, at least at preventing a recession, and it is difficult to establish whether they actually made it less severe or longer lasting.
]]>Fed’s announcement less bullish for equities, in our view.
But the equity market, which had already been enjoying a classic short-covering rally accentuated by quarter-end pressures, also reacted very positively to the Fed’s announcement today and at one point the S&P 500 looked set to break above the 800 threshold for the first time since mid-February. We are of the view that what occurred this afternoon was less bullish for the equity market than meets the eye. Here’s why:
1) Fed buying bonds not stocks. The Fed announced that it is buying bonds, not stocks. This is not the HKMA, circa 1998.
2) Government cannot prevent nature from taking its course. While an additional $1.15 trillion expansion of the Fed’s balance sheet is large as a stand-alone event, it really is just a drop in the bucket when one considers that there is still almost $8 trillion of combined household and business sector credit that must be unwound in order to mean-revert the private sector-to-GDP ratio (which is still close to a record-high). Once again, the government is cushioning the blow, but cannot prevent nature from taking its course, in our view.
3) Fed does not see a flicker of light at the end of tunnel just yet. The economic backdrop highlighted in today’s press statement makes us feel that much more confident that corporate earnings are going to slide again this year (to $40 for S&P 500 operating EPS from nearly $50 in 2008). To wit: “… the economy continues to contract … Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. US exports have slumped as a number of major trading partners have also fallen into recession”. Yikes. This is with the Fed funds rate effectively at zero. But it’s pretty clear that the Fed does not see any flicker of light at the end of the tunnel just yet. Mr. Market may be in for yet another surprise.
We remained convinced this is still a bear market rally. We will say this. We do not claim to be market-timers. There is always the chance that this bear market rally is extended. Only a fool would rule that out entirely, we think. But we remain convinced that this is all it is. Does anyone remember what happened in the opening weeks after the BoJ switched to quantitative easing (QE) back on March 19th, 2001? The Nikkei closed at 12,190 that day and went on to rally all the way to 14,529 by May 7th for a nice 20% advance. But you only made money if your timing was so impeccable that you knew to get out that day (or sell calls) because we didn’t see that level on the Nikkei again for three years. In fact, by July 11th, 2001, four months after the ballyhooed move to QE, the Nikkei was back to 12,005 as the stock market pulled a big U-turn.
]]>The situation is fluid, and other options are also being discussed, the source said, adding that it was unclear where the talks would ultimately lead.
AIG declined to comment.
AIG, once the world’s largest insurer, has already gone to the government twice for help. The government rescued the company in September after bad mortgage bets left it on the verge of collapse. The bailout swelled to about $150 billion in November when the Federal Reserve and U.S. Treasury stepped in with more cash to buy mortgage assets that had left AIG deeply in the red, and to ease the terms of its loan repayment.
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