Video(s) of The Day - Dodd and Kyl on the Massive Bailout Package

News Hour brings together Senator’s Chris Dodd (D-CT) and Jon Kyl (R-AZ) to discuss some of the legislative goings on related to the Paulson Mega-Bailout initiative.

Dodd confirms that although Congress feels somewhat obligated to protect taxpayers, they are pressed (by the market, etc.) to get this legislation done quickly and done “right”.

Capitol Appeal!

The National Association of Realtors (NAR) recently produced an email campaign that seeks to harness its legions of member Realtors specifically to urge congress to include the conforming loan limit provision of the economic stimulus package.

Not only has the “temporary” increase to the conforming loan limit been approved by the house, influential representatives are now calling for the conforming loan limit increase to become permanent.

"While I would have preferred the stimulus package to incorporate a permanent increase and other elements of the FHA Modernization bill passed by the House, this temporary measure will ensure that FHA can help distressed borrowers and new homeowners in high cost housing markets like California at this critical time." – Rep. Maxine Waters (D-CA)

“Increasing the loan limits is a very important step in stabilizing the mortgage market and helping consumers refinance, … I look forward to working with the Senate to make these changes permanent.” – Rep. Barney Frank (D-MA)

The following is the text of an email that I have sent to my senators regarding the proposed changes.

If you agree with the sentiment and spirit of this letter, PLEASE consider clicking the following link in order to send it to your senators as well.

CLICK HERE TO SEND TO YOUR SENATORS

Dear Senators:

I am writing you to express my deepest concern that Congress is about to make one of the most severe economic policy miscalculations in modern times.

By increasing the conforming loan limit for GSE sponsored loans to 125% of an area’s median home price (up to $729,750), Congress is effectively doing the following:

1. Interfering with the fundamental “free market” clearing process that is the necessary natural outcome of and most immediate remedy for the deflation of the historic national housing bubble that was brought about by many years of unhealthy and largely unregulated conditions in the real estate, mortgage and finance industries.

2. Subjecting the GSEs (Fannie Mae and Freddie Mac), critical linchpins in the stability of both the housing and general economy, to additional pressures that had never been anticipated or outlined as part of their original or ongoing charters.

3. Creating a severe “moral hazard” thus allowing and even encouraging existing and new home owners/buyers to ignore risk and repeat mistakes that we now know carry harsh consequences.

4. Endorsing both a grossly unequal treatment of the American people as well as laying the foundation of an immense socialized bailout of the wealthy.

As certain as the national housing bubble had inflated upon popular but unwise notions of unparalleled potential for immediate wealth, so certain too will be its steady deflation now that those notions were proven false.

There is NO way to prevent or otherwise mitigate the deflation we are now experiencing in our housing markets and its decline will simply provide another example in a lengthy list of typical economic crashes in recorded human history.

Increasing the conforming loan limit is not merely a futile effort but, in fact, may prove to be the single greatest threat and injury to the stability of the overall economy.

As you may already know the GSEs now guarantee over $5 Trillion worth of mortgage backed securities much of which was originated after the year 2000 when the national housing mania was most exuberant.

As home prices continue to fall, much of this debt will predictably go bad… it is a statistical certainty.

It’s important to understand that, contrary to the current consensus view and popularly reported belief, subprime debt is only the “tip of a far larger iceberg”.

Having just entered the price “free-fall” phase of the housing correction (as shown so clearly in the latest results of the S&P/Case-Shiller HPI for ALL 20 major metro markets) in the fourth quarter of 2007, we are just now on the verge of realizing the extent to which this period will affect ALL grades of mortgages and borrowers.

Expanding the role of the GSEs during a period where the dangers they may face have yet been fully realized is more than imprudent… it is simply reckless.

And what of the participants who would make most use of the increased limit?

The dramatically higher loan limit would allow the country’s most affluent individuals located in the metropolitan housing markets to receive the benefit of a loan carrying an “implied” government guarantee that had been originally intended to help the poor and the middle class.

Enabling extremely affluent home buyers/owners to purchase/refinance homes costing $915,000 DOES NOT qualify as assisting in the process of providing “affordable housing”.

It has been shown that these metro markets were the most exaggerated during the era of the housing bubble where market participants routinely ignored risk instead choosing to accept and even rely on popularized misconceptions related to home price stability, appreciation and housing demand.

As a result, prices inflated far beyond the reach of most creating an epidemic of “affordability” problems for residents, local governments and businesses.

But with the unwinding comes a reassertion of healthy long term fundamental trends in the valuation of residential real estate that will again bring balance back to local economies.

There will undoubtedly be a significant disruption created by this unwinding but who better to shoulder this burden than America’s most well-off, and consequently the most active and risky, market participants.

