Archive for May, 2010
President Barack Obama sent an e-mail to me on May 22, titled "they backed down." In it, he said "the House and Senate must iron out their differences before I can sign [financial reform] into law."
He continues: "But the financial industry will not give up. They have already spent more than $1m per member of Congress, lobbying on this issue. And in the coming days, they will go all in. This is their last shot to stall, weaken, or kill reform, and they are not accustomed to losing."
The e-mail then solicits a donation to the Democratic Party.
Perhaps I ended up on this e-mail list after HousingWire convinced the Federal Election Commission to provide a list of all the Goldman Sachs donations to Obama's election campaign. That is not what this column is about, but for the record, we held off on an article after contacting some on the list and finding that they acted more in the energy of the election than in the interests of the investment bank that employed them. In fact, one said that his donations were kept under $200 (he made several in one day) because he thought that it would stay "under the radar."
It didn't, but we respect an individual's right to privacy.
The widespread calls to have the President return donations, such as those by Goldman employees, is understandable considering the signals of the administration. The above e-mail is definitely a political machine versus the financial monster scenario. Yet, through the white noise of it all we've forgotten what exactly is today's enemy at the gates.
With the financial reform sure to be signed into law, it marks a huge success for the administration over Wall Street. Right? Really?
Let me run this example: take the financial reform package, all 1,400+ pages and its bazillion amendments, and put it to work. Imagine the Dodd bill in its current manifestation being applied in debt-crisis riddled Europe. And imagine that the bill does nothing at all to curb the most worrying of all financial instruments: the current state of sovereign debt. Would Europe be safer, better off than it is today because of it?
That's precisely the problem that underpins the current legislation effort: The financial reform makes no attempt to control the government overloading on debt, and instead is content to focus on the private market as the root of all evil.
According to the Office of Thrift Supervision, foreclosures are rising again, after dipping through much of 2009. Clearly government programs supporting mortgage modifications and short sales are not working, indicating that the real reform should be at the doorsteps of HAMP and HAFA.
Recent regulations such as the Restoring American Financial Stability Act signed last week, offers government assistance to unemployed borrowers. In it, $3bn in TARP funds go to loans to the unemployed. Yet the Merkley (D-OR)-Klobuchar (D-MN) amendment in the Dodd bill establishes minimum underwriting standards in which borrowers must prove they can repay certain loans (I guess with the caveat being unless they can't, in which case the government will loan money directly).
Above it all, the one thing that really needs reform may be the mechanism of reform itself.
Germans balk at helping Greece, but as Europeans they still expect it needs to be done. Apply this to the United States: Would state-led bailouts of other states prove to be innovative? Would Texans accept life being a little worse in the Lone Star state in order to make the lives of distressed homeowners in California a bit better? I believe the argument would be that Texans already feel they are doing enough already.
So there is something to be said for David Cameron, the new prime minister of Great Britain, declaring a period of austerity and cutting back on government spending. It tight times, there is a greater need and necessity is the mother of invention.
Unfortunately, however, with current reform tackling problems in the past tense, the only real accomplishment is that the spirit of innovation in the financial markets remains crippled. If the best we've seen so far is re-REMICS, then there is little hope for anything exciting anytime soon. The only thing that will really come of this, in fact, is that the increased regulatory burden will only serve to crush already struggling smaller financial players.
Jacob Gaffney is the editor of HousingWire and HousingWire.com.
Write to him.
Federal Housing Finance Agency (FHFA) acting director Edward DeMarco, appearing today before the House Financial Services subcommittee on government-sponsored enterprises (GSEs), indicated legislation on the future of the GSEs should supplement recent moves for higher-quality loans and transparent data.
His comments arrive after a letter he sent to ranking committee members in both the US Senate and House of Representatives on Tuesday concluded losses on private label mortgage-backed securities from 2005, 2006 and 2007 at the GSEs are directly responsible for the FHFA taking an oversight role in 2008.
As the GSEs Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A) take an increasingly large market share of mortgage originations, credit losses continue to mount. For example, Fannie and Freddie mortgage purchases and guarantees represented 76% of all originations in 2009, according to DeMarco's testimony (download here).
FHFA, as the GSEs' conservator, requested nearly $145bn in total draw-downs from the Senior Preferred Stock Purchase Agreements with the US Treasury Department as of Q110. Once the most recent requests are granted, Fannie Mae will have drawn $83.6bn and Freddie Mac will have drawn down $61.3bn in Treasury support.
The requests for aid come even after the GSEs took steps to cut back on Alt-A and interest-only mortgage purchases. Additionally, the GSEs are rolling out a new initiative that aims to streamline home appraisal and loan delivery data.
