Archive for January, 2010
One wonders when our government will recognize that a loan made to someone who claims to have $200,000 in income but really makes $50,000 simply cannot be refinanced into anything the borrower can afford nor is there any way to prevent that loan from defaulting. This is the ultimate fraud and outrage in "extend and pretend" and "mark to fantasy" – there is no possible way for these loans to be "made good" no matter what happens in the future – they were always going to blow up unless house prices continued to rise forever, thereby allowing the "borrower" to roll them over time and time again.
Those who believe we can "make it all ok" are delusional beyond words.
So how have the first two weeks of the reforms been going? Not exactly as planned. Many loan officers and lending institutions are sidestepping the new, price-bound GFE by giving shoppers "worksheets" and "loan scenario" forms that come with no legal requirements for accuracy, and were not even contemplated under the reforms. In effect they are substitutes for the new GFEs but, in the wrong hands, are wide open to lowballing and bait-and-switch games.
The worksheets purport to contain much of the information provided by a GFE. Typically they are only issued when shoppers do not provide — or are asked not to provide — key information that constitutes an "application" under HUD's definition in the rules. For example, if a consumer does not provide the address of the property to be financed, there is no "application" and therefore no requirement to issue a tolerance-bound GFE.
This is not quite as crazy as it sounds. For one thing, Kevin has truncated the quote a little bit; the version I read has Dimon saying "We didn't stress test housing prices going down by 40%." America had not had a sustained national decline in residential housing prices since the Great Depression. So while local banks might need to model the risk of substantial price depreciation, banks glomming together national pools of mortgages figured this wasn't such a big problem–as long as you didn't think we were going to have another Great Depression. And most regulators, commentators, economists, bankers, and ordinary folks thought we weren't going to have another Great Depression.
Indeed, we didn't. It turned out to be a sufficient, but not necessary condition for a collapse in housing prices.
But some important voices are raising questions about whether widespread principal reductions are the answer.
When he was asked about that in a news briefing Friday, Assistant Treasury Secretary Michael Barr didn’t rule out broader use of principal reductions. But he suggested that there would be a risk that such a program would change a lot of borrowers’ behavior. “Most people, most of the time, make their mortgage payments …even if they’re underwater,” Mr. Barr noted. “You have to be quite careful not to design a program that induces more people to walk away” or one that strikes people as unfair.
How would principal reductions induce more people to walk away? Let’s say your neighbor, who hasn’t made any payments on his loan for months, gets a huge reduction in his loan balance. Meanwhile, you’ve been working three jobs and dining on cat food to pay your note each month. Your reward from the bank? Zilch.
Consider what happens when banks sell their loans to Fannie or Freddie. A bank might write a mortgage at 5.1% and sell it to Fannie, which guarantees the loan and sells it with other loans packaged as mortgage-backed securities, perhaps with a coupon of 4.35%. The difference of 0.75 of a percentage point is booked by the bank, which uses some of that revenue to cover costs in its mortgage business.
From 2000 through 2008, that margin averaged 0.73 of a percentage point, according to data from Barclays Capital. But in 2009, the average was a much wider 0.98 of a percentage point.
Any additional margin likely boosted banks' bottom lines. And by a lot, potentially, given that $1.4 trillion of mortgages were written in the first three quarters of 2009, according to Inside Mortgage Finance. Indeed, Wells Fargo and Bank of America, which together account for 45% of the market, reported blowout mortgage earnings last year.
The whole world felt the reverberations of China imposing leverage limits on its banks. Regulators there are clearly freaked out by the heat of its economy. So we thought we'd adjudicate the question.
Our answer is yes, China's real estate is the most obvious bubble ever. More obvious than the Dubai bubble in fact.
