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Thursday, January 24, 2008

Congress Is STOOOPID

I mean, Congress is really, really, really stupid. Or maybe Congress is really, really corrupt. The proposal to raise FHA & GSE conforming limits is either stupid, or corrupt.

There is only one thing this can accomplish, and that's for a bunch of banks to unload crap loans with faked appraisals onto GSEs, and hence the taxpayers. This will not help people who haven't bought yet in the high-cost areas, because a return of accountability is rapidly pushing entry-level prices down to below conforming levels just about everywhere.

It would be wonderful for WaMu, which is stuck with a lot of junk, and for Countrywide, which is stuck with a lot of junk, and for Bank of America, which is stuck with Countrywide. But if you are a taxpayer, it's going to be very expensive. And if you are a person who would like to buy in CA, it's the worst possible thing for you, because it will support prices which will kill your financial future if you succumb to the "pride of bankruptcy" NAR meme.

I repeat - Congress is either really, really stupid, or really, really corrupt. I suppose it could be a blend - some of them are honest but stupid, while others are intelligent but corrupt. I think there's a good possibility that some are both stupid and corrupt, and don't understand why they are getting promised so much money for this vote.

In the annals of insane proposals, this takes high, high billing. Loans do not become more payable because they go into the GSE bucket.

It would be way cheaper to just directly give money to Bank of America, Countrywide, WaMu and a few others. It would also be more honest. If that's what we want to do, then let's do it. But let's not destroy the country while bailing out these banks.

Countrywide wants to be able to take its loans that the market won't accept and refi them under FHA or FNMA. That's what this is all about. Don't forget that.

It's not about homeownership. Let's look at the latest 25th percentile (starter homes) list prices for a range of CA cities, compared to the price in January 2007:
LA: $365,000/ $429,920
OC: $414,900/ $499,000
Riverside: $259,900/ $335,000
Sacramento: $229,900/ $316,477
San Diego: $325,000/ $392,279
San Francisco: $380,000/ $468,376
San Jose: $489,950/ $580,589
Santa Cruz: $489,000/ $577,400
What you see above is great news for all the people who would like to buy homes without going bankrupt a few years down the line. It's VERY bad news for banks and financial companies that made the original bad loans without bothering to check whether the borrowers could pay the danged loan. You figure out who this country should reward - responsible aspiring home owners or stupid banks.

Then call your Congress Critter and tell him or her what you think. This is not an ambiguous situation. There is no problem here to be fixed that the market won't fix more cheaply. If we need to bail out a few big banks and servicers, then let's do it honestly, and let's let the wealthiest individuals pay the highest part of the cost. The bad loans will default wherever they end up, and if they end up on the books of FHA and FNMA, it's going to be the pensions and the would-be rational borrowers who pay for it.

This is why I'm waiting to close my FNMA/FHA forecast. The possibility of legislative stupidity like this makes the range of predictable outcomes vary wildly. The reason why these Alt-A loans are going bad is that the principal balances are too high in relation to the borrower's incomes, and if you grab one of these funky loans before it detonates and dump it into FNMA, it will detonate just the same.

If you go to the FEC database, you can find out who is giving what to whom. I suggest that you contact your Congress Critters to find out their positions on this proposal. If you don't like the answer, use the FEC database to look up the bank/finance contributions they have received, then email your Congress Critter with that infoamtion and a copy and paste of the data above. The combination of that and the FEC data should scare the corrupt and enlighten the stupid.

Of course, you realize that McCain-Feingold tries to make it impossible for citizens to join together and publish such information in connection with a candidate's name during the actual campaign. You might want to mention that too.

Alternatively, you could preemptively drop your pants and clutch your ankles.

Remember that stupid and corrupt are not mutually exclusive. With enough practice, both skills can be mastered.
How much discretion do the GSEs have as to what they will accept? Can't they strengthen the criteria and also make the reps & warranties (on things like faked appraisals) more draconian?
Fred - true. I'm not sure that much practice is needed, either.

David, first, FNMA was pushing for this. They can and do alter their underwriting. But remember, FNMA is already taking bad losses on its guarantees. Both Fannie and Freddie bought subprime securitizations, etc. Remember, this is Fannie that just got caught up with filing its financials, which is a management failure which would have forced delisting of most other companies. One cannot fairly claim that this company's management has shown the skills and foresight necessary to deal with this situation.

