So Fannie and Freddie Weren’t the Problem…

Popular Economics Weekly

We are learning just how much mortgage fraud was committed by 17 national and international banks and other financial entities that the Federal Housing Finance Authority (FHFA) originally sued to recover some $200 billion in losses to the GSEs that it regulates, Fannie Mae and Freddie Mac.

This tells us where the real faults lies for the credit bubble that led to the housing bubble.  The once private stock corporations and now wards of the government, Fannie Mae and Freddie Mac, didn’t precipitate the housing bust.  They weren’t even the main issuers of faulty mortgages that imploded with the Great Recession. It was the federally-supervised commercial banks themselves that misrepresented many of the mortgages it sold to Fannie and Freddie, thereby giving them the cover of AAA rated assets, when they were much closer to junk bond quality.

Fed Chairman Alan Greenspan had lowered short term interest rates below what was the inflation rate at that time—some 3 percent—whereas his fed funds rate was as low as 0.5 percent.  (That meant if money was lent at below the inflation rate, it was basically free money because inflation would eat away at the amount owed so that it was actually worth less when paid off, or sold, than the face amount of the debt.)

And banks jumped into the housing bubble that resulted, almost ignoring the most basic lending safeguards from such ‘free’ money, such as verifying income and assets of the borrowers that Fannie and Freddie required.  In other words, Fannie and Freddie guaranteed that nothing was “stated” on the loan application that wasn’t verified.

The GSEs themselves were also at fault for allowing mortgage banks such as Countrywide Financial (acquired by Bank of America) to package and sell Mortgage Backed Securities to Fannie and Freddie that mainly consisted of negatively amortized ‘liar’ loans with very low initial payment rates, and little or no income and asset verification.  But that was a small portion of the defaulted loans, and in fact Fannie and Freddie guaranteed mortgages have far and away the lowest default rates.

Wall Street insiders now believe that up to $50B could be the tab to settle all the pending cases, according to the New York Times.  Some $1.96 Trillion in so-called private-label mortgages were issued by banks from 2005 to 2008 during the height of the housing bubble, according to the latest figures.

As of January, the FHFA has settled six of the private-label RMBS cases, recovering nearly $8 billion for taxpayers.  Whether due to a lack of adequate supervision, or outright fraudulent misrepresentation of the credit quality of those mortgages, these banks sold Fannie and Freddie mortgages that didn’t meet the strict credit standards of the GSEs.

Graph: NY Times

Banks such as JP Morgan Chase ($5.1B), Deutsche Bank ($1.9B) and now Credit Suisse ($885B) have settled, while admitting they had inadequate oversight.  But Bank of America and Goldman Sachs are holding out, so are going to trial sometime in midyear 2014. 

Others that have settled include, GE (Ally Bank), United Bank of Switzerland and Citigroup.  They had failed to prove in federal court that the mortgages underlying their Mortgage Backed Securities sold to Fannie and Freddie were due to the busted housing bubble that caused the loss of some $5 Trillion in real estate values, rather than their faulty underwriting practices.

Twelve of the cases remain, including FHFA’s lawsuits against Barclays Bank (BCS), Bank of America (BAC), Credit Suisse Holdings (CS), First Horizon National Corp., Goldman Sachs & Co. (GS), HSBC North America (HSBC), Merrill Lynch & Co., Morgan Stanley (MS), Nomura Holding America (NMR), SG Americas (Societe Generale), The Royal Bank of Scotland Group (RBS) and Countrywide Financial Corp.

So don’t blame Fannie and Freddie for wanting to expand home ownership, as those who oppose government ownership or regulation of anything have contended, and seem to have convinced the Obama administration.  They were as much a victim of deceptive lending practices as the borrowers and homeowners who lost out due to the resulting Great Recession.

Harlan Green © 2014

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Fewer Foreclosures Boost Housing Prices

The Mortgage Corner

Calculated Risk just reported that Lender Processing Services (LPS) released their Mortgage Monitor report for July with some good news. According to LPS, 7.03 percent of mortgages were delinquent in July, down from 7.14 percent in June, and down from 7.80 percent in July 2011.

Graph: Calculated Risk

LPS reports that 4.08 percent of mortgages were in the foreclosure process, down slightly from 4.09 percent in June, and down slightly from 4.11 percent in July 2011.
This gives a total of 11.12 percent delinquent or in foreclosure. It breaks down as:
• 1,960,000 loans less than 90 days delinquent.
• 1,560,000 loans 90+ days delinquent.
• 2,042,000 loans in foreclosure process.

