Seriously, technology helps most other businesses in terms of both efficiency and creativity. Want to propose keeping the mortgage biz in the relative dark ages? Good luck with that.
Ralph - Unless I misread you message you are most certainly an ass. (Otherwise please disregard)
Now to more serious business:
... Working together, the federal regulatory agencies will continue to use their supervisory authority to ensure that regulated institutions have policies and procedures designed to treat borrowers fairly....
Why the distinction? What would be the nature of an unregulated institutions?
If the loans have been packaged and sold, how much latitude does a bank have to renegotiate with borrowers? Am I wrong in assuming the answer falls somewhere in the range of "zero"?
I see a few highly publicized "workouts" attempting to paper over an ocean of defaults in the near future.
If the loans have been packaged and sold, how much latitude does a bank have to renegotiate with borrowers? Am I wrong in assuming the answer falls somewhere in the range of "zero"?
I see a few highly publicized "workouts" attempting to paper over an ocean of defaults in the near future.
Great post, Tanta. Was it you that pointed out that loan mods are useful when a borrower has hit a temporary rough patch? A period of forbearance is definately called for when a person has lost a job (and has good prospects), has been ill, etc. All that said, most delinquent borrowers today have more loan than they can handle. Forbearance in that case is just sweeping the problem under the rug and later lifting it to find higher loss severities. I'd imagine the regulators would have an interest in preventing banks from engaging in this practice.
The loan mod "solution" most warranted today is called:
WRITING DOWN THE LOAN
Then they can proceed to work with the borrower. Not before.
Dark ages, Banker? Really? You think a lender having to see a borrower's face at least once in the process is medieval? Please.
Ask anyone who has been a victim of identity theft whether the ability to get "instant credit" at the department store was really such a fantastic deal after all. Where did we get this idea that we just don't have another 10 minutes?
Ralph, if you're trying to be funny, I missed the funny part.
This push for high levels of home ownership must have a social engineering side to it. i.e. Sometimes it reminds of me of my mother and aunts (God bless'em all) trying to get me married and settled down just so everybody worries less and I stay out of trouble.
Economists twitter about the virtues of a disciplined labor force. Maybe the Fed is convinced a nice mortgage will help with that and the risks are worth it to the collective.
For me a mortgage? Forget it. I've never owned a car or held a job more than 18 months. How's that for a guy in his 40s?!
Banker, I don't think Tanta opposes innovation. The economic idea is that a little more spent on the transaction costs (of a very expensive transaction), might be beneficial to all parties.
The word relative means something. In the bigger picture, the arrogance of dictating the level of business management , and believing that 1) it can be superior to the market's solution and b) that the capitalists won't figure a way round it is amazing.
The big flaw in much of this is the idea that anything unusual is going on here. Markets self correct constantly. That's why they are superior to other forms of economic structure. Markets lurch back and forth, but all in all they have been demonstrably superior to anything else yet devised.
But maybe Mortgage Czarina Tante would do better ! [ducks]
Mortgage Czarina Tanta leaned the biz at an institution whose deposits were taxpayer-insured, and which was ultimately "resolved" by this outfit called the RTC, which was funded by the taxpayers. There was a unit on "moral hazard" in my final exam.
Which self-correcting superior free market did you learn the business in?
If the parties involved agree with you and Tante, then they are certainly free to do that. But to dictate it? Seems like spitting in the wind (at best) and counterproductive more likely.
Markets lurch back and forth, but all in all they have been demonstrably superior to anything else yet devised
Interesting how the market does not want to go anywhere near where real markets go - pitchforks and torches. Nah, it just wants to go far enough to pontificate about itself, no more.
This subprime-o-gasm could not have come at a better time: The markets were begging for a reason to retract and offer up a buying opportunity, and the raw emotion of the national media coverage has driven the Fed from a tightening into a neutral bias.
Existing regulatory guidance does not require institutions to immediately foreclose on the underlying collateral when a borrower exhibits repayment difficulties. Working constructively with borrowers is typically in the long-term best interests of both financial institutions and the borrowers. Capital markets investors in securitizations have the same motivation as direct lenders in maximizing recoveries on defaulted loans.
Banker, let me try to make my point more clear. The Federal Reserve regulates banks. It is entitled to use "benefit to the homebuyer" as one of its criteria for judging the acceptability of financial institution risk-taking. It does this because it understands that there are public policy issues at stake here, not merely maximizing profits for banks.
I have no problem with the Fed taking the position that "benefit to borrower" is an important consideration, and that some higher-risk lending may be justified in order to assure that the depositors with the little accounts have some access to lending, just as the depositors with the big accounts do.
What I do have problems with is the Fed assuming that things banks do precisely to compete in the old superior free market are necessarily "benefits" to borrowers. And as CR says, I think it's absurd to conclude that all transactions should be as inexpensive as possible. Some transactions should reflect more "externalities" or whatever you economists call them than others.
You sound like you think that I or CR or anyone else has no business making such an assertion, because it is "dictating" to the banks. Well, yeah, it's an attempt to. I expect to have a voice in regulatory policy in exchange for being one of the ones on the hook for the potential bailout. I think we should all expect that. It's that democracy thing I keep hearing about.
Mouse over states on page 9, I'm wondering if the reason some states didnt see as big of increase as others is if it is merely regulatory, it simply takes longer to get into foreclosure in those states.
Banker, if the burden falls only on lenders, investors, and foolish borrowers - and not on taxpayers in any way, then the market might be (and probably is) the most efficient method to sort this out.
Then we could just read Tanta's advice as being for the intelligent (read: surviving) lenders.
If the burden falls on me (and you), well, then the story changes. Now I have a say.
BTW, I'm not sure anyone should buy right now with a subprime loan (I'm not suggesting regulation, I just think it's dumb). Why not improve your credit first, and then buy with a much lower interest rate? With rising housing prices, I understood the desire to buy right away (aka speculation). But with flat or falling prices, subprime makes no sense.
Asebius, I wouldn't disagree that there's an undercurrent to all this "ownership society" that sounds a lot like "everybody tie themselves to a mortgage so you can all be both good consumers and docile workers, since now you'll really be afraid of getting fired." It's why I'm always so surpised that the Bushies aren't in favor of gay marriage. You'd think they'd want those fun-loving homosexuals to settle down, buy a house, and get busy caulking the windows in their newly-limited free time. Oh well. Ideology's a weird thing.
I just can't, really, figure out what the relationship is between the more respectable reason for boostering homeownership--that is, giving low-to-mod income people the opportunity to buy low-to-mod homes at low-to-mod prices on mortgages with reasonable terms--and this idea of nothing having to take more than 24 hours or cost more than 108 bps or whatever.
And, well, if you're an experienced mortgage servicing veteran who can really collect on loans, and your job just got outsourced to India where the labor is cheaper, and you still have your own mortgage payment to make, you could, well, be a little pissy. (I'm not describing myself, btw. No one has ever allowed me anywhere near the collections department.)
I think we can probably assert: when an external financial actor/system/force enters a specific non-financial industry and causes changes in behavior for the sole purpose of "increased liquidity" it's bad.
Cole - he sickened me. Every time he was asked a question about what took place in the past, the boom & bust, he answered in the form: "the fed has procedures for...". Always focused on the present & future. Am I wrong to conclude that there is institutional denial at the Fed?
Another observation is a little bit more "pro-Fed". I notice that everyone relies on the all-powerful Fed to magically sustain this economy. To me, that's the equivalent of dangling no carrots, only sticks. The Fed has nothing to gain from good actions, because it is not a political body. So it's up to the Fed to hold its culture high. But since people expected so much of it, maybe it got used to not working enough and always telling the Senate that all is well. Kinda like prisoners who are tortured and confess false facts.
Banker: Intentionally misspelling people's names is childish. Unintentionally misspelling them is ignorant. Which will it be?
The passage that leapt out at me was:
Capital markets investors in securitizations have the same motivation as direct lenders in maximizing recoveries on defaulted loans. Thus, mortgage servicers will have an important role to play in working with delinquent borrowers. Established and well-rated loan servicers are usually given a range of options by investors in workout situations. These options could include modification of interest rates, payment restructuring, and extension of maturities.
I read that as a shot across the bow of those who have bought several trillion dollars worth of MBS. As in, "Don't call us; we'll call you." As in, "If part of your plan going forward is forcing us to lower interest rates, make sure your forcer isn't broken."
The Koolaid part I read as pure mockery. Parroting the Greenspan bullshit just to make sure everybody knows what page they're on.
I think the Fed is now in the hands of some very smart people who have very specific goals in mind. I don't think that among those goals is guaranteeing that the rich get richer.
I looked over the CFC REO list for Calif yesterday and found little of anything in areas that I would considerable desirable. While commerical banks, Investment Banks, MBS holders etc have embraced these modern and creative lending standards the market is rewarding them with a larger and larger pool of REO's in areas that have a very small and decreasing number of potential buyers.
The subprime market is a very old and established sector of the lending industry, albeit one with a checkered history. The notion that subprime will disappear or be regulatory-burdened to death is absurd. It aint going nowhere. It serves a very significant segment of the population. This latest credit bubble saw for the first time the Big Money Wall St. Boys dipping their toes into that market as the suppliers of the warehouse lines of credit, and then securitizing the originations for sale. It didnt take long before they realized the profit potential of controlling the entire food chain, i.e., owning the originators as well as long as the price was right.
We are now going through the Darwinian process of the strong eating the weak.
The cover of this week's Economist reads: "The Trouble with the Housing Market". Our favorite subject has now gone big time globally. Let's just hope there is no Sports Illustrated type jinx.
OK, here we go. Sorry about the misspelling Tanta! Ignorance, not malice...actually, laziness is a better description.
CR,
I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough? Or do you wish to make more appeals to authority? We can compare regulatory education if you wish. I have my Series 7, 24, 63 and on and on we go. I've seen/participated in market collapses, 1991 and 1998 (particlarly the latter) were the scariest. Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much. What happened to those markets in the face of currency speculation, hedge fund collapses, bankruptcies etc? Geeze, just look around they are all functioning well and bigger than ever. Huh, whoda guessed?
Just for the record, thankfully we don't live in a Democracy. We live in a Constitutional Republic.