I doubt very much that their managements have the ability to deal with this. Fannie, in particular, seems to have done quite badly with its forays into the newer "innovative" lending. In recent years, Fannie's "access" loans sometimes feature DTI's of 60% or more. I think many are going to get quite a shock over the next few years as the losses start rolling in.

Fannie does not originate itself. It depends on other companies to do that, so the risk controls that every other company is using for these loans (cutting wholesale) are not available to it.

The fact that the HPI is so badly off, and worse off for refis, shows how loose appraisals are. And yes, Fannie can put back if it later decides that an original appraisal was bad, but of course it can only do so if the originator is still around. However the problem in some of these areas is that the entire pool of appraisals was bad, since there were basically no checks on the process.

My guess is that they will get burned, and burned badly. There are companies which are completely desperate. The better mortgage outfits opposed this move, of course.
This is going to socialize the losses,and allow a few people to refi but it will not keep prices from falling to sustainable levels.I ascribe this more to corruption than stupidity although as fred noted they are not mutually exclusive
When a leadership elite is about do drop from power, they become stupid.

In this case, the Dems did about as well as could be expected. The GOP still has a lock on the government and will until next year. Also the mime that business knows best is still there and the fact that business can guy government is still a fact.

The thing that ended the last such leadership crisis was the great depression which simply wiped out so much money that there was not that much left to buy government.

The loss of food stamp and unemployment extensions grieves me but realistically, this is not the time. In a few months with a election disaster becoming apparent, then the GOP will not be so eager to block it.
So much for letting prices drop back to where people could afford starter homes again in CA. Depressing.

Vader - good point on the food stamps, but aren't you being delusional saying that GOP controls things? Both houses of Congress are majority Dem. Pelosi is well-known to be buddies with developers. Why don't you look up who contributes money to her campaigns? I can assure that if this goes through she'll be rolling in cash. Here's a google search link for you. I suggest you do a little reading. Pelosi was instrumental in blocking the attempt by Congress to address the Kelo ruling. There's a reason for that! And it's monetary.

David - exactly. This is a bailout of the Countrywide crew at the expense of low income families. It's class warfare of the upper middle class against the lower/workiing class. The only reasons homes are so expensive in most the high cost places are because lenders were willing to lend without verifying repayment capacity.
I suspect they will need to add funding for both food stamps and unemployment. The problem is that it's too early. They still don't want to admit to a recession. You can't really justify extended benefits until you are in one. We had both state and federal extensions during the tech bust and I suspect that we will need them again.
I am missing something - when I got my nice fixed rate loans in 11/2005, I damn near had to get a proctoscopy, due to 95% CLTV and insisting on fixed rate fully amortizing loans.

So just because the size limt is pushed up, does that mean that Freddie and Fannie throw out every other rule, such CLTV, DTI, etc? Isn't this going to limit the damage done, or did everyone just lie enough to sneak by with the warrants and reps crap?
What you see above is great news for all the people who would like to buy homes without going bankrupt a few years down the line.


Vader - good point on the food stamps, but aren't you being delusional saying that GOP controls things?

That's because EVERYTHING bad that happens "Is The Republicans' Fault, The Republicans Are To Blame." Ees Party Line, Comrades.
Bob - see the next post up.

The size of the loan is just one variable. Yes, your high CLTV was a risk.

Remember, too, that procedures vary by origination entity. FNMA doesn't originate. Say your loan was from a bank. They probably ran it through DU (Desktop Underwriter), which would tell them what products you qualified for. But different entities handle the outcome differently.

The risk for originators with Fannie is eventual put backs for loans that go under and then don't pass muster in the aftermath.

Have you seen Nick Bagley's WaPo article? It's outside my expertise, but his arguments seem absurd: are the majority of sub-prime lenders banks, much less Federally-chartered banks regulated by the OCC?

Bagley, btw, is a former Justice Stevens clerk who now is a Department of Justice lawyer in Civil Appellate. That's the part of DOJ which sometimes represents the OCC, and other Federal agencies, in litigation on preemption. See, e.g., Watters v. Wachovia Bank, No. 05-1342 (Apr. 17, 2007).

So Bagley is expressing personal views that are at odds with the litigation positions of his employer--something all too common lately.
Carl - the GA law was a terrible law that didn't leave the OCC any choice. Nor was it just the OCC who preempted.

Part of the problem with the GA law was the legislature, and part was a state banking agency that wasn't up to the job. But the underlying fact was that although subprime and non-subprime lending practices have caused great trouble, most state legislatures aren't up to the task of regulating lending properly.

