Few things are simplex, most are complex – and when it comes to the current financial meltdown, the failures go beyond complex to multiplex. No depression coming, but a serious recession – here’s a lecture that enumerates the multiple sources of the multiplex stall we are in.
* My wife has a quibble with the statement on underwriting standards – she says in the bigger institutions the underwriting standards were there, but were too often over-ridden by Regional Managers to hit volumes. If regulators don’t pay attention to who can over ride an Underwriter’s “NO way in Hell!” as well as the securities risk managers, then we will just be back here in a few decades.
The notoriously liberal McClatchey papers are trying to cover up some of the guilt of Fannie Mae and by the secondary effect, some of their legislative supporters in Washington like Barney Frank and Christopher Dodd.
They print a few facts about the industry, but gloss over the real problems created by the loosy-goosey Government Sponsored Enterprises. Specifically these bullets from the article are somewhat factual, but leave out things:
_ More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. [ true, but they wouldn’t do it if they didnt’ think a market was there – without Fannie and Freddie Securitizing these no sane lending instition would have dumpster dived the bad credit market the way they have the past decade.]
_ Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. [Of course they did, see comment above]
_ Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that’s being lambasted by conservative critics. [ no, companies like Greentree, Canseco, Countrywide and others who created the chain of processing, sales, and servicing firms tried to comply with those federal guidelines because if they didn’t they couldn’t expand or compete with the big-box banks in products in some states and it was all about volume as well as secondary goals like selling contractor homes.]
Basically Fannie was worse than Freddy, Freddy had higher standards, and higher fees. By leading the way to the bottom in standards and raising their caps the highest Fannie led directly to this mess. If you had some toxic waste on the books you had to carry because no loan servicer would buy it who cared? Fannie or Freddy were securitizing it right?
This atmosphere of churn and burn and increasing volume led to a cuthroat business in refinancing and sales where overnight mortgage giants were racing each other to see who could dive the deepest in the credit barrel the fastest to cut into the big box bank’s turf.
Loan officers didn’t care, they got commission good or bad. Underwriters across the country were browbeaten until they learned to hold their nose and look the other way. In the meantime to keep up banks were sending out people with cameras to take pictures of huge sums of money laid out bill by bill on kitchen floors because there were “cultural differences” and some cultures didn’t trust banks (meanwhile on the counter there were labratory quality scales and packaging material…) Processing was outsourced to third parties with even lower standards because the onboard staff couldn’t keep up with the glut, and automated online processing raised their profit margins.The processing outfits got paid by number of loans processed, so it was rare to reject. Non-Traditional lenders were knife-fighting to gain major contractor’s business, and in some offices on the same computer that held the loan forms you would find the home office software to print up fake W-2’s. If you needed more money than your home was really worth on a refi package, there were specialty appraisers who would inflate the value to meet the needs.
Fly by nights came and went, and their loans got sold, repackaged, sold again. Massive fraud started occurring in some rescue agencies, some sponsored by ACORN. Straw buyer schemes, fractional deeds, and rescue angels who turned demonic all flourished. It all floated downstream to Fannie in the end because they blazed the path to lower standards and larger subprime loans. You only have to think about it a minute: Have you ever seen the government do anything where there wasn’t massive fraud and bilking? The GSE’s have been the loss leaders in today’s financial crisis, and it was truly congress and the GSE’s who led down that path into vallies of vultures by opening markets that shouldn’t have existed in the first place.
Do you think Obama isn’t neck deep with the community organizations who led to the lowering of standards and the raising of caps? Do you think Urban Democrats didn’t use these groups to increase their vote blocks?
What really did happen? Who enabled Countrywide to loan money on houses over the heads of many? Who created the atmosphere in which banks were often picketed if they turned down loans? Who made their campaign cry the last decade and a half “Redlining! Predatory Lending!”. If you don’t get the predatory lending part it’s pretty simple … people with bad credit used to have to pay higher interest rates and fees on their loans. To the Dems, that was redlining and predatory. Here’s the tape:
The American people know who has held the US economy hostage for housing the past few years, it’s time for a new speaker. If the Dems want a vote on this, they can put forward a speaker who is less incendiary. IHT 11/08/2006:
Representative Barney Frank of Massachusetts, who will soon become the head of the House Financial Services Committee, said he and other Democrats who have been advising Pelosi, the party’s leader in the House, were planning to propose a “grand bargain” with business interests.
If the Republicans support the Democrats’ efforts to increase minimum wage, extend student loans and expand affordable housing programs, Frank said, then the Democrats would support efforts to reduce trade barriers and burdensome regulation.
Representative John Dingell, who will head the Energy and Commerce Committee, said that he intended to focus on an energy bill that would make America more independent of foreign oil and another one outlining a bill of rights for patients. He also plans to hold hearings on unfair trade practices that have hurt American industries and workers.
Dingell, who is the chamber’s senior member, said he intended to work with Republicans in crafting legislation because “it’s best to legislate from the middle.” But he also said that “it won’t be the easiest task because the far right has controlled the House and I’m not sure how we can emancipate the Republican party and work with them.”
For some large companies, the Democratic victory is a major one. Fannie Mae and Freddie Mac, the two mortgage finance giants, which have been recovering from accounting scandals, had faced the possibility of tight new oversight laws pushed largely by Republicans. But some powerful Democrats had resisted, preferring to promote the companies’ housing mission over tighter capital standards and portfolio limits.
Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, would be allowed to expand their $1.5 trillion mortgage portfolio to buy subprime loans under a Democratic plan to help struggling borrowers.
Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi and other leading Democrats also called on President George W. Bush to increase funding for foreclosure prevention and appoint a coordinator to oversee the administration’s response to the mortgage-market turmoil in the plan they unveiled today in Washington.
“Our country faces a challenge that threatens the economic security and the dream of homeownership of many of America’s working families,” Pelosi, of California, said at a news conference.
Just a year ago she was begging to shove more crap loans down the american taxpayer’s throats.
Here’s her friends Chuckie Schumer and Barney Frank trying to lower lending standards on homes costing nearly half a million dollars — yes we should give half million dollar homes to people not worthy of credit Chuck & Barney, I mean the taxpayers are always willing to take it up the bum from Dems in congress right?:
Schumer and other Democrats have called on the Office of Federal Housing Enterprise Oversight to relax government restraints barring Fannie Mae and Freddie Mac from buying home loans exceeding $417,000 and from expanding their assets.
The senator introduced legislation last month to let Fannie Mae and Freddie Mac temporarily increase their mortgage portfolios by 10 percent. The bill would also allow the companies to buy loans in “high-cost areas” where values are 50 percent higher than the current $417,000 cap.
U.S. Representative Barney Frank, chairman of the House Financial Services Committee, said Congress would pursue “sensible regulation” to restore investor confidence in the mortgage markets. Frank, a Massachusetts Democrat, said he wants to meet with mortgage lenders to urge them to help borrowers refinance.
“We need the people who hold the paper to be more flexible,” Frank said.
Am I angry? No, I am enraged at Pelosi’s speech. It seems intended to politicize this and ensure that there is no fix. The Dems are not happy unless we are all poor victims with a tanking economy because they are party-power first people.
“From the minute John McCain suspended his campaign and arrived in Washington to address this crisis, he was attacked by the Democratic leadership: Senators Obama and Reid, Speaker Pelosi and others. Their partisan attacks were an effort to gain political advantage during a national economic crisis. By doing so, they put at risk the homes, livelihoods and savings of millions of American families.
“Barack Obama failed to lead, phoned it in, attacked John McCain, and refused to even say if he supported the final bill.
“Just before the vote, when the outcome was still in doubt, Speaker Pelosi gave a strongly worded partisan speech and poisoned the outcome.
“This bill failed because Barack Obama and the Democrats put politics ahead of country.” — McCain-Palin senior policy adviser Doug Holtz-Eakin
More History from 2006 — When the Bankers and the Dems shot the fix for this down in flames.
Here’s the timeline:
Along the same vein, I want to know who in the WUSSANIMOUS Republican leadership decided not to put John McCain’s bill up for a vote in 2006. What are the names?
UPDATE: I’m taking a bit of heat over this post, so let me clarify, I am in favor of doing this save for the credit markets, and unlike most I always have been. What I don’t think we need to do is rush into it and be hammerlocked by expediency into bad choices. Like Steve Forbes I do think it absolutely necessary to prevent a deep recession. However I also have a lot of faith and confidence in both the breadth and depth of our economy, and do not think it would lead to depression.
What we don’t need with it is political posturing of the sort Pelosi pulled that is transparently false and riddled with Bush derangement syndrome. The Dems in the house have fought off any reform or any change to FNMA GMAC and CRA since 2001, to point at Republicans as the cause is very heinous demagoguery and a flat out big lie. She needs to be replaced by the Dems, or she needs to resign, or she needs censure. Holding this bill hostage a day or two until she at least does a mea culpa isn’t going to absolutely kill the economy, and it will give people a couple more days to digest why it’s necessary, and to improve it.
The new plan puts caps on exective pay and golden parachutes, it also allows foreclosures to proceed (and this is a must – some people have walked away from their homes,) and it stops money from going to Acorn and other Democrat activist groups that led us to this crisis. So on the surface it looks good.
Over the next thirty years many of these mortgages will be paid off, producing potential profit, and those that aren’t are still backed by houses and property in the US, still one of the best countries in the world to live in. The bill will be posted for 24 hours before the vote, and you can bet that bloggers will be going over it with a fine tooth comb. I intend to read it, but won’t plan on commenting unless there is something egregiously wrong with it (beyond just the fact that we have to do this.)
Right now on paper these bundles of mortgages appear to have little value, but over time they will regain their worth. The similar period we saw in Japan took about ten years, if we build the energy sources we need and build our economy it could happen quicker than that here.
Much more on the deal at Washington Post:
The money would be dispersed in segments, with Paulson receiving $250 billion immediately, $100 billion upon White House certification of its necessity and the final $350 billion only after Congress has been given 15 days to object.
Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, so taxpayers can benefit if the companies return to profitability.
Firms taking advantage of the bailout would be required to limit compensation for senior executives, with especially severe limits on “golden parachutes” at failing firms. The compensation limits will be enacted primarily, but not solely, through the tax code by reducing tax deductions for firms that pay executives more than $400,000 a year.
I like it that they are metering the money with checkpoints, I like it that there are these and other limits. What I don’t like is that there will be fees on the financial services industry as part of the agreement if they don’t turn this around in five years. Without seeing the details of how this all knits together, it’s really impossible to comment more on the plan. I await the posting of it.