CR,
I'm not propsing any bailouts and didn't support them in the S&L collapses, or for Chrysler either. In general there is in my mind a huge difference between suggesting someone shouldn't do something and dictating what can and can't be done under the law.
The notion that the mortgage originator still holds the paper and is an any position to 'forbear' is a charming one. However, I don't see Barclay providing much forbearance toward New Century, to use one example.
People are going to get fried here. They can smile during the process if they choose, but it really won't make it any more pleasant.
Hapsberger,
Real estate investment trusts, or REITs, are not regulated. New Century is one; they're no longer lending and are under criminal investigation. Novastar is one; it has filed bankruptcy. Those were top 10 subprime lenders in 2006. There were two other REITs in the top 25 lenders by volume last year. I can't recall their names right now (was WMC one of them? Not sure), but those two were bought by non-REIT corporations and presumably won't be REITs anymore.
So four of the top 25 subprime lenders in 2006 were REITs, and they began 2006 as REITS that were doing business as REITs. March isn't over yet, and none of them are doing business as REITs. It appears that freedom from regulation didn't help them.
Probert: "Am I wrong to conclude that there is institutional denial at the Fed?"
No, you're not wrong. Any other questions?
Here's an exchange between Menendez and Cole, just to give folks the flavor of Cole's discourse:
Menendez: "The size of this problem that we've heard defined here already leads me to question, regardless of everything you're telling me, how could it be this big, and have you done your job?"
Cole: "I will say that, given what we know now, yes, we could have done more sooner."
Menendez: "And why did you not do more sooner?"
Cole: "We were doing a good deal and what we've observed in terms of a risk layering that's really created the problems that are coming to light now is something that we have observed in the extreme in the last year. And 2006 is when the risk layering really started to compound in terms of various dimensions of these contracts that made these loans unviable."
Wally said: "The notion that the mortgage originator still holds the paper and is an any position to 'forbear' is a charming one. However, I don't see Barclay providing much forbearance toward New Century, to use one example."
One of the people who testified today was Irv Ackelsberg, a lawyer specializing in foreclosures. Here's an excerpt from his testimony:
"It's not the lenders who will be foreclosing. These loans are all made to order for Wall Street investors who purchase them almost immediately after they are created. Foreclosure decisions are made by massive servicing organizations that work for those investors. In the ordinary course of their business, the servicers never have to justify a foreclosure. They do, however, have to answer for their investors for any forbearance being offered to the borrower. I believe Congress will need to mandate moratoriums and debt restructuring in order to avoid a national disaster and to ensure that the investors are absorving at least some of the losses that otherwise would fall solely on America's homeowners."
Here's the translation: "As long as Greenspan was Chairman, everybody was forced to drink Koolaid every morning."
And it's true.
Greenspan did all this crap. And they're not going to come out and say it. I don't blame them. Only Greenspan himself is the sort of bottom-dwelling, feculent scum to blame it on the other guy.
Lord, Holden, I'm glad I just read the written testimony instead of making myself listen to it. So it all just popped up last year, huh?
I'm still puzzled by the thought that foreclosure is always and everywhere cheaper to the investor than other workouts. I thought Cole was merely conceding the obvious that security holders' collateral isn't in some magic part of the RE market where REO will fetch top dollar. They're just as much in the drown-or-burn dilemma as depository lenders.
What financial innovation would allow a person making 50K a year able to pay off a 400K mortgage? Other than forgiving a portion of the debt, what can a lender do to make an unmanageable payment doable for that borrower? The numbers didn't and will not work out.
CR, I think Banker was accusing me of an appeal to authority. He/She is just confused because you and I look so much alike.
Banker, my point was not an appeal to authority. It was an appeal to experience. My opinion is that we once upon a time experimented with deregulating mortgage lenders. It didn't work out so well for the taxpayers. You're free to disagree, but calling me "Czarina" because I dare to express an opinion on what I take to be public policy is, well, asking for more trouble than you actually got from me. I assumed you were just kiddin' around, so I kinda just kidded a bit back. It would be a good idea if you allowed me to continue to believe that you were just having a bit of fun, and not really name-calling. If you doubt that, ask Sippn.
Is this correct - Servicers may be quicker to foreclose because they don't have to ask permission to do so. I will admit to a non inconsiderable amount of ignorance about this business, but it seems to me that one to be in a hurry to foreclose one would have to believe that it is possible to sell the property for more than the fellow that currently owns it? Also, how long is all that REO going to sit around at last year's prices?
Not always and everywhere, but...with foreclosure, especially earlier in the cycle, you'll get something back for your money. With forbearance, you wind up with decreased confidence in your CDO/MBS's which could well lower their value more than the foreclosure loss. So you wind up with reduced income and reduced liquidity. And you're supposed to accede to the people who sold you the crappy loans in the first place handling the forebearance. I can understand the impulse to wash one's hands of the whole thing.
"Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much."
Yes, agreed. Via derivatives or whatnot, the financial community seems to have done a good job of protecting itself from meltdown. Some hedge fund blows up (Amarath)? There's enough money washing around to fix the problem.
But that's not the real point - what about the 69% of consumers who are homeowners, and their protection from blowup? Well, consumers only make up a small part of the economy after all (where's that irony button?)
"Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much."
Maybe, Banker, maybe.
Maybe it's all over. We've seen the worst. Sunny days ahead.
I see a day of reckoning on the horizon. I see this as a Greek tragedy in the making -- we're still in Act I.
Many informed people here cite data, history, experience to support their view.
For me, I read people like you and I hear hubris. I'm just a mere mortal watching this play out, but even I know Zeus don't dig hubris.
Bankster is serving the usual load of cya free market bushwa. Hey Bankster- if your prostate surgery goes badly because your surgeon was picking tomatoes for the temp agency- is it equitable for your heirs to sue for damages for your demise?
The Fed is telling folks to practice forebearance? News to moi- all I hear is that Saxon Mortgage is the devil incarnate.
Tanta's original post contained the witticism: "Like Queen Victoria, I am not amused". So I think Banker's "Mortgage Czarina" comment, as Tanta suspected, is just having a little fun. The lack of flaming in this blog is a big attraction for me, so I hope Tanta, Banker, and others maintain the current high level of mutual respect and politeness.
Tanta, you clearly note in your post that the key driver behind the efficiency push is "lenders pass on the efficiency savings to borrowers, in the form of lower rates and fees." I think this phenomenon has been empirically verified (something on the order of $4,000 to originate a loan in the 1980's, vs. $400-600 today), but can't find any cites off the top of my head.
However, you then suggest that you "see these 'savings" going mostly to executive bonuses, ...". I deeply respect your mortgage industry experience, so I'm a little troubled that you think the banking industry is inefficient enough for this to occur. Could you expand on this issue?
While I think the overall efficiency push has been beneficial, I agree that the big move to low/no documentation is a clear invitation to fraud. I also agree, since taxpayers are on the hook for insured depositories, that we might have some say in whether to allow this low/no doc lending by regulated lenders.
However, your interchange with Banker about whether the market or regulation will fix the problem really interests me. According to Zelman (CSFB 2007), he share of low/no doc lending from 2001 to 2006 has risen from 16% to 26% in prime, 66% to 81% in Alt-A, and 30% to 50%, for a total shift of 18% to 49%.
My instincts argue that Banker's "free-market approach" is the best way to address this problem. Equity holders in the various fiduciaries take the hit from high losses, but the FDIC is not in danger. However, Zelman's numbers make me a little nervous, and I wonder if low/no doc issues could affect the banking industry as a whole. Do you have any thoughts on the issue?
Banker, aptly named, is a true apologist for the financial industry.
The prime beneficiaries of Fed largesse, a result of diluting our money of course, these bankers will trot out their "helping the disadvantaged" bromide. This is straight from the socialism playbook, only the communist party did it with more conviction while they robbed and destroyed the rest of society. In this case no one is buying their story.
Regarding what servicer has to ask permission or seek approval to foreclose, and just because I've had MI on the brain lately . . . Here's MGIC's default servicing guide. The sections on loss mit and foreclosures may be of interest to some folks. And yes, those securitized loans carry mortgage insurance.
Forgive me -- I don't usually cast aspersions on other participants in this forum, but I had to chuckle at this one:
"I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough?"
As I remember, the 1998 problems were well telegraphed, starting with the Korean devaluation in 1997. Throughout the turmoil in emerging markets (Korea, Thailand, then Russia), corporate credit spreads were as razor-thin as mortgage spreads are now.
"Compared to those? This is nothing." And it was nothing then, until it was something.
There was, essentially, the same type of mass denial of any potential risk then as there is now -- which, of course, is in and of itself a precondition for a market to crash.
So here's where the disparaging comes in. Mr. Banker, did you perhaps think in the early summer of 1998 that junk spreads were juuuuussst about where they should be? Could you, perhaps, be holding a similar view now of all but subprime ABX?
Tanta, you clearly note in your post that the key driver behind the efficiency push is "lenders pass on the efficiency savings to borrowers, in the form of lower rates and fees." I think this phenomenon has been empirically verified (something on the order of $4,000 to originate a loan in the 1980's, vs. $400-600 today), but can't find any cites off the top of my head.
The claim, certainly, is that those costs are passed on to borrowers. I'm a bit suspicious of the numbers you've cited. I have no publicly available information at my fingertips on that, although I will try to do some digging. I will simply observe that back in the 80s, for instance, no mortgage servicer ever charged a payoff quote fee. And I clearly remember the uproar (especially by HUD) when lenders started charging borrowers the cost of recording the assignment of mortgage. Making the borrower pay the cost of selling the loan! Many of us were literally in shock that anyone could be so greedy. These days it's commonplace. Just two years ago I got into it on a bulk deal because the originator was charging the borrower per diem interest from the day of closing (signing of the documents), even though, as cash-out refis, the loan funds didn't disburse until three days later. Where I come from, you don't charge interest on money until it is disbursed to the borrowers. When I declined to buy the loans unless the "double dipped" interest was refunded to the borrower, the originator had the gall to tell me that it wasn't illegal in the state in which the loans were originated, they'd checked. I asked what, frankly, made them think it was acceptable just because it wasn't illegal. The answer was a blank stare. And everything I've just mentioned is prime loan business, not subprime.
