Pension-fund risk transfers. The next Too-Big-To-Fail debacle? – Nom de Plumber’s Thought of the Day

ndp1  Nom de Plumber is a Nom de Plume
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As background, please read the following:

http://news.prudential.com/article_display.cfm?article_id=6977

http://www.bloomberg.com/news/2014-10-30/metlife-losing-pension-deals-to-prudential-cites-margin-of-error.html

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Without any fiduciary-duty reason, each pension beneficiary is forced to select one of two LOSING choices:

1.)     a deeply discounted lump-sum payout

2.)     an unsecured insurance company annuity.  

In Choice 1, the upfront payouts typically are far below the Full Present Value of the lifetime pension-stream obligations.   The employer harvests this gap for itself.

 In Choice 2, defined-benefit pension beneficiaries relinquish their pension portfolio assets, which had long been dedicated solely to them. These assets are transferred non-recourse to the general account of some insurer, which then owns them free and clear.  These beneficiaries receive an unsecured promise from the insurer to pay future retirement benefits.  They bear counterparty risk (if the insurer later fails) but enjoy no compensation, for losing both that hard-asset coverage and any US Pension Benefit Guarantee Corporation pension protection.

In either employee choice, the employer unwinds the defined-benefit pension plan, freely walks away from any existent pension plan funding deficit, stops paying PBGC insurance premiums, and offloads all future longevity risk.

It keeps all these cost savings, sharing none with any employee.

Motorola, Verizon, and GM recently did so…..notably right before actuarial tables were updated to reflect much greater US longevity projections.  Convenient timing!

Before accepting such annuities, employees were the sole, secured beneficiaries of a bankruptcy-remote pension asset portfolio.  Afterwards, they become unsecured claimants on a non-dedicated asset portfolio, commingled with totally unrelated policyholders, exposed to insurer bankruptcy.   In such plausible event, they must compete with those other claimants, reliant on meager state-regulated catastrophe pools for partial compensation of unpaid benefits.

What a deal everyone gets…..except all these pension beneficiaries, who bear default-correlation risk exposure to a Too-Big-To-Fail insurer.  Many brand-name insurers, once highly rated for claims-paying ability, have either failed or hit financial distress, forcing policy benefits cuts, premium increases (whether annuity, long-term care, life, or investment policies), or even full-blown bailout.

·         AIG

·         Genworth

·         UNUM

·         Conseco

·         Hartford

·         Confederation Life

·         Baldwin United

·         MGIC

·         Executive Life.

The employees should be allowed a third choice…..to do nothing and just keep intact their existing pensions.

What happened to concept of fiduciary duty?  This may be the next big Too-Big-To-Fail systemic risk event.

Thank you.

Nom de Plumber: GSE’s & REGULATORS SAY ONE THING… DO ANOTHER

ndp1        Nom de Plumber is a Nom de Plume.

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Dodd-Frank mandates originator risk retention, ostensibly to foster high-quality loans.

How do Fannie and Freddie comply with this core “reform” principle?

Ironically, the largest US credit providers do the opposite……..selling first-loss risk, via their STACR and CAS credit-sharing deals.   If originator risk retention were so inherently good, why should the GSE’s be able to exempt themselves?

Dodd-Frank supporters might respond that shedding default risk onto private investors serves to protect the GSE’s, and ultimately US taxpayers, from systemic credit losses.   Well, if their rationale were sound, then the GSE’s would protect taxpayers and borrowers even better by just retaining that exposure, as “skin-in-the-game” incentive to write ultra-safe mortgages.   (Their wording, not mine, mirrored right back to them.)

By their actions, the GSE’s show zero faith that originator risk retention will truly prevent residential mortgage defaults.  In reality, only substantive borrower down-payments can do so, as commercial mortgages prove.

Bottom lines:

  1. Regulators and GSE’s hold themselves high above the very rules which they enforce on others.
  2. Far worse, they may fundamentally misunderstand the rules which they make.

On the second point, please see here:

http://mortgagenewsclips.com/2010/12/05/dodd-franks-unintended-consequences-of-risk-retention-in-future-mortgage-securitizations-by-nom-de-plumber/

http://faymortgagenews.com/federal-regulators-officially-admit-that-qmqrm-fails-to-reduce-mortgage-default-risk-nom-de-plumbers-thought-of-the-day/

Thank you.

