Question(s) of The Day - FDIC Freebie?

The proposed FDIC homeowner bailout initiative has been reported to have an objective of reducing monthly payments for delinquent borrowers to a level that they can afford… Won’t this simply encourage others to become delinquents?

Why spend 50% of your take home income on the mortgage when, with the government’s help, you can spend just 30%?

Is implementing this type of policy the proper role of the FDIC?

Senators and the Subprime Implosion

Yesterday, the Senate Banking Committee held a hearing titled “Mortgage Market Turmoil: Causes and Consequences” on the topic of the mortgage meltdown.

The hearing presented two panels of witnesses which included government regulators, lending industry representatives, as well as affected consumers.

Opening the hearing, the committee chairman, Senator Christopher Dodd (D-CT) offered a generally accurate, yet slightly disingenuous account of the evolution of the easy lending era in the US which was then followed by a round of opening statements from the other committee members.

During these statements there was an unusual amount of Greenspan bashing, placing a substantial amount of the blame on the former Federal Reserve Chairman’s shoulders.

“In February 2004, the leadership at the Federal Reserve Board seemed to encourage the use of adjustable rate mortgages that today are defaulting and going into foreclosure at record rates. The then chairman of the Fed said in his speech to the National Credit Union Administration, and I quote him ‘American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed rate mortgage.’ … In my view these actions set the conditions for almost a perfect storm that is sweeping over millions of American homeowners today.” said Dodd in his opening statement.

“I’m amazed, sitting here, listening to all of our colleagues on this committee and forgetting who used to come here before this committee and brag about the housing market carrying the economy. None other than our former Chairman the Federal Reserve, Alan Greenspan. And he was in charge of bank regulation at the time that all these kind of sophisticated mortgages came into being. And I didn’t hear him say a word about those when he was here. And now I hear him criticizing everybody that’s in the business of lending. … I think if your going to criticize, and watch a bubble burst, as he did not only in the housing market but in the market prior to that where he predicted the dot-com downfall before it came, I think you ought to at least take some of the responsibility on your shoulders for having it happen under your watch.” said Senator Mike Crapo (R-ID).

The first panel was exclusively allocated to government regulators including representatives from FDIC, the Office of Thrift Supervision, the Federal Reserve, and the Office of Comptroller of Currency.

The following are some notable quotes from the first panel’s opening statements:

“While liberalized underwriting standards allowed more borrowers to qualify for home loans, competitive pressures eventually lead to the abandonment of the two most fundamental tenants of sound lending, approving borrowers based on their ability to repay the loan according to it’s terms, not just at the introductory rate and providing borrowers with clear information to help them understand their loan transaction.” said Sandra Thompson Thompson Director of the Division of Supervision and Consumer Protection, Federal Deposit Insurance Corporation.

“I want to emphasize that national banks are not dominant players in the subprime market. Last year, their share of all new subprime production was less than ten percent. We know of some subprime lenders that have abandoned their plans for a national bank charter rather than submit to the supervision of the OCC [NOTE: this is a reference to the recent filing and subsequent approval of the conversion of Countrywide Financial to a federal savings bank charter from a national bank in it’s successful effort to side-step the basic regulatory provisions related to non-traditional mortgage risk management proposed last September by both the OCC and the Federal Reserve]” said Emory Rushton Senior Deputy Comptroller and Chief National Bank examiner, Office of the Comptroller of the Currency.

The second panel was allocated to representatives from several lenders including Countrywide Financial, HSBC Finance Corporation, and WMC Mortgage a subsidiary of GE as well as several consumer advocates and consumers themselves.

The following are some notable quotes from the second panel’s opening statements:

“[on changes at WMC Mortgage] First, borrowers will be qualified on the fully indexed rate, second on new loans, prepayment penalties will expire 60 days prior to the first interest rate reset date, … third, WMC will not make loans based on stated income except in the case of borrowers who are self employed and then, only with the appropriate verification. Beyond what has been proposed in the guidance, WMC will continue its historic policy to not offer any option ARMs or products with negative amortization and going forward, we will begin to hold a portion of this loan portfolio on our own books.” said Laurent Bossard Bossard, Chief Executive Officer, WMC Mortgage.