So we can look at numbers on lender's cost to originate all we want, if we can find them. But we will also have to talk about how those costs are kept low by passing things that used to be considered "overhead" onto the borrower through fee escalation, and business practices like that interest overcharge on refis. In short, my view is that it used to cost us more to book a loan because we didn't pass those costs onto the consumer.
Perhaps some of our readers who are currently loan originators can tell us what the going "junk fee" load is these days.
I suspect, Kyle, that you and I will have to agree to disagree about whether the market is efficient enough to punish excessive executive compensation, in banking or anywhere else.
And thanks for reminding me to keep up my Victorian sense of humor. You're right, and thoughtful comments like yours are what make the blog.
Let me add that the reason it doesn't appear to borrowers that they're paying more is that first, these "no fee" refis blossomed. Of course you pay the fees on those. You just pay them over time, on the rate, or in the form of interest on the extra balance because you rolled them into the loan. But we all know about the sad level of financial literacy out there, and some people really think a "no fee refi" is no fee. The Fed, interestingly, is in charge of writing rules for consumer disclosures that are supposed to clue people in to this kind of thing.
The other issue is just the incredibly low rates we had, especially in the 2003-2004. That masked a lot of fee escalation from the borrowers, who of course kept thinking that these refis were getting cheaper, since they were in fact getting lower rates when they refinanced old loans. But that doesn't mean they were paying the "true cost of credit," to steal a phrase.
Amato- thanks for the bug to check out countrywide's foreclosure pipeline at recontrust.
Arizona- Phoenix area- Maricopa County They will be doing 691 sales on the courthouse steps in the next four months- not counting some of the houses that are in Pinal County- add in another 100 for them. 07 stats-They have performed 98 in Maricopa County so far with 78 going to the beneficiary- 20 bought by third party buyers. A 21% uptake rate for foreclosures!?!?
AllenM, no problem. The problem with CA REO's is not the number, it's the quality - or EXTREME lack thereof - and price.
99% of them are unfit for human habitat, and require extensive work to be considered as even a rental, that is IF they cashflowed with a DP of less than 50% - which they DON"T.
1% are decent properties selling for whopping discounts in the 10% range. That's NOT blowing my skirt up.
If someone knows where the residential RE carnage is in CA, they are doing a GREAT job of keeping it a secret.
Banker...banker...banker (shaking head.) Cascading cross-defaults always START at the margin. Subprime is nothing if not the margin and it's already been pretty well established that this is not only not contained, but is spreading like wildfire. God, I feel like a parrot for constantly reminding people of this. This is like Dataquick releasing a report in Sept. 2006 saying that default rates are low and indicators of market distress are largely absent from the market. As tj said: YET!!!!!!! This reminds me of the old days on Ben's blog where we'd get Realtor trolls that sounded very convincing except that they were full of mierda.
Amato- I did a quick check of San Diego County sales since 1/1/07- of 156 prperties only 17 went to third party buyers- so they are still trying to keep the market up with full debt bids on the courthouse steps. In other words the houses now join the zombie market and begin weighing on it through REO management.
I notice that in Phoenix there are a bunch of houses and condos (yikes!) coming up in Scottsdale and in nicer parts of town. Now the high end will gradually get participation in this slow motion process. Of course this will get interesting since we are only looking at one companies worth of material!!!!
I figure that thousands of houses are going to be added to an already saturated market here in Phoenix, with attendant damage resulting in more foreclosures and short sales. Of course as equity vanishes, short sales decline and foreclosures rise.
Mortgage crisis overwhelming credit counselors
POSTED: 9:25 a.m. EDT, March 22, 2007
Story Highlights Analysts predict between 1 million and 3 million foreclosures in 2007
The industrial heartland hard-hit by foreclosures in 2006
Some economists believe a recession could result from the mortgage defaults
AllenM, any property that's not half destroyed is being taken back by the lenders making full debt bids. That's about 90% to 95% of the courthouse action. Those homes then go into the mls through the lenders realtors, where bargains are few and far between.
The other 5% are stupidly bid up by a large and growing crowd of housewives and husbands looking for a "bargain" and amateurs who watched "Flip That House".
Happy to see Tanta keep mentioning public policy -- maybe that's why there are suddenly so many of these "free market" fantasy flags flying on this board.
t didnt take long before they realized the profit potential of controlling the entire food chain, i.e., owning the originators as well as long as the price was right.
We are now going through the Darwinian process of the strong eating the weak.
Yup. It won't be long and we'll be able to pick up our 'sub-primes' in Isle 8 at WalMart... between Bubba's BBQ sauce and telephone calling cards before heading home in the monster truck.
Banker, aptly named, is a true apologist for the financial industry.
No he just grew up in the shadow of the Lubyanka and sees any & all regulation as a projection of 'Five Year Plans'... While we all grew up in 'Morning In America' and many of us see the 'Ownership Society' as little more than 'Rust Belt II'.
We are what we eat. I'd love to do dinner (and drinks) with banker. We really are probably not that far apart (after drinks anyway).
Oh really??? Forget that bank reserves are at all-time lows and bank's exposure to RE is at record highs.
According to the Mogambo Guru, bank deposits are around $4.8T whereas actual required reserves are only $39M.
FDIC is insurance. Like insurance, the many pay premiums to cover the ills of the few. If more than a few get sick at once, GAME OVER.
Yes, no doubt RTC II is in the cards, and people will get some of their money back. The questions will be (1) when will they get it back -and- (2) will it be worth anything when they do. Wanna bet that all the best investment deals are gone by then, too?
Wells Fargo's Annual Report is out, they say "have no fear, all is well": "For the 14th consecutive year we were the nations No. 1 retail mortgage originator. Were very disciplined in home mortgage lendingwe dont make option adjustable-rate mortgages or negative amortizing mortgages. Our owned home mortgage servicing (administering the monthly payments of your home loan) reached $1.37 trillion, the largest in our industryup 38 percentand mortgage originations were up 9 percent to $398 billion."
Amato, I just talked to a realtor on Tuesday looking for my bidness- I told her don't bother me unless the property is good and runs 120 times current market rent. She had a FB property where there were trying to get out from under 210k and the going rent is about 1300 per month. I said they are about 50k too rich for reality.
So back to the banks it goes and they sit and sit. We only have three more months before phoenix shuts down in the summer heat. Nearly 50k in homes weighing on the market and more on the way? If I was a lender I would be flushing inventory as fast as possible, instead of waiting for some mythical make whole buyers.
Nobody is playing flipo thato houso with liar loans, cause the loans are gone. Now the market has to adjust.
Time. Time. Time. Real estate is slooooooowwwwww to change.
Four years to see real blood and I would guess 100k in foreclosures in the Phoenix AMA.
The Banker seems to think when players cross the line it's okay cuz the markets will correct any excess. Many of these toxic loans should never had been written in the first place. I hope all the bastard financial institutions involved in this scheme go belly up along with the investors who cheered it on.
This March 30, 2002 article form the Economist was much less optimistic than the cover might suggest. The last paragraph:
"The lesson which consumersand also many over-sanguine economistshave to learn is that spending cannot outpace income for ever. House prices have saved America and the world from a deep downturn, but they do not remove the need for consumers to take care over their balance sheets. Homes are only as sound as their foundations."
"I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough?" NO I am not impressed.
Mr. Banker thinks he is another genius cuz he skims a small commission off of every transaction pumping his toxic garbage. well Mr. Genius we have seen many so called phd's noble laureates and smart @$$@$ go bust over the last 10 years.
Yes, no doubt RTC II is in the cards, and people will get some of their money back. The questions will be (1) when will they get it back -and- (2) will it be worth anything when they do. Wanna bet that all the best investment deals are gone by then, too? - tj & the bear
A few years ago I was over the FDIC limit at my bank. Since I was withdrawing a fairly large sum of money the teller wanted to know if I was willing to talk to a manager. Sure, why not.
The manager asked me why I was taking money out. I told him I was over the FDIC limit. He then told me that FDIC doesn't mean much. In theory, they could take up to 99 years to pay. (Hard sell bank tactics? The truth?) As I love a good debate as much as many here, I asked him very politely and calmly, "So are you suggesting I take all my money out of your bank?" He had no response. He did have a rather shocked look on his face though, lol.
I told him I sympathized with his position. My dad was a bank manager decades ago. I saw how much stress he was under when he had to explain to his superiors that a customer paid off his $250k+ debt with his $250k+ savings. $500k+ accounts disappeared in mere moments. Apparently they wanted him to talk the customer out of it. Yeah, like THAT'S going to work.
For what it is worth and as much as I don't trust our government's reckless fiscal policies, I feel no need to add on reckless consumer banking risk. I'd rather have my money in treasuries than in CDs these days. Go figure.
Further, treasuries tend to pay better than CDs on the short end. That's just all messed up, but I'll take it.
Tanta: But we all know about the sad level of financial literacy out there, and some people really think a "no fee refi" is no fee.
You should team up with soap opera writers and have mortgage related troubles part of an unfolding drama. Or maybe Jack Bauer could be running across town in a desperate race to find a mortgage lender still using loose lending rate sheets.
AMERICAN PRESIDENT:
Jack, look we have a situation. We have just received word that the MBS market is tightening up. We have millions of subprime borrowers about to default. You need to find a lender in Orange County and submit these applications before 5pm tomorrow. If this loss mitigation doesn't go well, we could be facing a collapse of our financial system. If that happens Jack, the terrorists will have won.
You should team up with soap opera writers and have mortgage related troubles part of an unfolding drama. Or maybe Jack Bauer could be running across town in a desperate race to find a mortgage lender still using loose lending rate sheets.
Murder mysteries.
I was thinking just today that Tanta's ruminations would make great fodder for a murder mystery... sort of a Carl Hiassen comedy-thriller with fast talking mortgage brokers and easy blond bimbo RE agents and a dry almost humorless banking industry risk managers turned PI when her department was mysteriously outsourced to India just as the boom turned to bust.
Then we find the body...
Okay I've done the high concept glossy cover page. You all finish it & email it to me... I got places to go, people to see. Is that one of my phones or yours?
