Home Forums Hunting & Shooting Hunter's Campfire Mortgage Crisis: It's like Groundhog's Day

The government, in recent days, has been giving one set of bankers nearly everything they want.

In this case, the lucky lenders are mortgage bankers, who for months had pressed federal agencies to loosen regulations on the home loan market. The regulators, eager to increase the flow of housing credit, seemed happy to make the adjustments. Just this week, they relaxed agreements that help shield taxpayers from losses on bad mortgages, and they watered down a regulation that aimed to set safe standards for home loans.

The government is in a tight spot. Some six years after the financial crisis, thousands of apparently creditworthy borrowers are being shut out of the housing market because they cannot get mortgages. From the authorities� perspective, it may be worth throwing the mortgage bankers a bone if it helps open up the market to deserving households. And regulators stress that they are doing so in a careful way.

�We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner,� Melvin L. Watt, director of the Federal Housing Finance Agency, said on Monday.

Bankers assert that, over all, mortgage regulation has tightened significantly since the financial crisis of 2008. And they add that the changes made this week by regulators help stop the pendulum from swinging too far toward overregulation.

�This is absolutely the most conservative framework ever in the history of this country,� David H. Stevens, president of the Mortgage Bankers Association, said. �What has happened in the last weeks shouldn�t be reflected as going easy on the mortgage industry.�

Still, the regulators� mortgage concessions are at odds with the broader thrust of the financial system overhaul that started after the crisis. In areas not directly related to mortgages, the agencies have sometimes adopted rules that were tougher than initially expected. Capital requirements, for instance, have become more stringent, and the final version of the Volcker Rule, which aims to keep banks from gambling with depositors� money, ended up stricter than its first draft.

But in crucial ways, the rules on mortgage lending have become more lenient.

This week, for instance, after fierce industry criticism, regulators weakened a provision of the Dodd-Frank Act of 2010 that governs how banks sell mortgages.

When banks make home loans, they package them into bonds, which they then sell to investors. In the years leading up to the crisis, banks sold substandard mortgages to investors, who later took enormous losses on them. To help keep that from happening again, Dodd-Frank required banks to hold on to a small portion of the loans they sold.

But the legislation had an important exemption: Lenders would not need to retain mortgages that had a low risk of default. The act assigned regulators the task of defining a low-risk mortgage. In the first draft of the so-called risk retention rule, the regulators said that such a loan would, among other things, have a down payment of at least 20 percent. But after mortgage bankers and other groups asserted that this could restrict credit, the down-payment requirement was left out of the rule completed this week.

�The opposition for that proposal was so intense. It came from all corners,� said Daniel M. Gallagher Jr., one of two Securities and Exchange commissioners who voted against the rule on Wednesday. �They were opposed to what we thought were prudent lending standards before the subprime crisis.� The commission passed the rule 3 to 2.

Mr. Gallagher said that there was a lot of political pressure against a rule that required down payments for the exempt mortgages. �We got letters from both parties telling us to go with the gutted rule,� he said. �But I don�t view this as political. It�s about good policy and what�s good for the taxpayers.�

The victory of the mortgage bankers over down-payment requirements did not surprise some housing finance analysts. Over the years, they say, the bankers have benefited from a broad alliance with homebuilders, real estate agents, consumer advocates and investors.

�That was really what won the battle for mortgage bankers,� Mark A. Calabria, of the libertarian-leaning Cato Institute, said in an email.

In recent years, mortgage lending has become quite profitable for banks as borrowers have taken advantage of low interest rates to refinance. At the same time, it has become a lower-risk business for banks because most home loans these days carry a government guarantee of repayment. As a result, if the borrower defaults, the taxpayer, not the bank that made the loan, takes the hit.

The banks have paid dearly for loans made before the crisis. Fannie Mae and Freddie Mac, the government mortgage giants that guarantee home loans, have demanded that banks buy back billions of dollars of precrisis loans, mostly defaulted on, that fell short of agreed-on standards. Also, law enforcement agencies have pressed the big banks into multibillion-dollar settlements over selling subpar loans.

To avoid having to buy back large amounts of loans again, the banks say that they now place demands on prospective borrowers that are even stricter than what the government requires on the loans it buys. To calm the banks, the regulators on Monday loosened the terms governing when Fannie Mae and Freddie Mac can demand that banks buy back loans.

But some housing specialists do not see why the government made that concession. To avoid buying back loans, they say, the banks could just do a better job of extending mortgages that meet the standards that they and Fannie and Freddie have agreed on.

�It�s remarkable the way lenders say it�s been too harsh on them to buy back loans, rather than say, �We should make better loans,� � said Thomas J. Adams, a partner at the law firm Paykin, Krieg & Adams who specializes in mortgage securities. �The overwhelming evidence is that they are not very good at their business.�

And the bankers need the money, so it's all good, right?

Sycamore

I'm in the wrong business.

