Using Veritas to Construct the "Per…

29-04-2017 Hits:85781 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:80009 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:79869 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:84348 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:80888 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:83135 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:54146 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:82270 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:82121 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81990 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:88015 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:85890 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Ban on short-selling

US:  The Securities and Exchange Commission on Friday issued an emergency order temporarily banning short selling in the shares of 799 financial institutions until midnight on October 2, 2008. The SEC said it may extend the order if it's necessary to protect investors, but it won't last more than 30 days. In a pre-trading market GS and MS have gained 10%.

 

The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records. The SEC would hedge funds and investors managing more than $100 mn to publicly report their daily short positions. SEC has also made it a securities fraud when sellers deceive brokers about delivering shares to buyers. The SEC would also impose penalties on brokers if their clients haven't delivered shares to buyers within three days of a short sale. The SEC also approved a rule drafted in March 2008 that it would amount to be a fraud for investors to lie to their brokers about locating shares to be sold short. Currently, brokers rely on their customers' assurance that they had located shares that could be used to cover a sale.

 

UK: Britain's Financial Services Authority has imposed temporary ban on investors from taking new short positions in financial stocks from midnight on Thursday, September 18. The ban has been imposed until January but would be reviewed each month.

 

Likely impact on the markets:

 

UK: UK banking stocks made double-digit gains on September 19 with the ban on short-sales coming into effect. The FTSE 100 was 332 points higher at 5,212, a rally of 6.1 per cent at the start of the first session.

 

US: The ban would lead to rally in the near-term, i.e. as long as the ban is in effect. However, once the ban is lifted, whether the markets would remain stable or plunge will depend on the success of the current government plans to stabilize markets and avert further deepening of the crisis. We expect the ban if imposed would most likely continue till the Congress elections, lest the volatility resulting from lifting of the ban may impact the markets and the economy thereby impacting citizens' sentiments.

Steps being considered by US government and Fed Reserve to resolve the housing and credit crisis

1.               Create an entity to buy distressed assets from the market - the SAFE plan

U.S. Treasury Secretary Henry Paulson is making proposals to create an entity to deal with the clogging the financial system. The idea has been compared to the Resolution Trust Corp formed in 1989 and the Home Owners Loan Corporation of the 1930s.

Saving America's Family Equity (SAFE): SAFE loan plan is modeled after the successful Home Owners' Loan Corporation (HOLC) of the 1930s.

The original HOLC program

Purpose:

  • The HOLC was established in 1933 to help distressed families avert foreclosures by replacing old mortgages (that were in or near default) with new mortgages that homeowners could afford.

Structure:

  • HOLC bought old mortgages from banks (traded for safe government bonds) and then issued new loans to homeowners.

Financing:

  • The HOLC financed itself by borrowing from capital markets and the Treasury.

Size and scale:

  • Within two years, the HOLC received about 1.9 mn applications and granted about 1.0 mn new mortgages. (Nearly one of every five mortgages was owned by HOLC). The corresponding mortgage figure today would be almost 2.5 mn.
  • Its total lending over its lifetime amounted to $3.5 bn -5 % of the gross domestic product at the time. (The corresponding figure today would be about $750 bn).
  • Nearly 20% of the HOLC's borrowers defaulted. So the corporation acquired ownership of about 200,000 houses which were sold by 1944.

Remodeled HOLC - SAFE plan

The SAFE plan would use existing government agencies and government-sponsored housing institutions to purchase pools of loans at current value and refinance those into fully amortizing, fixed-rate loans based on the current value of the property. (Most of the refinanced loans would take the form of new fixed-rate 30-year mortgages underwritten to 80% of current home value).

Under the SAFE loan plan, Treasury and the Federal Reserve would run auctions, in which Federal Housing Administration originators would purchase mortgages from current investors at discounts. Investors would take a hit through haircut and yield in exchange liquidity and certainty. The Federal Housing Administration will work with responsible originators to restructure the loans they acquire to stem defaults, foreclosures, and liquidations. SAFE loans would be pooled into securities and sold to private investors.

