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We Are The Ones Holding The Bag After Everybody Else In The Process Has Made Money And Walked Away

A report from Politico. “The U.S. housing finance system is worse off today than it was on the cusp of the 2008 financial crisis, Republican lawmakers and Trump administration officials warned on Tuesday. Fannie Mae and Freddie Mac, the two government-controlled enterprises that stand behind half the country’s mortgages, are way too undercapitalized, and lending standards have actually deteriorated since the housing crash, the officials said.”

“‘This whole thing is a car wreck. It’s a dumpster fire, Sen. John Kennedy (R-La.) said at a Senate Banking Committee hearing on the White House’s proposal to overhaul the way the nation finances mortgages. ‘We spent $190 billion of taxpayer money, and we’re in worse shape,’ he said, referring to the bailout of Fannie Mae and Freddie Mac, which were seized by Treasury a decade ago to stave off catastrophic losses in the crisis.”

“Right now, the companies are only allowed to retain a combined $6 billion in capital despite owning or guaranteeing $5.5 trillion of mortgages. ‘I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,’ Federal Housing Finance Agency Director Mark Calabria, the companies’ regulator, told the committee. ‘If we do nothing, this is going to end very badly.'”

“What’s more, Fannie and Freddie are less equipped for a downturn now than they were before the crisis, Senate Banking Chairman Mike Crapo (R-Idaho) said. Before 2008, he said, the companies held 45 cents in capital for every $100 in mortgages; today that figure is 19 cents.”

“Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson and Calabria all agreed with Crapo’s assessment that the GSEs ‘are systemically important companies [and] that they continue to be too big to fail.'”

“Yet when Sen. Mark Warner (D-Va.) pressed Mnuchin and Calabria on whether the Financial Stability Oversight Council, the uber regulator created after the crisis to spot emerging risks in the financial system, should subject Fannie and Freddie to greater oversight, they rejected the idea. ‘It appears to me from your administrative proposals, we could end up with a system that actually doesn’t end too-big-to-fail and doesn’t increase affordable access to credit — that is a grave concern to me,’ Warner said. The administration’s plan, he said, is ‘going to put us right back to where we were prior to 2008.'”

“Mnuchin disputed Warner’s characterization, and he and Calabria emphasized that the White House plan includes reforms to reduce the risk in the companies’ portfolios. As it stands, underwriting standards at Fannie and Freddie have ‘gotten worse, not better,’ Calabria said, pointing to a ‘massive expansion’ of loans with high debt-to-income ratios in recent years.”

“Efforts to reduce risk, though, would inevitably result in fewer people getting mortgages — a point Democrats on the committee made repeatedly. When Sen. Jack Reed (D-R.I.) pressed the officials to identify people who would not be able to get mortgages under the plan, Mnuchin said ‘there may be certain people today who really shouldn’t get a mortgage because they can’t afford them.'”

From The Hill. “Sen. Sherrod Brown (Ohio), the Banking panel’s ranking Democrat, condemned the Trump plan as a ‘cream-skimming privatization scheme.’ Brown said the proposal failed to reflect basic areas of agreement among lawmakers and advocates. ‘Rather than create a system that addresses the needs of working families, the Trump Administration has put out half-baked proposals that will make mortgages more expensive and harder to get,’ Brown said.”

“The Trump administration has given lawmakers an open-ended set of guidelines meant to reshape Fannie and Freddie into smaller firms with less leverage and control over the secondary housing finance market. ‘We are the ones holding the bag at the end of the day after everybody else in the process has made money and walked away,’ Calabria said. ‘This is not a safe situation to be in.'”

The Wall Street Journal. “The Trump Administration last week sketched out an ambitious plan to rein in mortgage monsters Fannie Mae and Freddie Macand release them from government captivity. Godspeed to Federal Housing Finance Agency (FHFA) director Mark Calabria, who’s unlikely to get help from Congress in this Sisyphian task.”