Bailing out these individuals risks putting the GSEs in further jeopardy of becoming insolvent.

In the event of that very plausible outcome, generations of middle class taxpayers will be the real losers, paradoxically, of a benefit intended to strengthen and enhance their economic condition.

I urge you to reconsider your support of the inclusion of this provision of the economic stimulus package.

The Daily 2¢ - Mortgage Tsar?

In terms of government response to crisis, you know things are really going haywire when they anoint a new Tsar.

And so it goes for the housing-mortgage meltdown.

Not satisfied with intervening in the “free” market through mere Fed rate cuts and a potentially (in the bag) dramatic expansion of Freddie Fannie and FHA, Congress seems so bent on attempting to prevent a correction in the nation’s housing markets that they are now proposing the “temporary” creation of the position of “Mortgage Tsar”.

Furthermore, Representative Barney Frank (D-MA), Chairman of the House Financial Services Committee, offered up his pick for the spot, former Congressman Jack Kemp.

I think, at this point, it’s safe to say that Congress is getting a little carried away.

Senator Christopher Dodd (D-CT) even suggested that the current circumstances in the housing-mortgage market are akin to a “slow-motion, 50-state Katrina, taking people's homes one-by-one, deva­stating their lives and destroying their communities.”

So, what are the expectations for a “Mortgage Tsar” anyway?

Here is a possible “Mortgage Tsar” credo:

“Willing to combat foreclosure wherever it should strike the innocent and further to prevent the unwitting debt getter from making bad decisions. Stops at nothing to eliminate pre-payment penalties… Able to make a large Jumbo loan conform in a single bound!... look up in the air… it’s a bird… it’s a plane… it’s… it’s… The Mortgage Tsar!”

Congress… Put your hands down and slowly back away from the legislation.

The Daily 2¢ - Pusherman

“Silent life of crime
A man of odd circumstance,
A victim of ghetto demands.
Feed me money for style
And I'll let you trip for a while.
Insecure from the past,
How long can a good thing last?

Got to be mellow, y'all
Got to get mellow, now
Pusherman gettin' mellow, y'all

Heavy mind, every sign
Makin' money all the time
My LD and just me
For all junkies to see
Ghetto Prince is my thing
Makin' love's how I swing
I'm your Pusherman” – Curtis Mayfield

You have to admit, Chairman Bernanke is pretty cool…

The commercial paper market stalls… “ain’t no thang”… Here’s $30 billion… just pay it back when you can…

Financial markets continue to stumble as Wall Street “junkies”, strung out on yield and leverage, writhe desperately for their next hit… Bernanke’s “discount” window is open for business and he don’t mind your crap collateral.

Man… Think of the power! … What’s next? … a good pistol whippin’ for PIMCO’s Bill Gross?... Possibly…

Although… it does occur to me that there is only so much hustlin’ one pimp can do before he irreparably damages his “street cred”.

Like every good dealer, Bernanke’s “clients” are becoming more and more dependent and demanding of his services.

In trying to satisfy them all, he’s clearly in jeopardy of over promising and overextending.

Plus, it’s not as if Bernanke doesn’t have his own problems… He’s dealin’ for the man!

The first sign of trouble and Senator Dodd’s got him in the office with Paulson…

God only knows what went on in there but when they came out the Senator (and frail presidential candidate) clumsily grabbed some much needed limelight while Bernanke scurried away looking sort of busted.

So much for the independence of the Federal Reserve!

Oh well... I guess that’s the price one pays for being SuperFly!

The Daily 2¢ - Federal Nonconformists

I can't think of a more preposterous and irrational example of exuberant upside bias on the part of the Federal government then that of the recent toiling over the OFHEO conforming loan limit.

For those of you that are not yet familiar, the Office of Federal Housing Oversight (OFHEO) is the government agency that is responsible for regulating the two primary Government Sponsored Enterprise (GSE) mortgage giants, Fannie Mae and Freddie Mac.

One of the main, if not THE main, role of OFHEO is to set the “conforming loan limit”, a maximum loan value that is used to act as the threshold between a “safe” loan that Freddie Mac and Fannie Mae are allowed to purchase and an “unsafe and unsound” loan “running contrary to statute”.

This is how the “conforming” vs. “Jumbo” loan is defined… below the limit is “conforming” above is non-agency “Jumbo”.

Currently, the limit for a single family home is $417,000, pretty frothy when you consider that, only as far back as 2000, the limit stood at $252,700.

Keep in mind that this means that an average home buyer can go to a mortgage broker, bank or other lender and borrow as much as $417,000 of home loan principle and still remain eligible for GSE underwriting that carries a lower rate of interest since GSE loans are assumed to be backed by the full faith and credit of the federal government (this assumption is really a bit of a myth… but that’s a post for another day when things really start to quake!).

