The Bully Mentality—Part II

Financial FAQs

NOAA, the National Oceanic and Atmospheric Administration, just announced 2014 the warmest year in recorded history, and 14 of the last 15 years as the warmest in recorded history.

Yet Paul Krugman in his latest NYTimes Oped still seems mystified by conservatives’ opposition to Good Government—such as denying the results of NOAA, the government organization mandated to track global warming (or maybe he isn’t, really):

“And why this hatred of government in the public interest? he writes. Krugman cites political scientist Corey Robin’s explanation that conservatives in particular are “…reactionaries. That is, they’re defenders of traditional hierarchy--the kind of hierarchy that is threatened by any expansion of government, especially when that expansion makes lives of ordinary citizens better and more secure.”

That, of course is the definition of a conservative—preserving the status quo. I would posit there is another, deeper reason for the denial of scientific results—whether it’s climate-related, or the record income inequality that almost all economists agree is real.

It’s called the bully mentality that has been discussed in prior columns. Bullies are those who want to dominate others without regard to reason or even common sense. And they appear periodically when prevailing cultures or societies lack strong leadership—positive leadership, that is.

Wikipedia defines it as, “Bullying is the use of force, threat, or coercion to abuse, intimidate, or aggressively dominate others. The behavior is often repeated and habitual.”

For instance, school bullying is at an all-time high, and has been the reason for many of the school shootings by those who have felt bullied. The NRA is a classic institutional bully—demonizing opponents with falsehoods, such as its campaign of “guns don’t kill people, people kill people,” in wanting to remove all gun controls, even though assault rifles with expanded magazines have been used in all the mass shootings to slaughter dozens, even hundreds before they were stopped.

Political bullying is another example. Republican bullying, particularly the Tea Party types that called compromise a dirty word, began when a very inexperienced Barack Obama became President who had no apparent experience in dealing with bullies.

And that is the point. Bullies have a wholesale disregard for scientific truth, or any other, and only stop bullying when they are opposed. America’s bullies can only be stopped with equal and opposing force, and where are the leaders capable of that?

Senator Elizabeth Warren is popular because she has been willing and able to stand up to the financial bullies. She sees Wall Street and the financial industry as classic bullies that need to be opposed at every turn to reverse the record income inequality. Hence her opposition to the just-passed $1.1 trillion federal budget authorization that extended the deadline for Wall Street institutions to divest themselves of the riskiest derivatives.

"Pretty much the whole Republican Party—and, if we're going to be honest, too many Democrats—talked about the evils of 'big government' and called for deregulation," Warren said at the recent AFL-CIO National Summit on Raising Wages. "It sounded good, but it was really about tying the hands of regulators and turning loose big banks and giant international corporations to do whatever they wanted to do."

“These families are working harder than ever, but they can’t get ahead. Opportunity is slipping away. Many feel like the game is rigged against them—and they are right,” Warren said. “The game is rigged against them…. The world has changed beneath the feet of America’s working families.”

Maybe President Obama finally understands that it’s not in the nature of bullies to compromise as he proposes policies on immigration and reducing carbon emissions (such as rising CO2 levels that even the Pentagon has foretold could result in future wars) that require executive action only, which will benefit all Americans. It doesn’t look like the new Republican Congress wants to compromise, which means they don’t want government to work at all if it will benefit Main Street, rather than Wall Street.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Restricted Credit Will Impede Housing Recovery

Financial FAQs

As if we need more evidence that the Consumer Protection Finance Bureau and government regulators have listened to the wrong people when drafting their Qualified Mortgage requirements (that lowers the maximum debt-to-income ratio to 43 percent for non-agency mortgages, disallows interest only options and 40-yr amortization for starters), while Fannie Mae and Freddie Mac add huge fees and stricter underwriting criteria to anyone below a 700 credit score (which is almost perfect in today’s trying markets), the latest new-home sales should convince us.

Graph: Calculated Risk

The Census Bureau reports New Home Sales in June were at a seasonally adjusted annual rate (SAAR) of 406 thousand, while May sales were revised down from 504 thousand to 442 thousand, and April sales were revised down from 425 thousand to 408 thousand. Inventories rose to a 5.8-month level from 5.2 months in May.

The National Association of Home Builders tried to put a good face on the numbers. "With continued job creation and economic growth, we are cautiously optimistic about the home building industry in the second half of 2014," said NAHB Chief Economist David Crowe. "The increase in existing home sales also bodes well for builders, as it is a signal that trade-up buyers can move up to new construction." Regionally, new-home sales were down across the board. Sales fell 20 percent in the Northeast, 9.5 percent in the South, 8.2 percent in the Midwest and 1.9 percent in the West.

