Marketplace Whiteboard
- (Marketplace)
Cramdowns
A debate is raging in Washington, D.C., about how to deal with America's foreclosure problem. One proposal is to restructure the loans using a tool usually seen in bankruptcy courts: The "cramdown." Senior Editor Paddy Hirsch explains.
Derivatives
Credit default swaps? They're complicated -- and scary! The receipt you get when you pre-order your Thanksgiving turkey? Not so much. But they have a lot in common: They're both derivatives. Senior Editor Paddy Hirsch explains.
Bonds, notes and bills
So much government debt! But what's the difference between the Treasury's bills, notes and bonds? Senior Editor Paddy Hirsch explains.
Inflation
Most economists agree that inflation of about 2% or 3% annually is a natural function of a growing economy. But people are worried government stimulus measures could spark much higher inflation. Senior Editor Paddy Hirsch explains
High-frequency trading
High-frequency trading is creating a ruckus on Wall Street. Marketplace Senior Editor Paddy Hirsch explains what high-frequency trading is and why some people are up in arms about it.
Factoring
Many small businesses get the cash they need to operate and expand from so-called factors. One of the biggest factors in the business is CIT, and with CIT on the ropes, small businesses are worried. Senior Editor Paddy Hirsch explains what factoring is, and how it works.
Financial alchemy
Many asset-backed securities have been downgraded from AAA recently. But at least one issuer has miraculously repackaged a downgraded deal to make some of its bonds worth a AAA rating again. Senior Editor Paddy Hirsch explains.
Where's the toxic waste?
Banks are paying back TARP money and claiming they're the picture of health. So what happened to all those toxic assets that were clogging their arteries a few months back? Senior Editor Paddy Hirsch explains.
Dark pools
Dark pools are exchanges where people trade stocks anonymously. Senior Editor Paddy Hirsch explains how they work, and why the SEC is considering regulating them.
The 'repo' market
Senior Editor Paddy Hirsch explains why the repurchase (or repo) market is a vital part of the financial system, and why the government is considering changes to it.
Meet Cap 'n Trade
Cap and Trade is the linchpin of the government's effort to curb carbon emissions. Senior Editor Paddy Hirsch explains how the cap and trade model works.
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Comments
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From Riverside, CA, 07/07/2009
Paddy, your Whiteboard on Cramdowns was very good but you forgot one item. Did you ever stop to think of all those people who are looking for a house after being priced out of the market? Did you ever stop to think of all those people who played by the rules and did not buy anything because they could not afford the price of a house? Now the price is down to a level I can afford - in California. I am looking forward to getting a nice foreclosure at a fair price. I am sorry for the person who spent too much. All I can say is learn that not everything keeps going in value for ever. Just remember these people paid too much and as a result the cost of homes went up for everyone. Good story, good information, keep it up but think of other people in the equation.
From central point, OR, 04/23/2009
Chapter 13 cramdown was made years ago for the rich (trump people) they can keep their vacation homes, yachts, fancy cars whatever, but the working class that got into this mess can't. It should be the last resort but never the less still available to the little guy
From Gardnerville, NV, 04/08/2009
I am hoping for the cram down program. I bought my home for 145,000.00 in 2001. I put 50,000.00 down, and refinanced more than once to do home improvements. Now, I owe over, 260,000,00. Due to the market, my home has decreased in value by 57,000.00. I am behind im my mortgage payments, and my home is being forclosed on. I was out of work for 3 and a half months. Just enough to set me behind in my paymets by 4 months. My lender refuses to do any loan moditication, and I have been back to work since Jan. I think the cram down program would help the people that need it the most. The little people, like me. The banks have the money to work with us. Why don't they???
Hopeful,
Kathy Hart
From Seattle, WA, 03/04/2009
Thank you Paddy. More of this information needs to get to the general public rather than the "experts" who travel the business show circuit expounding their B.S. from their Ivory Towers (aka the Hamptons, Long Island where they live).
The American Bankers Association needs a good cramdown of a shite sandwich rather than cake since their market expertise has put us in this mess.
If they get tax payers money carte blanche (sp?) this is what we the people get in return.
Can't have your cake and eat it too...
03/03/2009
I love these Whiteboard clips. Very informative and easy to digest. I am a software instructor and course developer and would like to do something similar for snall snippets of software training. I am wondering what tool you used to develop your marketplace whiteboard presentations? Did you find it reasonably easy to learn to use this application?
Thanks,
Elizabeth
From Orlando, FL, 02/28/2009
So I guess a cramdown means nothing to my situation. 3 years ago at the height of the market I bought my home for $244,000. After a down payment and 3 years of paying over the monthly minimum I now owe about $183,000. My home is now valued at $185,000.
Am I totally screwed either way? I can't get a cramdown because I am technically in the black on the house, but still I am paying $244,000 for a $185,000 home. Is it too late to say forget it and forclose me now or what?
From iowa city, IA, 02/26/2009
Have mergers that rely on easy credit from investment banks, private capital firms(Cerberus) or over inflated stock prices, significantly added to the present bubble?
For Example
Confronted with an obsolete business model (dial-up internet portal(MercK) AOL used an inflated stock price to help purcahse Time-Warner.
How is this action different than homeowners over-estimating their personal worth and spending money they don’t have?
Don’t these mergers (ie Maytag Whirlpool) lead to ineffective debt burdened companies?
When a Dow Chemical merges with a Union Carbide does that usually lead to a net gain or loss of R&D Money?
Does to much easy and a hunger for short term profit, lead to unnecessary mergers and acquisitions that in the end cannibalize industry by loading it with long term debt?
From NJ, 02/26/2009
These are the best economic class ever! Thank you Market Place Amigos!
