Reunion

I'm back from spending a weekend playing golf and hanging out in Myrtle Beach with eleven guys I grew up with in the Bronx during the 50's and 60's.

It was great fun to be with a bunch of guys who completely understand each other, have deep respect and fondness for each other, know each other's great strengths and weaknesses, and have nothing to gain from each other but complete and unabashed enjoyment.

Most of us grew up in conditions that could be seen as deplorable today.  Some had parents who, under today's laws, might be jailed, while they might be put in foster care.  None had wealthy parents; just the opposite.  Some came from large families of seven or eight children, others were the only child.  What we all had in common was attending a Catholic parochial school, and growing up on the streets of the Bronx.

Hammered by similar circumstances, and tempered by the same fires of strong family, social values, and work ethic, we were all driven to succeed.  And all did - way beyond any of us could have even dreamed, back in those cramped apartments in the Bronx.

All went to college; most served in the military; all left the Bronx; some stayed in the NY Metropolitan area; some traveled the country and the world; all married and had families; some are still working, some are retired. We all talked about the past events that made us laugh, and despite all being realists about the current state of the world economy, all are looking forward to new adventures and fun.

Like a band of brothers, we came together - some for the first time in forty years, without any hesitancy in conversation or familiarity.

Life, for most of us, has elements of pain and pleasure.  This past weekend was definitely pleasure.

Somewhere in the Bronx, there's another group of kids running around on the streets and in the same playgrounds and parks we did.  They haven't any idea where they'll be in forty years, and they're not even thinking about it, but I hope that they all get the chance to reunite, play some golf, and laugh like the kids they are today.....

Denmark Model Mortgage Market May Be Answer

I normally find myself on the opposit side of the positions that George Soros takes, but his suggestion that the Danish Mortgage Market system may be a better approach than the current system in use in the US is intriguing.

To reconstruct our mortgage system on a sounder basis, we ought to look to the Danish model, which has withstood many tests since it was brought into existence after the great fire of Copenhagen in 1795. It remains the best performing in Europe during the current crisis. First, it is an open system in which all mortgage originators can participate on equal terms as long as they meet the rigorous regulatory requirements. There are no GSEs enjoying a quasimonopolistic position.

Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market. Indeed, the spread on Danish mortgage bonds is similar to the option-adjusted spread on bonds issued by the GSEs, although they carry no implicit government guarantees.

Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.

The U.S. can emulate the Danish system with surprisingly few modifications from our current practices. What is required is transparent, standardized securities which create large and fungible pools. Today in the U.S., over half of all mortgages are securitized by Ginnie Mae, which issues standardized securities. All that is missing is allowing the borrowers to redeem their mortgages at the lower of par or market.

Because of the current havoc in the mortgage market, there is no confidence in the origination and securitization process. As a result, a government guarantee is indispensable at this time, and may be needed for the next few years. As the private sector regains its strength, the government guarantees could, and should, be gradually phased out.

How to get there from here? It will involve modifying the existing stock of mortgages, so that the principal does not exceed the current market value of the houses, and refinancing them with Danish-style loans. The modification will have to be done by servicing companies that need to be properly incentivized. Modifying mortgages that have been sliced and diced into securitizations may require legislative authorization. The virtual monopoly of the GSEs would be terminated and they would be liquidated over time.

A plan to reorganize the mortgage industry along these lines would inspire the confidence that would allow a successful recapitalization of the banking system with the help of the $700 billion package approved last week.

Story....