Tuesday, April 08, 2008
Observing With Displeasure
Dryfly commented over here a while ago that as the election wore on we would see crazier and crazier bailout plans proposed. Dryfly wins the prediction award.
Ignoring the maxim that you get what you pay for, a bipartisan (we're going to come to hate that word) plan sponsored by Senators Dodd and Shelby has emerged. It is laughingly known as the "Foreclosure Prevention Act of 2008". (Whenever our Congress Critters do something they know the population will hate, they name it something completely opposite, such as the Bank Secrecy Act which mandated that banks report on their customers to the government. They clearly believe that the electorate is abysmally stupid or at least extremely ill-informed and count on trained journalists to perpetuate that ignorance.)
Following that rule, the Foreclosure Prevention Act of 2008 subsidizes creditors $7,000 for each foreclosure. See Housing Wire for the story. It ought, of course, to be called the Profitable Foreclosure Act. of 2008. Naturally the proposed bill doesn't include anything to address cramming down first mortgages in bankruptcy. As far as I can see virtually the entire bill is a bonus to lenders which will reduce the bargaining position of borrowers, plus shoving even more bad mortgages to the FHA, which means that you, the taxpayer, get to cover the losses for lienholders. How charming.
As bad as most of the Congressional proposals have been, don't expect most consumer groups to look after your interests, especially with regard to mortgages. A coalition of three groups is claiming that declining market policies are anti-minority:
Hispanic, Asian and African American real estate professionals believe that new lending policies have unintended consequences for vulnerable minority and low- to moderate-income families, according to a survey of 1135 combined members of the National Association of Hispanic Real Estate Professionals (NAHREP), the Asian Real Estate Association of America (AREAA) and the National Association of Real Estate Brokers.(This wouldn't have anything to do with declining broker and realtor commissions, would it?)
“This study confirms that minorities are experiencing a much greater than anticipated hit from declining market policies,” says outgoing NAHREP Chair Felix DeHerrera. “In effect, the consequence of these policies is a near complete suspension of financing resources to communities that need it most.”Alright, alright, remain calm, I say to myself. But then I snap again, as I contemplate the unending, ever-expanding barrage of stories in the press detailing the losses that minority borrowers are taking on their homes. I strongly suspect that these same "real estate professionals" are the ones that got them in that position.
Declining markets policies are implemented by GSE’s, Lenders, and Mortgage Insurance companies in areas where home values are declining, or where home values are difficult to determine. In cases where homes are in declining markets, GSE’s, lenders, and mortgage insurance companies policies increase pricing to deliver home purchase and refinance loans to consumers. In most instances, the policies also require higher down payment requirements as well.
Declining market policies are a good thing for the vulnerable, because they act as a warning flag. By requiring higher downpayments and changing policies, the lenders attempt to ensure that they will be covered from losses. This also serves the borrower. Many of these people shouldn't be buying a house with no or very low downpayments in this environment. If they do, they stand a high chance of losing a great deal of money, and a much higher than normal chance of experiencing default followed by a forced sale or foreclosure. Their credit will be ruined, and the cost for those borrowers will end up being very high.
Being unable to buy a home for a year or two is not a crisis. Saving for a downpayment or buying something equivalent to current rent is not societal discrimination. Finagling someone who can't afford it into a home is abusive, because their homeownership is almost certain to be temporary, but the losses in credit and money may hang on for as long as ten years.
The final act in this trifecta of dysfunctionalism is one of the stupidest columns I have ever read by a Jerry Bowyer. The column claims that the current mortgage crisis is all the fault of Congress, because the banks were forced to lend to people who couldn't pay their mortgages. There is a small germ of truth in it, but only a small germ. It is true that groups such as ACORN often take wildly unrealistic positions (see the above article), and it is true that banks are mandated to lend money back in areas in which they are taking deposits.
However, nobody ever made banks make bad mortgage loans. Seriously now, the regulators absolutely do not have the power to do that.
The basic mandate of CRA is that you can't set up a bank branch in a community, take all their deposits, and send all the money out of the community. You should be somehow feeding capital back into the community. Think about that. If a community is going to generate enough money in deposits to justify a branch, is it at all plausible that no one and no interest in that community can qualify for a loan? You can satisfy CRA mandates all sorts of ways, and one of those is to buy affordable housing mortgage bonds, or business loans, etc.
There was always a subprime mortgage market, even before we had FICOs. The fact is, if you qualify your borrowers carefully, you can make many good subprime loans. However you have to provide extra levels of servicing and you have to be very careful in underwriting. You cannot get borrowers with low downpayments, lower incomes and low reserves in over their heads. You have to pay very close attention to Debt-To-Income ratios - real ones, not made up ones.
There are all sorts of ways you can qualify some borrowers who are not traditional prime for loans. If, for example, the PITI payment is going to be close to rent and the borrower has been making rent payments on time for years, you have very good evidence that the loan will perform. Likewise, if the borrower is a saver and can show saving from income for a few years and a good rental payment history, you are fine as long as long as the PITI is going to come in a bit lower than effective savings plus rent and as long as you leave the borrower a couple of months of reserves. If you write your subprime loans carefully, they will perform if you provide the adequate level of servicing, and in a few years you will get those off your books because the borrowers will have equity and good credit. They will at least be near-prime, and in fact they will qualify for a better rate, so then their payment comes down and expected performance jacks up another level.
