Tuesday, July 31, 2012

New FHFA Analysis is Reported to Show Principal Reduction Saves Taxpayers Money

This is potentially very important to the Valley Economy.  The Wall Street Journal reports,

As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests taxpayers could benefit from the move, according to people briefed on the findings...
The Obama administration has argued strongly in favor of the FHFA adopting the principal-reduction program for Fannie and Freddie, saying it would provide more sustainable loan modifications. "We think there's a set of cases where it's clearly in the interest of the taxpayer for them to do principal reduction upfront," said Treasury Secretary Timothy Geithner in congressional testimony earlier this year.

In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.

But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said. As many as 500,000 borrowers could be eligible, these people said....
The Treasury Department rolled out the debt-forgiveness program in 2010. Fannie and Freddie opted against participating. The initiative, part of the administration's Home Affordable Modification Program, is open to homeowners who have missed their mortgage payments or face imminent hardship and who owe more than their homes are worth.

The program has been increasingly adopted by mortgage servicers that handle deeply underwater loans which aren't guaranteed by Fannie and Freddie. To qualify, homeowners must make at least three payments under the reduced loan amount, and principal balances are cut in installments over three years. The median principal amount reduced under the program has been $69,000.
It will be interesting to see the analysis, but the results make sense to me.  Every incremental improvement to resolving unsustainable, underwater mortgages moves us a little closer to the end of this nightmare.

Update:  Not long after I post this, FHFA announces that Fannie and Freddie will not offer principal reduction.  It is interesting that FHFA is worried about the Treasury subsidy and the possibility of a relatively small net loss to taxpayers on a nationwide basis.  I think Treasury is willing to take that risk, because they see it as a much needed investment in improving the economy and neighborhoods. 

If the Treasurey investment shortened the duration of the foreclosure crisis by only a few months, it may be well worth the investment. But with something like 3-4 million mortgages severely delinquent or in foreclosure out of a roughly 10 million underwater, how much would the program really help?  Best case scenario, it seems it might cut future foreclosures by 10%, probably more like 3-4%.  So it probably wouldn't do more than shorten the foreclosure crisis by 1-3 months of what looks like another 3-4 years.  It still seems a good bet to me, but I am tired of wasting energy on this lost cause.  I am just grateful that they have at least enhanced the HAMP program

Wednesday, July 18, 2012

BDCP moves from unpermittable to unfinanceable

The first page of the new draft BDCP document has a refreshingly honest statement.
it has been clear that previous preliminary proposals were not likely to satisfy the statutory requirements necessary for securing permits.
So the BDCP has finally gotten "real" about the science.  But is the new process also going to "get real" about basic issues of economics and finance?  It doesn't seem like it from this new framework.   

From everything I am told, the alternative that is likely to be "permittable" will not deliver any additional water compared to the status quo, possibly even less.

Even under the original dreams of 6.5 maf of exports, the tunnels/canal were a pretty marginal investment.  At 5.5 maf, it is a bad investment for ratepayers and probably unfinanceable.  At the supposedly permittable 4.5 maf (less water than the 4.7 maf no action alternative), the tunnels are a financial joke. 

But the framework offers a glimmer of hope for the agencies (and water plan consultants).  It has a multi-year science based decision tree process whereby there is a chance that the public's multi-billion dollar investment in habitat will allow the water supply project to be upgraded from a financial joke to a bad investment in 15 years or so. 

The water agencies seem to be reacting with a mixture of denial and anger.  At their June 26 meeting, Metropolitan Water District staff was inexplicably still presenting their 2010 water supply fantasies to their board of directors.  Jason Peltier was far more honest when he recently declared 4.3 maf an insult, and that the BDCP was on a crappy path for Westlands. 

The new water buzzword that I have been hearing in 2012 is the need for "leadership."  In my opinion, real leadership would pull the plug on the BDCP before any more money and time is wasted that could be used on less expensive, more realistic solutions.  The project simply doesn't work. 

I have been wondering if we wouldn't all be better off if the state could move the agencies further along the path to acceptance by reimbursing them for a significant share of their BDCP planning costs.  In return for the public dollars, the agencies would release all the BDCP data and studies for public use and improvement of our knowledge of the Delta.

It's time to move on.

Thursday, July 5, 2012

Does Regulatory Assurance for Delta Water Exporters Require the $13 billion Tunnels?

A few weeks ago at the BDCP meeting, I asked this question to David Sunding, the economist hired by the BDCP.  He said it was a really good question, but answered he had analyzed the scenarios he had been given.

His conclusion from that economic benefit analysis was that the tunnels were worth paying for to the water contractors because the BDCP would provide regulatory assurance against further water supply reductions under the ESA, whereas the "no action" alternative did not include assurance against additional water supply cuts if the fish are not recovering.  Based on the value of incremental water supply, improvements in water quality, and seismic risk reduction, the tunnels were not a good investment for water exporters.  Those three benefits were about $5 billion short of the capital costs of the tunnels alone.  It took regulatory assurance, a benefit he valued at $11 billion in one scenario, to put them over the top.  But the tunnels don't get regulatory assurance without the huge habitat program, so how can all that economic benefit be assigned to the tunnels?

