Tuesday, September 14, 2010

Edward Pinto: Subprime 2.0 is Coming Soon to a Suburb Near You

Former chief credit officer at Fannie Mae (from 87 to 89, before things really got out of control, so I'll cut him some slack) Edward Pinto posted an editorial on Bloomberg last week, with some interesting tidbits.  While I disagree with his thesis that ALL of the blame was on Congress for weakening standards - and none was with regulators or the private sector (in my view, the whole daisy chain is to blame) - it's still a good overview of what happened, and why we are on the path to repeating it as we struggle to find new buyers to keep the Ponzi going.  This all goes hand in hand with so many of the other mega trends happening in the country - fewer and fewer actually have the ability (or chose not to) have savings, so to keep the gravy train going, easier and easier credit and bigger and bigger handouts had to be done both in the auto and housing markets.

One takeaway that was new to me, was that as part of the Dodd-Frank Bill neither an adequate down payment NOR a good credit history were deemed necessary to include in the criteria to indicate a lower risk of default as regulators are to seek (in the future) a "qualified residential mortgage".

Sit on that for a moment.

Why would something so nonsensical be omitted?  Well, this way Fannie and Freddie can purchase "qualified" residential mortgages en masse.  After all, they have the stamp of approval!

I also did not realize that even after the extension thru 2012 of unlimited liability to the U.S. taxpayer (done in the still of the night on Christmas Eve 2009), [Jan 5, 2010: WSJ - The Treasury Department's Christmas Eve Masscare of the US Taxpayer]  we are still on the hook for MORE even AFTER 2012.

The statistics on "less than 3% down" mortgages also awed me:
  1. 1990: 1 in 200 homes had down payment of 3% or lower
  2. 2003: 1 in 7
  3. 2006: 1 in 3

I did heartily applaud his solution to this nonsense - put all congressional pension assets into funds backed by the high risk loans mandated by federal housing legislation.  It would be amazing to watch the rats scurry to actually change over to risk based lending rather than a repeat of "have a heartbeat, get a loan".

3 minute video on Bloomberg

Snippets from op-ed below:

  • On the second anniversary of the bailouts of Fannie Mae and Freddie Mac, it’s now obvious that weak lending standards, serving the political interest of affordable housing for all, were the main reason for the nation’s mortgage meltdown.  But the government just can’t permit lending to anyone and everyone; it must insist on prudent judgment about who will repay and who will default. Not only will borrowers who lack a down payment, steady income, employment and a good credit history probably get into trouble -- surprise! -- but too much irresponsible lending also creates artificial demand for houses, driving prices into the stratosphere and, as we have just experienced, puts all homeowners at risk.
  • The same mistake occurred in 1929, when any investor could buy stocks on margin with as little as 10 percent down. Small wonder that after the crash the U.S. government instituted a margin requirement of 50 percent down.  Congress should apply the same principle to housing purchases, increasing the amount a buyer must put down and other safeguards to assure prudent lending. Congress refuses to do this. Why? Giving citizens cheap, easy housing is a great way to win votes, no matter what horrific repercussions ensue.
  • From 1993 onward, regulators worked with weakened lending policies as mandated by Congress. These policies systematically dismantled a housing-finance system based on the common sense principles of adequate down payments, good credit, and an ability to handle the mortgage debt.  Substituted was a scam of liberalized lending standards that turned out to be no standards at all.
  • In 1990, one in 200 home-purchase loans (all government insured) had a down payment of less than or equal to 3 percent. By 2003, one in seven home buyers had such a low down payment, and by 2006 about one in three put no money down.
  • The Dodd- Frank Bill, signed in July 2010 by the president, omitted both an adequate down payment and a good credit history from the list of criteria indicating a lower risk of default as regulators sought to define a qualified residential mortgage.  This was no oversight. Republican Senator Robert Corker and others proposed an amendment that would have added both a minimum down-payment requirement and consideration of credit history along with the establishment by regulators of a “prudent underwriting” standard. This amendment was defeated.

So where has that taken us?
  • In early September 2010, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, following requirements set out in 2008 by Congress, finalized affordable housing mandates that are likely to prove more risky than those that led to Fannie and Freddie’s taxpayer bailout.

Of course we can tie this all together - since neither down payment NOR credit history is part of a qualified loan, *poof magic* the loans approved now that don't take those into consideration are 'not risky'.

  • Of course, FHFA Director Edward DeMarco notes that Fannie and Freddie aren’t to undertake risky lending to meet these goals. As has already been noted, Congress doesn’t consider low down payments and poor credit as indicative of risky lending. How convenient.
  • The Federal Housing Administration, in its actuarial study released late last year, projected that it will return to an average FICO credit score of 635 by 2013. This signals the FHA’s intention to return to subprime lending. Once again, Dodd-Frank supports this policy change.
635? Meaning half of these taxpayer backstopped (because there is almost no private market anymore) mortgages will fall below FICO 635?  Heck there is not even that much of the population that is below 635!  (maybe 20%?)  What this policy means with the average at 635 is almost any American with a heartbeat can get a government backed loan... and since 3.5% down is usurious - as we saw last week, the 0% down is coming back.  So let's review: little to nothing down loans, to people of almost any credit score... hmm... somewhere I remember that sort of story playing out.  Can't... quite... put... finger.... on... it.

This all sounds like a recipe for success!  Because as we saw above credit history, per Dodd Frank, has nothing to do with making a low risk mortgage (or any kind of) loan, does it?  

It would be laughable if not so absurd, but its business as usual for the self interested attorneys running the land in D.C.  Whatever the cost to the public... as long as it buys votes for self preservation.  These things used to upset me when I was more idealistic, but if it still upsets you - you apparently do not understand what government is now here to do.  Whenever I feel an inkling of anger I now simply just re-attach to the Matrix and have Kool Aid injected into the veins while I the music repeats to me "it's all good... go forth and shop".

This next part, regarding post 2012 obligations, was new to me:
  • On Christmas Eve in 2009, the Treasury Department announced new terms to the bailouts of Fannie and Freddie. Starting on Jan. 1, 2013, the terms of the bailout agreement provide for a continuing obligation to provide about $274 billion in capital to Fannie and Freddie. This amount is in addition to the unlimited sums that are available between now and Dec. 31, 2012.
Based on the current policy, it looks like we're going to need the post 2012 funds.

I did like the solution by Pinto and I think it should apply to EVERYTHING in U.S. policy... i.e. Congress should have the median healthcare plan that the average American has, Congress should have the median retirement plan, Congress should have their assets invested into the gosh awful policy they inflict on us.
  • Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast.

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