“The Godzillas, backed by the housing lobby and Wall Street speculators who have bought their shares, are eager to break loose and run wild again. While the Trump Administration has some useful ideas to cut them down to size, to avoid a repeat it’s first worth recalling how they became such monsters.”

“Congress chartered the government-sponsored enterprises some five decades ago to increase liquidity in housing finance. The GSEs securitize and guarantee mortgages, freeing private lenders to make more loans. Thanks to an implicit government guarantee, they could borrow cheaply and push out competitors. Private profit and socialized risk—sweet.”

“The duo also benefited from lower capital requirements that gave them an advantage over banks. Their mortgage-market share tripled to 25% in the 1980s, and then Democrats in Congress imposed ‘affordable housing’ mandates that encouraged the GSEs to bulk up even more. Fan and Fred increased subprime lending and relaxed underwriting standards, including ‘liar loans’ that required no income documentation. Their profits ballooned.”

“But all of this set them up to collapse when the housing bubble burst, prompting Congress to establish the FHFA and bail them out. Uncle Sam took an 80% common stake in the GSEs. We argued at the time that they should be placed in receivership, but FHFA kept them on life support. Drip, drip.”

“The Consumer Financial Protection Bureau exempted the GSEs from its ‘qualified’ mortgage rule requiring borrowers to have a 43% debt-to-income ratio. About 30% of the GSEs’ new purchase mortgage acquisitions last year exceeded this threshold and homeowners have put less than 5% down in about 10% of new purchase loans acquired by the GSEs.”

“Fannie and Freddie have also competed with each other and the Federal Housing Administration (FHA) for subprime borrowers by easing underwriting standards. Obama-appointed FHFA directorMel Watt encouraged Fan and Fred to expand into riskier lines of businesses like cash-out refinancing and multi-family affordable housing. Taxpayers now stand behind $5 trillion in mortgages, while hedge funds have bought GSE shares on a bet they’ll eventually be unleashed.”

“Mr. Calabria, who has substantial discretion as the new FHFA chief, could start by reducing GSE support for cash-out refinancing, investor oans, vacation home loans and higher principal-balance loans. The American Enterprise Institute’s Ed Pinto estimates that leaving these businesses over time could shrink the GSE footprint by 45%.”

“The Administration also suggests levelling the regulatory field by subjecting Fannie and Freddie to comparable capital and underwriting standards that private lenders must meet. The Federal Reserve requires banks to hold more than twice as much capital for comparable loans than Mr. Watt proposed for Fannie and Freddie. Another idea is to form a nonaggression pact with the FHA to prevent a competitive erosion of lending standards.”

“Mr. Calabria’s most urgent task is to make Fan and Fred less dangerous by shrinking them.”

This Post Has 91 Comments
  1. ‘As it stands, underwriting standards at Fannie and Freddie have ‘gotten worse, not better,’ Calabria said, pointing to a ‘massive expansion’ of loans with high debt-to-income ratios in recent years…The Consumer Financial Protection Bureau exempted the GSEs from its ‘qualified’ mortgage rule requiring borrowers to have a 43% debt-to-income ratio. About 30% of the GSEs’ new purchase mortgage acquisitions last year exceeded this threshold and homeowners have put less than 5% down in about 10% of new purchase loans acquired by the GSEs’

    ‘Fannie and Freddie have also competed with each other and the Federal Housing Administration (FHA) for subprime borrowers by easing underwriting standards. Obama-appointed FHFA directorMel Watt encouraged Fan and Fred to expand into riskier lines of businesses like cash-out refinancing and multi-family affordable housing. Taxpayers now stand behind $5 trillion in mortgages’

    Nothing new to readers of this blog, but I’d bet 90%+ of the population have no idea how much subprime is being loaned. A few weeks ago I found a report of a no-doc, zero down loan being flogged in Tennessee, and if it’s there it’s everywhere.

    1. “I’d bet 90%+ of the population have no idea how much subprime is being loaned“

      But I was assured by every realtor everywhere this is why “it’s different this time”.