"getting a mortgage shouldn't be any harder than ordering a pizza,call 888" was an ad i heard on the radio hundreds of times last year.as far as california,and especially the central valley and inland empire where very large numbers of Alt-a loans were made,look at their economies.or look at rohnert park in sonoma county,near me,where home sold for 500 plu times monthly income,these were 15-20 year old tract homes.the crap in the central valley is so badly built it is unlikely to last 30 years even with reasonable maintenance,is largely mcmansions,which are totally inappropriate for the needs of an aging populace,and cost a fortune to heat and cool.the median family income in sonoma county is 53k,median home is still 545k,and incomes here are higher than the valley.we have a long long way to go in california,down.i went to a fraud seminar today put on by OREA,california has a total of 8 investigators.eight.
Banker, when I was in the old country, I thought that the hatred towards the free markets was due to indoctrination. But now I realise thats also a mental problem. Sad but true. So dont take it too seriously.
Who gave him permission to give himself flexibility? Bernanke of course! (This is almost dizzying.)
Do we need to insure the risk of borrowers who are too damned lazy to dig up the W-2s? Somehow I don't think so. - Tanta
But Tanta, What About Bob? It is clear he needs serious help and Dr. Leo Marvin, um, I mean Dr. Ben Bernanke, has just the prescription!
Bob: I don't need pills. I have plenty of pills.
Dr. Leo Marvin: It's not pills. Read it.
Bob: It says: "A vacation from my problems."
Dr Leo Marvin: I'm giving you permission to take a vacation, Bob. Not a vacation from your work. Not a vacation from your daily life. But a vacation from...
Bob: My problems.
Dr Leo Marvin: I'm glad you came. I'll see you in my office next month.
Bob: That's it?
Dr Leo Marvin: You came here for relief, Bob. Read your prescription.
Broker: Banker, when I was in the old country, I thought that the hatred towards the free markets was due to indoctrination. But now I realise thats also a mental problem. Sad but true. So dont take it too seriously.
Broker, This Bud Is For You!
Bailout -- Irvine H Sprague
...
In 1971 no one could be sure that the failure of a black bank in a rundown urban center would not touch off a new round of 1960-style rioting.
...
Bill Camp, the third member of our [FDIC] board, had not participated in the discussions but I kept him informed. He told me he was dead set against assistance from the outset, a position he maintained later in our Bank of the Commonwealth deliberations. Camp believed that bailouts were bad public policy and doing the first one would lead to many more, possibly an uncontrollable flood.
...
More than just bank safety was on my mind as we approached decision time. Increasingly, my thoughts revolved around public safety. I found myself harkening back to the violent scenes of our riot-torn cities not many years before. Watts, in particular, haunted me. The eruption in that black section of Los Angeles was the first major big city riot in the country, and the ordeal of those harrowing days was -- and remains -- vividly alive in my mind.
...
All told, our historic act and its implications went relatively unnoticed. However, H. Erich Heinemann of the New York Times saw through to the heart of the matter and wrote a perceptive analysis of our action. He described the saving of Unity as an example of "one of the thornier questions American society has to face these days -- how to resolve the often apparently irreconcilable between responsibility to the community and responsibility to self." He suggested we were on thin legal ice for making the use we did of a section of the law "that Congress had in mind for small, isolated rural communities" and then stretching the essentiality requirement in a situation where large Boston banks, including those that participated in the loan to Unity, had branches near the little bank. Heinemann wrote:
The fundamental question raised by the FDIC's action though, is the precedent that it sets.... Some bankers are asking whether the FDIC has any business using its insurance fund -- build up by the contributions of 13,500 banks for the protection of millions of depositors -- to bail out the stockholders of any bank, no matter how important the social value that bank might have in its local area.
...
like anything, mortgage innovation overshot the mark. it will correct and yet be all those things the article talked about due to all those reasons it referred to.
that will mean that not EVERYONE can get a mortgage, just mostly everyone.
just 2 out of 3 by Fannie's book, no? More or less depending apparently on those lending standards and house prices.
I wonder how this ratio stands up over time, across all districts in DC, across destination states vs Idaho (sorry you horse lovers), compared to Canada, to Europe, to emerging economies...
I think that line should read, "We are not amused".
As for the rest of the common taters, I still think the housing market will be "unstable" until prices get back in line with what the average person can afford to pay. Sure there will be a certain percentage of McMansions but most of the homes will need to be priced so us ordinary folks can buy or rent.
"I think the Fed is now in the hands of some very smart people who have very specific goals in mind. I don't think that among those goals is guaranteeing that the rich get richer."
"Do we need to insure the risk of borrowers who are too damned lazy to dig up the W-2s? Somehow I don't think so."
Lets not be naive. Borrowers avoid Full Doc when the full documentation would not back up the loan.
During a time of asset inflation it makes sense to overleverage yourself, to take out credit that your actual income and assets wouldn't support. Hence the existence of stated/stated. Of course there is risk to this, which is why the borrower is paying a higher rate. But I suspect very little of this is being driven by "I must have left my W-2 in my other coat".
Borrowers were making money by taking out loans, lenders were making money by writing loans and the natural end result was loans.
Alt doc, no doc, stated/stated, all of that was an elaborate Kabuki Dance around the vested interest on all sides to get the loan written.
Now it is unravelling a bit. And 'poor borrowers' are pointing their fingers at 'merciless lenders' and 'victimized lenders' are pointing fingers at 'unscrupulous borrowers' hoping that someone outside the transaction will take the hook and initiate a bailout.
Nope, been there, done that. Most of the participants in these loans knew what they were doing, and certainly were plenty happy to pocket the money on the way up. Now they are crying to have their risk buffered on the downward side.
Sorry. People losing money on an investment is just people who ended up in a different position on the reward/risk axis than they expected. You don't just get to shift risk after the fact.
I had the opportunity to invest in real estate, I worked for a real estate investment company and through the company took out a HELOC on my condo to finance a house owner-occupied. Which technically would have been mortgage fraud, on paper I would have had two owner-occupied primary residences, which would have been a violation of my loan terms. But you know one thing? Nobody would have cared. Because it would have been in their own best interests not to care and certainly not to openly check.
There is exactly no one out there rewarding lenders for not writing loans. Certainly there are penalties to writing bad loans, at least ultimately, but those penalties don't kick in in a strong market. Because nobody walks away from equity if it can be extracted and up to a couple of months ago equity extraction was as simple as walking into a loan office.
Well things recently got a little stickier both on the asset appreciation and the lending side. And the combination is making some people who were used to easy money squeal a little. Which doesn't make this inherently a crisis. As a society our total obligation is to hedge off the spillover. Mortgage companies going out of business is just business.
I lost my job because a real estate deal didn't come off. It happens. You don't go crying to daddy.
An untold part of the story of yesterday's Senate Banking Committee hearing is that bank regulators have almost no control over the mortgage industry in this country. The regulators and the legislators look at this as a "safety and soundness" issue, when it is not. These loans are for the most part not funded by depositories and even if they are, they are not held in their portfolios, which is why the subprime meltdown is not threatening the viability of any bank in this country. The regulators said so yesterday!
Can the regulators have some influence over the types of loans that are made, by issuing "guidance"? Sure, but it is indirect. If non-depositories, as they are called, want to write/fund these loans and then pool them and securitize them and sell those securities, well there is nothing the bank regulators can do about it!
The Senators are looking for a scapegoat, someone to accuse of being "asleep at the switch," as Senator Menendez said at the hearing. I don't think these bank regulators were asleep at the switch because the subprime/exotic/nontraditional loans were not a risk to the entities which they regulate.
Bruce Webb states:
"Lets not be naive. Borrowers avoid Full Doc when the full documentation would not back up the loan."
Not true. I did a no doc (so-called liar loan) 15 yr fixed because having a high FICO and very low LTV meant there was NO DIFFERENCE in rates between the full and no doc loans.
"Dark ages, Banker? Really? You think a lender having to see a borrower's face at least once in the process is medieval? Please"
Yes, it is medieval. Technology, reduced documentation and speed of delivery is here to stay. Borrowers want, demand(and are receiveing) lower rates and better terms than ever before because of these initiatives.
One could nake a strong arguement that the mortgage biz is still very archaic when it comes to technology and automation.
"The Senators are looking for a scapegoat, someone to accuse of being "asleep at the switch," as Senator Menendez said at the hearing. I don't think these bank regulators were asleep at the switch because the subprime/exotic/nontraditional loans were not a risk to the entities which they regulate."
You're right and it's the way it should be. And I wish we could strike the "exotic" term out of the lexicon. There is nothing exotic about these loans.
Agreed. The new lending environment only benefits Edit: [poor people]. We need to bring back the old ways which were alot better.
Edited By Siteowner
Keep the poor down where they belong dammit!
Seriously, technology helps most other businesses in terms of both efficiency and creativity. Want to propose keeping the mortgage biz in the relative dark ages? Good luck with that.
Ralph - Unless I misread you message you are most certainly an ass. (Otherwise please disregard)
Now to more serious business:
... Working together, the federal regulatory agencies will continue to use their supervisory authority to ensure that regulated institutions have policies and procedures designed to treat borrowers fairly....
Why the distinction? What would be the nature of an unregulated institutions?
If the loans have been packaged and sold, how much latitude does a bank have to renegotiate with borrowers? Am I wrong in assuming the answer falls somewhere in the range of "zero"?
I see a few highly publicized "workouts" attempting to paper over an ocean of defaults in the near future.
If the loans have been packaged and sold, how much latitude does a bank have to renegotiate with borrowers? Am I wrong in assuming the answer falls somewhere in the range of "zero"?
I see a few highly publicized "workouts" attempting to paper over an ocean of defaults in the near future.
Great post, Tanta. Was it you that pointed out that loan mods are useful when a borrower has hit a temporary rough patch? A period of forbearance is definately called for when a person has lost a job (and has good prospects), has been ill, etc. All that said, most delinquent borrowers today have more loan than they can handle. Forbearance in that case is just sweeping the problem under the rug and later lifting it to find higher loss severities. I'd imagine the regulators would have an interest in preventing banks from engaging in this practice.
The loan mod "solution" most warranted today is called:
WRITING DOWN THE LOAN
Then they can proceed to work with the borrower. Not before.
As if Bono doesnt have enough on his plate with that whole world hunger thing, now he is sticking his big fat nose into US baking?
Dark ages, Banker? Really? You think a lender having to see a borrower's face at least once in the process is medieval? Please.