Volcker Rule implementation: Mission Impossible? – Nom de Plumber’s Thought of the Day

ndp1  Nom de Plumber is a Nom de Plume.

 

A hedge at a bank will be deemed allowable risk mitigation, and not forbidden proprietary trading—–but only if no material new risk arises, unless the hedge simultaneously protects against that too. Yet, in reality, every hedge does NOT eliminate risk, but merely exchanges one risk type for ideally more-palatable risk types. For instance, a bank could hedge the market risk of its Treasury bond portfolio, by shorting Treasury futures. The bank thereby assumes these substantive new risks, instead:

So, how can any hedge truly be Volcker Rule-compliant?

To prove having only client market-making and no proprietary exposures, a bank must attribute its daily trading P&L to particular risk factors (yield curves, prepayments, defaults, credit spreads, equity indices, dividend streams, option-implied volatility, IRR, asset cashflows, currency rates, etc.) and buy-sell activity. It must then report all un-attributable P&L to regulators, for flagging non-client, proprietary risk positions. Yet, in reality, almost every asset (except non-callable, fixed-rate, high-quality sovereign debt) trades strictly by market price……not by observable or consensus settings of underlying risk factors. Because infinite permutations of risk factor movements can cause a specific asset price movement, no definitive anchor points will arise to bootstrap that mandated P&L attribution.

So, how can a bank or regulator attribute daily P&L, to flag proprietary trading versus client market-making?

Bottom line: The Volcker Rule will be remarkably hard, at best, to implement.

Moreover, a bank complying with Dodd-Frank originator risk retention could simultaneously be charged as a disguised version of non-compliant proprietary trading.

http://mortgagenewsclips.com/2011/07/14/dodd-frank-conundrum-can-lender-risk-retention-be-distinguished-from-proprietary-trading-nom-de-plumbers-thought-of-the-day/

I Have Moved this Blog to FayMortgageNews.com and am the Editor There. Same Content, Same Email List. – BC

mnc-bc-fay2

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Hi – This is Bill Coppedge.

Many of you know that I work at Fay Servicing in Chicago. I have moved my blog there. Same content, same email list.

Fay Mortgage News.com    http://faymortgagenews.com/

Be sure to check out “About the Editor’ there. I hope it makes you smile.

Plus you can get continuous mortgage news updates during the day at

Twitter    @FayMortgageNews

and at my profile on Linkedin.     http://www.linkedin.com/in/billcoppedge

All the best.

CFPB and QM, Rental Buyers, Cost of Renting, Housing Helping GDP, Profitable Servicing Ops, 10 FC Buyer Hazards, Two Harbors Jumbo Deal, Private Risk Share, Tapping Home Equity, Eminent Domain, Sheila at Fed?, $11.15 Trillion Household Debt

mnc-bc-fay2

email signup          RSS News Signup          Fay Servicing          BC’s profile

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Headsup from BC – Sometime this week, MNC will be migrating to Fay Mortgage News, where I am editor. Besides the blog, there will be increased exposure on Twitter, Google Plus, and Linkedin. No action by you required. You will still be on the email list. BC

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(read all of this – specifics) CFPB Updates Exam Guide for QM, Mortgage Rules – RACHEL WITKOWSKI – American Banker 
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Single-family investors search for different markets – Look to invest in stable cities - Brena Swanson – … reports OwnAmerica, a single-family investment brokerage.  … – Housingwire 
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Cost of Renting, Owning Unaffordable for Many Workers Across the U.S. – BY: ESTHER CHO – .. according to the 2013 Paycheck to Paycheck report from the Center for Housing Policy (CHP). The report examined housing costs related to renting and owning for workers in five jobs that deal with travel and tourism across 207 metropolitan areas. … housekeepers, wait staff, auto mechanics, front desk managers, and flight attendants. – DS News 
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(gives 3 ways) Housing to Continue Aiding Weak Economic Recovery - BY: ESTHER CHO – Despite “lackluster” performance from the economic sector, the housing recovery will press on and stimulate overall growth, according to Freddie Mac’s most recent economic and housing outlook. Over the past four years since the recession ended, GDP has grown only 9 percent. – DS News 
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Servicing Operations Back in the Black – By Ted Cornwell – (quotes wells and KBW) – National Mortgage News
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(interesting consumer piece) 10 Hidden Hazards to Check for When Buying Foreclosed HomesWhiteFence.com 
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(good looking loans) Two Harbors markets first private RMBS - Subsidiary Agate Bay sole depositor in long-awaited deal – … The approximate $434 million deal consist primarily of 30-year, fixed-rate mortgage to low-leveraged buyers with strong credit and loss reserves. The average FICO is 770, and the typical household income is $350,747 annually, with about that amount tucked away in liquidity. For example, the average loan-to-value is below 70%. The highest concentration risk is in California, but that is relatively low at 46.4% … – Housingwire