      1. This time the Realtors only intend to talk dummies into buying high, they do not intend to buy real estate for themselves. So it is different than last time when many realtors were drinking their own Kool aid. There are probably exceptions but this time I think many know that the bubble actually is deflating. I may be an outlier but I think that this is actually good for the economy even in the short term. Housing is a consumptive good, we need more investment to better compete with China and others. Only globalists want increased consumption and less investment in the US.

    2. “Efforts to reduce risk, though, would inevitably result in fewer people getting mortgages — a point Democrats on the committee made repeatedly.”

      Sounds the Democrats are worried that they’ll lose votes?

    3. This time let them fail.

      The fact that Fannie and Freddie bondholders got more interest than Treasuries for years, and were left with no more risk than Treasuries, is why this was allowed to get out of control again.

      They bailed out Fannie and Freddie to bail out the banks, who had lots of mortgage bonds as capital. Fannie and Freddie may be worse off, but the banks are holding more capital overall. Let the take a loss.

    4. Incomes are not remotely keeping pace with housing price increases. I really thought the crash in 08 would return us to sanity. The fact that NOTHING changed, means some people need to be imprisoned.

      1. The fact that NOTHING changed, means some people need to be imprisoned.

        It wasn’t that simply nothing changed…it was in the process of changing quickly and was “rescued” with stolen money. Agree on the prison statement.

  2. ‘But all of this set them up to collapse when the housing bubble burst’

    If I have time I’ll find my post from early in 2005 when the swamp finalized conservator status for the GSE’s. Yep, they were broke long before the bubble popped. People just don’t remember how corrupt these corporations were/are. The Enron style off-shore entities, we were never told how that dumpster fire turned out. Imagine that.

    1. Here it is:

      Monday, February 07, 2005
      Fannie/Freddie Regulator Preps For Bankruptcy

      The Office of Federal Housing Enterprise Oversight is pushing legislation through congress that prepares for the insolvency of the mortgage giants. Patrick Lawler, OFHEO chief economist told a forum “Receivership is a valuable thing”.

      None of this is reported on the official website of the regulator. Also mentioned in this story was this tidbit;”..a coalition of 37 federal, state, and local groups urged the federal government and Congress to cut ties with Fannie and Freddie Thursday. Warning that Americans are threatened by a potential taxpayer bailout of the two companies”.

      http://thehousingbubble.blogspot.com/2005/02/fanniefreddie-regulator-preps-for.html

          1. Wouldn’t endlessly kicking the can further down the road with hair-of-the-dog hangover cures be preferable?

            Definitely seems to be preferable for the decision makers. They’re kinda fond of their heads.

          2. Plus they’re probably old. As long as they can delay the day of reckoning until after they are gone, they’re good with the status quo.

  3. ‘Fannie and Freddie have also competed with each other and the Federal Housing Administration (FHA) for subprime borrowers by easing underwriting standards. Obama-appointed FHFA directorMel Watt encouraged Fan and Fred to expand into riskier lines of businesses like cash-out refinancing and multi-family affordable housing’

    Good ol’ pedal to the metal Mel. (He actually said that, in a casino no less!) And this multi-family affordable housing – value add, slap on some paint, jack up rents, and throw in some non-recourse loans! We have no accounting of how much of that is out there either.

    1. “Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame and danger that their acts would otherwise involve… But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to the other persons to whom it doesn’t belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Then abolish that law without delay – No legal plunder; this is the principle of justice, peace, order, stability, harmony and logic.”
      ― Frédéric Bastiat, The Law

  4. Mr. Calabria, who has substantial discretion as the new FHFA chief, could start by reducing GSE support for cash-out refinancing, investor oans, vacation home loans and higher principal-balance loans.

    If the Federal housing agencies would get out of cash-out refinancing, vacation home rentals, and higher principal-balance loans, that would be “yuge”.

  5. For any of you broke-assed losers who cannot come up with a measly down payment needed to buy a house I suggest you read the following …

    “Hold Onto Money For 60 Days”

    “Ask any lender if you’re allowed to borrow your downpayment with a personal loan or cash advance and they will probably say no.”

    Check.

    “However, there’s a point at which funds borrowed from elsewhere become, for all practical purposes, your own money.”

    Say what?

    “Typically lenders consider funds ‘yours’ if they have been in your bank account at least 60 days.”

    Bahahahahahahahahahahahahaha.

    “At this point, the borrowed funds are said to be ‘seasoned.’”

    “Seasoned”. The borrowed funds are seasoned. Borrowed but seasoned. Got it.

    “For instance, you take out a $25,000 personal loan for emergency cash and deposit it into your checking account. Six months later you decide to purchase a house. The lender is not going to ask you to specify which funds in your checking are from the loan. It’s all just considered yours.”

    Why, it’s a miracle!

    “However, you will have to disclose the debt and the monthly payment, and that will be counted in your qualifying ratios.”

    Shucks.

    Whatever.

    😁

    5 Ways To Borrow Your Mortgage Down Payment On A Home
    https://themortgagereports.com/21479/borrow-downpayment-funds

  6. When Sen. Jack Reed (D-R.I.) pressed the officials to identify people who would not be able to get mortgages under the plan, Mnuchin said ‘there may be certain people today who really shouldn’t get a mortgage because they can’t afford them.’”

    You can’t make this stuff up. I hope I live to see the day when post-collapse tribunals mete out summary justice to every single one of the gold-collar criminals who crashed our financial system.

    1. “Mnuchin said ‘there may be certain people today who really shouldn’t get a mortgage because they can’t afford them.’”

      Bahahahahaha … and both of them have been identified.

      1. He’s not the only one, from Trump’s tweet this morning:

        ‘The Federal Reserve should get our interest rates down to ZERO, or less…’

  7. “Before 2008, he said, the companies held 45 cents in capital for every $100 in mortgages; today that figure is 19 cents.”

    Are they referring to banks? If so, time for me to make a withdrawal

  8. ‘I will tell you as a safety-and-soundness regulator, when I look at a $3 trillion institution that is leveraged 1,000 to 1, it keeps me up at night,’ Federal Housing Finance Agency Director Mark Calabria

    1000 to 1 leverage is really unfathomable, insane levels of risk.
    But the horse has already left the barn, so lets crank ‘er up to 2000 to 1.
    Why not?

    1. Kind of like having enough nuclear weapons to kill every one a hundred or two hundred times. Once your demise is going to wipe out the financial system, it doesn’ t really matter. Might as well keeping it going to the baby boomers and gen xs are dead. Might cure the biggest problem millennials seem to worry about. Do not have to worry about which bathroom to use if indoor plumbing is gone.

      1. Yes. I do not see a recession taking Trump down but an I’ll advised war just might. Far less chance of that now.

        Really? I see it the opposite way…he’s done a lot to try to innoculate himself from blame for the coming recession but I doubt it’s possible to do enough. So his biggest hope is just to delay it.

        But if he timed it right I would think that a war could easily keep him in office if handled the right way.

        1. You are assuming a recession in 2020, I do not see one prior to 2021 at the earliest. Thus he does not need a wag the dog. Moreover, those wars can mess up an economy and lead to a defeat like Bush in 1992. The war could not have been more successful but the destruction of oil fields caused economic pain.

          1. a defeat like Bush in 1992

            Yes…but if he had anticipated that and delayed the ground war for about a year to get the 92% approval rate right around election time it would have changed history. He wasn’t thinking that way at the time, but he might be if he had it to do over again and I wouldn’t put it past anybody now to do that.

          1. If he timed it right? Are you asking Trump to start or prolong a war to stay in office? Let’s not go that far.

            I wasn’t saying I approve. Just saying it could happen. We were talking about a hypothetical ill advised war and I assumed that intentionally timing it for election reasons was also a possibility.

