Feds to Back Risky Home Loans Again
Critics warn that Fannie and Freddie are setting up housing market for repeat of 2008 crisis
AP
Critics warn that government agencies are making the same mistakes that led to the economic downturn of 2008.
Federal agencies have made a series of recent moves that could precipitate another housing crisis similar to the one in 2008, experts say, again threatening the stability of the entire U.S. economy.
Housing regulators and other agencies have announced rulings and proposals in recent weeks that would lower credit and lending standards for home mortgages. Subprime or low-quality mortgages that defaulted in 2008—a majority of which were backed by the government housing giants Fannie Mae and Freddie Mac—were a significant contributor to the economic downturn.
Additionally, Fannie and Freddie currently hand over most of their earnings to the Treasury Department under changes made by the agency in 2012. That means that as home loans become more risky, the companies known as government-sponsored enterprises (GSEs) would have no capital buffer to absorb losses. Taxpayers could again be called upon to rescue them in the event of another economic shock.
Treasury provided $188 billion during the 2008 crisis to save Fannie and Freddie, which were seized by the government and placed in “conservatorship” by the newly established Federal Housing Finance Agency (FHFA).
“When those two firms fail—as they will, especially when they don’t have any capital—the result will be the taxpayer will have to pick up the bill again,” said Peter Wallison, a fellow at the American Enterprise Institute (AEI) and former general counsel of Treasury during the Ronald Reagan administration, in an interview.
“The lessons of the financial crisis have not been learned,” he added.
FHFA Director Mel Watt said last month that Fannie and Freddie would soon begin to guarantee loans with down payments as low as 3 percent, though the final details of that plan have yet to be released. The two companies operate by buying loans from lenders, selling those loans in mortgage-backed securities, and then guaranteeing payment to investors if the loans default.
Fannie and Freddie purchased loans with little or no down payments before 2008, but had largely stopped doing so in recent years.
Watt also expressed concerns that lenders had restricted loans to borrowers with lower incomes or credit scores out of concern that Fannie and Freddie would force them to buy back the loans if they defaulted. He outlined instances where lenders would not have to repurchase the loans, and encouraged them to loosen up lending standards.
On Friday, Watt sought to assuage concerns that lower down payments would result in more defaults. Borrowers will still need to have “compensating factors” such as strong credit records or lower debt-to-income (DTI) ratios, he said, and the loans will require a form of “credit enhancement” such as private mortgage insurance.
“There are creditworthy borrowers in today’s market who have the income to afford monthly mortgage payments but do not have the money to make a large down payment and pay closing costs,” he said in prepared remarks at the National Association of Realtors Conference & Expo. “Purchase guidelines that allow for 3 percent down payments will provide an opportunity for access to credit for some of these borrowers.”
Wallison said he was skeptical that private mortgage insurance firms would accept mortgages with the low down payments, adding that the risk would eventually go back to Fannie and Freddie or the Federal Housing Administration (FHA). The loans could actually be more expensive with the addition of mortgage insurance premiums.
“The right conclusion would be to have a good solid down payment and good credit score and the borrower gets a much less expensive mortgage,” he said.
Six federal agencies, including the FHFA, also announced last month that while sellers of some asset-backed securities must retain at least five percent of the credit risk of the assets, other securities backed by “qualified residential mortgages” (QRMs) are exempt from the risk retention requirement. The new criteria for “prime” or traditional mortgages requires borrowers to document their debt and income and meet a DTI benchmark of 43 percent or less.
However, the new rule dropped the tougher credit and lending requirements of the initial proposal in April 2011—which included a down payment of at least 20 percent and a DTI ratio of 36 percent or less. Wallison said the rule “completely destroyed” the risk retention goal of the Dodd-Frank Act that was supposed to make mortgage-backed securities less risky. Those securities were a principal cause of the financial crisis.
Wallison said he hopes a new Congress, now led by Republicans in both chambers, will take action to reduce government involvement in the housing market. As long as Fannie and Freddie dominatethe purchasing of home loans, a coalition of realtors, homebuilders, low-income housing advocates, and lenders will push for lower lending standards that inject risk into the market, he argued.
“Once you turn it over to the government, all of the tendencies are to reduce underwriting standards until the result is a series of failures and defaults that caused the kind of problems we had in 2008,” he said.
... But... but... it was the banks....
ReplyDeleteIt was is the banks. Do we have to have ultra tight regulations to have our banks operate in a manner that enhances our economy? I have always said that Dodd Frank wasn't tough enough and now those terms are loosened. But why the need for Dodd frank in the first place. That's easy Greed. But we have never and will never regulate greed. someone will always do all the wrong things in the name of profit. Just because we can does that mean we should TS? Even if it's wrong ? Even if it's risky? Yes my friend it always was the banks. Even today without this revelation you bring out the banks are doing the same credit default crap as always this time on 1. Student loans, and 2. Automobiles purchased on the subprime market. So yes TS no matter the regulation it's the banks that willingly make the risky bets not because they should but because they can.
ReplyDeleteNo Rick... No one, unless they are very reckless makes risky bets with their own money. Were it not for the enabling features of crony capitalism most of this behavour wouldn't exist in the first place.