The headline in newspapers one recent weekend read like an April Fool�s joke, but it wasn�t April 1. The Obama administration announced it wants to provide a little more juice to the now-lackluster housing market by bending the home lending rules to make it easier for banks to make loans and marginal buyers to take on a mortgage.

One of the big changes: The Federal Housing Finance Agency will lower down payment requirements from an already absurdly low 5 percent to a ridiculously low 3 percent on many loans that are eligible for federal mortgage insurance assistance.

Here we go again.

Maybe the Obama Democrats should start running billboards across the country announcing: �Uncle Sam is back in the subprime lending game.�

Is the Obama administration actively trying to create the conditions for another housing collapse? What everyone who follows the housing market knows full well is this: The major reason for the millions of home foreclosures during the meltdown was the policy of low down payments on home loans.

One study by researchers at the University of Texas in Dallas looked at some 30 million mortgages issued before the bubble burst and found that �[t]he evidence strongly suggests that the single most important factor is whether the homeowner has negative equity in a house� � i.e., whether they paid a high or low down payment. This study found the down payment was a much stronger prediction of whether a loan would end up in default than the credit score of the borrower.

As the housing bubble kept inflating from 2001 to 2006, aspiring homeowners could walk into a bank or a branch of Countrywide Financial and walk out with home loans with as low as 2.5 percent or 3 percent down payment (including closing costs, which also could be financed through the loan). The Wall Street Journal, Investor�s Business Daily and other free marketeers warned of the insane risk that taxpayers were underwriting on almost $1 trillion in mortgages. They were shouted down as alarmists.

Back then the laws of financial gravity seemed to have been suspended, and when home prices went up, they stayed up. Even if the home ended in foreclosure, with Fannie Mae, Freddie Mac and the Federal Housing Administration providing a near 100 percent taxpayer repayment guarantee on more than 80 percent of the mortgages, there was little downside in issuing very risky loans. Underwriting standards flew out the window. The Bush administration celebrated year after year of rising homeownership rates. Everyone was getting fat and happy.

When prices did start to comply with the laws of gravity and collapsed back to earth in 2007, millions of homeowners were underwater. Many lost 20 percent, 30 percent and sometimes 50 percent on the value of the house � especially in then-red-hot markets such as Florida, Nevada, Arizona and California. Thanks to low down payments, these families suddenly were under water on their mortgages, owing more than the house was worth. With little skin in the game, borrowers walked away from the house, sent the lender the keys (�jingle mail,� as it was called) and let taxpayers take the fall.

Boy, did we. Fannie and Freddie ended up needing more than a $100 billion taxpayer bailout.

So Washington tightened the lending rules. No more �predatory loans,� then-Rep. Barney Frank, Massachusetts Democrat, and his gang declared, which was like saying to lenders: Remember those loans we were encouraging you to make last year? No more of that. The feds even sued banks for making loans the government enticed them to issue in the first place.

Amazingly, Fannie, Freddie and the Federal Housing Administration are again insuring between 90 percent and 95 percent of all new mortgages. Taxpayers are back on the hook for hundreds of billions in new mortgages.

Even those lifelines aren�t enough for the homebuilders, the Realtors, the mortgage banks and left-wing advocacy groups for the poor such as the Center for Responsible Lending.

Now we will get 3 percent down payment mortgages again with taxpayer guarantees. Whoopee. The Federal Housing Finance Agency might even suspend some of the rules that had required higher fees on riskier loans. All of this makes about as much sense as injecting Ebola virus into blood supplies.

The way to prevent another catastrophic housing bubble is obvious. The feds shouldn�t be lowering down payments � they should be raising them. Foreclosures would be a rarity if we went back to the sensible old rule of 20 percent down. Studies show that almost none of the mortgages with 20 percent down went belly up.


The housing lobby protests this rule will price moderate-income buyers out of the market. Wrong. It simply means instead of buying a $250,000 house they can�t afford, they are going to have to buy the $175,000 house they can afford. Homeownership is a very worthy goal, but we don�t do any family or community a favor by pushing buyers into a home they are going to lose.

None of these lessons from the last crisis have taken hold in Washington. The best and the brightest in President Obama�s camp want to roll the dice again and lower, not raise, down payments and ease the credit rules at banks. When sensible people protest this insanity, critics call us fear mongers. That, too, is what the housing lobby said on the eve of the previous housing crisis.

Everything that caused the financial meltdown of '08 has just been papered over

With an interesting cast of winners & losers


Next 1 should be a doozy

And it may end up being referred to as bail in

THAT is what caused the collapse that required the bail out.

Frankly I don't give two hoots. I'll just save money and be ready to buy the houses that loose value. I guess if it works in the stock market it works in real estate. Buy low, sell high!!!

Frankly I think it will be harder to pull off this time. People nervous about the whole deal.

[quote=Cariboujack]Frankly I don't give two hoots. I'll just save money and be ready to buy the houses that loose value. I guess if it works in the stock market it works in real estate. Buy low, sell high!!!