“Countrywide is primarily a prime lender, as I’ve mentioned, 93% of our originations are to prime borrowers [NOTE: this is only true for the month of February 2007. Countrywide’s full year 2006 was closer to 10% subprime originations] … Cumulatively over the past 10 years, Countrywide originated almost 540,000 hybrid ARM loans and less than 20,000 less than 3.5% of those hybrid loans have gone through foreclosure.” said Sandy Samuels Samuels, Executive Managing Director, Countrywide Financial Corporation.

During the Q&A portion of the second panel the most notable exchange came from Senator Dodd and Sandy Samuels of Countrywide:

When asked by Senator Dodd about what the point of a “teaser rate” was, Samuels suggests.

Samuels: “It makes the loan affordable… ”

Dodd: “Yea but if it’s only for a year or so her [a consumer] circumstance is not going to change… if she’s 70 [years old] with a teaser rate, and [then] she’s 72 what’s her circumstances?”

Samuels: “If she makes the payment on time, for the period of those two years, her FICO score will go up and we will be able refinance her into a prime loan…. She’ll pay less because she would have gone from a subprime loan into a prime loan.”

For my money, the best testimony came from Consumer Attorney Irv Ackelsberg (which kicks in at 3 hours 24 minutes) Ackelsberg who states:

“What we are seeing, I believe, is a run away train that is only starting to gather speed. These recent foreclosures reflect large numbers of early payment defaults, that is, homeowners defaulting before the fixed rate periods on their loans expire and the adjustments kick in. We have yet to see the full effect of those adjustments. It is not unreasonable to predict as many as 5 million foreclosures over the course of the next several years, a number that represents one out of fifteen homeowners in this country.”

“But think it would be a really bad mistake for this committee to think that the problem can be solved by reining in the brokers, we have to understand that they are selling the products that the lenders want them to sell and the lenders themselves are selling the products that Wall Street has ordered. The ultimate consumer here is not the homeowner. There’s no real market demand for being ripped off. The real market is on Wall Street, for bond securities. And the broker and the lender and everybody else in between is part of a factory that’s producing bond securities for Wall Street. That’s the real market, and that’s the real culprit.”

The entire hearing can be viewed here in Real Audio format.

Unfortunately, I wasn’t able to capture the feed as a Windows Media file so I can’t add it to BNN. If anyone knows of a reliable RM to WMV conversion utility, I would greatly appreciate the information.

housing+bubble housing bubble recession economy realtor lender mortgage ARM+loan Senate banking Senator Dodd Greenspan Bernanke interest+rates Countrywide+financial Mozilo HSBC FDIC

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer

Coming Home to Roost

With the sub-prime meltdown now in full swing, federal regulators seem to be working feverishly to crank shut the recklessly spewing spigot of easy lending.

A little late to the party maybe but at least its confirmation that something other than useless lip-service regarding “toxic” loans and “rate shock” needed to be paid to the situation.

Of course, we did see the initial signs of official concern back in June of 2005 when former Federal Reserve Chairman Alan Greenspan suggested that “the apparent froth in the housing markets may have spilled over into the mortgage markets” while raising concern about “exotic” mortgage products during his testimony to the Joint Economic committee.

This was later followed by the drafting and subsequent finalization in September 2006 of the Federal Reserve’s “Interagency Guidance on Nontraditional Mortgage Product Risks”, a series of new regulatory guidelines that clearly had the effect of creating concern among some of the most aggressive lenders.

About that same time, Congress expressed some interest in the issue, hosting a Senate Banking Committee hearing entitled “Calculated Risk: Assessing Non-Traditional Mortgage Products” in which many government and industry experts spilled their guts on the topic.