Delete"Housing regulators and other agencies have announced rulings and proposals in recent weeks that would lower credit and lending standards for home mortgages." (keep in mind that it isn’t the government that sets lending standards in the first place but the lenders themselves. It is only with the force of or incentives by the government that would cause these lenders to change the way they are doing business.)
This is no different than the provisions of the CRA that drove standards lower than lenders would risk themselves and to prove it, 70% of those loans required government backing before they were written. Were their greedily, dishonest and opportunist companies doing some of these loans... Yes... Can you name a major institution or one of their directors that was indicted for criminal behaviour?... No.
I don’t understand your position. Apparently, lending institutions are not currently lending to people that folks like YOU believe should get loans. Apparently these people do not fit into the lenders acceptable risk model. The companies/banks are conducting business in a manner that mitigates the chances that they, over all, would lose money that will cause them to fail and go out of business otherwise. Left alone, these bad loans are not getting made and in the case of both the housing bubble and the education cost bubble would not exist without the interference and insistence of the government. It is just that simple Rick but you want to shift the blame for loose criteria to the banks... the same people who refused to make the loan before the government insisted. If you want sound loans then get the government out of the guarantee business and stop telling business how to run their risk model.
Random thoughts- it's a bit ironic to have this story quote someone from Reagan's administration, especially when it was under Reagan that we deregulated S&L's watched them blow up. The repeal of Glass/Steagall, pushed by Republicans and singed by Clinton, was the same thing.
DeleteTo me, it's a matter of managing risk. The banks, who suddenly have decided they shouldn't make risky loans, wrote trillions of dollars worth of shitty loans in the past because they had no risk. They could buy NINJA loans from originators, bundle them into mortgage backed securities, and dump them on firms like Fannie and Freddy. IMO, this entire scheme was one giant and massive fraud. Can the intent be proved? No. This doesn't mean it didn't exist.
The mention of the CRA is a red herring. the CRA did not specify that banks write NINJA loans. What the CRA did do was tell banks you can't operate in a community and not invest there. The CRA was created decades ago. NINJA loans are recent. THE CRA loans are not what blew up. Regardless of which party controls Washington, there was never going to be an accounting for what the banks did.
Philosophically, TS, your last para is pure. The REAL world, however, does not work this way. Banks won't lend right now because there is some scrutiny in what they do. They can't bundle shit together and call it AAA anymore and sell it like they did before. This won't change your thinking one iota, but I think you really should read, "The Big Short" by Michael Lewis
TS Fannie and Freddie are not making the banks do what they do they only provide the means through their regulations or lack of. Banks are not making risky gambles on credit swaps with their money. No my friend they use the money entrusted to them by the consumer.
DeleteBanks won't lend right now because there is some scrutiny in what they do.
DeleteBanks... those who make and service their own portfolios will always lend to the customer that fits their risk model just like there is always venture capital available to someone who has a good idea and a plan to execute it.
The theater that you speak of is a direct product of a world of fiat money, loose central banking and the enabling co-partnership with a slimy central government that will use any and all methods of resting control of anything it can away from the states… Witness MERS.. Another to big to fail banker creation. Mark my words, county registries will no longer be the record base for property in their areas. MERS will, at some point, be found in violation of some federal something and will be taken over by the government… viola … a federal land registry where the central government will track and no doubt review every single land purchase in the good old USofA.
You are correct in some respects Rick. Banks use depositor’s money and historically customers picked their banks very carefully. Some banks went under from bad management... true, but enter the ‘we will take care of you’ federal government... now customers don't give a damn who they bank with because the government has a plan to cover their lack of vigilance... and banks, particularly the ones who are well connected to the fed, the treasury and have many tentacles in the government know that they really don’t have to worry about stiffing the customer …. Cause uncle sugar is there to save the day…. Of course of the FDIC had actually been doing its job as a regulator, most banks that collapsed would have been caught before they failed and they certainly wouldn’t have been underwater by 30-40-50% of their outstanding loans. We don’t need new laws, we just need a federal government to stop picking and choosing which laws to follow and who are winners and loosers.
DeleteAs far as the risky loans that the government doesn’t force bankers to make… I ask again for anyone to explain to me why the government needs to make a loan guarantee if banks would lend under their current criteria anyway. Clearly the government wants banks to do something different than what they would ordinarily do.
Once upon a time, depositors chose their bank carefully because there was actually some competition. It's kind of surreal now to think back to when banks were giving away appliances or offering higher interest rates. These days, consolidation has made it tougher for consumers to find a bank that matches their needs. I have a credit union account here in Las Vegas and the only saving grace of that is that I'm not giving free money to Bank of America.
DeleteIt's fair to be critical of the bailouts, nobody but wall street was happy with that. The crack about the FDIC though is off base. The financial services industry, aided by the free market gospel of Greenspan lobbied congress to remove and decrease scrutiny into their business. The banks were full of swap products that were traded in unregulated markets, that were never marked to market on a daily basis, and subsequently, the average investor let alone depositor, never knew how much risk their bank really had.
In today's world TS, the amount of leverage a single trader can take is staggering. A single rouge trader can, and has taken down big firms. To say that some individual should lose their life savings because some asshole single handedly blows up a firm will never be acceptable to me. For decades, banks were tightly constricted and separated from taking massive risk. Conservatives blame the CRA, ridiculously so, while completely dismissing the reality that banks could not have gotten so large if not for deregulation. The laws we had worked well until they were taken away.