Ask anyone who has been a victim of identity theft whether the ability to get "instant credit" at the department store was really such a fantastic deal after all. Where did we get this idea that we just don't have another 10 minutes?
Ralph, if you're trying to be funny, I missed the funny part.
This push for high levels of home ownership must have a social engineering side to it. i.e. Sometimes it reminds of me of my mother and aunts (God bless'em all) trying to get me married and settled down just so everybody worries less and I stay out of trouble.
Economists twitter about the virtues of a disciplined labor force. Maybe the Fed is convinced a nice mortgage will help with that and the risks are worth it to the collective.
For me a mortgage? Forget it. I've never owned a car or held a job more than 18 months. How's that for a guy in his 40s?!
But, you know, for other people.....
.
Banker, I don't think Tanta opposes innovation. The economic idea is that a little more spent on the transaction costs (of a very expensive transaction), might be beneficial to all parties.
Best to all.
Tante,
The word relative means something. In the bigger picture, the arrogance of dictating the level of business management , and believing that 1) it can be superior to the market's solution and b) that the capitalists won't figure a way round it is amazing.
The big flaw in much of this is the idea that anything unusual is going on here. Markets self correct constantly. That's why they are superior to other forms of economic structure. Markets lurch back and forth, but all in all they have been demonstrably superior to anything else yet devised.
But maybe Mortgage Czarina Tante would do better ! [ducks]
Mortgage Czarina Tanta leaned the biz at an institution whose deposits were taxpayer-insured, and which was ultimately "resolved" by this outfit called the RTC, which was funded by the taxpayers. There was a unit on "moral hazard" in my final exam.
Which self-correcting superior free market did you learn the business in?
CR,
If the parties involved agree with you and Tante, then they are certainly free to do that. But to dictate it? Seems like spitting in the wind (at best) and counterproductive more likely.
YMMV
Markets lurch back and forth, but all in all they have been demonstrably superior to anything else yet devised
Interesting how the market does not want to go anywhere near where real markets go - pitchforks and torches. Nah, it just wants to go far enough to pontificate about itself, no more.
Bring on the real market.
This subprime-o-gasm could not have come at a better time: The markets were begging for a reason to retract and offer up a buying opportunity, and the raw emotion of the national media coverage has driven the Fed from a tightening into a neutral bias.
KAAAAAAAAAAAACHING!
I'm fartin' through silk, baby!
Existing regulatory guidance does not require institutions to immediately foreclose on the underlying collateral when a borrower exhibits repayment difficulties. Working constructively with borrowers is typically in the long-term best interests of both financial institutions and the borrowers. Capital markets investors in securitizations have the same motivation as direct lenders in maximizing recoveries on defaulted loans.
Translation, You can renege on your MBS and CDOs.
Banker, let me try to make my point more clear. The Federal Reserve regulates banks. It is entitled to use "benefit to the homebuyer" as one of its criteria for judging the acceptability of financial institution risk-taking. It does this because it understands that there are public policy issues at stake here, not merely maximizing profits for banks.
I have no problem with the Fed taking the position that "benefit to borrower" is an important consideration, and that some higher-risk lending may be justified in order to assure that the depositors with the little accounts have some access to lending, just as the depositors with the big accounts do.
What I do have problems with is the Fed assuming that things banks do precisely to compete in the old superior free market are necessarily "benefits" to borrowers. And as CR says, I think it's absurd to conclude that all transactions should be as inexpensive as possible. Some transactions should reflect more "externalities" or whatever you economists call them than others.
You sound like you think that I or CR or anyone else has no business making such an assertion, because it is "dictating" to the banks. Well, yeah, it's an attempt to. I expect to have a voice in regulatory policy in exchange for being one of the ones on the hook for the potential bailout. I think we should all expect that. It's that democracy thing I keep hearing about.
Shriek all you want. A willing lender and a willing borrower will always win the day in the USA, the greatest country on earth.
404 Not Found
Mouse over states on page 9, I'm wondering if the reason some states didnt see as big of increase as others is if it is merely regulatory, it simply takes longer to get into foreclosure in those states.
Banker, if the burden falls only on lenders, investors, and foolish borrowers - and not on taxpayers in any way, then the market might be (and probably is) the most efficient method to sort this out.
Then we could just read Tanta's advice as being for the intelligent (read: surviving) lenders.
If the burden falls on me (and you), well, then the story changes. Now I have a say.
BTW, I'm not sure anyone should buy right now with a subprime loan (I'm not suggesting regulation, I just think it's dumb). Why not improve your credit first, and then buy with a much lower interest rate? With rising housing prices, I understood the desire to buy right away (aka speculation). But with flat or falling prices, subprime makes no sense.
Best Wishes.
Asebius, I wouldn't disagree that there's an undercurrent to all this "ownership society" that sounds a lot like "everybody tie themselves to a mortgage so you can all be both good consumers and docile workers, since now you'll really be afraid of getting fired." It's why I'm always so surpised that the Bushies aren't in favor of gay marriage. You'd think they'd want those fun-loving homosexuals to settle down, buy a house, and get busy caulking the windows in their newly-limited free time. Oh well. Ideology's a weird thing.
I just can't, really, figure out what the relationship is between the more respectable reason for boostering homeownership--that is, giving low-to-mod income people the opportunity to buy low-to-mod homes at low-to-mod prices on mortgages with reasonable terms--and this idea of nothing having to take more than 24 hours or cost more than 108 bps or whatever.
And, well, if you're an experienced mortgage servicing veteran who can really collect on loans, and your job just got outsourced to India where the labor is cheaper, and you still have your own mortgage payment to make, you could, well, be a little pissy. (I'm not describing myself, btw. No one has ever allowed me anywhere near the collections department.)
I think we can probably assert: when an external financial actor/system/force enters a specific non-financial industry and causes changes in behavior for the sole purpose of "increased liquidity" it's bad.
Cole - he sickened me. Every time he was asked a question about what took place in the past, the boom & bust, he answered in the form: "the fed has procedures for...". Always focused on the present & future. Am I wrong to conclude that there is institutional denial at the Fed?
Another observation is a little bit more "pro-Fed". I notice that everyone relies on the all-powerful Fed to magically sustain this economy. To me, that's the equivalent of dangling no carrots, only sticks. The Fed has nothing to gain from good actions, because it is not a political body. So it's up to the Fed to hold its culture high. But since people expected so much of it, maybe it got used to not working enough and always telling the Senate that all is well. Kinda like prisoners who are tortured and confess false facts.
Banker: Intentionally misspelling people's names is childish. Unintentionally misspelling them is ignorant. Which will it be?
The passage that leapt out at me was:
Capital markets investors in securitizations have the same motivation as direct lenders in maximizing recoveries on defaulted loans. Thus, mortgage servicers will have an important role to play in working with delinquent borrowers. Established and well-rated loan servicers are usually given a range of options by investors in workout situations. These options could include modification of interest rates, payment restructuring, and extension of maturities.
I read that as a shot across the bow of those who have bought several trillion dollars worth of MBS. As in, "Don't call us; we'll call you." As in, "If part of your plan going forward is forcing us to lower interest rates, make sure your forcer isn't broken."
The Koolaid part I read as pure mockery. Parroting the Greenspan bullshit just to make sure everybody knows what page they're on.
I think the Fed is now in the hands of some very smart people who have very specific goals in mind. I don't think that among those goals is guaranteeing that the rich get richer.
I looked over the CFC REO list for Calif yesterday and found little of anything in areas that I would considerable desirable. While commerical banks, Investment Banks, MBS holders etc have embraced these modern and creative lending standards the market is rewarding them with a larger and larger pool of REO's in areas that have a very small and decreasing number of potential buyers.
The subprime market is a very old and established sector of the lending industry, albeit one with a checkered history. The notion that subprime will disappear or be regulatory-burdened to death is absurd. It aint going nowhere. It serves a very significant segment of the population. This latest credit bubble saw for the first time the Big Money Wall St. Boys dipping their toes into that market as the suppliers of the warehouse lines of credit, and then securitizing the originations for sale. It didnt take long before they realized the profit potential of controlling the entire food chain, i.e., owning the originators as well as long as the price was right.
We are now going through the Darwinian process of the strong eating the weak.
The cover of this week's Economist reads: "The Trouble with the Housing Market". Our favorite subject has now gone big time globally. Let's just hope there is no Sports Illustrated type jinx.
Might be worth a read/report by CR.
OK, here we go. Sorry about the misspelling Tanta! Ignorance, not malice...actually, laziness is a better description.
CR,
I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough? Or do you wish to make more appeals to authority? We can compare regulatory education if you wish. I have my Series 7, 24, 63 and on and on we go. I've seen/participated in market collapses, 1991 and 1998 (particlarly the latter) were the scariest. Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much. What happened to those markets in the face of currency speculation, hedge fund collapses, bankruptcies etc? Geeze, just look around they are all functioning well and bigger than ever. Huh, whoda guessed?
Just for the record, thankfully we don't live in a Democracy. We live in a Constitutional Republic.
CR,
I'm not propsing any bailouts and didn't support them in the S&L collapses, or for Chrysler either. In general there is in my mind a huge difference between suggesting someone shouldn't do something and dictating what can and can't be done under the law.
"I looked over the CFC REO list for Calif yesterday and found little of anything in areas that I would considerable desirable"
Yup, I look 3 times a week and have yet to find a single property worth a drive by.
The notion that the mortgage originator still holds the paper and is an any position to 'forbear' is a charming one. However, I don't see Barclay providing much forbearance toward New Century, to use one example.
People are going to get fried here. They can smile during the process if they choose, but it really won't make it any more pleasant.
Hapsberger,
Real estate investment trusts, or REITs, are not regulated. New Century is one; they're no longer lending and are under criminal investigation. Novastar is one; it has filed bankruptcy. Those were top 10 subprime lenders in 2006. There were two other REITs in the top 25 lenders by volume last year. I can't recall their names right now (was WMC one of them? Not sure), but those two were bought by non-REIT corporations and presumably won't be REITs anymore.
So four of the top 25 subprime lenders in 2006 were REITs, and they began 2006 as REITS that were doing business as REITs. March isn't over yet, and none of them are doing business as REITs. It appears that freedom from regulation didn't help them.
