We all focus on the headlines ... those prominent stories that dominate the front pages or first few minutes of news.
As someone who has followed the current financial meltdown carefully, I find that I have learned much more from stories nowhere near the headlines.
Here are examples from just the last day or two:
1. "HSBC Strains While It Tries to Help Out Homeowners" - Section C of Tuesday's Wall Street Journal.
HSBC was one of the first lenders to acknowledge the depth of the subprime crisis (HSBC purchased subprime lender Household International in 2002). It was also one of the first lenders to attempt to keep people in homes by modifying mortgages.
Unfortunately, its efforts to date have not been very successful. To date HSBC has modified 238,000 mortgages with a total outstanding balance of $28.8 billion. It did this by "re-aging" loans, basically wiping out amounts due (arrearages) and giving borrowers a fresh start. The approach has not worked. Re-aged borrowers are still defaulting.
As the real estate world struggles to find ways to modify mortgages and keep people in homes, it needs to understand this principle: We must lower principal balances so that people who are presently disheartened because they are underwater (debt higher than value), can see some light at the end of the tunnel. Temporary mortgage payment reductions by lowering rates or deferring payments don't work.
2. "Investors Hit BofA Loan Modifications" - Section C of Tuesday's Wall Street Journal.
Another big question the real estate world is grapping with is how to modify mortgages that are bundled in mortgage securities, owned by several disparate interests. Note what Bank of America is trying to do: it is taking the position that as an investor and servicer of mortgage securities it has the "delegated authority" to modify loans. The referenced article makes the point that not all investors in these securities agree:
"In my 10-plus years in the market, I've never seen anything as outrageous as this," said one money manager.
3. "CMBS Market Begins to Show Fissures" - Section C of Wednesday's Wall Street Journal.
Lots of lenders all over the world are debating whether the commercial real estate market is going to plunge like the residential market did.
The referenced article is not optimistic. It makes note of two big commercial mortgages packaged into securities (CMBS means "commercial backed mortgage securities") that are likely to default. Not good news!
By the way if you want to see how we got into the mess we are in, see the last column of the article. You will note how lenders in go-go days assume huge increases in net operating income to justify the magnitude of their loans.
So, what to take from these three articles?
1) Modifying residential mortgages is tough when you own the mortgages.
2) Modifying residential mortgages is very tough when they are part of mortgage securities.
3) Commercial mortgage securities may be our next huge challenge.
Perhaps I would be better off just reading the headlines.
Jim Randel is the author of the new book,The Skinny on the Housing Crisis (Clover Leaf 2008) and the about-to-be released book, The Skinny on Willpower (Clover Leaf 2008).
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