From Minneapolis, MN, 02/25/2009
The problem I have with "cramdowns", or principal reduction on a loan, is that the only person who has access to the lowered price of the home is the person who lied (by borrowing huge sums of money from a bank) to price every other legitimate buyer of that home out of the bidding war, and then defaulted on the loan. There are other people who could buy that home at the reduced price (and put down a significant downpayment or buy it outright with no financing) if the home were put on sale at the lowered price. Why let a liar, a thief, and a loan defaulter (who obviously has bad credit) be the only consumer to have access to the lowered price on a home? That is not free market, nor fair market. Homes that are not paid for by the lendee should be put on the market for all consumers to have a fair chance of buying that home at legitimate market value (where legitimate market value is determined by the consumer who can actually pay for it).
From OH, 02/25/2009
Explain why it makes more sense to give billions to the people who caused the problem than to send checks directly to the taxpayers. Even if taxpayers "sit" on the money by putting in their savings accounts, it is available to the banks for investing, but at least the taxpayers can feel like they're getting something for the massive debt their assuming. Better yet, distribute the money on a curve where the lowest income earners get the biggest check. It has been my limited experience that the lower the income, the less likely they will be to keep any of the money they get. What better way to stimulate the economy than having tens of millions of people flooding their local economies with thousands of dollars? Also, by giving it directly to taxpayers, the government recovers almost 1/3 of the money in the first year from income taxes. I just don't understand you humans and your accounting.....
From Los Angeles, CA, 02/24/2009
Paddy’s videos are easy to understand and incredibly informative. Keep teaching us the ins-and-outs of the Byzantine world of finance. Only with knowledge will we be able to understand the mess we are in… and hopefully find a way out.
From FL, 02/23/2009
It should not take a cramdown for investors to agree to a principal reduction. What's the alternative? The stimulus package will not curb the housing meltdown. I'm on the front lines of real estate at ground zero (Florida) where 1 out of 87 home "owners" is in trouble. Realtors are pulling back on showing and listing properties (in trouble) with more than one mortgage. Banks are not working with Realtors. Within the month, new practices have taken hold. Suddenly, junior lien holders are selling debt. One recent short negotiation defines the growing problem: a junior lien holder verbally agreed to a $4,000 short payoff contingent of course on 1st lien holder short payoff. A few weeks ago, I received acceptance from 1st. Went back to 2nd (with whom I'd stayed in contact) for their written acceptance, only to hear that 2nd had sold to "investor" who demands $24,000 (not the $4k). 1st cannot force 2nd to settle, though 2nd will get ZERO in foreclosure with borrower forced to file BK. Why would a 2nd force foreclosure to get ZERO? Why wouldn't 2nd settle for $4k especially knowing the borrower has nothing to go after? This is the case with 5 of my short files. Realtors across the country are forming a petition to force the National Association of Realtors to issue a moratorium on Realtors taking short sale listings and/or showing properties listed as short sales. In many parts of Florida, 75-90% of all listings in the MLS are pre-foreclosures. Unfortunately, cramdowns and the recent stimulus package will not slow down or stop further tragedy. Bankruptcies are exploding...courts cannot keep up. I have two short sale files that I've worked for 18 months. Thank you, Paddy, for helping people understand cramdowns. It shouldn't come to this, but even cramdowns (which will HAVE to happen) will be wonderful for the people it helps but insignificant in the big picture. By nature, I'm not a pessimist either. Only from history books do I know The Great Depression. I cannot imagine a worse economic time as today. Every day, I hear from friends who have lost their jobs and cannot find work. Mike
From Mclean, VA, 02/23/2009
Paddy,
Thanks for sharing this knowledge with us. In your 'Cramdown' session, what happens to the unsecured portion of the loan? Does the bank take a loss of $250,000? In addition, what do you mean by 'smaller interest'? Do you mean smaller monthly payment or refinancing for a lower rate?
Please let me know as I am very interested.
Thanks for your help,
Guy
From Severna Park, MD, 02/20/2009
Why do I not hear more of Paddy on the program? He's very good at explaining things so the average person can understand what's going on.
I look forward to hearing him more often on the air.
From Troy, MI, 02/20/2009
Dear Mr. Hirsch, Can I please please be your student?????!!!!
02/20/2009
Hi Michael Forgive the confusion - if the judge orders the remaining secured debt amortized over the remaining life of the loan term, it's the monthly payments which will be reduced. Which helps the howeowner as it's his inability to pay his large monthly nut that's getting him into trouble.
02/20/2009
Hi David Yes, the homeowners still technically owe the $250k, and they may well be able to pay it over time, if their situation improves. But because the 250 is unsecured, and the homeowners are bankrupt, they may well just throw up their hands and say "sorry guv - I'm skint." Which is why unsecured bonds in a bankruptcy rarely trade particularly high.
From Redmond, WA, 02/19/2009
I believe the $250k in teh example is a loss to the bank. But my question has to do with the interest. Paddy says that this cramdown will reduce the barrowers interest rates. It is not clear to me how that happens. Reducing the principle owed and amortizing the new principle over the same period of time at the same interest rate will reduce the interest payment, but at the same rate. Is an interest rate adjustment typically part of a cramdown? Thanks, mike
From CA, 02/19/2009
What happens to the $250k? Does Fred still owe that money?
Thanks for these whiteboard presentations. They really help to understand what is happening.
02/19/2009
I am a big fan of the white board. I get it on my ipod and the time on treadmill flies by. Besides, it is amazing how you make complex topics so easy to understand. Also, I have started using white boards a lot for my team meetings. Cheers mate!
From Boston, MA, 02/18/2009
Keep up the great work Paddy. We all appreciate your explanations. You're looking more tired than usual, make sure to get some rest!
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