          2. ill advised war

            Yeah sure, a sitting president is usually given a second term in times of war. There is a special place in hell for anyone who instigates war to feather their pockets.

  9. Fannie Mae just moved about 1000 employees from Dallas to their new office in Plano, (just North Of Dallas) Also JP Morgan Chase just moved to the same area bringing about 6,000 employees. Between these 2 companies plus Toyota, Liberty Mutual that just moved here, and other companies bringing thousands of people and their families, it caused a massive housing boom in Collin County. They can’t build houses fast enough for all the newcomers. This place grew too fast, traffic is awful, everywhere is crowded, crime went up…

    If any of these companies start any significant layoff, there goes Collin County housing boom. Things can go downhill quick around here. But right now, you see construction everywhere. It’s still growing.

  10. California lawmakers have passed a bill that paves the way for gig economy workers to get holiday and sick pay.”

    “Uber lost more than $5bn in the last quarter alone. Some estimates suggest that having to treat workers as employees, rather than independent contractors, could increase costs by as much as 30%.”

    It might get harder to find an illegal taxi in California.

    1. I think this is a nothing burger. At best, Uber will have to pay their half of the payroll taxes. As for bennies, IIRC those only kick in if the driver works more than 35-40 hours per week. Part-timers get zilch. Isn’t that how most low-pay jobs are? They don’t give you enough hours to qualify for bennies.

      1. Uber has bigger problems but having to pay another 6.2 percent for wages due to having to pay social security is not a nothing Burger. Of course, Uber will have to pay 1.45 percent in Medicare taxes too. Thus, around 7.65 percent in employee costs in a labor intensive operation. Could be the straw that breaks the camel’s back. Do not agree with much California does but I do agree with this action.

    2. https://www.zerohedge.com/economics/uber-finds-legal-loophole-ignore-new-california-ridesharing-law

      “The San Francisco-based company’s chief legal officer, Tony West, said in a news conference that its drivers’ work is ‘outside the usual course of Uber’s business,’ which is serving as a technology platform for several types of marketplaces.”

      From a legal and business perspective, I would view Uber’s “usual course of business” as its greatest revenue stream. I neither know what that is nor care enough to go through its financial statements.

    1. If the spike in lending rates underway proceeds much further, it could prove to be the last nail in the Housing Bubble’s coffin.

    1. WeWork is worth 70% below where it last raised money, NYU’s ‘dean of valuation’ says

      ‘That price tag, according to Damodaran, is largely based on the CEO’s “storytelling” ability, instead of financial metrics. In that sense, Damodaran said WeWork has “has had many of the same ingredients” as failed blood-testing company Theranos and its value built on “a personality rather than a business.”

      “As we saw with Theranos, in its rapid fall from grace, there is a dark side to story companies and it stems from the fact that value is built on a personality, rather than a business,” he said. “When the personality stumbles or acts in a way viewed as untrustworthy, the runaway story can quickly morph into a meltdown story, where the ingredients curdle.”

      https://www.cnbc.com/2019/09/10/aswath-damodaran-wework-is-worth-70percent-below-where-it-last-raised-money.html

      1. When the personality stumbles or acts in a way viewed as untrustworthy, the runaway story can quickly morph into a meltdown story, where the ingredients curdle.”

        Oh dear. What if our idols have feet of clay? Or if they’re outright scoundrels and scammers?

        Thanks goodness the SEC is on the job, vigilantly safeguarding the integrity of these markets and ensuring investor confidence is not misplaced. And the intrepid Fauxahontus and the entire banking oversight apparatus stand ready to bring swift and severe justice to any scalawags who would defraud middle class investors.

