Mortgage cramdowns…again & the Dumping Dollar syndrome

Cramdowns are back–how could it affect you?

Barney Frank just announced today in the Huffington Post that he’s preparing to re-open the bankruptcy cramdown debate this fall in a financial regulatory reform bill – he claims there aren’t enough borrowers getting put into loan mods, so he’s looking to the courts to help meet the purported demand. I agree with him on one thing: allowing bankruptcy judges to cramdown firsts is a way to inject much-needed underwriting into the market.

It could also greatly supplement your own loan modification initiatives as an investor – let the courts underwrite instead of doing it in-house, I say! Will it hurt principal balances? Sure, but then any savvy investor would have proposed a principal write-down in the first place given the high recidivism rates for the term and rate adjustments we’ve seen industry-wide.

Weak Dollar will impact note investors

In other news … the dollar has officially tanked. As one Brown Brothers Harriman analyst pointed out today: “As we have stepped away from the abyss people have a healthier appetite for risk” and so they’re dumping dollars and seeking better yields elsewhere. Whether the bulls have won out and whether the economy has turned the corner for good (led first and foremost by house prices), is a topic for another day.

The impact of a weakening dollar, however, is inevitable pressure on the Fed to raise overnight rates in an attempt to prevent further weakening. Bernanke will face increasing (and polarizing) pressures, in my opinion: balancing demand for dollar-denominated debt (investors will have little interest in low-interest rate Treasuries with an underlying stagnating US economy) vs. higher-yielding investments abroad.

Exports are being bolstered by US-manufactured products being priced as cheaply as they have been in over a year, against Asian-denominated currencies, but the mortgage market will come under increasing pressure if rates were to rise. Follow the Fed closely – the next FOMC meeting is Sept 22-23.

The impact of higher interest rates on note investors? Lower yields; larger discounts; and potentially a weaker refi market to exit into. If rates really increase dramatically, this could change a number of investors’ strategies from re-perform (why re-perform at below-market rates?) to cash out (short sale and deed-in-lieu).

Dean