Mortgage Crisis Deja Vu

In the name of diversity, Watt greases looser credit by mandating mortgages for "very low income" borrowers.

Mortgage Crisis Déjà Vu – Investors Business Daily – Op/Ed - November 5, 2014

http://license.icopyright.net/user/viewFreeUse.act?fuid=MTg2MzU0Nzk=

Dissenting Statement of Commissioner Daniel M. Gallagher Concerning Adoption of Rules Implementing the Credit Risk Retention Provisions of the Dodd-Frank Act By SEC Commissioner Daniel M. Gallagher - Oct. 22, 2014, at:

http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370543240793#.VFzCVfnF-So

Relevant video-clips:

Bill Clinton: Laying the Foundation for The House of Cards

Former Mayor of New York City Michael Bloomberg, “Wall Street Didn’t Cause the Financial Crisis, Plain and Simple Congress Caused It”

Warren Buffett testifies before The Financial Crisis Inquiry Commission Who Caused the Financial Crisis?

 


"Wall Street Didn't Cause the Mortgage Crisis, Congress Did"

On November 1, 2011, during a "Town Hall" meeting in mid-town Manhattan, a reporter asked Mayor Michael Bloomberg for his thoughts on the "Occupy Wall Street" protests. Mayor Bloomberg responded by, in effect, saying the movement's focus on Wall Street was mis-directed, because in the mayor's words, ". . . . Plain and simple, Wall Street didn't cause the financial crisis, Congress did."

If you are unfamiliar with Michael Bloomberg’s credentials you might logically ask, “Does Michael Bloomberg have the background and experience to make judgment about financial matters?”.  You be the judge:

From Wikipedia

Michael Bloomberg attended Johns Hopkins University. He graduated in 1964 with a Bachelor of Science in electrical engineering. In 1966 he received his Master of Business Administration from Harvard Business School

In 1973, Bloomberg became a general partner at Salomon Brothers, a bulge-bracket Wall Street investment bank, where he headed equity trading and, later, systems development. In 1981, Salomon Brothers was bought and Bloomberg was laid off from the investment bank and given a $10 million severance package. Using this money, Bloomberg went on to set up a company named Innovative Market Systems. His business plan was based on the realization that Wall Street (and the financial community generally) was willing to pay for high quality business information, delivered as quickly as possible and in as many usable forms possible, via technology (e.g., graphs of highly specific trends). In 1982, Merrill Lynch became the new company's first customer, installing 22 of the company's Market Master terminals and investing $30 million in the company. The company was renamed Bloomberg L.P. in 1987. By 1990, it had installed 8,000 terminals. Over the years, ancillary products including Bloomberg News, Bloomberg Message, and Bloomberg Tradebook were launched.  

One year into his second term of office President Bill Clinton explained it this way:

For more on this subject see, "The Role of the Government Sponsored Enterprises  and Federal Housing Policy in the Financial Crisis" at:  http://www.scribd.com/doc/106248756/The-Role-of-the-Government-Sponsored-Enterprises-and-Federal-Housing-Policy-in-the-Financial-Crisis

The Ten Thousand Pound Gorilla

A Mortgage Market Out of Balance By Peter Eavis New York Times DealBook Investment Banking Investment Services September 6, 2013. http://dealbook.nytimes.com/2013/09/06/a-mortgage-market-out-of-balance/?_r=0

The above linked article mentions put-back-risk as a possible cause for what, on its face, appears to be an economic anomaly in the current pricing of mortgages. Over the past couple of years, I’ve been reading articles which discuss mortgage put-backs and put-back-risk, and every time I see the phrase put-back-risk I wonder . . . whatever happened to “buyer beware” and I wonder, did Fannie and Freddie abandoned due-diligence in their processes while attempting to buy as many loans as they could buy in order to hit their mandated executive bonus targets?

RE: Put-Back-Risk

In the late 1990's Fannie Mae and Freddie Mac created automated underwriting systems. Fannie and Freddie encouraged mortgage originators to use their automated systems as “conduits” for underwriting and submitting loans to be purchased by Fannie and Freddie. If mortgage originators were using automated underwriting systems developed by the purchasers (Fannie and Freddie) why didn't the systems detect the poorly underwritten loans? Were there no audit procedures in place for ongoing audit and quality testing of the loans the GSEs were buying? I'd like to see an examination of the effect of the automated underwriting systems used by Fannie and Freddie.