In the BDCP most, if not all, of the environmental gains that could result in regulatory assurances for the overall projects are due to the habitat investments, not the tunnels which have uncertain environmental effects.  The BDCP envisions $4 billion in habitat investments paid for by federal and state taxpayers.

So my question is could a similar $4 billion investment in habitat in a "no conveyance" alternative merit a comparable regulatory assurance from the Fish and Wildlife Service?  What about $2 billion?  In a typical HCP, the regulated entity pays for investments in habitat that would not otherwise be made and thus improves the overall survival prospects for the species.  In return for the habitat investment that advances recovery of the species as a whole, the HCP provides incidental take permits and some degree of "No Surprises" assurance that there will be no further regulatory or financial burdens for the regulated entities under the ESA.  In the proposed BDCP, regulated entities are paying for water supply infrastructure and the public is paying for the habitat.  Why would that be more deserving of regulatory assurance, than an HCP without the tunnels where the exporters themselves are paying for a comparable investment in habitat?  

If a $2-4 billion investment in habitat could buy regulatory assurance on the current biological opinions, by my understanding of Dr.Sunding's results, the water contractors would be better off with this "no tunnel" HCP than paying for the tunnels through the current BDCP proposal.

Even more importantly, taxpayers would be much better off if the water agencies paid for the habitat (or at least shared the cost).  In this scenario, the cost of the water bond wouldn't be taking funds away from education and other essential services.  The BDCP would also have a much better chance of success since it wouldn't need the water bond to pass.

In-Delta interests would not be happy with such extensive habitat restoration, but they are supportive of many habitat projects, and would be more accepting of BDCP if it didn't come with the peripheral tunnels.

I am no environmental scientist or ESA lawyer, so I may be missing some reason why a "no conveyance" HCP couldn't work as a BDCP alternative.  But from my economic perspective, it certainly looks like a win for all stakeholders compared to the current BDCP proposal, and a hell of a lot more financially and politically feasible.

Despite the dozens of so-called alternatives, the BDCP has never included a strong no-conveyance alternative.  Is it really too late?

Strong Words Between Assured Guaranty and the City of Stockton

There has been a heated exchange between bond insurer, Assured Guaranty, and the City of Stockton over its bankruptcy filing.  Assured Guaranty insured the City's two riskiest and most ill advised bond sales in 2007, $125 million in pension obligation bonds and $40 million to buy the WAMU building for a new city hall.

I don't have a lot of sympathy for the bond insurer.  Although they weren't the underwriter (that was the risk-loving, now bankrupt, Lehman Brothers), they are certainly part of the Wall Street financial crowd that encouraged cities to issue pension obligation bonds with deceptive sales tactics that downplayed the risk.  Pension obligation bonds were routinely sold as if they were refinancing debts (exchanging liabilities) when they were really high-risk investing on margin.

The Wall Street bankers came to the City of Stockton in 2006 and literally told them that selling pension obligation bonds were a low-risk strategy that was a better choice than their budget balancing alternatives such as painful cuts to employee salaries, retiree benefits or layoffs.  When the risky bet blew up in Stockton's face (the value of the Bond proceeds were invested right before the market crash of 2007, leaving Stockton with both its fixed bond liability and a huge investment loss), the Wall Street bond traders and insurers are now demanding that Stockton make further cuts to its employee costs and services rather than reducing what they are owed by a cent.  The City has cut over 30% of its employees, slashed the pay of remaining employees by 10-30%, is taking promised health care benefits from its retirees, and is enduring a crime wave after slashing its police force.

Assured Guaranty says in this statement that they are being treated unfairly, as if all the City didn't also have contracts with its employees and retirees (at the time it insured risky bonds) and an on-going obligation to provide essential services to its citizens.  No bond insurers were at the City Council meeting to explain why honoring the obligation to pay them was a higher priority than honoring obligations to provide health insurance for cancer stricken retirees, or provide adequate police on crime-ridden streets. In the face of the real human struggles going on in Stockton, Assured Guaranty's anonymous statement is cold and cowardly.  I recommend that their senior management and shareholders attend the next City Council meeting to read it in person to the Council and the citizens of Stockton and explain why it is "unfair" for them to take a loss that is proportional to others.

The City and its leaders are certainly responsible for most of their own problems. They didn't have to sell those bonds in 2007, write unsustainable employee contracts, or make a host of other poor financial decisions prior to the recession.  I don't think cities should default on bonds. But the City, its employees, citizens and retirees are suffering serious consequences, and Wall Street clearly encouraged and was a partner to many of the City's risky bets. The future of an important American city is at stake, and the federal government isn't coming to bail them out like when the bankers got in trouble. Thus, I understand and support City Manager Bob Deis' response to the statement printed in the Stockton Record.
City Manager Bob Deis called Assured's statement arrogant.  The city will ask a bankruptcy judge to make records from the three-month mediation public so the world can see how Assured conducted itself behind closed doors, Deis said. 
Most galling, Deis said, was Assured's suggestion that Stockton should take more from its employees, like the city's understaffed Police Department. Crime in Stockton is rampant, he said. "They literally want anarchy in the streets." Deis said. "They don't care. They just want to get paid."