Obama Got it Wrong

On Monday morning, presidential candidate Barack Obama published an editorial calling on lawmakers to corral the "predatory mortgage brokers" who got all these people into trouble by closing bad loans for them."

If you ask most people, they will tell the same general story.

Here's one or two bullet-point things people (including Obama) need to understand before they start using their platform to spread fear:

Mortgage brokers are solicited by lenders. Lenders create and publish loan programs, and employ sales executives to go out and sell those programs to brokers. That's not to say all brokers are blameless, though.

Part of the process lenders use in establishing loan programs, and loan interest rates, is the potential appetite for closed loan files using a particular program. That means the lender (with the exception of a VERY few) intends to sell the loans in a pool of similar loan profiles. This is called "sale into the capital markets". The loans are then packaged into VERY large securities instruments, called MBS's, or "Mortgage Backed Securities", and shares in them are traded every day on Wall Street's bond market. The ups and downs of the bond market are what determine the prevailing interest rates on a day to day basis.

Mortgage brokers are the low man on the totem pole. Loans are never closed in the name of the broker (as the lender), but rather, the loan documents show the LENDER as the mortgagee. It was their loan program, they underwrote the file, collected specific items from the borrower, evaluated the collateral, and agreed finally to lend the money to the borrower.

Further, in MOST cases, the borrower signed a veritable RAFT of paperwork outlining every jot and tittle of the loan terms.

So there's the background information that will hopefully help make my next comment make sense to you.

Here's what Obama SHOULD have said:

There shouldn't be ANY government bailout of anyone in this case. Rather, lawmakers should be going to the lenders (the mortgagees) on these bad loans, and to the original capital market buyer/investor of the loan package, and put into place the following policy:
Foreclosure is not an option for most of the homeowners in certain loan programs, and under certain conditions. Instead, dear lender, you will identify any and all files that have fraud in them at all, and you will take the necessary steps to cure that fraud - if it was the buyer who perpetrated the fraud to take advantage of the system, they will have no recourse. Credit reporting changes will be made to be more stringent and punitive to these buyers, if there is a provable case for such.

(We will need a system whereby buyers can be classified and qualified.)

However, if it is shown that a good borrower has been stuck in a loan that is too punitive in its terms, you will have to modify the note attached to that loan, and you WILL put into place workout terms that are generally acceptable. You will carry these notes for these buyers and you will not foreclose.

Lenders who profited GREATLY from the origination and sale of that security should be forced to now rescue buyers in their program, because it is obvious there were contagious flaws in the program.

There should also be standards within the mortgage lending industry that outline what kinds of terms are allowable, and what are not. For example, a purchase transaction should not be allowed to be originated on any variable interest rate loan without a certain minimum credit score, without putting verified money down. There are lots of examples of what should be allowed and what should not.

And guess what - the MARKET is moving in this direction already. The problem is not that there are not loans to be had out there. It is that those who used to buy loan pools in the secondary market are not buying ANY pools, almost no matter what the profile of the pool. That leaves the lender without the necessary capital to pay off the old mortgage and originate a new one. Secondary buyers are even shying away from Commercial mortgage paper, not just residential.

So, the FED, in the last two weeks, did two things - first they bumped cash into that secondary marketplace, providing needed liquid capital, then they lowered their internal interest rate - the one used to lend short term money to banks. The FED has also set the table of expectations now for the third and final action they may take: the lowering of the interest rate you and I care about.

The expectation is certainly there at this point for the FED to lower that rate at their Sept 18th meeting. The volatility in the stock market over the last two days has to do with this expectation.

We shall see. I don't think interest rates are the problem, and some would even note that the foreclosure rate is not that big a problem either. The problem is enticing the secondary big-money buyers that the pools they may potentially buy will offer sufficient return through timely payments made by homeowners. They are scared kitties right now.

Needless to say, the heyday has passed where one could get a loan by simply possessing the ability to fog a mirror. Now you're going to have to prove yourself. Credit score isn't ALWAYS indicative of that. Many thought it was. Obviously that was flawed thinking, espoused by lenders eager to make as much money as possible. Time to pay the piper.


That One Guy said...

Here's an analogy: As I mentioned, buyers are shying away from everything right now - the issue isn't liquidity as much as it is credibility, like when you realize your kid just told you their first lie. It makes secondary buyers very gun-shy about believing ANYTHING they are told about future performance, because they've heard it before. They have money, they just aren't believers right now. They'll wait for some other guinea pig to test the theory that new pools will actually perform.

Part of the Plan said...

This was the most cogent explanation of the whole sub-prime mortgage mess that I have read. Thank you!

OneHungMan said...

People seem to think that just because some schmuck lenders approves their loan for a 9 trillion dollar home that they can actually afford a 9 trillion dollar home.

As everyone is now finding out, that's not exactly the case and sadly, it's a little too late.

The good news is that the price of the condo in PVB should remain somewhat constant over the next year or two til OHM can make the purchase. But the bad news is that the price is going up anyway because he'll be paying 8.75% interest instead of 6.25%.

Thanks fuckers.

That One Guy said...

Actually, here's a nice thing... there is MAJOR pressure on the FED to lower rates in Sept, and there will likely be one or two more rate cuts by the end of the year...

AND... rates are actually LOW again right now.

So you might not have a rate headache.