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Housing risks belong with private investors: Bipartisan Policy Center – Creating a mortgage market with choice is the solution – Kerri Ann Panchuk – Housingwire 
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U.S. News: 5 Ways to Tap Home Equity for Retirement – by Alyssa Gerace – Reverse Mortgage Daily 
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Seize The Day – Or The Mortgage – Cities look at eminent domain to ease underwater mortgages. – By Nora Caley – MortgageOrb eFeature

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(focus on housing) Sheila Bair for the Federal Reserve Chairmanship – BY PHIL HALL – Progress in Lending 
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CHART OF THE DAY: This Is What $11.15 Trillion Worth Of Household Debt Looks Like
SAM RO – Business Insider 
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Celebrities, CFPB, MI Deduction, FN Nixes Low Down Payment?, Falling Foreclosures, Cloud Inventory, QRM Good and Bad, FHFA On Eminent Domain, Housing is Hot, Yellen on Banks, Homeownership Perceptions, CA Affordability, Treating Money Well

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email signup          RSS News Signup          Fay Servicing          BC’s profile

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Headsup from BCSometime this week, MNC will be migrating to Fay Mortgage News, where I am editor. Besides the blog, there will be increased exposure on Twitter, Google Plus, and Linkedin. No action by you required. You will still be on the email list. BC

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(Fun: you MUST look at this) NYC Artist Shows Us What Famous Celebrities Would Look Like as Normal People – hattip Rob Coppedge – Techebog 

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(Dave Stevens quoted, lots about housing) Don’t blame the CFPB for tight credit – By Lydia DePillis – Washington Post

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(thoughtful view) The Mortgage Interest Deduction Scam – Posted by Tom Lindmark – But Then What 
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Fannie (portfolio) reconsiders low downpayment mortgages – Fannie reconsiders low downpayment mortgages - HousingWire 
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(not mentioned – delevering hurts econ. growth) Falling foreclosures: A sign of borrower heroism – More Americans focus on debt reductionHousingwire 
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Inventory up, demand down, the standoff over cloud inventory begins - OC Housing News – In my opinion, the housing market has reached an important inflection point. … This is an opportunity to get out from under the debt on the house they really can’t afford, so many of them listed in hopes the rising bids would take them out at the ask. The influx of inventory has been significant. … event we all knew was coming — rising interest rates — came upon us sooner than anyone expected. 
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Revised QRM Rule may contain good and bad news - By Stanley Mabbitt – … It is rumored that the proposed revision would require that the 5% risk retention requirement for securitized, non-QRM mortgages be triggered if the borrower’s DTI is higher than 43% (which is the DTI level in the QM rule). …  However, there is speculation that the proposal may also increase the down payment requirement from 20% to 30%, … and lead to contraction in the mortgage market … – CFPB Monitor 
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FHFA Stiffens Its Stance On Eminent Domain – by MortgageOrb.com

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10 Stats That Show The Housing Market Is On A Crazy Tear All Around The Country – JOE WEISENTHAL – Business Insider  – Economist Mark Perry has been tweeting some great stuff this evening about how hot the housing market is around the country.