“Nationally, 18 percent of borrowers who are current on their loan payments are ‘underwater’ (owing more on the mortgage than the home’s current market value),” continued Calculated Risk from a Herb Blecher report, “ranging from a low of 0.4 percent in Wyoming to nearly 55 percent in Nevada. As negative equity increases, we see corresponding increases in the number of new problem loans. In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines – should they occur – could jeopardize recent improvements.”

Graph: Calculated Risk

But we are seeing that real estate prices are beginning to climb in those same states that gained, then lost the most equity during the bubble and consequent bust. “Home prices gained in the second quarter,” says David M. Blitzer, Chairman of Standard and Poor’s Dow Jones Indices. “In this month’s report all three composites and all 20 cities improved both in June and through the entire second quarter of 2012. All 20 cities and both monthly Composites rose for the second consecutive month. It would have been a third consecutive month had we not seen home prices fall in Detroit back in April."

Graph: Calculated Risk

And Housing Wire reports that “a sustained uptick in home prices in more metros caused the number of improving housing markets across the nation to rise to 99 in September from 80 the previous month, according to the National Association of Home Builders and First American Home Price Index.

This is while there are already principal reductions happening for the non-Fannie and Freddie home loans. Billions worth of subprime mortgages once handled by Saxon Mortgage Services received more principal write downs since Ocwen Financial Corp. took over the portfolio.

Ocwen, now the largest subprime servicer in the U.S., completed its October 2011 acquisition of Saxon from Morgan Stanley in April 2012.More than $22 billion in mortgages transferred through the deal.

Just 11 percent of all modifications done on these loans included a principal reduction as of May. But in the three months since, Ocwen wrote down principal on 56 percent of modifications on Saxon loans, according to Laurie Goodman, chief analyst at Amherst Securities.

So now we are waiting for implementation of the recent National Mortgage Settlement Act that Wells Fargo, Citibank, Bank of America, Ally, and JPMorgan Chase agreed to. Among other things, it appropriates $25 billion to both settle borrowers’ claims of fraudulent foreclosure practices, but also help homeowners needing loan modifications now, including first and second lien principal reduction that aren’t Fannie Mae or Freddie Mac insured.  (Those mortgages are covered by the HARP loan modification program).  The servicers are required to work off up to $17 billion in principal reduction loan modifications and other forms of loss mitigation nationwide. Eligible borrowers will by contacted by the Servicers and will receive letters offering principal reductions or other modifications starting in June 2012.  This modification process will continue for approximately 3 years.

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers. Keeping in mind the timeline above, you may contact the banks directly if you need additional information:

• Ally/GMAC: 800-766-4622
• Bank of America: 877-488-7814 (Available M-F  7am - 9pm CT and Saturdays  8am CT - 5pm CT
• Citi: 866-272-4749
• JPMorgan Chase: 866-372-6901
• Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)

Harlan Green © 2012

Have Some Institutions Become Too Big To Succeed?

Financial FAQs

The conversation may change with JP Morgan Chase’s latest $2 plus billion faux pas. Instead of being too big to fail, we may find that the Wall Street behemoths in particular have become too big to succeed. That is to say, the literal size of corporations like Citibank, JP Morgan, Bank of America, and even AIG, all the products of banking deregulation, may have outgrown any manageable size and so have become a danger to themselves as well as the U.S. economy overall.

Whether out of ignorance or not understanding the ramifications of such high risk derivative hedges, CEOs such as JP Morgan Chase’s Jamie Dimon apparently have little control over the trades such as caused the $2 billion loss. “Top investment bank executives raised concerns about the growing size and complexity of the bets held by the bank’s chief investment office as early as 2007, according to interviews with half a dozen current and former bank officials”, said the New York Times article.

In fact, it now has been reported that Chief Investment Officer Gina Drew in charge of their risk management department had Lyme’s Disease and so was incapacitated during this period, which led to “shouting matches” between subordinates in the New York and London offices.

We know since 2000 that banks have made huge profits since the repeal of Glass-Steagall allowed them to make such risky bets. The down side has been their overleveraging that caused Greatest Recession since the Great Depression. And now we see that the excessive profits generated since then have only caused them to take even more chances.

Then there is the too-big-to-manage syndrome: “What is more, said another senior former executive, Mr. Dimon had other fires to put out, and the chief investment office wasn’t a “problem child” for either top managers or the board of directors, despite its rapid expansion,” according to the New York Times article. “Gigantic losses were piling up from bad mortgages, and new regulations were threatening the profitability of traditional banking, among other pressing matters.”

The record has not been good for large financial institutions, in particular. For with rising profits as a share of the national income pie, have been declining employee incomes, benefits, and a diminished social safety net. This is in part because the too-big-to-manage entities have used their economic muscle to divert more resources to themselves—whether as extravagant CEO salaries, less progressive tax rates that endanger new research and development, major infrastructure improvements, and rising inequality that is creating a permanent underclass of the less privileged.

What size is too big to manage? Any institution that breeds market panics, endangers other institutions, and so has to be regulated. Paul Krugman probably said it best in a recent blog. “The point, again, is that an institution like JPMorgan — a too-big-to-fail bank, not to mention a bank whose deposits are already guaranteed by U.S. taxpayers — shouldn’t be engaged in this kind of speculative investment at all. And that’s why we need a return to much stronger financial regulation, stronger even than the Dodd-Frank regulations passed back in 2010.”

So why not judge our institutions on the basis of whether they are too big to succeed? Should they even be attempting to diversify into high risk areas with federally insured deposits without limits? It looks like CEOs like JP Morgan’s Jamie Dimon are able to fool some of the people—including their investors—much of the time. It might prevent a few financial disasters.

Harlan Green © 2012

The National Mortgage Settlement

The Mortgage Corner

The $25B National Mortgage Settlement has finally been signed off by a federal judge, and 5 of the largest banks will begin the process of providing relief to the estimated 9 million present or former homeowners who are either now underwater with their mortgages, or who have already lost their home due to foreclosure.

Who May be Eligible for Assistance

Because of the complexity of the mortgage market and this agreement, which will be performed over a three-year period, borrowers will not immediately know if they are eligible for relief. Borrowers from states who did not sign the settlement will not be eligible for any of the relief directly to homeowners. Borrowers from Oklahoma will not be eligible for any of the relief directly to homeowners because Oklahoma elected not to join the settlement.

The settlement provides assistance for:

• Homeowners needing loan modifications now, including first and second lien principal reduction.  The servicers are required to work off up to $17 billion in principal reduction and other forms of loan modification relief nationwide.

State attorneys general anticipate the settlement’s requirement for principal reduction will show other lenders that principal reduction is one effective tool in combating foreclosure and that it will not lead to widespread defaults by borrowers who really can afford to pay.

• Borrowers who are current, but underwater.  Borrowers will be able to refinance at today’s historically low interest rates.  Servicers will have to provide up to $3 billion in refinancing relief nationwide.
• Borrowers who lost their homes to foreclosure with no requirement to prove financial harm and without having to release private claims against the servicers or the right to participate in the OCC review process.  $1.5 billion will be distributed nationwide to some 750,000 borrowers.

TIMELINE

• Over the next 30 to 60 days, settlement negotiators will be selecting an administrator to handle the logistics of the settlement and monitor compliance.
• Over the next six to nine months, the settlement administrator, attorneys general and the mortgage servicers will work to identify homeowners eligible for the immediate cash payments, principal reductions and refinancing. Those eligible will receive letters.
• This settlement will be executed over the next three years.

WHERE YOU CAN GO FOR HELP

For loan modifications and refinance options, borrowers may be contacted directly by one of the five participating mortgage servicers. Keeping in mind the timeline above, you may contact the banks directly if you need additional information:

• Ally/GMAC: 800-766-4622
• Bank of America: 877-488-7814 (Available M-F  7am - 9pm CT and Saturdays  8am CT - 5pm CT
• Citi: 866-272-4749
• JPMorgan Chase: 866-372-6901
• Wells Fargo: 800-288-3212 (Available M-F 7 a.m. to 7 p.m. CST)

Loans owned by Fannie Mae or Freddie Mac are not impacted by this settlement.  You may visit the following websites to learn if your loan is owned by either Fannie Mae or Freddie Mac:

• http://www.fanniemae.com/loanlookup
• http://www.freddiemac.com/mymortgage

These sites will also include links to information about mortgage and foreclosure programs you may be eligible to access.  You may also call 1-888-995-HOPE (4673)

Harlan Green © 2012