          1. vir·tue sig·nal·ing
            noun
            noun: virtue signalling; noun: virtue signaling
            -the action or practice of publicly expressing opinions or sentiments intended to demonstrate one’s good character or the moral correctness of one’s position on a particular issue.
            “it’s noticeable how often virtue signaling consists of saying you hate things”

            It’s like invoking “taxpayers”. I’ve never meet a taxpayer who said, “you know I really feel bad we haven’t even paid for World War 2, I’m a gonna send a check to those Chinese bond holders.” Any “investor” that throws their money out the window on this We crap deserves to lose it all.

          2. The IPO is the mechanism for the VC money pit to offload onto middle class investors.

            Which will make it a beautiful sight to watch if they can’t get the IPOs done.

    1. How do you read this chart to come up with the 28% price drop? When I look at the median sales price from July 2018 to July 2019 it looks like it has gone up?

  11. ‘California’s Office of the Attorney General issued a warning of loan modification scams targeting homeowners using “rescue” tactics. Someone calling or emailing to offer modifications to monthly loan payments that significantly shrinks down the cost is often scamming the target, said a notice from the Attorney General’s Office.’

    ‘Fear of foreclosure is a driving tactic in the scam. One of the methods used by these scammers is offering to forgive a chunk of the loan leading to fewer long-term payments at a cheaper price tag.’

    https://www.chicoer.com/2019/09/10/loan-modification-too-good-to-be-true-it-probably-is-scam-of-the-week/

      1. “Been working the phones again, Mr. Banker?”

        Yep. I like to think of it as Dialing For Dollars. Check this out:

        “Fear of foreclosure is a driving tactic in the scam.”

        This only works on totally dumbed-down ignorant fools, which is why I like to use it as there is such an abundant supply of such fools.

        “One of the methods used by these scammers is offering to forgive a chunk of the loan leading to fewer long-term payments at a cheaper price tag.”

        Again, this tactic is marketed to fools. My thanks go out to our educational system (sic) and it’s stated goal of No Child Left Behind.

        1. Here’s a snip frm the article:

          “It will soon be illegal in California for both public and charter schools to suspend disruptive students from kindergarten through eighth grade

          “Gov. Gavin Newsom on Monday signed into law Senate Bill 419, which permanently prohibits willful defiance suspensions in grades four and five. It also bans such suspensions in grades six through eight for five years.”

          “The law goes into effect July 1, 2020.”

          Enjoy your pain.

          1. “It will soon be illegal in California for both public and charter schools to suspend disruptive students from kindergarten through eighth grade.”

            I’m sure glad my kids finished their public school educations before Nuisance passed this Every Child Left Behind legislation. It seems designed to give license to disrupters to destroy the public education experience for the majority of children who follow the rules.

            An increased share of disruptive students and competent teacher resignations seem like the logical consequences.

            Brings to mind my high school calculus teacher, who quit teaching and coaching the track team to establish a lumber yard out in the sticks when disruptive behavior exceeded critical mass.

          2. It is how you raise a new generation of liberals. Arrested adolescents are liberals. They are going to hold their breath and stomp their feet until the house votes for impeachment. No matter that the Senate will acquit and it will help the Republicans in 2020.

          3. Brings to mind my high school calculus teacher, who quit teaching and coaching the track team to establish a lumber yard out in the sticks when disruptive behavior exceeded critical mass.

            He must have had other classes too…I’ve never seen the disruptors make it to calc before.

  12. I don’t know if the get rich quick types or the Communist are the greatest Force that is operative today that is intent on crashing the USA.

    No underwriting standards, no law and order, no borders, monopolies controlling pricing, with nothing but fake news and fake markets.

    I think the get rich quick types have no clue how much the real Communist would eat them for lunch once they gain the power they are seeking.

    1. I think the get rich quick types have no clue how much the real Communist would eat them for lunch once they gain the power they are seeking.

      Hence the term “useful idiots”.

      1. I am in agreement with the communists on the idiots part. I have to diverge on the useful part. They are as useful as udders on a bull. That is the G rated version of a Vermont saying.

        1. I have to diverge on the useful part.

          Just because they aren’t useful to you doesn’t mean they aren’t useful to the communists.

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