The Devil is in the Detail

TROJAN HORSE PHILANTHROPY

In the last few days the Bank of America (BOA) announced a very generous program of debt forgiveness of up to 30% of the loan amount, affecting some 45,000 homeowners who owe more than 120% of their homes’ value and who are more than 60 days delinquent. It is estimated to cost the bank approximately $3 billion dollars over the next five years (link HERE).

To benefit from this philanthropic gesture, homeowners must also qualify for the Obama Administration’s $75 billion mortgage loan modification program and not miss any payments over the next five years. Furthermore, debt forgiveness only allows for write-downs to 100% of the home’s value.

Anyone who thinks that the BOA has seen the light or that the Federal Government has shamed them into action will be sorely disappointed. This new found philanthropic instinct by the BOA is probably nothing more than mutton dressed as lamb.

TOO MANY QUESTIONS

The first thing to note is that all these loans are shipwrecks. That is, they are well and truly underwater. They have a snowflake’s chance in hell of coming good. But let’s look at a few interesting issues:

1.     Three billion dollars in write-offs spread over 45,000 homeowners equates to $66,666 per home loan. Now follow the maths:

                        Average loan                                      $222,220

                        30% write-off (see above)                 $  66,666

                        Loan balance (home value)                $155,554        

2.     If we assume that all loans are written-down by 30%, the first question that arises is, WHO is the bank digging out of a whole?  Just remember that $66,666 is just an average. A house that is worth $100,000 and which has a loan of $142,857 will get a write-off of only $42,857. This means someone else will get an additional $23,809 on top of their $66,666 write-off.

            It also means that a jumbo loan which is 60% underwater will get an even bigger percentage and dollar share of the write-off. The bottom line is that they are probably out to save the bigger end of town. The challenge is for the BOA to provide a breakdown by area and mortgage write-off amount to see who is actually benefiting. How many BOA employees will also benefit from this?

            The socio-economic profile of their write-off will be very telling but I doubt the BOA will release such details. This reminds me of the following words by Clint Murchison:

            “Money is like manure.  If you spread it around, it does a lot of good, but if you pile it up in one place, it stinks like hell.”

3.     The Attorney General of Massachusetts is dreaming if he thinks that he has cornered the BOA into announcing this plan. In fact they have fooled him and the people he is supposed to represent. The fact of the matter is that proposed amounts to be written-off would never be repaid. Had the normal legal process been followed for repossession and sale of the property, then the time delays, legal costs, damage to the house and further period of the non-performing loan could easily add another 10-20% on the existing loan balance. Rather than announce damaging foreclosures the bank is announcing conditional accounting write-offs in the form of philanthropy.

4.     The BOA is clearly putting on its best philanthropic face so as to space out the inevitable write-offs and keep its ugly books of account looking far-more rosy than they truly are. It is better to write-off $3 billion over 5 years as opposed to $3 billion in one year and adding to the general tsunami of foreclosures.

5.     The other question that arises is what will happen if between now and the next five years the value of the home goes up or down? Who benefits and who loses in calculating the write-off down to 100% of the home’s value? My guess is that the value is being determined and set TODAY so that in a climate of worsening home values the BOA will try to limit its exposure.

6.     In February of this year the BOA announced bonuses averaging $400,000 and totalling $4.4 billion for its employees. This beggars belief that a bank would announce such bonuses in the face of such a large write-off. Once again recall the words of Clint Murchison above. If the Attorney Generals of the various States wanted to do some real good, they should have forced the BOA to allocate these bonuses to reducing the loan balances of those sitting on loans equal to 100% of their home’s value. Perhaps some dividends to the bruised shareholders might also be in order.

In writing the above I have only had access to the various reports of the press in so I stand to be pleasantly surprised and corrected if the BOA in fact acts in a way to overcome the above comments. Somehow I doubt it. In fact how many bank employees might benefit from such a scheme?

WALL STREET v MAIN STREET

In short, it remains a sore point for the people on Main Street that Wall Street has benefited so handsomely from the handouts and cheap money of the Federal Government despite its contribution to the melt-down the USA is experiencing. So much for trickle-down economics! So much for a nation built on democracy.

It goes without saying that the man on the street (almost literally now) bears a fair share of the responsibility for his plight. But those with the means and the intellect to correct the current malaise (and to have avoided the mess in the first place) must now show greater leadership, sacrifice and high-mindedness otherwise their black swan day will also arrive when they least expect it.

No doubt many more such schemes will be hatched by other banks in the weeks and months ahead. NOW is the time for the Federal Government to ensure that proper parameters are set to avoid the abuse of such a write-down. Even more importantly it needs to allow the system with the means to create manufacturing jobs otherwise the whole nation will have to be written-off as loans that cannot be serviced are worthless.

Before I forget, I should make it clear that the shareholders of the BOA and the depositors who are paid fake rates of interest are also being raped with the full acquiescence of the law and the system.

With such a mess is it any wonder that so many people choose to protect their wealth by owning gold and silver? Would you rather place your trust in a bank that is holding dubious loans or would you rather hold precious metals and know where and what your net worth is?