Unfortunately, these efforts, although sound an necessary, were essentially all in vain as the real damage had already been inflicted over an unrestrained period years that saw Americans go on a home-buying-investing-building-rehabbing-flipping binge of epic proportions.

While lenders hit new lows of standards and ethics the nations housing markets surged to highs not seen before in history.

Well now the “chickens have come home to roost” so to speak leaving federal regulators in the position of playing catch-up for the years of negligent regulatory oversight.

To that end, late yesterday afternoon the FDIC issued an “Order to Cease and Desist” to Fremont Investment and Loan of California, asserting that Fremont and it’s affiliates Fremont General Credit Corporation and Fremont General Corporation have been practicing “unsafe or unsound banking practices and violations of law and/or regulation”.

Certainly, this effort is to be expected in this new found era of regulatory risk management but what’s most interesting about this initiative is that many of the corrective actions that FDIC is requiring of the company could easily be applied to countless other lending institutions including those not know to be primarily sub-prime lenders.

This is, in fact, the key take-away from this action.

Fremont may have been primarily a sub-prime lender but it is being “spanked” for committing the very same “unsafe” practices that were exceptionally common during the housing run-up.

Most, if not all of the nations lenders, including the largest institutions, have engaged in either direct sub-prime lending or some form of “pseudo-prime” lending, turning a blind eye to both risk and ethics.

Foolishly though, many on Wall Street are refusing to see the writing on the wall, instead favoring a point of view that seeks to recognize the sub-prime fiasco as merely isolated circumstances, contained only to those participants at the lowest end of the economic spectrum and with the poorest credit quality.

One only needs to recount some of the circumstances we have all observed over the last five to ten years and contrast that to prior eras to see the insanity that has become commonplace in the home lending market.

Zero-down, low-doc no-doc, hybrid-piggyback-blended loans, ARMs, rate-shock, interest only, reverse amortization, teaser rates, cash-out refinance, cash-back at closing, 40-50 year terms, the list goes on and on.

There is simply no doubt that, although the melt-down has begun in the sub-prime market it will end, and in a significantly more ugly fashion, in the pseudo-prime market.

The following is the list of actions that the FDIC is requiring of Fremont but could be applied to nearly every lender sub-prime or not:

• Bank’s analysis of a borrower’s debt-to-income ratio include an assessment of the borrower’s ability to meet his or her overall level of indebtedness and common housing expenses, including, but not limited to, real estate taxes, hazard insurance, homeowners’ association dues, and private mortgage insurance.
• In any case in which a loan would result in a debt-to-income ratio greater than 50 percent, the Bank’s policy should set forth specific mitigating factors (e.g., higher credit scores, significant liquid assets, mortgage insurance) that will permit the Bank to determine that the borrower possesses the demonstrated ability to repay the loan.
• Bank must verify the borrower’s income, assets, and liabilities, including the use of recent W-2 statements, pay stubs, tax returns, or similarly reliable documentation, and verify that the borrower remains employed.
• Provisions which require that when the Bank uses risk-layered features, such as reduced documentation loans or simultaneous-second lien mortgages, the Bank shall demonstrate the existence of effective mitigating factors that support the underwriting decision and the borrower’s repayment capacity, which mitigating factors cannot solely be based on a higher interest rate.
• Bank shall develop, adopt, and implement a policy governing communications with consumers t0 ensure that the borrowers are provided with sufficient information to enable them to understand all material terms, costs, and risks of loan products at a time that will help the consumer select products and choose among payment options.
• All communications with consumers, including advertisements, oral statements, and promotional materials, provide clear and balanced information about the relative benefits and risks of the products, and that such communications shall be provided in a timely manner to assist consumers in the product selection process, not just upon submission of an application or at the consummation of the loan.

housing+bubble housing bubble realtor real+estate ARM+loan toxic+loan subprime sub-prime lenders pseudo-prime greenspan bernanke FDIC Federal+Reserve risk+management recession economy economics

Copyright © 2007
PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer