AEIdeas

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Discussion: (46 comments)

  1. Great idea. Let’s bail out the careless and the stupid and wind up destroying the currency in the process. Gold anyone?

  2. sure, o’bama will do that if he KNOWS it will help his Bankster OWNERS and head the country further down the TOILET

    1. The voters will get what they deserve. Why fight it when you can take steps to protect yourself or even benefit from it?

  3. Obama refinance 3.0 wasn’t ever going to work because FHA is capped. It was never a good plan send private label through FHA. Yikes, only the Czar of the HUD could come up with this

    http://loganmohtashami.com/2012/02/02/obama-refinance-plan-3-0/

    1. Max Planck

      From the Mohtashami’s link:

      ” However, Obama’s plan is a streamlined process which does not require income verification, and only requires that the homeowner has made timely payments in the last six months. This will undoubtedly lead to another government bailout, this time by the FHA. The FHA leverage ratio is already high, and will expand under this program. The FHA was not designed to be such a large player in the home purchase market, and now it is going to be asked to become a player in the refinance market.”

      It will NOT necessarily lead to another bailout, which apparently FHA already may need.

      Mr. Mohtashami should know, as a mortage professional, that this program simply mimics existing FHA policy when it comes to refinancing. The borrower, of course, pays the mortgage insurance, but the meltdown has apparently exhausted the FHA insurance pool.

  4. Max Planck

    “Basically, Obama was calling for a way to allow homeowners with non-government backed loans to refinance into FHA loans.”

    What the President was apparently doing- there are no details here- was allowing what is called a “Streamline Refinance” to borrowers with clean mortgage payment histories. I had written to the President myself about it, although I’m sure I’m not the first or only person to think of it.

    Streamline Re-fis have been a standard feature of FHA and VA loans for decades. With a two page application, the borrower can re-fi into a lower interest rate loan. The only thing is the payment history on the mortgage must be clean. There is no appraisal, and no closing, and it is performed with a modest fee.

    In following this matter, I have a conflicted view on loan forgiveness, partially because I do have a conflict of interest- bond holders might get hurt by this. But if borrowers can drop the rate, the smart play for them is to use the savings to accelerate the payment of their principle- in effect, buying back lost equity at all time low rates. That’s not a bad deal.

    1. The problem with allowing streamline refinances with private label loans is that you’re taking a Non FHA loan and putting it on to the balance sheet of FHA.

      FHA wasn’t designed or created for this much loan volume. Adding another dance partner to the mix will just deplete them more

      This was a easy call to make that FHA was going to need a bailout. Under their current capital reserve model they were doomed as soon as the financial crisis started because there is no private sector alternative.
      So, their volume of loans went up and their capital reserve got depleted. The model for $2 dollars for every 100 insured wasn’t going to fly with their rise in popularity
      What FHA needed to do is raise their down payment level to at least 7.5% with their Rise in MI. However, they stuck to bad model of just raising MI which is pointless as long as they were offering 3.5% down payment loans.

      This was never going to work for FHA.

      http://loganmohtashami.com/2012/03/30/diana-olick-just-a-few-questions-maam/

      1. Max Planck

        Not sure I follow your logic here.

        FHA’s problem was also exacerbated by the ham fisted attitude of banks offering conventional loans- all of a sudden, a 700 FICO and 20% down wasn’t getting the job done. Lots of people who would normally qualify for a conforming loan were denied.

        You know what every loan officer does in THAT situation, right?

        However, if we’re talking about re-fi’ing a borrower who can already handle their mortgage and dropping the rate, that strengthen’s the borrower’s position, and should theoretically lower default risk. I.E, if he can handle $1200 a month, he is better off paying $900.

        I have long cast a baleful eye on helping homeowners who made purchase loans through B&C lenders. But there are no easy ways out of this. I’m not sure if the down payment level has that much to do with foreclosure- in raw dollars, it’s not that much different carrying costs. As with all other loans, timing counted.

        1. Capital Reserve Model for FHA wasn’t created for the massive amount of loans it was going to take in after the financial crisis.

          It wasn’t designed for a 30% of the lending market. This is why it took less than 4 years for it go insolvent.

          “FHA’s problem was also exacerbated by the ham fisted attitude of banks offering conventional loans- all of a sudden, a 700 FICO and 20% down wasn’t getting the job done. Lots of people who would normally qualify for a conforming loan were denied.”

          Maybe it’s just me, However, excluding a low appraisal or condo project issue. Everyone who applied for a 20% down 700 fico as long as they met the DTI ratios got a loan. Not once have I seen this not happen. Of course it’s more difficult to have 20% down. However, the myth that lending standards are too tight is unwarranted because FHA core requirements of

          1.620 Fico
          2. 3.5% down-payment
          3. Verified income to show capacity and exception loans go up to 50 DTI

          That isn’t strict at all, that is very weak in my eyes and FHA needs to raise it’s down payment level.

          So, this is a purchase market issue not a refinance issue I am talking about. Some of us have been saying for a long time that FHA wouldn’t make because their intake of purchase loans is way too high, much like Freddie and Fannie. They went 75-1 and 72-1 and FHA was running at 30-1. If FHA was a bank which it isn’t obviously the FDIC would have seized it over night for horrible capital reserve ratios.

          So, the FHA delinquency and foreclosures play a part in this for sure. However, the Main Reason why FHA is in as bad a shape as they are in is because of the massive loan volume they took since 2008. Law of big numbers came into play and their 2/100 dollar reserve insurance ratio couldn’t handle the increase of loans they were taking in.

          Since the 80/20 loans 80/15/5 loans are gone FHA was the only game in town. Conventional goes 80/10/10 with PMI but FHA has been where the actions is act

          This is why we must always resist in easing lending standards. It would be economic treason to bring back the crazy standards of the past

          http://loganmohtashami.com/2012/09/26/stop-crying-about-lending-standards/

          1. Max Planck

            You’re missing my point, and I think you’re missing the core reason for FHA’s shortage:

            “Maybe it’s just me, However, excluding a low appraisal or condo project issue. Everyone who applied for a 20% down 700 fico as long as they met the DTI ratios got a loan.”

            I trust you are telling me what you saw, and I know my evidence is somewhat anecdotal, but I have heard nothing but complaints about qualified buyers- even with MORE than 20% down (since people are downsizing and have cash) getting turned down. Aside from that, Mr. Bernanke has made the same complaint repeatedly, as well as other sources in the housing market.

            ” Not once have I seen this not happen. Of course it’s more difficult to have 20% down. However, the myth that lending standards are too tight is unwarranted because FHA core requirements of

            1.620 Fico
            2. 3.5% down-payment
            3. Verified income to show capacity and exception loans go up to 50 DTI”

            That was my point- the borrowers who were turned down were going for conventional/conforming loans. OF COURSE FHA will take these rejects!

            “That isn’t strict at all, that is very weak in my eyes and FHA needs to raise it’s down payment level.”

            Let me say something about down payments. While it’s true it’s easier to walk away from a mortgage when you have less skin on it, it’s not a bullwark against foreclosure. I have Bloomberg screen shots of Collateralized Mortgage Obligations I have saved. I saved them for a reason- despite an average of 65% LTV, FICO average north of 720, they display a foreclosure rate of over 6%. I don’t have to tell you how astounding that is. For each successive month displayed, the REO capture rate inches up. My point is that if value craters, a large down payment won’t save anyone. Having said that, this WAS in the aftermath of massive job losses and again, the down payment itself may not have been an issue. Its a hell of a thing to give up one’s home, especially since most are occupied by families, with children, going to local schools.

            “So, this is a purchase market issue not a refinance issue I am talking about. Some of us have been saying for a long time that FHA wouldn’t make because their intake of purchase loans is way too high, much like Freddie and Fannie. They went 75-1 and 72-1 and FHA was running at 30-1. If FHA was a bank which it isn’t obviously the FDIC would have seized it over night for horrible capital reserve ratios.
            So, the FHA delinquency and foreclosures play a part in this for sure.”

            I think this misses the point. When I was a broker, FHA UFMIP was 2.25%. When real estate flourished, the insurance pool was flush with assets, and I believe they cut the rate at one point. As you point out, they raised it back again after the crash, but probably not by enough, and I doubt if anyone could even project what their need would be.

            My point is that it doesn’t matter how much loan volume the institution processes or securitizes. As long as everyone pays their bills, and those who don’t are covered by adequate insurance reserves, it shouldn’t matter where origination volume stands.

            “However, the Main Reason why FHA is in as bad a shape as they are in is because of the massive loan volume they took since 2008. Law of big numbers came into play and their 2/100 dollar reserve insurance ratio couldn’t handle the increase of loans they were taking in.”

            Yes, as I said, everyone was stuffing the FHA channel because lenders were crapping their pants over putting them into the GSE pipe. But take note: LOANS ORIGINATED AFTER 2008 ARE NOT OUR PROBLEM. The bulk of foreclosure fallout comes from the 2005-2007 bucket when prices spiked intensively. You have the same phenomenum in the CMBS space. As long as their is equity, there shouldn’t be an issue. Post 2008 home sales had most of the excesses in price bled out- to say the least.

            “Since the 80/20 loans 80/15/5 loans are gone FHA was the only game in town. Conventional goes 80/10/10 with PMI but FHA has been where the actions is act

            This is why we must always resist in easing lending standards. It would be economic treason to bring back the crazy standards of the past”

            Here is where I don’t agree, but since you don’t state what “crazy standards” are, this is what it comes down to. My position- after exhaustive research from reading books, hundreds of articles and Op-Eds, and news reports is this: without the glacier like encroachment by the TRUE B&C crowd, i.e,, Long Beach Mortgage, Associates, New Century, Household, Option One, and the B&C divisions of lenders like Chase and Countrywide, this crisis would never have happened. This chapter in mortgage history is known as “SupPrime 2.0.”

            Don’t forget- no one ever wrote up derivative contracts on FHA paper. This was all done on junk loans certified by S&P and Moody’s as AAA. I trade and invest in mortgage paper, and I will tell everyone again: if you stay out of the 2005-2007 super spike, your paper WILL pay off without foreclosure issues. Some areas of the country, notably Arizona and Nevada, for example, do stretch this rule.

            But I find the SEC’s blessing of 40 to 1 leverage in late 2004, followed by a fantastic spike in real estate asset prices, a bit much to ignore.

            This was not an underwriting problem so much as it was an asset bubble problem.

          2. Let me explain it this way on 2 fronts

            FHA has a certain capital reserve model. How the structure of that model is created doesn’t work well if the institution all of sudden has a massive increase of loan intake. Why because for each loan they take in they have to have reserves. This is the main reason why the reserves are depleated.

            More loans take reserves away, also, with more loans you get more risk of foreclosres

            Remember FHA was less than 5% of the market and then went above 30%. That is a massive rise of business.

            So the 2/100 insurance reserve model couldn’t stands it’s own and after 2010 they really started to see the reserves dwindle.

            I believe they were down to .24 or 24 to that 2 dollar to 100 insured model.

            This is why they needed a bailout from the robo signing settlement and congress needed to pass the 2012 FHA solvency act. The writing was on the wall early of 2011 for FHA

            Now in regard to “Crazy Standards”

            2/28 80/20 S.S.
            3/27 80/ S.S.
            80/10/10 Option Arm Stated
            80/15/10 Option Arm Stated
            80/20 Option Arm Stated. Yes this crazy loan was created in 2006 because the facilitation of the bubble needed loan programs that more exotic

            If you look at all the charts and especially the “the real DTI” to what housing cost and people’s income it went parabolic

            If you look back in the last decade, no real equity was created in the housing bubble, because it was debt on debt borrower. A huge debt bubble asset inflated nightmare that was going to pop.

            Which fits well in America, because we like Financial Bubbles because the government needs to revenue to pay it’s bloated budget.

            Here is a good example, even Barney Frank, with all his wisdom couldn’t tell Americans that Housing was a bubble in June 2005. See, no one wants to stop the party

            http://loganmohtashami.com/2012/11/05/barney-frank-no-housing-bubble-in-june-2005/

            The United States in the first modern day country now to have three financial bubbles with in less that a 20 year spam

            Tech bubble, real estate bubble, Bond market government debt bubble

            You can even look at this as corp debt, household debt and now sovereign debt

            One of the biggest mistakes in the past was the SEC 40-1 leverage allowance. That was horrific and allowed Bear Stearns to its death spiral as they were the biggest abusers of this.

            Packaging crap and selling it away, horrific business model.

            However in regards to what I see in the business now and what I have been saying for years in housing that we simply don’t have enough qualified home buyers in the US. The Mortgage Purchase application charts says it all. Rates have fallen from 5% -3.25% from early 2011 and Purchase Application nation wide have been getting weaker not stronger. We don’t have enough income/assets to buy homes as Americans.

          3. Max Planck

            This article appeared this morning. Site is a good follow:

            http://housingwire.com/news/bernanke-housing-not-out-woods-lending-remains-too-tight

          4. Did you read the article. The Bernanke comments explain your confusion about default rates being low for risky loans.

          5. Max Planck

            The article does nothing of the kind, and you can’t even define what a “risky loan” is.

            Believe me, Sir, I am not “confused” on this issue.

          6. Of course you are. As I said, the Bernanke quote is very instructive to those who are ignorant of how things work and claim to have expected something that the market would not produce in the relevant environment.

            You are just as ignorant about the FHA problems. There is no way to truly bail out the FHA. You can easily kick the can down the road for a while or wipe away its losses if you blow another big bubble in real estate by devaluing the currency. Neither option would be good for savers, workers, or the general economy.

          7. Max Planck

            What quote would you be referring to, little troll?

          8. The one in the link that you provided. You really might try reading the material that you are referencing and try to understand the implications. Think before you hit send and we will all be spared a lot of meaningless drivel.

          9. Max Planck

            I read the artice, thanks. Now tell me how

            ” the Bernanke quote is very instructive to those who are ignorant of how things work and claim to have expected something that the market would not produce in the relevant environment. ”

            You have the floor.

          10. You claim to be an expert and a smart guy. Surely you can figure out why the expected defaults that you were saying should have appeared on the CRA thread were explained by Bernanke’s comments.

            (A hint. Look at the last quote and try to understand why your explanations on the CRA quote were shown to be wrong by Bernanke.) If you can’t figure it out I will explain it to you.

          11. Max Planck

            Indulge me. Please……..

          12. Here you go:

            “[T]he fall in home prices means that many current homeowners cannot rely as much as they could in the past on tapping their existing home equity to trade up to larger or better homes, while underwater homeowners may be financially unable to move from their current homes,” Bernanke said.”

            Bernanke points out that in the past when homeowners got in trouble they would not default because, THANKS TO THE RISING MARKET, they could extract equity or simply sell at a profit. This is exactly why we would not expect huge default rates with the CRA mortgages. His statement invalidates many of the statements that you made on the other post. That is what Ron and a few others were trying to point out to you. But you were so impressed with your own view of yourself that you did not pay much attention.

          13. Max Planck

            You fell into my trap. Your statement reveals the ignorance that will hound you for the rest of your days. Because you WANT it that way. Despite dozens of posts, you refuse to digest the information I provided, and the truth. Let us repeat the statement:

            “[T]he fall in home prices means that many current homeowners cannot rely as much as they could in the past on tapping their existing home equity to trade up to larger or better homes, while underwater homeowners may be financially unable to move from their current homes,” Bernanke said.”

            What Mr. Bernanke is referring to is the lack of “trade up” business in real estate. Talk to any broker who has been around for a time- they will tell you that a good part of their customer base comes from existing homeowners who have taken the increase in value, plus their amortization, and trade up to a bigger home using a good opportunity, like lower mortgage rates to do it. The borrower gets a better home, and thanks to all of these factors, his monthly nut hasn’t changed much. This is a normal thing in a normal housing market. People do better, and they want better neighborhoods and schools for their kids. For many brokers, trade up was over half of their sales. That market is dead. Conversely, Mr Bernanke noted, if you want to move to get another job or just out of real estate hell, you’re have to work out a “short sale” with your lender. So you have two dynamics which have helped to freeze the residential market.

            Naturally, you decided to read a sinister dynamic in here where non exists. Tell me, genius: if the owner of an existing home can’t even handle the mortgage he has in place, where did you get the idea that a legitimate lender was going to give him a BIGGER loan?

            Not in the cards, pal. I’ll tell you who WOULD give him a mortgage though. The B&C lenders I mentioned, who sell their high yield paper to those who want to take on the added foreclosure risk, just as I do when I purchase Sub Prime paper for myself.

            And using cash-out re-fis to satisfy CRA metrics?

            LOLOLOLOLOLOLOLOLOLOLOLOL!!!!!!

            Oh, you little people are so pathetic.

          14. I do not care about narrative or supposed motivation because the facts are sufficient for our purposes. If you borrow money and have a problem but you have a rising market there is no default because you can extract home equity or simply sell your home. That implication was very clear in the Bernake statement. In a stagnant or falling market people who cannot make the payments are trapped and cannot get out. In a rising market there is no such problem because the home would sell for more than the outstanding loan amount in most cases.

            I thought that you were supposed to be an expert in this field.

          15. Max Planck

            I AM an expert, and once again, you simply ignored the truth of the matter, or feigned ignorance to deflect the obvious fact that you’re wrong. You’re also deflecting.

            I don’t give a crap if the value of the house triples. If the borrower is demonstrating that he cannot handle the existing mortgage burden he already has, you can bet your @ss he’s going to have a great deal of difficulty getting a legitimate conforming lender to increase his mortgage burden. It’s not going to happen. As I have said before, mortgage underwriting, at bottom, rests on two simple principles:

            1) The ability to pay
            2) The willingness to pay

            These two factors are assessed in the mortgage underwriting process.

            If the borrower is having trouble and he sells at even money or a profit, there is no default. So there’s no problem there.

            You’re getting away from the point of your post, which was Bernanke’s statement. That statement had nothing to do with the point you’re making now. He didn’t even mention pulling cash out of a house, he was talking about using built up equity to trade up to a new house, which is a normal occurence in a normal market.

            And again, your mention of CRA in regards to the subject is ludicrous.

          16. I don’t give a crap if the value of the house triples. If the borrower is demonstrating that he cannot handle the existing mortgage burden he already has, you can bet your @ss he’s going to have a great deal of difficulty getting a legitimate conforming lender to increase his mortgage burden. It’s not going to happen. As I have said before, mortgage underwriting, at bottom, rests on two simple principles:…

            The industry was giving 125% of equity ‘freedom loans’ and no doc loans so let us not talk about how great the lending standards were. And if a borrower purchased a house for $300K and saw it go to $900K he would have $600K of equity that could be used to pay his mortgage. If his original lender would not make the new loan we saw players like GMAC, ready to fight for the business.

            http://www.youtube.com/watch?v=9sOzDqXKwXw&feature=relmfu

            Note that anyone who was behind would simply sell and pocket the several thousand percent of profit that would cover the cash purchase of a new home in a more reasonably priced area.

            The fact are what they are, not what your narrative tries to paint them out to be. Many people who never would have been able to get loans wound up being approved for mortgages. The influx of new money into poor urban areas created a boom in those areas. Other areas followed as a rising market attracted a lot of new money and created a lot of new demand. The bubble gave the Fed a chance to inject a lot of new money and credit in the system as it attempted to deal with the aftermath of the equity crash in 2000, which was its own creation. In the end, the housing bubble ended as the equity bubble before it. As we argue about these events the Fed and government are desperately trying to breathe new life into the housing market. FHA loans have exploded, the GSEs are not foreclosing on delinquent loans, and the Fed is promising to spend billions each month on mortgage backed securities. While some are very excited about the increased sales the people who same saw the crisis developing long before it was recognized are pointing out the dangers of the new bout of lending and the housing market’s dependence on low interest rates at a time when debts are exploding and there is no agreement to cut real spending by government. If (when) the bond bubble breaks the last crisis will appear to be very minor in comparison.

          17. Max Planck

            Once again, a torrential downpour of ignorance:

            “The industry was giving 125% of equity ‘freedom loans’ and no doc loans so let us not talk about how great the lending standards were.”

            EXCEPT THESE UNDERWRITING METRICS ARE NOT PERFORMED BY GSE LENDERS OR CRA LOANS. HOW MANY F&&KING TIMES DO I HAVE TO REPEAT MYSELF. ARE YOU THAT THICK?

            “And if a borrower purchased a house for $300K and saw it go to $900K he would have $600K of equity that could be used to pay his mortgage.If his original lender would not make the new loan we saw players like GMAC, ready to fight for the business. ”

            GMAC was what is known as a “B&C” or what we call a “Hard Money” lender, and ONCE AGAIN, HAD NOTHING TO DO WITH GSEs OR ANY POLICY INPUTS ON HOUSING. They were selling the “financial innovation” people on the AEI were cheerleading for- before the blowout.

            “Note that anyone who was behind would simply sell and pocket the several thousand percent of profit that would cover the cash purchase of a new home in a more reasonably priced area.”

            Not only was this not a common phenomenon, but if a person found that he couldn’t handle his existing mortgage and traded DOWN to bring down his carrying costs, that is a sensible thing to do, and that person would not end up as a statistic.

            Your reasoning is non-existent.

            “The fact are what they are, not what your narrative tries to paint them out to be.”

            Oh, shut up.

            ” Many people who never would have been able to get loans wound up being approved for mortgages. The influx of new money into poor urban areas created a boom in those areas.”

            No it didn’t. As has been pointed out, again many times over, the more densely populated an area, the smaller the price swings. It was the secondary and tertiary areas that suffered the greatest losses in equity. You were even provided a chart with the statistics to prove it, and yet, you STILL lack the ability to change your mind with the evidence of front of you. That is how sick people have become when it comes to politics.

            “Other areas followed as a rising market attracted a lot of new money and created a lot of new demand. The bubble gave the Fed a chance to inject a lot of new money and credit in the system as it attempted to deal with the aftermath of the equity crash in 2000, which was its own creation. In the end, the housing bubble ended as the equity bubble before it. As we argue about these events the Fed and government are desperately trying to breathe new life into the housing market. FHA loans have exploded, the GSEs are not foreclosing on delinquent loans, and the Fed is promising to spend billions each month on mortgage backed securities. While some are very excited about the increased sales the people who same saw the crisis developing long before it was recognized are pointing out the dangers of the new bout of lending and the housing market’s dependence on low interest rates at a time when debts are exploding and there is no agreement to cut real spending by government. If (when) the bond bubble breaks the last crisis will appear to be very minor in comparison.”

            There are so many idiocies in the paragraph above, I won’t even waste my time. A sewer of illogic.

          18. EXCEPT THESE UNDERWRITING METRICS ARE NOT PERFORMED BY GSE LENDERS OR CRA LOANS. HOW MANY F&&KING TIMES DO I HAVE TO REPEAT MYSELF. ARE YOU THAT THICK?

            But that is not entirely true. There were plenty of properties with inflated assessments that would up on being purchased by Fannie and Freddie. In the early 2000s Fannie was involved in a fraud scandal where the CEO pointed out the incentive to fluff up revenues and do all that can be done to increase business and reported profit. And in 2005 Fannie’s new management got into the subprime loan business, including liar loans.

            Everyone knows this. Why don’t you?

          19. Max Planck

            Here ya go, mutt:

            Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs

            Thursday, October 02, 2008 | 07:00 AM

            in Credit | Derivatives | Fixed Income/Interest Rates | Psychology/Sentiment | Real Estate | Taxes and Policy

            “It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.”

            -Robert Gordon, American Prospect

            >

            I have been meaning to get back to this issue, but events in the market have kept me a tad busy.

            Making the rounds amongst a certain subset of wingnuts on CNBC, at IBD and other selfconfoozled folks has been the meme that the entire housing and credit crisis traces to the the Community Reinvestment Act (CRA) of 1977. An alternative zombie myth is the credit crisis is due to Fannie Mae and Freddie Mac. A 1999 article from the New York Times about the GSE’s role in subprime mortgages has been circulating as if its the rosetta stone of the credit crisis.

            These memes have become a rallying cry — cognitive dissonance writ large — of those folks who have been pushing for greater and greater deregulation, and are now attempting to disown the results of their handiwork.

            I feel compelled to set the record straight about this pseudo-intellectual detritus. As we have painstakingly discussed over the past few years, there were many direct and indirect causes of the current financial mess.

            Let’s clarify the causes of current circumstances. Ask yourself the following questions about the impact of the Community Reinvestment Act and/or the role of Fannie & Freddie:

            • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

            • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

            • What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

            • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

            • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

            • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

            • How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

            • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?

            • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

            • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

            • Did the GSEs require banks to not check credit scores? Assets? Income?

            • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

            • What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?

            • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?

            The answer to all of the above questions is no, none, and nothing at all.

            The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.

            If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed’s part in supervising bank lending, allowing banks to give money to people who couldn’t possibly pay it back.

            The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with — which they promptly did.

            There are too many people who are trying to duck responsibility for the current mess, and seeking to place blame elsewhere. I find this to be terribly important, as we seek to repair the damage amidst an economic crisis. Rather than objectively evaluate the present crisis in an attempt to craft an appropriate response, the partisan hacks are trying to obscure the causes of the current situation. Like burglars trying to destroy the surveillance tape, they are all too aware of their role in the present debacle.

            Shame on them for their foolishness or cowardice.

            Whenever I see a CRA proponent blathering, I have a “Star Trek moment.” That’s when Captain Kirk proves to some random alien computer that its basic programming is logically inconsistent. It’s the AI (artificial intelligence) version of cognitive dissonance. The computer, recognizing the fraud its entire existence was based upon, seeing the futility of its belief system, at least has the dignity to blow itself up. No such luck with the wingnuts, who merely move on to their next piece of spin . . .

            “You can fool some of the people some of the time and some of the people all of the time. That’s usually enough.”

            -MILTON BERLE

            ~~~

            Note in the Sources section, we have a few subtopics: “Sources” is what I use to show where data, quotes and charts are from. “Previously” discusses commentary on this subject we have written in the past. “Related” is a good jumping off point for further reading; lastly, Consistently Wrong is where we point out the willfully misleading tripe written by people who should know better, but publish nonsense anyway. In the case where it appears some are trying to mislead the public, the least we can do is call them out.

          20. Here ya go, mutt:

            Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs…

            All you give us is narrative that comes from the same people who failed to see the the crisis coming in the first place. The ones who predicted it showed exactly how the CRA, GSEs, insurers, and rating agencies were creating the bubble. You have to understand human action Max, not get lost in trivial details that have no meaning on their own. Individuals respond to incentives. That is why the GSE management was engaged in fraudulent activity and wound up with a balance sheet that was loaded up with subprime mortgages.

          21. Max Planck

            “All you give us is narrative that comes from the same people who failed to see the the crisis coming in the first place. The ones who predicted it showed exactly how the CRA, GSEs, insurers, and rating agencies were creating the bubble. You have to understand human action Max, not get lost in trivial details that have no meaning on their own. Individuals respond to incentives. That is why the GSE management was engaged in fraudulent activity and wound up with a balance sheet that was loaded up with subprime mortgages.”

            AGAIN: THESE ARE NOT “TRIVIAL DETAILS” and you’re just too limp minded.

            • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

            • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

            • What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

            • Explain the shift in Loan to value from 80% to 120%: What was it in the Act that changed this traditional lending requirement?

            • Did any Federal legislation require real estate agents and mortgage writers to use the same corrupt appraisers again and again? How did they manage to always come in at exactly the purchase price, no matter what?

            • Did the CRA require banks to develop automated underwriting (AU) systems that emphasized speed rather than accuracy in order to process the greatest number of mortgage apps as quickly as possible?

            • How exactly did legislation force Moody’s, S&Ps and Fitch to rate junk paper as Triple AAA?

            • What about piggy back loans? Were banks required by Congress to lend the first mortgage and do a HELOC for the down payment — at the same time?

            • Internal bank memos showed employees how to cheat the system to get poor mortgages prospects approved that shouldn’t have been: Titled How to Get an “Iffy” loan approved at JPM Chase. (Was circulating that memo also a FNM/FRE/CRA requirement?)

            • The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?

            • Did the GSEs require banks to not check credit scores? Assets? Income?

            • What was it about the CRA or GSEs that mandated fund managers load up on an investment product that was hard to value, thinly traded, and poorly understood

            • What was it in the Act that forced banks to make “interest only” loans? Were “Neg Am loans” also part of the legislative requirements also?

            • Consider this February 2003 speech by Countrywide CEO Angelo Mozlilo at the American Bankers National Real Estate Conference. He advocated zero down payment mortgages — was that a CRA requirement too, or just a grab for more market share, and bad banking?

            The answer to all of the above questions is no, none, and nothing at all.

            The CRA is not remotely one of the proximate causes of the current credit crunch, Housing collapse,and mortgage debacle. As I detailed in Barron’s, there is plenty of things to be angry at D.C. about — but this ain’t one of them.

            If you were to ask me to reveal the prime causative factor for the Housing boom, I would point you to Fed Chairman Greenspan taking rates to 1%, and then leaving them there for a year. The prime factor in the bust was nonfeasance on the Fed’s part in supervising bank lending, allowing banks to give money to people who couldn’t possibly pay it back.

            The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with — which they promptly did.

          22. • Did the 1977 legislation, or any other legislation since, require banks to not verify income or payment history of mortgage applicants?

            The 1977 legislation was fine because all it required was that the banks let poor people know that there were loans for those that qualified and let the banks self police their compliance. But the Clinton changes to the CRA legislation let the regulators micromanage, had the banks collect race based data that allowed activists to demand that money be poured into certain areas, and forced certain volume of loans to be made.

            That triggered a boom and once the banks figured out a way to eliminate their risk by selling off mortgages to the GSEs, large Wall Street firms, or packaging them off and selling them to ‘investors’ they began to ‘innovate’ and created systems that approved loans that would never have been made in the days of prudent lending.

            • 50% of subprime loans were made by mortgage service companies not subject comprehensive federal supervision; another 30% were made by banks or thrifts which are not subject to routine supervision or examinations. How was this caused by either CRA or GSEs ?

            The CRA ensured that we would have a bubble in housing in certain areas. That bubble sparked other bubbles elsewhere. After all, if the crappy crime ridden areas saw prices double the better areas near them would also see a significant increase. That would cause the areas further out to rise in price until the bubble acquired a life of its own. When the Fed injected all of that liquidity it went into homes, which was what both Clinton and Bush wanted.

            • What about “No Money Down” Mortgages (0% down payments) ? Were they required by the CRA? Fannie? Freddie?

            Do you understand how bubbles work? As long as prices go up you don’t have a risk even with no-money-down mortgages. Even if you made an error there would be no loss since the owner could sell at a profit. But let us keep in mind that the ‘revenues’ at the GSEs exploded during the bubble so they are to blame. Why exactly do you think that they have cost the taxpayer around $140 plus billion so far?

          23. Max Planck

            I’ve met some incredibly stupid people on line, but few have been as persistently stupid as you are.

            Good day.

          24. The root legislative cause of the credit crisis was excessive deregulation. From exempting derivatives from regulation (2000 Commodities Futures Modernization Act) to failing to adequately oversee ratings agencies that slapped a triple AAA on junk paper, the pendulum swung too far away from reasonable oversight. By taking the refs off of the field and erroneously expecting market participants could self-regulate, the powers that be in DC gave the players on Wall Street enough rope to hang themselves with — which they promptly did.

            Deregulation? Weren’t there around 120 or so regulatory agencies that were looking at the financial sector? Do you really think that more of them were needed? The root cause was meddling with the market, printing money, giving implicit guarantees, and looking the other way when fraud was discovered early in the game. Had Raines and his crew wound up in jail in 2003 there would have been a much smaller bubble that did not have to cost the taxpayers anything.

            As I said, you love detail but have no idea about economics in the real world. The Keynesian religion that you seem to follow was discredited a long time ago. Most of its followers missed the bubble while the vast majority of those that understood economics could see the bubble and warned of the consequences after it popped.

  5. When ever you lend more money your reserves are at risk and with 3.5% down, that’s not leaving a lot of wiggle room.

    FHA always needed to raise their down payment level to manage the influx of loans to reserve ratio. They never did and today they have a short fall

    faculty.chicagobooth.edu/amir.sufi/research/profsufi_twitter_20121116.pdf …

    1. Max Planck

      I think you’re confusing a few aspects of the matter. For one, the chart shows that defaults are now trending DOWNWARD, and although I’m not a technical analyst, that chart looks like it’s going to continue to trend down.

      The down payment, as I have stated, and as I have seen with my own eyes, may not be a major causative factor in default. Losing 11 million jobs in a few months will surely do the trick.

      The “reserves” you are talking about refer to FHA’s insurance pool, which is funded by the Up Front Mortgage Insurance Premium, as I am sure you know. (There is also an additional monthly premium to pay if LTV is less than 80%.) If there are more foreclosures, that fund will deplete. However, the loans that are defaulting are NOT the ones that were originated post-crash, and in fact, should be performing quite well.

      Housing Wire reported that 1.1 million homes went from underwater to “overwater” based on Case Schiller data showing improved pricing. Look for this trend to continue.

      Please see this article:

      http://www.businessweek.com/news/2012-11-16/fha-sets-stage-for-taxpayer-subsidy-with-2012-deficit

      1. The “reserves” you are talking about refer to FHA’s insurance pool, which is funded by the Up Front Mortgage Insurance Premium, as I am sure you know

        Bingo, your logic was the same logic the US government used to justify that FHA was never going to need a bailout

        You think MIP and MI can insure the massive amounts of loan intake.

        There is a reason why FHA is negative today even with a bailout already this year, Volume.

        It’s Math like Freddie, Fannie and FHA all needed bailouts because they were over leveraged

        It’s as easy as that

        1. Max Planck

          Sir- let’s try this again, OK?

          Here is the chart you presented:

          http://faculty.chicagobooth.edu/amir.sufi/research/profsufi_twitter_20121116.pdf

          Please look at it again. Now then: are foreclosures SLOWING after 2008 or not? If they are, does it require an enormous leap of logic to assume that the FHA loans orginated AFTER this date are NOT the problem?

          The current shortfall in insurance reserves is the detritus from the pre-2008 period, NOT the FHA loans that were being stuffed into the FHA channel since the lenders didn’t want to take on conventional product. You’re obviously a mortgage professional, and you know this.

          You keep repeating this:
          “Twice this week you made the statement on CNBC that Mortgage lending standards are too strict. We’ve heard that opinion before. We’re familiar with that claim. I’m just here to investigate a bit further. You won’t mind, I hope Ma’am? Like I said, I won’t need much of your time. I’ll be brief.

          Right now in the United States what a person needs as core requirements to buy a home is:
          1.620 FICO Score
          2.3.5% Down Payment
          3.Income verified which shows a financial capacity to own a home”

          But that is for FHA, NOT a conventional/conforming loan, so that is why the FHA channel is being stuffed. Getting a commitment is a lay-up compared to a “plain vanilla” mortgage.

          Again, the loan origination volume POST CRASH is probably not an issue, because those loans more than likely perform, and as long as the market firms and the economy improves, will strenghthen and feature lower default risk. Borrowers have purchased at rock bottom prices AND interest rates. As long as those loans perform, the reserve will not be depleted. Therefore, your assertion that the rise in FHA originations post crash is the reason for the reserve shortfall, would seem to me to be misplaced.

          That is why I mentioned the Bloomberg screen shots- those loans were “A” paper from the get go, but if the price goes down by 30-40%, and the economy craters, a 20% down payment will not help anyone.

          BTW, I was THRILLED to get an 8% rate when I bought my first house!

          1. :-)

            I am going to stick with my thesis and keep it simple.

            Freddie, Fannie and FHA all needed a bailout because they were over leveraged

            75-1
            72-1
            FHA went over 30-1

            Being over leveraged requires high volume intake compared to your reserves. Pre crisis FHA was less than 5% of the market and went to over 30%. That much leverage on a balance sheet usually caused stress and their reserve model wasn’t created for this much volume after the financial crisis.

            FHA reported a negative balance today, even with the robo signing bailout they got earlier this year, it didn’t matter, they still went negative

            That shows an over leveraged balance sheet. This is why they should have raised the down payment level to stop in flows of loans

        2. Max Planck

          “I am going to stick with my thesis and keep it simple.

          Freddie, Fannie and FHA all needed a bailout because they were over leveraged

          75-1
          72-1
          FHA went over 30-1

          Being over leveraged requires high volume intake compared to your reserves. Pre crisis FHA was less than 5% of the market and went to over 30%. That much leverage on a balance sheet usually caused stress and their reserve model wasn’t created for this much volume after the financial crisis.”

          First, your volume percentage numbers are incorrect. Please see this report prepared for HUD. There are many interesting facts to glean from this, and this will correct many assertions you are making. To my own surprise, check out the allocation by FICO score of closed loans- not bad.

          http://www.housingwire.com/sites/default/files/editorial/FHAreport.pdf

          Secondly, volume has nothing to do with reserves, unless you’re talking about the insurance pool that was depleted.

          When a mortgage closes, the paper is put into a pool and securitized. The originating lender does the funding, and the mortgage is sold into a GinnieMae pool, so the lender has the capital to fund another loan. The sheer volume is not the issue.

          Also, I do not believe GSE leverage was as high as you state. A former Lehman trader I correspond with told me it was more like 45 to 1, but with a historical default rate under 2%, this is tolerable, IMHO.

          It is NOT tolerable for Bear Stearns and Lehman.

          From the report:

          “As can be inferred from Exhibit III-3, the FY 2009, FY 2010, FY 2011, and FY 2012 books of business constitute approximately 19.4, 21.3, 16.5 and 18.4 percent of the Fund’s total end of FY 2012 amortized IIF, respectively. Mortgage endorsements declined significantly after FY 2003 as the subprime market expanded. FHA endorsements, however, have increased rapidly since
          FY 2007. As the housing market deteriorated, mortgage default rates skyrocketed and most private lenders tightened their underwriting standards. Loans endorsed during the 2005 to 2008 period are expected to suffer the most from the recent national housing recession”

          “The projected endorsement volume of the FY 2012 book remains high, making it the third largest book in FHA history, after the peak volumes endorsed in FY 2009 and FY 2010. These recent books since FY 2009 have the best credit quality compositions among FHA’s endorsements since 1975″

          Which is what I have been saying all along.

          What is interesting here is that despite your chart showing higher defaults for FHA in “high risk zip code” areas, the report states a dynamic consistent with the GSEs: origination for FHA loans shrank commencing in 2003, paralleling the volume decline Fannie and Freddie experienced, replaced with SubPrime.

          Of course, that is of no interest to Wallison and Pinto.

          1. You and I have a different view on leverage ratio and it’s impact on capital reserves.

            Then again, I rest my case with Freddie,Fannie and FHA all broke and needing bailouts, if they were are 10-12 -1 leverage ratio all three of them would be in business

          2. Max Planck

            Sir, you’re confusing things- the repeal of the NetCap rule in 2004 only affected five major broker dealers, not the GSEs.

            If your foreclosure rate jumps from under 2% to 6% on a large number of loans, you’re going to have a problem. The GSEs did not create that problem, it was made FOR them.

          3. Exactly, the 2004 rule was awful and it did only effect 5 banks.

            However, no one was running the ship at Freddie, Fannie and FHA.

            You find it bad when Banks have high leverage ratio but it seems to me it’s ok for you when Freddie, Fannie and FHA do it.

            Math is Math … anyone who over leverages themselves are at risk of default.

            Again I rest my case with Freddie, Fannie and FHA all needing bailouts because they were over leveraged.

          4. Max Planck

            You’re blaming the drunk driver for pushing the sane one off the road.

            Again 40 to 1 on Sub Prime is reckless, but its not on agency paper unless someone distorts the market.

          5. Ahhhh…. Now I get it, I see where you’re coming from

            You don’t mind Freddie, Fannie and FHA having high leverage ratio.

            :-)

          6. Max Planck

            Not really, no.

  6. Todd Mason

    Principal reductions, aka cramdowns, are commonplace in commercial bankruptcy reorganizations. Allowing them ion personal bankruptcies would help unstick severely depressed markets like Riverside Ca and Las Vegas NV (by limiting foreclosures) without a major impact on mortgage securitization. You’d need underlying financial issues to file and to convince creditors to sign off.

    Local initiatives could help as well. Some communities are considering seizing underwater properties under eminent domain and selling them back to homeowners at market prices. And Montgomery County’s (MD) affordable housing program could be adapted as well. The county sells props at discounted prices but keeps a share of appreciation to be paid after a resale. It has been a huge money maker for the county. Private equity could do the same.

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