Probert: "Am I wrong to conclude that there is institutional denial at the Fed?"
No, you're not wrong. Any other questions?
Here's an exchange between Menendez and Cole, just to give folks the flavor of Cole's discourse:
Menendez: "The size of this problem that we've heard defined here already leads me to question, regardless of everything you're telling me, how could it be this big, and have you done your job?"
Cole: "I will say that, given what we know now, yes, we could have done more sooner."
Menendez: "And why did you not do more sooner?"
Cole: "We were doing a good deal and what we've observed in terms of a risk layering that's really created the problems that are coming to light now is something that we have observed in the extreme in the last year. And 2006 is when the risk layering really started to compound in terms of various dimensions of these contracts that made these loans unviable."
Wally said: "The notion that the mortgage originator still holds the paper and is an any position to 'forbear' is a charming one. However, I don't see Barclay providing much forbearance toward New Century, to use one example."
One of the people who testified today was Irv Ackelsberg, a lawyer specializing in foreclosures. Here's an excerpt from his testimony:
"It's not the lenders who will be foreclosing. These loans are all made to order for Wall Street investors who purchase them almost immediately after they are created. Foreclosure decisions are made by massive servicing organizations that work for those investors. In the ordinary course of their business, the servicers never have to justify a foreclosure. They do, however, have to answer for their investors for any forbearance being offered to the borrower. I believe Congress will need to mandate moratoriums and debt restructuring in order to avoid a national disaster and to ensure that the investors are absorving at least some of the losses that otherwise would fall solely on America's homeowners."
Holden Lewis:
Here's the translation: "As long as Greenspan was Chairman, everybody was forced to drink Koolaid every morning."
And it's true.
Greenspan did all this crap. And they're not going to come out and say it. I don't blame them. Only Greenspan himself is the sort of bottom-dwelling, feculent scum to blame it on the other guy.
Banker, I didn't mean to make an appeal to authority.
Best Wishes.
NC Jim,
The Economist frequently covered housing topics, warning that this is unsustainable. This is a cover from June 2005
http://www.economist.com/printedition/displayCover.cfm?url=/images/20050618/20050618issuecovUS400.jpg
Lord, Holden, I'm glad I just read the written testimony instead of making myself listen to it. So it all just popped up last year, huh?
I'm still puzzled by the thought that foreclosure is always and everywhere cheaper to the investor than other workouts. I thought Cole was merely conceding the obvious that security holders' collateral isn't in some magic part of the RE market where REO will fetch top dollar. They're just as much in the drown-or-burn dilemma as depository lenders.
What financial innovation would allow a person making 50K a year able to pay off a 400K mortgage? Other than forgiving a portion of the debt, what can a lender do to make an unmanageable payment doable for that borrower? The numbers didn't and will not work out.
Ownership society-no, a mortgaged society.
CR, I think Banker was accusing me of an appeal to authority. He/She is just confused because you and I look so much alike.
Banker, my point was not an appeal to authority. It was an appeal to experience. My opinion is that we once upon a time experimented with deregulating mortgage lenders. It didn't work out so well for the taxpayers. You're free to disagree, but calling me "Czarina" because I dare to express an opinion on what I take to be public policy is, well, asking for more trouble than you actually got from me. I assumed you were just kiddin' around, so I kinda just kidded a bit back. It would be a good idea if you allowed me to continue to believe that you were just having a bit of fun, and not really name-calling. If you doubt that, ask Sippn.
Compared to those? This is nothing.
YET.
Is this correct - Servicers may be quicker to foreclose because they don't have to ask permission to do so. I will admit to a non inconsiderable amount of ignorance about this business, but it seems to me that one to be in a hurry to foreclose one would have to believe that it is possible to sell the property for more than the fellow that currently owns it? Also, how long is all that REO going to sit around at last year's prices?
Not always and everywhere, but...with foreclosure, especially earlier in the cycle, you'll get something back for your money. With forbearance, you wind up with decreased confidence in your CDO/MBS's which could well lower their value more than the foreclosure loss. So you wind up with reduced income and reduced liquidity. And you're supposed to accede to the people who sold you the crappy loans in the first place handling the forebearance. I can understand the impulse to wash one's hands of the whole thing.
Good post by Banker
"Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much."
Yes, agreed. Via derivatives or whatnot, the financial community seems to have done a good job of protecting itself from meltdown. Some hedge fund blows up (Amarath)? There's enough money washing around to fix the problem.
But that's not the real point - what about the 69% of consumers who are homeowners, and their protection from blowup? Well, consumers only make up a small part of the economy after all (where's that irony button?)
"Compared to those? This is nothing. In 1998, the Capital markets just about ceased to function for several months. Now that's scary. This? Not so much."
Maybe, Banker, maybe.
Maybe it's all over. We've seen the worst. Sunny days ahead.
I see a day of reckoning on the horizon. I see this as a Greek tragedy in the making -- we're still in Act I.
Many informed people here cite data, history, experience to support their view.
For me, I read people like you and I hear hubris. I'm just a mere mortal watching this play out, but even I know Zeus don't dig hubris.
Our friend assymetrical has used Casey Serin as a polemical- well my bad- I did reference him on her blog as the absolute poster child for this mess.
Premium content | Economist.com
Bankster is serving the usual load of cya free market bushwa. Hey Bankster- if your prostate surgery goes badly because your surgeon was picking tomatoes for the temp agency- is it equitable for your heirs to sue for damages for your demise?
The Fed is telling folks to practice forebearance? News to moi- all I hear is that Saxon Mortgage is the devil incarnate.
Tanta's original post contained the witticism: "Like Queen Victoria, I am not amused". So I think Banker's "Mortgage Czarina" comment, as Tanta suspected, is just having a little fun. The lack of flaming in this blog is a big attraction for me, so I hope Tanta, Banker, and others maintain the current high level of mutual respect and politeness.
Tanta, you clearly note in your post that the key driver behind the efficiency push is "lenders pass on the efficiency savings to borrowers, in the form of lower rates and fees." I think this phenomenon has been empirically verified (something on the order of $4,000 to originate a loan in the 1980's, vs. $400-600 today), but can't find any cites off the top of my head.
However, you then suggest that you "see these 'savings" going mostly to executive bonuses, ...". I deeply respect your mortgage industry experience, so I'm a little troubled that you think the banking industry is inefficient enough for this to occur. Could you expand on this issue?
While I think the overall efficiency push has been beneficial, I agree that the big move to low/no documentation is a clear invitation to fraud. I also agree, since taxpayers are on the hook for insured depositories, that we might have some say in whether to allow this low/no doc lending by regulated lenders.
However, your interchange with Banker about whether the market or regulation will fix the problem really interests me. According to Zelman (CSFB 2007), he share of low/no doc lending from 2001 to 2006 has risen from 16% to 26% in prime, 66% to 81% in Alt-A, and 30% to 50%, for a total shift of 18% to 49%.
My instincts argue that Banker's "free-market approach" is the best way to address this problem. Equity holders in the various fiduciaries take the hit from high losses, but the FDIC is not in danger. However, Zelman's numbers make me a little nervous, and I wonder if low/no doc issues could affect the banking industry as a whole. Do you have any thoughts on the issue?
Thanks!
Banker: "the high yield departments"?
The good old high yield departments. Where risk is a four-letter word.
Can you say, "Part of the problem"?
Okay, the FDIC is not in danger. However, how many evening new stories about homeless families will it take before we are all paying for RTC II?
Banker, aptly named, is a true apologist for the financial industry.
The prime beneficiaries of Fed largesse, a result of diluting our money of course, these bankers will trot out their "helping the disadvantaged" bromide. This is straight from the socialism playbook, only the communist party did it with more conviction while they robbed and destroyed the rest of society. In this case no one is buying their story.
Regarding what servicer has to ask permission or seek approval to foreclose, and just because I've had MI on the brain lately . . . Here's MGIC's default servicing guide. The sections on loss mit and foreclosures may be of interest to some folks. And yes, those securitized loans carry mortgage insurance.
http://www.mgic.com/pdfs/71-41067_default_servicing_guide.pdf#loss_mitigatio
Tanta,
Forgive me -- I don't usually cast aspersions on other participants in this forum, but I had to chuckle at this one:
"I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough?"
As I remember, the 1998 problems were well telegraphed, starting with the Korean devaluation in 1997. Throughout the turmoil in emerging markets (Korea, Thailand, then Russia), corporate credit spreads were as razor-thin as mortgage spreads are now.
"Compared to those? This is nothing." And it was nothing then, until it was something.
There was, essentially, the same type of mass denial of any potential risk then as there is now -- which, of course, is in and of itself a precondition for a market to crash.
So here's where the disparaging comes in. Mr. Banker, did you perhaps think in the early summer of 1998 that junk spreads were juuuuussst about where they should be? Could you, perhaps, be holding a similar view now of all but subprime ABX?
Tanta, you clearly note in your post that the key driver behind the efficiency push is "lenders pass on the efficiency savings to borrowers, in the form of lower rates and fees." I think this phenomenon has been empirically verified (something on the order of $4,000 to originate a loan in the 1980's, vs. $400-600 today), but can't find any cites off the top of my head.
The claim, certainly, is that those costs are passed on to borrowers. I'm a bit suspicious of the numbers you've cited. I have no publicly available information at my fingertips on that, although I will try to do some digging. I will simply observe that back in the 80s, for instance, no mortgage servicer ever charged a payoff quote fee. And I clearly remember the uproar (especially by HUD) when lenders started charging borrowers the cost of recording the assignment of mortgage. Making the borrower pay the cost of selling the loan! Many of us were literally in shock that anyone could be so greedy. These days it's commonplace. Just two years ago I got into it on a bulk deal because the originator was charging the borrower per diem interest from the day of closing (signing of the documents), even though, as cash-out refis, the loan funds didn't disburse until three days later. Where I come from, you don't charge interest on money until it is disbursed to the borrowers. When I declined to buy the loans unless the "double dipped" interest was refunded to the borrower, the originator had the gall to tell me that it wasn't illegal in the state in which the loans were originated, they'd checked. I asked what, frankly, made them think it was acceptable just because it wasn't illegal. The answer was a blank stare. And everything I've just mentioned is prime loan business, not subprime.