For what it is worth, the GA law was interpreted as effectively banning many Fannie, FHA & USDA loans. It had provisions that basically allowed anybody to be sued at will. It forced the ratings agencies to say that they wouldn't be able to rate any GA loans in securities. The state banking agency got itself in such a mess that at one point it issued a statement that if you wrote two loans, the one you sold to Fannie would be legal and the one you kept on your portfolio could expose you to massive fines, assignee liability and potential criminal liability.

It was unclear and a federal regulatory agency would have been forced to apply an unintelligible law made even more bizarre by an incompetent state attorney. It was one of the most incompetent state exercises in attempting to deal with predatory lending in the history of the United States, and the state banking agency made it much worse. The primary architect of the disaster was one Leslie A. Bechtel, who was a lawyer working for the GADBF.

And I write this, and I detest predatory lending.

The OCC had NO CHOICE but to preempt the darned thing. This is a stupid article in which a journalist has done no legwork.

Also federal preemption has been supported by the Supreme Court, so it's not as if the OCC is really on shaky ground.

GADBF resource GFLA.

Carl, the above link should get you to the GADBF's doc in which it tells banks the following:
"If the products you describe are mortgage products acceptable as secondary mortgage products by Federal National Mortgage Association, Government National Mortgage Association, and Federal Home Loan Mortgage Corporation and are products where the initial rate is higher than the index rate plus the margin, you should use paragraph A and compute the APR using the higher initial rate that exceeds the index rate plus the margin.

If the products you describe are not acceptable as secondary mortgage products by Federal National Mortgage Association, Government National Mortgage Association, and/or Federal Home Loan Mortgage Corporation, these products APR’s must be calculated in accordance with Section 7-6A-2(3)(c) which means the maximum interest that could be charged on that loan would be the interest rate used to calculate the APR. (Published 2/24/03)"

That is so blatantly illegal that it makes the mouth fall open. The text of the law introduces no such distinction.

I'm not sufficiently skilled to understand the blatant illegality. And I want to re-emphasize that the article wasn't written by a journalist but by a DoJ lawyer! As you say, Bagley's Op-Ed fails to account for the Supreme Court's clear precedent upholding preemption--and, worse yet, doubtlessly will be cited by state authorities seeking to regulate Federally charted banks, thus undermining the legal position of the government in future Clearing House-type cases.
Carl - law is inherently fact-specific, and lawyers can make tragic errors if they don't understand the facts. The hapless lawyer in this case needed a fast course from Tanta of Calculated Risk before venturing into these deep waters. Also, she should have at least read and tried to understand Reg Z. Her various Q&As still produce helpless laughter amongst those who do understand Reg Z.

GFLA created categories of loans, three of them, based on the terms in the loans. The problem was that in some cases the language of the law was ambiguous. The GADBF attempted to interpret it.

The GADBF by the time the excerpt was written had gotten in such a fix that it was trying to argue that the law did not apply to some entities but still did to others. That is blatantly illegal unless the law itself created those categories.

In other words, the law said "if such and such terms exist in a loan, the following applies". And the GADBF here states that if such and such terms exist in a loan originated by/for/on behalf of a government entity, the law did not apply to that entity, while if another type of entity originated the same loan, the law did apply. Nor did the GADBF have any authority to make those decisions, because the original version of GFLA did not grant decision making or regulatory authority under GFLA to the GADBF, and under GA's Constitution the GADBF did not have such authority.

OCC was forced to the action. The DOJ lawyer writing the article does seem to be completely ignorant of the legal precedents, issues and facts. For one thing, OTS and NCUA had substantially preempted GFLA before OCC. For another thing, the Michigan case utterly supports the OCC's action. Wonder Dummy of the DOJ appears to be arguing against the Supreme Court. I don't know what to make of someone who thinks the Supreme Court's decisions shouldn't have legal weight or is unaware of them.

The bottom line is that the problems in the loan system were created by the repeal of Glass-Steagall rather than federal preemption, and Congress should have passed a federal law to deal with these issues along with repealing Glass-Steagall. Because these markets truly are national, you have to have national rules and regulations. And as the SC has noted, the entire purpose of creating a national banking system would be defeated if the states could regulate national banks.

GFLA created the problems in the financing system we are seeing now, to be blunt. It did it just for one state, but believe me, the economy of GA was suffering.

The article you referred to is just as bizarre as you think it is.
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