Structural problems which may concern implementation of SAFE plan

In the 1930s, banks knew all of their customers. Today, most mortgages are securitized and sold to buyers who do not know the original borrowers

Proposed design changes from HOLC

Structure:

  • The original HOLC bought mortgages outright and then issued new loans to homeowners.
  • But Barney Frank, the Massachusetts Democrat, and Senator Christopher J. Dodd, Democrat of Connecticut, the chairmen of the two banking committees of Congress, are now cooperating on a different design.
  • Their approach would be to use FHA to guarantee new mortgages (issued say, by banks) instead of buying up old ones.
  • The effects although would be similar: Old mortgages would be replaced by new, affordable mortgages and the government would assume the risk of default. However under the Frank-Dodd proposal, the federal government would be a big insurer rather than a big bank.

Bailouts

  • In the new plan existing mortgages would be bought below face value, forcing investors to "take a haircut." But homeowners who get new mortgages to replace their old ones should also be made to pay for the privilege. Otherwise F.H.A. would be flooded with applicants.

Legal Hurdles

  • FHA would have to deal with legal complexities that were absent in HLOC. Back then, banks held mortgages in their loan portfolios. But most mortgages currently are bundled into pools and then sold to investors all over the world.
  • To buy selected mortgages out of these pools, FHA must clear a legal hurdle. The Congress must pass legislation shielding servicers from legal liability.

Setting Prices

  • Conceptually, haircuts should reflect current market values, which are well below face values. But there is a problem of price discovery. With the resale market for mortgages virtually shut down, there are hardly any market prices. The draft legislation is vague on this point.

Lack of market participants

  • The FHA would use government guarantees to induce private businesses to buy these mortgages.

Sunset

  • Mr. Frank and Mr. Dodd have proposed that FHA mortgages be packaged, securitized and sold back into the market as soon as conditions permit.
  • Once normal conditions were restored to credit markets, the SAFE plan would automatically cease operation.

Eligibility and Scale

  • Mr. Frank and Mr. Dodd are thinking about one to two million mortgages, although there is general feeling that there are a larger number of mortgages.  
  • Only loans on owner-occupied homes would be eligible for restructuring. Speculators and second homes would be excluded.
  • Based on current estimates considering refinancing one to two million mortgages with average mortgage balance of $200,000, the new HOLC might need to borrow and lend as much as $200 bn to $400 bn.

Road map to financial stability

  • The plan would help to restore liquidity in the marketplace and help markets function more smoothly. Investors' and creditors' confidence will most likely be restored. This new mechanism can assist the FDIC to resolve sick institutions. Instances such fallout of Lehman Brothers and Bear Sterns may be averted going forward.
  • By warehousing the troubled paper for a longer period than the Fed's discount window would typically do, it would allow for a more orderly liquidation and the chance to recover a significant portion of its value, except for the fact that much of it was leveraged on top of a massive bubble - meaning there is a slim chance price levels will return to that of par.
  • By giving the agency the ability to manage mortgages with flexibility to keep people in their homes, it should lessen the number of foreclosures. This, in turn, would help moderate the decline in real estate values and the deterioration of neighborhoods, thus supporting house prices
  • Since the earlier plan to bail financial sector in 1933 and 1989 were successful, there could be high probability that the plan if implemented could help restore the financial distress.

Hurdles

  • Political will: Currently the US Treasury and Federal Reserve are not working on such a plan, but are only looking closely at how previous interventions were used to redress systemic market crises. However according to Senate Majority Leader Harry Reid the U.S. Congress is unlikely to pass new legislation to overhaul financial regulations this year. He said' It is a multitrillion dollar issue that's facing America and we can't do it on some timeline that is unrealistic.'' Any such plan would require legislation which may not occur before the US presidential elections.
Paid subscribers can download the rest of this document here: pdf  Mortgage Bailout Initial Summary (664.39 kB 2008-09-19 13:27:25)