Nontraditional Mortgage Guidance: 60 Days
Submitted by
CalculatedRisk on Tue, 08/29/2006 - 7:57am (23 comments)
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Talk about rearranging the deck chairs on the Titanic.
When's the election?
When's the election?
Talk about rearranging the deck chairs on the Titanic.
Man, who is going to be able to buy houses now if they do that? ;^)
The important thing to note is that this is just guidance, as opposed to any direct regulation, and likely has very little teeth. I find it rather amusing though that they are finally getting ready to tighten standards and crimp demand right in the middle of a major downturn. Fricking idiots.
CR and others, do you see any nefarious motivation behind this delay? Maybe lobbyists from the NAR, MBA etc. pushing for the new guidance to at least be delayed past "prime" buying/selling season, so they can blame the inevitable falloff of purchases that will come from this guidance on seasonal variations (e.g. the winter market doldrums)? I'd think they'd like to hide the (obvious to us, news to the rest of America) fact that this boom was based on speculation and not fundamentals, and if they'd have tightened standards in June, as initially planned, the reduction of availability of those loans would have shined a light on their roles in propping up prices. Even the Fed governors deny the role of easy credit as a major factor in the bubble, for Pete's sake--is there even enough kool-aid to go around anymore?
OK, tin foil hat off now...
Even the Fed governors deny the role of easy credit as a major factor in the bubble, for Pete's sake
Because the FED ITSELF is largely responsible fro creating all that easy credit in the first place. Who dropped short rates to 1% and held it there for nearly 3 years?
dryfly, you are a cynic! OK, I admit that was my first reaction too. The election is Nov 7th.
Geoff, That is the key question: will there be any teeth? That is probably the real reason for the delay - debating the penalities for failure to comply.
All, Roubini will be on CNBC at 5PM EST today to talk about housing.
Best to all.
"Mandatory 40% down payment."
Yes, I totally agree, but who acutally believes the statement in that paper "First, it appears that the housing boom has not been driven by unusually loose monetary policy. This is not to say the monetary policy has not been unusually loose, but that to the extent it has been loose, this is not what has been driving spending on housing."
So with skyrocketing energy and healthcare costs, falling real wages, and rising inflation, what has been the driver for the perpetually increasing spending (indebting) on homes? If not the loose credit they admit to having created, then what? Magical money falling from the sky? They actually claim high prices are due to fundamentals? And these guys are economists? How they could publish that with a straight face after the housing market is basically falling flat on it's face because the true fundamental demand is becoming clear is beyond me.
Nikki, dont forget that there are very few economists out there who can say what they think. You get Nouriel (non corporate) Steve Roach (the bear that every other economists uses as a foil) and a few others that are given license to speak reality talk, while their firm just says, oh, well, you know, he doesnt really speak for the mainstream at the firm. I know from personal experience that you just cannot talk like that and keep your job. You have to tow the mainstream line, otherwise, you are reckless, out of control, off the hook, etc, and you will lose your job. Trust me on this one, Ive seen it more than once. Even in my current position, where I have more latitude to speak about such things, I still have to be very careful about how I couch the info.
Now, of course, there are economists who try to address the risks, and that's usually as much as they are allowed to do, and then there is that whole OTHER breed of so called economists, like Duncan, and Learah, etc, who are so captive to money that they will say whatever the hell their boss tells them. They, in my opinion, are a joke at best, and a detriment to us all at worst (or maybe the antichirst at worst). But we should really just ignore their crap, or believe in the opposite - they are spin masters, and almost completely useless, except for the fact that you can learn from how hard they have to spin, just how much they fear and how much they are hiding. You dont have to be a conspiracy theorist tin foil hat wearer to know that something is amiss here.
Here's the deal with penalties - it will take forever for them to settle on what they are, and meanwhile, the lenders will be fighting tooth and claw for market share in a declining market. Do you really think anyone is going to handicap themselves with the guidance when they know that just gives away share to competitors? Of course not! And why not? Because no matter what the penalty is, the fine even if they expected they would be caught with 100% probability, would be much less damaging to them then the impact of the lost share. Plus, while the regulators fiddle, Rome continues to burn, but the people who know the guidance is coming can easily continue to lend recklessly, while they cash out anything they have left in options, etc. It's a total racket at this point - it's just sad that it's going to have to end so painfully for so many.
Geoff,
Can you compile a list of the worst spin doctors and a list of the straight shooters in your opinion?
That you be very enlightening.
Thanks,
Dma
Lincoln sure made Rubini look like a tremulous, nervous Nellie on CNBC, didn't he? I felt sorry for him.
CR's earlier post on the 18th had some very good comments about how this market works, particularly by Tanta. Recommended re-reading for why controlling non-trads funding is a day late and a $ short. Can anybody spell speculative excess ?
The NYT had a great article from Mr. Irrational Exhuberance (Schiller)'s work on the 27th that graphs the l.t. changes in housing values: IDEAS & TRENDS; Read Between All Those For-Sale Signs - NY Times
Anybody reading that graph will know how far into a bubble we are IMHO.