So how is it, you ask, that the limit nearly doubled in roughly 5 years (keep in mind, it was set to $417,000 in November 2005)?

Easy, when the home prices went up, they simply raised the value (for more detailed information on how they change the limit, see my prior post on the subject).

But now comes the sticky part… now that home prices are going down, what are they doing to the limit?

The answer is surprise… OFHEO is coming up with all sorts of oddball ways of keeping from having to lower the limit (see my past two posts on the subject)

In fact, in 2006 when home prices declined which, according to their prior inflating methodology, should have resulted in a reduction of the conforming loan limit, OFHEO revised their guidelines and left the limit unchanged.

Now in 2007, home prices are going to fall again, only this time by a likely far more significant percentage and what has OFHEO done in response?

They have revised the guidelines once again, effectively postponing any decrease until certain conditions are met (again, see my prior post on the subject).

After soliciting public comment in June and July about the proposed changes to the guidelines, OFHEO received a number of respondents, particularly the National Association of Realtors (NAR), the National Association of Home Builders (NAHB) and the Mortgage Bankers Association (MBA) as well as Fannie Mae, Freddie Mac and a whole raft of two-bit mortgage lenders who expressed clear opposition to the changes NOT because they would leave the limit unchanged BUT because they feel OFHEO should NEVER LOWER THE LIMIT!

ONLY UP... NEVER DOWN!

If that weren’t outrageous enough, there has been much talk for the last few days coming from Congressional figures such as Representative Barney Frank (D-MA), the Chairman of the House Financial Services Committee, who actually prefers that the limit be INCREASED, even in the face of two years falling home prices!

The point of this, obviously, would be simply to force Fannie and Freddie to effectively “re-liquefy” the now totally stalled Jumbo market.

Apparently though, both Treasury Secretary Paulson, and Senate Banking Chairman Dodd (D-CT) have expressed that it will take specific legislative action in order to allow OFHEO to raise the conforming limit above the current level.

Now, I’m not very sure why they have concluded this as OFHEO just modified its procedures for lowering the value without any legislative debate whatsoever, but it really makes no difference.

If you listen closely to Dodd, Frank and Paulson, they are all saying the same thing namely it will take legislative action and the legislation is on the way.

This is one of the most egregious examples of a dimwitted Congressional-Federal assault on the “free” markets I have ever seen.

They, in the supposed well meaning attempt to help “average” Americans, are essentially attempting to control the market price of residential real estate.

Don’t underestimate the severity of this fumbling.

To put it in better perspective, it has recently been estimated (in Dean Bakers latest excellent paper... hat-tip HousingPanic) that there is anywhere between $4 to $8 TRILLION of housing equity that will be lost in the process of deflating (re-pricing) the housing bubble, bringing prices back to hundred year historical averages.

That’s nearly 2 – 4 times larger than the entire 2008 Fiscal Year Federal Budget.

This means the by finagling with things like the conforming loan limit, mortgage bailout funds and foreclosure timeouts, the Federal government is attempting to use both taxpayer dollars and the full faith and credit of our government in order to maintain absurdly inflated housing values and the artificial wealth this boom created.

This would clearly create a moral hazard of unparalleled proportions.

Remember, Jumbo loans were most frequently used by upper middle class affluent home buyers, and for the ones that are now in trouble, the ride down will be painful.

But that is the price you pay for taking a risk in a “free” market.
And who better to take this hit than Americans with generally good incomes and employment opportunities.

If the government is smart it will allow this natural correction to take place unfettered, permitting scores of Americans to learn a valuable life lesson.

BNN MUST SEE TV! – Countrywide Layoffs, GreenPoint Mortgage Folds, GMAC Slimed, Senator Dodd, Rep. Barney Frank and Nouriel Roubini

Things are really heating up for the credit-mortgage crunch.

We now have the news of a significant new wave of layoffs, closings and distress with Countrywide Financial (NYSE:CFC) cutting considerable staff, Capitol One’s (NYSE:COF) residential mortgage subsidiary GreepPoint Mortgage closing its doors, and GMAC’s residential mortgage unit ResCap Holdings suffering with its loss of non-conforming loan production.

Watch Countrywide Cut on BNN!

Watch GreenPoint Flop on BNN!

Watch GMAC get Squeezed on BNN!

To add a further complexity, Congress is now stepping up its actions, announcing a previously unscheduled meeting today between current presidential candidate and Senate Banking Committee Chairman Senator Dodd (D-CT) and Ben Bernanke as well as a seeing a significant new round of regulatory rumblings from House Financial Services Committee Chairman Representative Barney Frank (D-MA).