In the mid to late 1990’s The GSE's also created the Mortgage Electronic Registration System (MERS) which is a mess because it lacked supervisory controls and audit controls on in-puts (mortgage records) which were supposed to record land title changes and supposed to record changes in mortgage note ownership.

Below, I’ve hyperlinked a couple of interesting articles which discuss important historical information about the competitive environment in the mortgage industry.

For more on this subject, see: Why Big Lenders Are So Afraid Of Fannie Mae and Freddie Mac” By Patrick Barta - Staff Reporter of The Wall Street Journal – pub. April 5, 2001, at: http://online.wsj.com/article/SB986417586751445153.html?cb=logged0.6522271920004229

And, Is FM Watch a Crusader With an Agenda? By Louis Sichelman – RealtyTimes, pub. 7/5/1999 at: http://realtytimes.com/rtpages/19990705_fmwatch.htm  


Find the Loan Behind the Loans

FAIR GAME

Find the Loan Behind the Loans

By GRETCHEN MORGENSON - New York Times - Published: September 7, 2013, at:http://www.nytimes.com/2013/09/08/business/find-the-loan-behind-the-loans.html?nl=todaysheadlines&emc=edit_th_20130908

Toward the end of the article the author, Gretchen Morgenson, makes this observation:

“The funding arrangements used by Western Sky and Cash Call are reminiscent of what occurred in the recent mortgage mania. The most egregious predatory lending wasn’t done, for the most part, by big national banks. It was done by smaller subprime mortgage companies like New Century, NovaStar and Fremont General, which made thousands upon thousands of loans.

But these companies wouldn’t have been able to make even 100 loans had they not gotten the money they needed from the big Wall Street banks. The warehouse lines of credit provided by those banks, therefore, enabled the underwriting of billions of dollars in dubious mortgages. Without access to that money, most of the worst loans would not have been written. When Wall Street cut off the credit spigot, these companies folded almost overnight.”

It’s interesting that Gretchen Morgenson focuses on “the Wall Street Banks” as enablers of predatory lending and dubious mortgages. When you consider Fannie's and Freddie’s aggressive purchasing of mortgages which later have been labeled predatory mortgages, or dubious mortgages, it would seem more accurate to include Fannie Mae and Freddie Mac, along with “the Wall Street banks”, as significant enablers of unqualified borrowers, predatory lending and dubious mortgage practices. 

After all, there are those who believe Fannie Mae's and Freddie Mac’s long-term practice of progressively lowering of mortgage qualification standards and their apparent lack of ongoing auditing of borrower qualification standards for the mortgages they bought were major factors enabling mortgage originators to unload their predatory mortgage originations, and their dubious mortgage originations.(1)(2)(3)

Together, Fannie Mae and Freddie Mac were (are) the ten thousand pound gorilla that set the terms for competition in the mortgage industry (and, it seems they still are). And, perhaps more importantly, they had (and have) ‘government endorsement’ for the standards they set.

Footnotes:

1. Qualifications like: income, assets, employment, and if the borrower was actually going to be the resident in the property

2. From Automated Underwriting: “Each entity has its own system; yet despite the different names, the systems are intended to achieve the same goals. Fannie Mae calls her system Desktop Underwriter (DU), while Freddie Mac calls his Loan Prospector (LP). Portfolio and subprime lenders have trade names for theirs, as well.”

(3) Also see: Why Big Lenders Are So Afraid Of Fannie Mae and Freddie Mac By Patrick Barta - Staff Reporter of The Wall Street Journal – pub. April 5, 2001, at: http://online.wsj.com/article/SB986417586751445153.html?cb=logged0.6522271920004229


Financial Institution Regulation: More Smoke and Mirrors?