Speaking of economists one has to follow the money. Most of the names you see work on the Street and are narrowly focused on the interests and conerns of the financial community. Even Roubini's exaggerations are designed to generate interest on underlying sound analysis. Contrawise the names in academia don't get rewarded for doing applied economics - and in fact can get into a lot of trouble.
I've not been able to find much if anything that's neutral and competent per se. It's paid to look at Ritholz's BigPicture, Ahead-of-the-Curve and Northern Trust's Paul Kasriel as well as BeYourOwnEconomist by Mike Lehman (his books on the subject are worthwhile).
Young Matthew mistakenly assumes that the OCC has the political juice to enact subprime mortgage regulation with enough teeth "to pour cold water on the hot--and lucrative--nontraditional mortgage loan market adored by banks and mortgage brokers."
Poor lad.
Lincoln sure made Rubini look like a tremulous, nervous Nellie on CNBC, didn't he? I felt sorry for him.
Define 'him' - Lincoln or Roubini? Lincoln reminds me of Gen Custer... "Indians? What indians? never had trouble with indians before!!!"... as he rides off across the east Montana high plains, golden locks blowing in the wind.
I'd have felt more reassured if he had sound fundemental reasons why this time its the same as opposed to relying on 'its never happened before'. Great to have history on your side but there are usually fundememntals backing that history up if it does in fact repeat.
CR,
What's your take on how banks are going to fare in this bust? Did you see about Horizon? How many other banks are in the same boat? Isn't Horizon a 'conservative' bank?
That OCC regs will be like the barn door.
-billy
(Reuters)
By Jonathan Stempel
NEW YORK, Aug 29 (Reuters) - In a sign the U.S. housing slowdown may be deepening, shares of First Horizon National Corp. (FHN.N: Quote, Profile, Research) suffered their biggest loss in 13 months after the company said mortgage banking weakness will cause third-quarter profit to fall short of analyst forecasts.
The Memphis-based parent of First Tennessee Bank and First Horizon Bank said fewer loan originations, narrower margins, and higher hedging costs may reduce pretax operating earnings by $35 million from the second quarter.
First Horizon, Tennessee's largest bank by market share, became the latest mortgage lender to warn of weaker profits amid growing signs that the five-year U.S. housing boom may be over.
The warning also suggests the slowdown is not restricted to "subprime" lenders that specialize in loans to less credit-worthy borrowers. Only about 5 percent of First Horizon's mortgage lending is "subprime," Chief Executive Ken Glass said in April.
Per the update...if they enact this guidance and it also applies to refi's, which I hadn't thought about, what will all those people do who got a screwy loan in the first place and still can't afford to pay it off? I'd guess they'd be forced to accept the terms of their reset, which means selling or being foreclosed upon? Ouch.
Hey, gang.
CR, I honestly don't believe they're debating penalties. I think the worst "penalty" in the finalized regs will be a negative examination finding, which might have some financial cost to the institution (inability to open new branches, higher risk-based capital requirements, etc.) in the long term. Of course, in the long term the housing market will be dead.
I suspect what they're still arguing about is deadlines for enforcement. If even half of the portfolio analysis and reporting, stress testing, and disclosure requirements of the draft document remain in the final document, there will be a lot of work for institutions and non-depository mortgage servicers to do to become compliant. Even if the final document were released tomorrow, it will have an effective enforcement date of at least a year from now, to accommodate all the scrambling. So nobody will get examined on this stuff until at least 2008. Of course, by then the efficacy of stress testing will be a moot point, but I suppose the historians might be interested in it.
Were I a gambler, Id bet that the OCC is ready to go on this because it regulates the large national banks, who are subject to Basel II, which has similar stress testing and risk-based capital requirements, and who therefore a) have already done a lot of the necessary IT and report-writing work and b) have the resources to do the remainder in a (relatively) short period of time and c) have or pretend to have sufficient capital and loan loss reserves to withstand the shock when we find out how gruesome their whole-loan portfolio and wholesale lending operations really are. It will be the regulators of the smaller, Basel-exempt institutions, like FDIC, OTS, and NCUA, who are holding out for either longer time to enforcement or certain exemptions or both. The Fed, I suspect, is holding out because it doesnt want to spook the financial analysts, rating agencies, and bond "vigilantes." Its spooking the markets that will have the only potential for immediate slowdown in the nontraditional mortgage pipeline. If those bonds backed by those nasty little buggers start to seem dangeroustoo much credit risk, too illiquid, too price sensitivethen the punch bowl will empty long before some dorky bank examiner gets around to discovering the problem.
I am reminded irresistibly of Bill Grosss famous line that the Fed has fully transformed itself from the Lone Ranger to Barney Fife. Theres a helicopter overhead, but you tell me whether its here to drop money or medi-vac the wounded.
Tanta - thanks. That's helpful.
The helos will probably do both - cf. "We Were Soldiers" but don't ask what they were hosing out of the back compartment.
Thanks goodness! The regulators have finally closed the barn door!
Wait! Where's the horse?
Keep this thread alive. The Interagency Guidance and Subprime Guidance were 'enacted' 1 June 2007. I find it no coincidence that tighter lending standards ensued. Coupled with Moody's & S&P downgrading subprime-backed securities and the reluctancy to buy/hold subprime-backed securities has led to a credit crunch.
Thoughts?