Watch Dodd Preach on BNN!

Watch Frank Regulate on BNN!

Finally, as Nouriel Roubini sees it, the Feds latest strategy has not worked, panic is continuing to spread as indicated by the by the latest US Treasury yields, and that the Fed is likely to cut rates 25 basis points in September and possibly could have an emergency cut even earlier.

Watch Roubini Be Right Again and Again on BNN!

Bailin’ out the Bubble?

On Wednesday, the Senate Joint Economic Committee (JEC), chaired by New York Democrat Senator Charles Schumer, released a report entitled “Sheltering Neighborhoods from the Subprime Foreclosure Storm” that both presents a dire outlook for millions of homeowners nationwide as well as attempts to set the stage for possible federal legislative action.

Although the report presents a fairly accurate account of the issues surrounding both the subprime situation as well as various aspects of predatory lending, it clearly falls short of fully recognizing the true depth and breadth of the coming wave of foreclosures and wrongly places the burden of helping to mitigate that torrent on the shoulders of taxpayers.

Essentially taking a “where all in it together” position by linking the interests of the lender, homeowner, neighbors and local government which it calls the “stakeholders”, the report attempts to define both the actual dollar cost of a foreclosure as well as the cost of preventing one.

This isn’t an altogether a bad concept in that it is certainly true that the “stakeholders” mentioned are all effected, and in fact, recent studies by the Federal Reserve bank of Chicago suggest that there is even a strong correlation between foreclosures and increased rates of violent crime.

But what this really highlights is that foreclosures are local events, effecting local economies, and as such are probably best handled, at least initially, by the state and local governments in which they occur.

To be fair, the report never explicitly suggests that there should be a wholesale bailout of bad loans and furthermore only proposes federal assistance to existing local community-based non-profit organization that have proven track records in foreclosure prevention.

The foreclosure mitigation suggested by the report is limited to assisting with the costs associated to refinancing to fixed rate loans as well as funding counseling and possible legal services for borrowers that experienced more egregious predatory circumstances.

Never the less, by going over the head of state and local governments, there is a clear risk of circumventing the responsibility and value that government entities at the state and local level can have as well as immediately burdening the federal taxpayer with the cost.

For example, in early 2006, amidst growing numbers of foreclosures and even larger numbers of delinquencies clearly originating from questionable lending practices, a series of state Attorneys General successfully strong-armed Ameriquest Mortgage into providing $295 million in compensation, $30 million in state restitution and a commitment to strengthen lending standards in exchange for dropping inquiries into its questionable business practices.

Using the dollar estimate for foreclosure mitigation as outlined in the JEC report, these awards alone could have provided the proposed assistance for 98,484 individual homeowners.

Keep in mind, these were awards from only one lender.

If state governments, who are in many ways particularly well suited to bring legal action to corporate entities operating within their borders, were to target ALL the players involved in the food chain of loose lending, from mortgage brokers and lenders to the Wall Street financial institutions who effectively encouraged the majority of questionable lending practices, it would leave the financial burden squarely on the shoulders of those who caused it.

This could easily be achieved by examining the data collected by local and national mortgage banking associations as it relates to foreclosure events to see the clear patterns of questionable, predatory and fraudulent activities on the part of mortgage brokers and lenders.

The report also fails to recognize the true scale of the coming wave of foreclosures limiting its analysis to the subprime market which is likely to be only the tip of a vastly larger iceberg providing yet another reason why it would be unfair to burden the taxpayer alone with the cost of the repairs.

On a more dangerous note, the report supports the revamping of FHA, apparently as has been specified by the yet to be fully passed FHA Modernization Act, as well as funding and tasking FHA with the responsibility of overseeing a “rescue fund” allocated for purchase of failed mortgage loan portfolios.

This may be the worst recommendation of all as it effectively makes the federal government, i.e. you, the next great subprime lender by dramatically lower the qualifying standards for FHA loans as well as wrongly tasking HUD with the role of lender of last resort for failed lending institutions.

Keep in mind that the Federal Reserve has, as one of its principle mandates, the role of lender of last resort and is, in fact, prepared for possible systemic failures.

The report then concludes with a series of fairly sound proposals including actions to strengthening lending standards, create a federal anti-predatory lending law, establish a standard for determining a borrower’s ability to pay, and plain language disclosures on mortgage products.

If you agree the sentiment in this post, let Senator Schumer know by either emailing his office with your take on the subject or simply email a link to this post.

housing+bubble housing bubble federal+reserve fisher bernanke greenspan subprime lenders interest rates economy recession

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PaperMoney Blog - www.paperdinero.com
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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

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PaperMoney Blog - www.paperdinero.com
All Rights Reserved

Disclaimer