"Innovations" such as 2/28's or 3/27's, which force the borrower to refinance, used not to be a part of subprime lending. Also, the biggest players in the subprime market weren't even freaking banks! Does the name New Century ring a bell? Ameriquest?
And when this person writes:
But the bad paper remained principally on the balance sheets of the originating banks for a couple of years. The banks and their shareholders were directly hurt, but not the general public, at least in the beginning, that is until the bank regulators once again intervened and encouraged banks to push the paper out to unsuspecting investors.He is just completely misrepresenting the situation. Writing performing subprime loans pretty rapidly converts those to good assets, and after a few years you can move a lot of them off to Fannie or FHA or whatever. It was never news that non-performing loans would require more capital reserves, and this was never targeted toward subprime lending. It was targeted toward very high interest-rate lending, but that is because such loans do default at a higher rate! The high carrying cost of the loan creates the risk!
First the Fed issued guidance which warned the banks that their capital requirements would be severely raised in response to the Subprime mortgages. In other words, banks were told that to the extent that they issued mortgages to high risk borrowers, to that extent they would not be allowed to put as much of their money into income-producing activities.
Believe me, the regulators don't have the authority to force banks to engage in unsafe and unsound lending practices.
I don't know what the average person is supposed to believe when so much nonsense is promulgated everywhere. It seems as if absolutely everyone is lying and misrepresenting the situation, from Congress on down. But the fact is, it was bad underwriting that caused this problem on everything from LBO debt, to commercial mortgages, through commercial loans and mortgages. Willingness to take unacceptable risks does create more and more risk, and eventually that will blow up in your face. Many of those risks were in fact taken in writing Alt-A loans, which are loans with risky features to borrowers with good credit. That is why WaMu is shutting down its wholesale business, for example. The biggest losses overall will probably show up in Alt-A securities.
I guess what they really meant was that the act will prevent foreclosures... from causing too high of losses.
How anyone can believe that extending money to buy foreclosed properties isn't a direct benefit to the creditors is beyond me. I do not believe that senators are that stupid.
Maybe they got offered a 5% commission on each one for campaign funds. Jerks.
I also cringe when I hear the likes of Bowyer blame the CRA for subprime. This is so easily refuted, and yet its a case of "repeat something often enough and people start to believe it."
I have to tell you this kind of thing is a shame for conservatives (I am one). The reason is that it was the divergence from conservative principles that caused the crisis, but not in the way that Boyer thinks. No, it was the fact that conservatives were largely cheerleaders for the Fed's negative real interest rate policy. Sure there were a few dissents (WSJ op-ed), but they were mostly half-hearted as the same dissenters were also quick to trumpet the strength of the economy and downplay rising debt levels.
Parties and political groups that don't face up to "first principles" (such as sound money) deserve to spend some time in the wilderness...
Sorry, rant over :).
BTW, our laws (on the so-called Civil law side) are written by the lobbyists of cos., big Orgs., even govt. lobbyists lobbying brethren other public officials.
David - we seem to be in an era when both extreme conservatives and extreme liberals are attempting to walk the plank. I absolutely agree that parties which succumb to this sort of thing deserve to spend some time in the wilderness.
These "bipartisan" efforts are beginning to worry me badly. Do we have an alternative? It seems that both conservatives and liberals have adopted a mindless habit of resorting to fake axioms. Now they no longer even fact-check each other.
The reason why the Alt-A securitized losses should be higher is that the securitization structure is much less protected than for subprime, so there's less of the junk tranches to take up the slack. And their default rates and loss severities are zooming up.
Usually you have around 20% protection for the investment grade tranches in subprime, whereas less than half that for Alt-A.
I'd rather have top tranches of most subprime than top tranches of most Alt-A.
If the political parties are this stupid now, how stupid will they be in 2010?
Sigh. You are spot on that the real problem is that are parties are only bipartisan when they want to immunize themselve from blame. Clearly anything that writes mortgages should get regulated like, well, a bank. Perhaps we should make mortgage writers hold loans on their books for five years, and outlaw the 2/28 and 3/37 nonsense. That will tend to force better underwriting standards for the loans. Then when these loans are sold and securitized after the five years, we'll be dealing with loans that have already performed for a while and aren't as likely to go bad.
If we're going to get out of this without a depression or a Japan-style L-type recession, everyone is going to have to take their lumps. That means creditors too, not just borrowers and shareholders. If the creditors take their lumps too, then some of the least-bad loans can be crammed down to something that the borrowers can live with (though the borrowers still won't find it easy). If they don't, the prices are going to plunge further as more and more foreclosures come onto the market.
Coming soon to a nation near you (us)? [OK, Haiti is "close" to U.S. but I had in mind something like Mexico....]
to Philippines as Price Near Record.
[I guess we can't stop patronizing/colonizing Philippines or something?]
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