But this is not good news for housing advocates so late in the recovery. For one thing, government regulators and the Obama administration are way behind the housing curve in choosing to tighten credit standards long after the problem of too easy credit was solved. The Federal Reserve and regulators have outright banned low teaser rate, negatively amortized,‘liar’ loans, and loans that don’t require income and asset verification. Mortgages delinquencies are down, existing-home sales are back to a 5 million annual sales rate, and record low interest rates should make it easier to qualify.

So why are regulators still chasing phantoms, and continue to punish lenders five years after the housing bubble burst? Instead, it’s time to encourage them to lend some of their record $1 trillion in excess reserves held by the Federal Reserves in MZM accounts (i.e, at zero interest). Without a housing recovery, there will be no substantial economic recovery, say many major economists.

For instance, former Fed Chair Bernanke has said too-tight credit conditions have squeezed both prospective homebuyers and builders. "Why has the recovery in housing been so slow? One important factor is restraints on mortgage credit," Bernanke said in 2012, adding that total outstanding mortgage credit has shrunk by about 13 percent since its peak in 2007.

Just how weak are home sales? Five years after the end of the recession, sales of new single-family homes still remain far below an annual average of more than 770,000 over the 20 years leading up to a 2005 peak, government data show.

Fannie Mae is growing more optimistic this month about U.S. sales of new single-family homes, and now sees 2014 hitting the highest level in seven years. Fannie’s  FNMA July housing-market forecast estimates that sales of new single-family homes will reach 486,000 this year — the most since 2007 — a bit higher than June’s estimate of 478,000, which would have been the greatest since 2008.

However, despite the uptick in the July forecast, over the past year Fannie has slashed its outlook for new-home sales, showing just how disappointing the market’s been in 2014. Back in July 2013, federally controlled Fannie had expected 2014 sales of new single-family homes to hit 588,000.

Rising mortgage rates, a low supply of new homes and unusually poor winter weather each took a bite out of residential sales this year. It’s also been tough for many borrowers to meet lenders’ strict credit standards, as we said. But it is home sales, and new-home sales in particular that has to improve to boost inventory and keep housing prices in the affordable range.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

So-called Qualified Mortgages Are a Problem

The Mortgage Corner

The new rules coming into effect in January 2013 for most conforming loans—i.e., those guaranteed by Fannie Mae and Freddie Mac will cause a definite drop in mortgage lending. The Consumer Protection Financial Bureau, created under Dodd-Frank has labeled such mortgages as Qualified Mortgages.

Financial institutions in the business of originating mortgages that they plan to resell on the secondary market to government-sponsored mortgage buyers Fannie Mae and Freddie Mac will have to raise their standards for approving loans. That is likely to have the biggest impact on working-class families, many of whom are struggling with consumer debt and are living paycheck to paycheck.

Two of the most important new rules created by the Consumer Financial Protection Bureau related to housing are the Ability-to-Repay rule and the 3 percent test rule.

The Ability-to-Repay rule, also known as the Qualified Mortgage rule, says borrowers' total debt liability -- including housing -- should not exceed 43 percent of income. A Qualified Mortgage is one that would be qualified for resale on the secondary mortgage market.

Yet borrowers with up to 50 percent total debt liability (DTI), excellent credit and savings that qualify today, would be excluded. And other rules, such as no interest only programs, no more than 30-year amortizations, lower debt-to-income qualification levels, and perhaps lower maximum loan to value amounts, will severely restrict homeownership.

So the regulations also could have the unintended effect of making it more difficult for many working-class families to qualify for mortgage loans offered by major banks, as an example. This is because higher income is required, hence such families will qualify for lower-priced homes.

The 3 percent test rule says 3 percent of the mortgage amount is the maximum amount of fees that banks can charge a borrower in order for the home loan to be classified as a Qualified Mortgage that can be resold in the secondary market.

"If you are a bank that pretty much originates and sells your mortgages, you are now playing under these rules," said Ernie Hogan, executive director of Pittsburgh Community Reinvestment Group. "If you are a bank that originates mortgages but keeps them and holds them for 30 years, you can vary from some of these rules."

Mr. Hogan believes this rule will make lower-priced homes more expensive for banks because they will not make as much money on that kind of business.