So we can look at numbers on lender's cost to originate all we want, if we can find them. But we will also have to talk about how those costs are kept low by passing things that used to be considered "overhead" onto the borrower through fee escalation, and business practices like that interest overcharge on refis. In short, my view is that it used to cost us more to book a loan because we didn't pass those costs onto the consumer.
Perhaps some of our readers who are currently loan originators can tell us what the going "junk fee" load is these days.
I suspect, Kyle, that you and I will have to agree to disagree about whether the market is efficient enough to punish excessive executive compensation, in banking or anywhere else.
And thanks for reminding me to keep up my Victorian sense of humor. You're right, and thoughtful comments like yours are what make the blog.
"Ideology is a weird thing". That`s true dear Tanta, but only if you realise it. Otherwise it is called something like "For the people".
Let me add that the reason it doesn't appear to borrowers that they're paying more is that first, these "no fee" refis blossomed. Of course you pay the fees on those. You just pay them over time, on the rate, or in the form of interest on the extra balance because you rolled them into the loan. But we all know about the sad level of financial literacy out there, and some people really think a "no fee refi" is no fee. The Fed, interestingly, is in charge of writing rules for consumer disclosures that are supposed to clue people in to this kind of thing.
The other issue is just the incredibly low rates we had, especially in the 2003-2004. That masked a lot of fee escalation from the borrowers, who of course kept thinking that these refis were getting cheaper, since they were in fact getting lower rates when they refinanced old loans. But that doesn't mean they were paying the "true cost of credit," to steal a phrase.
Thank you for that observation David Pearson (and the civility of Kyle too).
Amato- thanks for the bug to check out countrywide's foreclosure pipeline at recontrust.
Arizona- Phoenix area- Maricopa County They will be doing 691 sales on the courthouse steps in the next four months- not counting some of the houses that are in Pinal County- add in another 100 for them. 07 stats-They have performed 98 in Maricopa County so far with 78 going to the beneficiary- 20 bought by third party buyers. A 21% uptake rate for foreclosures!?!?
REO hangover coming fast!!!!
AllenM, no problem. The problem with CA REO's is not the number, it's the quality - or EXTREME lack thereof - and price.
99% of them are unfit for human habitat, and require extensive work to be considered as even a rental, that is IF they cashflowed with a DP of less than 50% - which they DON"T.
1% are decent properties selling for whopping discounts in the 10% range. That's NOT blowing my skirt up.
If someone knows where the residential RE carnage is in CA, they are doing a GREAT job of keeping it a secret.
Banker...banker...banker (shaking head.) Cascading cross-defaults always START at the margin. Subprime is nothing if not the margin and it's already been pretty well established that this is not only not contained, but is spreading like wildfire. God, I feel like a parrot for constantly reminding people of this. This is like Dataquick releasing a report in Sept. 2006 saying that default rates are low and indicators of market distress are largely absent from the market. As tj said: YET!!!!!!! This reminds me of the old days on Ben's blog where we'd get Realtor trolls that sounded very convincing except that they were full of mierda.
DQNews - DataQuick Real Estate Headlines and Statistics
Amato- I did a quick check of San Diego County sales since 1/1/07- of 156 prperties only 17 went to third party buyers- so they are still trying to keep the market up with full debt bids on the courthouse steps. In other words the houses now join the zombie market and begin weighing on it through REO management.
I notice that in Phoenix there are a bunch of houses and condos (yikes!) coming up in Scottsdale and in nicer parts of town. Now the high end will gradually get participation in this slow motion process. Of course this will get interesting since we are only looking at one companies worth of material!!!!
I figure that thousands of houses are going to be added to an already saturated market here in Phoenix, with attendant damage resulting in more foreclosures and short sales. Of course as equity vanishes, short sales decline and foreclosures rise.
did you hear?
Mortgage crisis overwhelming credit counselors
POSTED: 9:25 a.m. EDT, March 22, 2007
Story Highlights Analysts predict between 1 million and 3 million foreclosures in 2007
The industrial heartland hard-hit by foreclosures in 2006
Some economists believe a recession could result from the mortgage defaults
from CNN so you know it's true
CNN.com - Page not found
AllenM, any property that's not half destroyed is being taken back by the lenders making full debt bids. That's about 90% to 95% of the courthouse action. Those homes then go into the mls through the lenders realtors, where bargains are few and far between.
The other 5% are stupidly bid up by a large and growing crowd of housewives and husbands looking for a "bargain" and amateurs who watched "Flip That House".
It's nuts.
Happy to see Tanta keep mentioning public policy -- maybe that's why there are suddenly so many of these "free market" fantasy flags flying on this board.
t didnt take long before they realized the profit potential of controlling the entire food chain, i.e., owning the originators as well as long as the price was right.
We are now going through the Darwinian process of the strong eating the weak.
Yup. It won't be long and we'll be able to pick up our 'sub-primes' in Isle 8 at WalMart... between Bubba's BBQ sauce and telephone calling cards before heading home in the monster truck.
March 30, 2002 economist cover: "The houses that saved the world"
gotta love it! what oh what will save us now!
Banker, aptly named, is a true apologist for the financial industry.
No he just grew up in the shadow of the Lubyanka and sees any & all regulation as a projection of 'Five Year Plans'... While we all grew up in 'Morning In America' and many of us see the 'Ownership Society' as little more than 'Rust Belt II'.
We are what we eat. I'd love to do dinner (and drinks) with banker. We really are probably not that far apart (after drinks anyway).
Okay, the FDIC is not in danger.
Oh really??? Forget that bank reserves are at all-time lows and bank's exposure to RE is at record highs.
According to the Mogambo Guru, bank deposits are around $4.8T whereas actual required reserves are only $39M.
FDIC is insurance. Like insurance, the many pay premiums to cover the ills of the few. If more than a few get sick at once, GAME OVER.
Yes, no doubt RTC II is in the cards, and people will get some of their money back. The questions will be (1) when will they get it back -and- (2) will it be worth anything when they do. Wanna bet that all the best investment deals are gone by then, too?
Good rant:
the parasites get busy
Wells Fargo's Annual Report is out, they say "have no fear, all is well":
"For the 14th consecutive year we were the nations No. 1 retail mortgage originator. Were very disciplined in home mortgage lendingwe dont make option adjustable-rate mortgages or negative amortizing mortgages. Our owned home mortgage servicing (administering the monthly payments of your home loan) reached $1.37 trillion, the largest in our industryup 38 percentand mortgage originations were up 9 percent to $398 billion."
Amato, I just talked to a realtor on Tuesday looking for my bidness- I told her don't bother me unless the property is good and runs 120 times current market rent. She had a FB property where there were trying to get out from under 210k and the going rent is about 1300 per month. I said they are about 50k too rich for reality.
So back to the banks it goes and they sit and sit. We only have three more months before phoenix shuts down in the summer heat. Nearly 50k in homes weighing on the market and more on the way? If I was a lender I would be flushing inventory as fast as possible, instead of waiting for some mythical make whole buyers.
Nobody is playing flipo thato houso with liar loans, cause the loans are gone. Now the market has to adjust.
Time. Time. Time. Real estate is slooooooowwwwww to change.
Four years to see real blood and I would guess 100k in foreclosures in the Phoenix AMA.
I have a ringside seat.
At least you are getting close to dealmaking numbers.
Unfortunately, even courthouse sales here are going for 250 to 300 times rent, and yes 100% liar loans are still PLENTIFUL for those with a 700+ FICO.
The Banker seems to think when players cross the line it's okay cuz the markets will correct any excess. Many of these toxic loans should never had been written in the first place. I hope all the bastard financial institutions involved in this scheme go belly up along with the investors who cheered it on.
stinkyfinger,
This March 30, 2002 article form the Economist was much less optimistic than the cover might suggest. The last paragraph:
"The lesson which consumersand also many over-sanguine economistshave to learn is that spending cannot outpace income for ever. House prices have saved America and the world from a deep downturn, but they do not remove the need for consumers to take care over their balance sheets. Homes are only as sound as their foundations."
How true.
"I learned the business at Salomon and Merrill eventually running the high-yield departments in both places, sat on investment and screening committees etc. Is that good enough?" NO I am not impressed.
Mr. Banker thinks he is another genius cuz he skims a small commission off of every transaction pumping his toxic garbage. well Mr. Genius we have seen many so called phd's noble laureates and smart @$$@$ go bust over the last 10 years.
Yes, no doubt RTC II is in the cards, and people will get some of their money back. The questions will be (1) when will they get it back -and- (2) will it be worth anything when they do. Wanna bet that all the best investment deals are gone by then, too? - tj & the bear
A few years ago I was over the FDIC limit at my bank. Since I was withdrawing a fairly large sum of money the teller wanted to know if I was willing to talk to a manager. Sure, why not.
The manager asked me why I was taking money out. I told him I was over the FDIC limit. He then told me that FDIC doesn't mean much. In theory, they could take up to 99 years to pay. (Hard sell bank tactics? The truth?) As I love a good debate as much as many here, I asked him very politely and calmly, "So are you suggesting I take all my money out of your bank?" He had no response. He did have a rather shocked look on his face though, lol.
I told him I sympathized with his position. My dad was a bank manager decades ago. I saw how much stress he was under when he had to explain to his superiors that a customer paid off his $250k+ debt with his $250k+ savings. $500k+ accounts disappeared in mere moments. Apparently they wanted him to talk the customer out of it. Yeah, like THAT'S going to work.
For what it is worth and as much as I don't trust our government's reckless fiscal policies, I feel no need to add on reckless consumer banking risk. I'd rather have my money in treasuries than in CDs these days. Go figure.
Further, treasuries tend to pay better than CDs on the short end. That's just all messed up, but I'll take it.
We are now going through the Darwinian process of the strong eating the weak.
Actually not so. The fittest survive and fittest, may or may not be the strongest.
Seen any dinos around lately?
Seen any dinos around lately?
No shortage of fungi or bacteria either, at least not the last time I checked my refrigerator.
Tanta: But we all know about the sad level of financial literacy out there, and some people really think a "no fee refi" is no fee.
You should team up with soap opera writers and have mortgage related troubles part of an unfolding drama. Or maybe Jack Bauer could be running across town in a desperate race to find a mortgage lender still using loose lending rate sheets.
AMERICAN PRESIDENT:
Jack, look we have a situation. We have just received word that the MBS market is tightening up. We have millions of subprime borrowers about to default. You need to find a lender in Orange County and submit these applications before 5pm tomorrow. If this loss mitigation doesn't go well, we could be facing a collapse of our financial system. If that happens Jack, the terrorists will have won.
You should team up with soap opera writers and have mortgage related troubles part of an unfolding drama. Or maybe Jack Bauer could be running across town in a desperate race to find a mortgage lender still using loose lending rate sheets.
Murder mysteries.
I was thinking just today that Tanta's ruminations would make great fodder for a murder mystery... sort of a Carl Hiassen comedy-thriller with fast talking mortgage brokers and easy blond bimbo RE agents and a dry almost humorless banking industry risk managers turned PI when her department was mysteriously outsourced to India just as the boom turned to bust.
Then we find the body...
Okay I've done the high concept glossy cover page. You all finish it & email it to me... I got places to go, people to see. Is that one of my phones or yours?
"getting a mortgage shouldn't be any harder than ordering a pizza,call 888" was an ad i heard on the radio hundreds of times last year.as far as california,and especially the central valley and inland empire where very large numbers of Alt-a loans were made,look at their economies.or look at rohnert park in sonoma county,near me,where home sold for 500 plu times monthly income,these were 15-20 year old tract homes.the crap in the central valley is so badly built it is unlikely to last 30 years even with reasonable maintenance,is largely mcmansions,which are totally inappropriate for the needs of an aging populace,and cost a fortune to heat and cool.the median family income in sonoma county is 53k,median home is still 545k,and incomes here are higher than the valley.we have a long long way to go in california,down.i went to a fraud seminar today put on by OREA,california has a total of 8 investigators.eight.
Banker, when I was in the old country, I thought that the hatred towards the free markets was due to indoctrination. But now I realise thats also a mental problem. Sad but true. So dont take it too seriously.
Fed Gets `Wiggle Room,' Ending Tilt to Higher Rates
Federal Reserve Chairman Ben S. Bernanke is giving himself flexibility to respond to slowing economic growth.
Who gave him permission to give himself flexibility? Bernanke of course! (This is almost dizzying.)
Do we need to insure the risk of borrowers who are too damned lazy to dig up the W-2s? Somehow I don't think so. - Tanta
But Tanta, What About Bob? It is clear he needs serious help and Dr. Leo Marvin, um, I mean Dr. Ben Bernanke, has just the prescription!
Bob: I don't need pills. I have plenty of pills.
Dr. Leo Marvin: It's not pills. Read it.
Bob: It says: "A vacation from my problems."
Dr Leo Marvin: I'm giving you permission to take a vacation, Bob. Not a vacation from your work. Not a vacation from your daily life. But a vacation from...
Bob: My problems.
Dr Leo Marvin: I'm glad you came. I'll see you in my office next month.
Bob: That's it?
Dr Leo Marvin: You came here for relief, Bob. Read your prescription.
Bob: This is... INCREDIBLE! This is ASTOUNDING!!
Broker:
Banker, when I was in the old country, I thought that the hatred towards the free markets was due to indoctrination. But now I realise thats also a mental problem. Sad but true. So dont take it too seriously.
Broker, This Bud Is For You!
Bailout -- Irvine H Sprague
...
In 1971 no one could be sure that the failure of a black bank in a rundown urban center would not touch off a new round of 1960-style rioting.
...
Bill Camp, the third member of our [FDIC] board, had not participated in the discussions but I kept him informed. He told me he was dead set against assistance from the outset, a position he maintained later in our Bank of the Commonwealth deliberations. Camp believed that bailouts were bad public policy and doing the first one would lead to many more, possibly an uncontrollable flood.
...
More than just bank safety was on my mind as we approached decision time. Increasingly, my thoughts revolved around public safety. I found myself harkening back to the violent scenes of our riot-torn cities not many years before. Watts, in particular, haunted me. The eruption in that black section of Los Angeles was the first major big city riot in the country, and the ordeal of those harrowing days was -- and remains -- vividly alive in my mind.
...
All told, our historic act and its implications went relatively unnoticed. However, H. Erich Heinemann of the New York Times saw through to the heart of the matter and wrote a perceptive analysis of our action. He described the saving of Unity as an example of "one of the thornier questions American society has to face these days -- how to resolve the often apparently irreconcilable between responsibility to the community and responsibility to self." He suggested we were on thin legal ice for making the use we did of a section of the law "that Congress had in mind for small, isolated rural communities" and then stretching the essentiality requirement in a situation where large Boston banks, including those that participated in the loan to Unity, had branches near the little bank. Heinemann wrote:
The fundamental question raised by the FDIC's action though, is the precedent that it sets.... Some bankers are asking whether the FDIC has any business using its insurance fund -- build up by the contributions of 13,500 banks for the protection of millions of depositors -- to bail out the stockholders of any bank, no matter how important the social value that bank might have in its local area.
...
sorry if this has been posted before but
like anything, mortgage innovation overshot the mark. it will correct and yet be all those things the article talked about due to all those reasons it referred to.
that will mean that not EVERYONE can get a mortgage, just mostly everyone.
just 2 out of 3 by Fannie's book, no? More or less depending apparently on those lending standards and house prices.
I wonder how this ratio stands up over time, across all districts in DC, across destination states vs Idaho (sorry you horse lovers), compared to Canada, to Europe, to emerging economies...
good question calmo - also what about the percentage of income dedicated to housing? what are the averages over time and location?
where did 30% of income or whatever come from in the first place?
Tanta
I think that line should read, "We are not amused".
As for the rest of the common taters, I still think the housing market will be "unstable" until prices get back in line with what the average person can afford to pay. Sure there will be a certain percentage of McMansions but most of the homes will need to be priced so us ordinary folks can buy or rent.
"I think the Fed is now in the hands of some very smart people who have very specific goals in mind. I don't think that among those goals is guaranteeing that the rich get richer."
If that were only true!
Loaning money to folks that are unlikely to pay it back is innovative. But is it wise?
"Do we need to insure the risk of borrowers who are too damned lazy to dig up the W-2s? Somehow I don't think so."
Lets not be naive. Borrowers avoid Full Doc when the full documentation would not back up the loan.
During a time of asset inflation it makes sense to overleverage yourself, to take out credit that your actual income and assets wouldn't support. Hence the existence of stated/stated. Of course there is risk to this, which is why the borrower is paying a higher rate. But I suspect very little of this is being driven by "I must have left my W-2 in my other coat".
Borrowers were making money by taking out loans, lenders were making money by writing loans and the natural end result was loans.
Alt doc, no doc, stated/stated, all of that was an elaborate Kabuki Dance around the vested interest on all sides to get the loan written.
Now it is unravelling a bit. And 'poor borrowers' are pointing their fingers at 'merciless lenders' and 'victimized lenders' are pointing fingers at 'unscrupulous borrowers' hoping that someone outside the transaction will take the hook and initiate a bailout.
Nope, been there, done that. Most of the participants in these loans knew what they were doing, and certainly were plenty happy to pocket the money on the way up. Now they are crying to have their risk buffered on the downward side.
Sorry. People losing money on an investment is just people who ended up in a different position on the reward/risk axis than they expected. You don't just get to shift risk after the fact.
I had the opportunity to invest in real estate, I worked for a real estate investment company and through the company took out a HELOC on my condo to finance a house owner-occupied. Which technically would have been mortgage fraud, on paper I would have had two owner-occupied primary residences, which would have been a violation of my loan terms. But you know one thing? Nobody would have cared. Because it would have been in their own best interests not to care and certainly not to openly check.
There is exactly no one out there rewarding lenders for not writing loans. Certainly there are penalties to writing bad loans, at least ultimately, but those penalties don't kick in in a strong market. Because nobody walks away from equity if it can be extracted and up to a couple of months ago equity extraction was as simple as walking into a loan office.
Well things recently got a little stickier both on the asset appreciation and the lending side. And the combination is making some people who were used to easy money squeal a little. Which doesn't make this inherently a crisis. As a society our total obligation is to hedge off the spillover. Mortgage companies going out of business is just business.
I lost my job because a real estate deal didn't come off. It happens. You don't go crying to daddy.
An untold part of the story of yesterday's Senate Banking Committee hearing is that bank regulators have almost no control over the mortgage industry in this country. The regulators and the legislators look at this as a "safety and soundness" issue, when it is not. These loans are for the most part not funded by depositories and even if they are, they are not held in their portfolios, which is why the subprime meltdown is not threatening the viability of any bank in this country. The regulators said so yesterday!
Can the regulators have some influence over the types of loans that are made, by issuing "guidance"? Sure, but it is indirect. If non-depositories, as they are called, want to write/fund these loans and then pool them and securitize them and sell those securities, well there is nothing the bank regulators can do about it!
The Senators are looking for a scapegoat, someone to accuse of being "asleep at the switch," as Senator Menendez said at the hearing. I don't think these bank regulators were asleep at the switch because the subprime/exotic/nontraditional loans were not a risk to the entities which they regulate.
Bruce Webb states:
"Lets not be naive. Borrowers avoid Full Doc when the full documentation would not back up the loan."
Not true. I did a no doc (so-called liar loan) 15 yr fixed because having a high FICO and very low LTV meant there was NO DIFFERENCE in rates between the full and no doc loans.
Bruce, sorry to hear about your job, mate. That's a bit of rough luck, but keep your head up.
"Dark ages, Banker? Really? You think a lender having to see a borrower's face at least once in the process is medieval? Please"
Yes, it is medieval. Technology, reduced documentation and speed of delivery is here to stay. Borrowers want, demand(and are receiveing) lower rates and better terms than ever before because of these initiatives.
One could nake a strong arguement that the mortgage biz is still very archaic when it comes to technology and automation.
"The Senators are looking for a scapegoat, someone to accuse of being "asleep at the switch," as Senator Menendez said at the hearing. I don't think these bank regulators were asleep at the switch because the subprime/exotic/nontraditional loans were not a risk to the entities which they regulate."
You're right and it's the way it should be. And I wish we could strike the "exotic" term out of the lexicon. There is nothing exotic about these loans.
By the way, nice site.