The improved loan quality and underwriting standards translates to lower delinquency rates, although Alt-A and interest-only mortgages already on the GSEs' books continue to account for significant quarterly losses, DeMarco said.
He noted the FHFA expects Fannie and Freddie to continue as "critical supervisory concerns," mainly due to credit losses and partly due to likely continued high delinquency rates for older books of business.
"The risk associated with continued house price declines is a difficult challenge faced by both Enterprises," he said. "Fannie Mae and Freddie Mac will continue to sustain credit losses on mortgages originated pre-conservatorship across the entire country but especially on loans originated in four states: California, Florida, Arizona, and Nevada. Each of these states has experienced significant house prices declines, with values dropping dramatically [as illustrated below]."
DeMarco noted that, while "conservatorship is not a long-term solution," the only post-conservatorship option available to the FHFA is to reconstitute Fannie and Freddie under their current charters. He added that any new legislation formed to produce large-scale restructuring of the mortgage-finance system must ensure adequate liquidity for the mortgage market, the ability to avoid and if necessary absorb credit risk, and the availability of mortgage credit.
"Given the extraordinary losses to these companies and the need for financial support from the federal government resulting from the present mortgage crisis, to say nothing of the toll on individual households and communities, we as a nation need to ask and answer some hard questions about what we want out of our housing finance system," he told the subcommittee.
A house resolution (HR) currently under consideration in Congress details the timeline to take the GSEs out of conservatorship and eventually wind down Fannie and Freddie.
Write to Diana Golobay.
Disclosure: the author holds no relevant investments.
Insurance giant American International Group (AIG) is better positioned to pay back all of its $182bn federal bailout, a key Treasury official plans to testify Wednesday.
But AIG's ability to repay taxpayers depends on its future profitability and the insurance industry's strength, Treasury chief restructuring officer Jim Millstein says in his prepared testimony. He says AIG must complete the planned sales of two large insurance subsidiaries and regain the market's confidence.
Few Texas tax filers are using the standardized mortgage interest deduction, a new report shows.
A May 25 report from the non-profit Tax Foundation shows that only 20.4% of tax returns by Texas residents sent to the Internal Revenue Service for the 2008 tax year included the deduction.
Net mortgage lending by UK banks in April slowed to its lowest level for almost a decade in April, while remortgaging remained elevated, data from the British Bankers Association showed Wednesday.
The survey also reported that lending to nonfinancial firms remained weak.
The banking and mortgage subsidiaries of Intervest Bancshares Corp. sold $207m in nonperforming and under-performing assets.
The sale included $187m in loans and $14.4m of real estate owned by Intervest National Bank, and $5.6m of loans owned by Intervest Mortgage Corp., a release said. The sale reduced Intervest’s total nonperforming and under-performing assets by 75%.
Congressional leaders took their latest step Tuesday toward passing sweeping bank-reform legislation by picking 12 senators — seven Democrats and five Republicans — to participate in efforts to reconcile the financial-industry regulation bills approved by the House and Senate.
Senate leadership excluded controversial senators from the effort by approving Democratic Sens. Christopher Dodd of Connecticut, chairman of the Senate Banking Committee; Tim Johnson of South Dakota; Jack Reed of Rhode Island; and Charles Schumer of New York, while the Republican senators chosen to participate are Richard Shelby of Alabama, the Banking Committee's ranking member; Bob Corker of Tennessee; Mike Crapo of Idaho; and Judd Gregg of New Hampshire.
A little-noticed bill introduced in the House last March may be the first step in connecting financial reform efforts with the eventual attempt to restructure the nation's housing financial system and the deeply troubled Fannie Mae and Freddie Mac.
The US Covered Bonds Act, introduced by Scott Garrett (R-NJ) and co-sponsored by Spencer Bachus (R-Ala.) and Paul Kanjorski (D-Pa.) and others, would add liquidity to the still sluggish credit markets and offer a private-market mortgage lending alternative to the government loans and guarantees of the two firms, which were taken over by the Treasury in September 2008 as the financial crisis was about to explode.
The global campaign to harmonize rules for financial firms is swerving off course, threatening efforts to curb the risky bets that rocked the world economy two years ago.
As US Treasury secretary Timothy Geithner lands in Europe on Wednesday, differences are growing among world leaders over how to keep the promise they made at the height of the financial crisis: that they would work together to reshape how finance is governed.
The Federal Reserve will probably transfer record earnings exceeding $70bn to the US Treasury Department this year on income from assets including mortgage-backed securities, according to the Congressional Budget Office (CBO).
“The Federal Reserve’s actions to stabilize the financial markets are likely to significantly increase the amount of its remittances over the next few years,” the CBO said in a report released today.