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Weekly Update: Existing Home Inventory is up 18.1% year-to-date on Aug 12th
by Bill McBride – Calculated Risk 

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Second Quarter Sees Prices Rising in 87% of Metros – BY: TORY BARRINGER    – The national median home price showed its strongest year-over-year gain in more than seven years last quarter, according to the latest quarterly report from the National Association of Realtors (NAR). – The M Report 
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(implies less leverage?) Fed’s Yellen Says Stance on Banks Hardened – Contender for Fed Chairman Says Crisis Made Her Rethink Views on Regulation - By DAMIAN PALETTA – Wall Street Journal

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(Harvard JCHS) Research: Housing Crisis Did Not Damage Homeownership Perceptions – BY: KRISTA FRANKS BROCK – DS News 
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California housing affordability declines as home prices rise – By Alejandro Lazo – Rising home prices in the Bay Area and other coastal markets made buying a home unaffordable for a big chunk of the state’s population last quarter, data show. – LA Times 
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(money goes where treated best) Swaps clients plan US bank exodus – By Mike Kentz – (IFR) – US banks are at risk of losing overseas swaps market share as European clients have begun making every effort to avoid getting caught up in costly cross-border derivatives rules that were finalised by the CFTC last month, and come into effect this October – Reuters

Interactive Population Chart, REO to Rental Securitization, Mortgage Fraud Overstated, CA New Default Trick, Millennials, Post-QE Origination, Remaking the Fed, CA Renters and Food Stamps Rise, Obama Housing Fix, Freddie Hates Eminent Domain, We Buy Ugly Houses, Rick Sharga, FHFA Mortgage Metrics report, Junk Bonds, Home Interest Deduction

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(must see – updates every second) U.S. Population Distribution by Age, 1900 through 2060 – by Bill McBride – Calculated Risk

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Quelle Surprise! Administration Lied About Mortgage Fraud Results, Numbers 4 to 10 Times Too High – Yves Smith – Normally I’d relegate a good job of news spadework to the daily Links feature, but Bloomberg caught out Attorney General Eric Holder in such an egregious lie that this failed con job , ample, widespread publicity and well-deserved derision. So remember that Mortgage Fraud Task Force? No? There’s a really good reason the name doesn’t ring a bell. It’s been missing in action. – Naked Capitalism
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(REO to rental securitization) FeatherStone Investment cracks into new asset class – Christina Mlynski – Housingwire 
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California: Defaulted borrowers can challenge RMBS assignment – Jacob Gaffney – A California homeowner managed to get a court to agree in theory that transferring his mortgage into a securitized trust effectively broke the chain of title. – Housingwire 
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(iteresting charts) Millennials: pent-up housing demand or lost generation?OC Housing News 
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(origination strategies) GET READY FOR THE POST-QE RIDE – Without Fed support, expect the market to be more volatile. – Scotsman Guide http://www.sg-comdigital.com/comdigital/201308ce/?pg=21#pg21
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The Federal Reserve System is nuts. Here’s how we could remake it. – By Neil Irwin – WAPO Wonk Blog 
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Rental World: California adds more than 500,000 renters while the homeownership rate declines amidst a boom. California food stamp users jump from 2.2 million in 2008 to nearly 4 million today. – Dr. Housing Bubble

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Time to fix housing - By: Boston Herald Staff – President Obama has lined up with a group of bipartisan senators who want to replace Fannie Mae and Freddie Mac, the government’s home mortgage dealers, with a new agency. The president’s proposals are sound — they just don’t go quite far enough. 
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Freddie Mac Mulls Action Against Eminent Domain Plan – BY ALLISON HALLIDAY – Realty Biz News
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(We Buy Ugly Houses franchise) HomeVestors posts largest quarterly number of new franchisees – 100 new franchisees added since January – Megan Hopkins – Housingwire 
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(gives 4 reasons) Media pulls a Freddie Krueger, creates a ‘fake’ housing bubble nightmare – Rick Sharga – Housingwire 
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FHFA Releases First Mortgage Metrics Report - National Mortgage Professional – … The report presents key performance data on 30.4 million first lien residential mortgages with outstanding balances totaling $4.4 trillion serviced on behalf of Fannie Mae and Freddie Mac from 2007 through the first quarter of 2008. The report focuses on the delinquencies, loss mitigation actions, and foreclosure data reported by more than 3,000 approved servicers. … 
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(Junk) Bond Hubris Overwhelms Fed in Riskiest Credit-Market Sectors – By Daniel Kruger & Mary Childs – … The amount of loans made this year that lack standard protections for lenders exceed the all-time high set in 2007, and only one other time have investors pumped more money into funds that buy lower-rated loans than they did last week. … – Bloomberg 
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The homebuilding industry’s increasingly desperate attempts to preserve the HMIDOC Housing News