Moody’s Threatens to Cut Credit Ratings of Banks By Peter Eavis - pub. New York Times / Dealbook - August 22, 2013(1)  

Comment from American Banker:

Downgrade Ahead? Moody's threatened to downgrade the nation's largest banks on Thursday, believing that the government is more likely to let them fail in the event of another financial crisis. The move, which could affect Goldman Sachs, JPMorgan Chase, Morgan Stanley, Wells Fargo, and possibly Bank of America and Citigroup, is likely to stoke the fire around the continuing "too big to fail" debate. "Moody's decision to review the ratings will reinforce the beliefs of those who say Dodd-Frank's measures are sufficient to deal with the 'too big to fail' issue," notes Dealbook. "But the actions of lawmakers who do not feel the act is adequate may have also contributed to Moody's actions." Standard & Poor's expressed similar sentiments about downgrading big banks back in June, believing that, while government bailouts were still a possibility, bondholders may be forced to shoulder losses, notes the Financial Times.

Questions:

Is the revenue model for the Nationally Recognized Statistical Rating Organizations (NRSROs)(2) still ‘issuer pay’ (rather than ‘user pay’).(3)

Subsequent to the real estate bubble bursting and the subsequent great financial crisis has the Securities and Exchange Commission developed and implemented sufficient auditing procedures to test the efficacy of the ratings issued by the NRSRO’s.
If the government is strictly enforcing the rigorous stress testing of banks, and if these stress tests use adequate testing procedures and ungameable testing criteria, why wouldn’t the rating agencies be more willing to accept the output from those stress tests as testimony to the safety-and-soundness of the individual financial institutions?
Shouldn’t the government’s stress tests be a better measure of the safety-and- soundness of a financial institution, than is a NRSRO’s quality rating? In my mind, the government’s stress tests should be a better (and more objective) measure of a financial institutions’ safety and soundness, because the government is theoretically protecting investors and taxpayers, while the NRSRO’s may be somewhat conflicted by their ‘issuer pay’ revenue model.

 Footnotes:

1.  Moody’s Threatens to Cut Credit Ratings of Banks By Peter Eavis - pub. New York Times / Dealbook - August 22, 2013,at:http://dealbook.nytimes.com/2013/08/22/moodys-threatens-to-cut-credit-ratings-of-banks/?_r=0%20http://  

2. The history of the Nationally Recognized Statistical Rating Organizations, at: http://http//en.wikipedia.org/wiki/Nationally_recognized_statistical_rating_organization

3.  For more on the ‘user pay’ ‘issuer pay’ revenue models see The Credit Rating Controversy pub. Council on Foreign Relations Campaign 2102 Backgrounder, at: http://http//www.cfr.org/united-states/credit-rating-controversy/p22328


Parallels in Political Genius?

Worth reading side-by-side.

‘Political Genius’ Housing Plan Spurs Bubble Talk: U.K. Credit By Svenja O’Donnell - pub. Bloomberg News - August 20, 2013, at: http://bloom.bg/173vFEx

The Clinton Era Roots of the Financial Crisis Affordable-housing goals established in the 1990s led to a massive increase in risky, subprime mortgages. By Phil Gramm and Mike Solon - pub. Wall Street Journal - August 12, 2013, at: http://online.wsj.com/article_email/SB10001424127887323477604579000571334113350-lMyQjAxMTAzMDEwNTExNDUyWj.html?mod=wsj_valettop_email

Three more years: A year and one day after Bill Clinton was inaugurated into his second term as president a PBS NewsHour interview with Bill Clinton was aired. In the interview President Clinton proudly discusses his Affordable Housing Initiative, and how he used regulators to force banks to make loans to borrowers who otherwise couldn’t have bought houses. I’ve copied the relevant portion of the January 21, 1998 PBS NewsHour video interview.

Ed Pinto's Great Idea!

The video clip featured below is a portion of a Sept. 8, 2010 Bloomberg interview with Edward Pinto, former Fannie Mae chief credit officer and a Bloomberg News guest Op-Ed contributor, in which he discusses the prospects for a second mortgage market meltdown and the regulation of Fannie Mae and Freddie Mac. Mr. Pinto talks with Carol Massar on Bloomberg Television’s “In the Loop.” (Source: Bloomberg).