"It will hurt working-class families buying homes for $75,000 or less," he said. "Those loans will be classified as a high-cost loan. You are going to lose people in the mortgage industry looking at that segment. That's what we think will happen. Banks will make a better spread on higher-priced homes."

Don Frommeyer, president of the National Association of Mortgage Brokers, said the 3 percent rule also will be a problem for mortgage brokers. He said brokers will have a harder time collecting their fee on homes priced below $160,000 because every cost to the customer in the home buying process goes toward the 3 percent. For a mortgage of $100,000, for example, all origination fees -- including the mortgage broker fee -- would be limited to a total of $3,000.

This will also mean a step backward in the incipient housing recovery, as qualification standards were already tightened by the Federal Reserve last year for conventional loans guaranteed by Fannie and Freddie, in an attempt to lessen mortgage fraud and predatory lending practices.

But predatory lending wasn’t much of a problem before subprime loan programs were introduced in early 2000 that were basically liar loans, with little or no attempt to verify incomes and assets. Conversely, loans underwritten to Fannie Mae and Freddie Mac standards have never had this problem, with default rates not much higher than historical averages since the housing bubble.

So there is conjecture that a major reason for even more restrictive rules is an attempt to get Fannie and Freddie, now wards of the government, completely out of the mortgage purchase and guarantee business. But who then would be left, since they have been guaranteeing more than 90 percent of all mortgages originated since the end of the Great Recession. Need we say any more restrictions on them could step this real estate recovery in its tracks?

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Saving Fannie and Freddie—Part II

Financial FAQs

The Federal Housing Finance Authority that supervises the so-called Government Supervised Enterprises (GSE), now including Fannie Mae and Freddie Mac, just announced restrictions that not only weaken Fannie and Freddie’s mandate, but the mortgage and housing markets in general. The FHFA just announced that it will no longer allow Fannie and Freddie to purchase or guarantee so-called “non-qualified” mortgages with more than 30 years amortization or that have interest only payments, among other restrictions.

Fannie and Freddie’s mission is to “Ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment”. So why has it just made a ruling that will restrict their ability to be the most “reliable source of liquidity and funding”, and so real estate in general?

FHFA’s answer is the “Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA’s goal of gradually contracting their market footprint and protecting borrowers and taxpayers,” said the announcement.

Yet Fannie Mae and Freddie Mac are the gold standard for mortgage underwriting, with the toughest qualification criteria, which is why these GSEs have the lowest default rates—some 3.13 percent vs. 6.7 percent for all private label mortgages, as I said in a past column (Saving Fannie and Freddie). That means first time home buyers and those with lower incomes will have to depend on portfolio lenders for those programs. These lenders therefore tend to use weaker qualification criteria and so either have to keep those mortgages on their books, or who package them as less credit worthy securities.

So Fannie and Freddie are the most “reliable source of liquidity and funding for housing”. There are really no other viable mortgage programs to sustain the housing market, in particular. They now guarantee some 90 percent of mortgage originations precisely because private label lenders have not come back into the market, even as housing prices have risen.

FHFA’s actual announcement said, “Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

· is not fully amortizing,

· has a term of longer than 30 years, or

·includes points and fees in excess of three percent of the total loan amount, or such

other limits for low balance loans as set forth in the rule.

“Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule, said its announcement.”

Yet both interest only and 40-year amortized mortgage lower the payments for first time homebuyers, in particular. It also means shutting out lower-income buyers, even though Fannie and Freddie qualify them at the fully amortized rate.

There is no other way to interpret this ruling, other than another attempt to lower the overall quality of mortgage lending at a time when housing and real estate in general is at the beginning of its recovery.

Fannie Mae just reported pre-tax income of $8.1 billion for the first quarter of 2013, compared with pre-tax income of $2.7 billion in the first quarter of 2012 and pre-tax income of $7.6 billion in the fourth quarter of 2012. Fannie Mae’s pre-tax income for the first quarter of 2013 was the largest quarterly pre-tax income in the company’s history.

Need we say more? A financially sound Fannie Mae and Freddie Mac will continue to be the mainstay of housing finance, unless those who do not want or support a healthy mortgage market for all home buyers succeed in limiting their mission to “serve as a reliable source of liquidity and funding for housing finance and community investment.”

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

We Need a Real Consumer Protection Agency

Financial FAQs

Why is there such an ongoing debate on whether to nominate Harvard Professor Elizabeth Warren as head of the new Consumer Financial Protection Agency that is mandated under the Dodd-Frank banking act? To put it bluntly, there are no regulations with teeth at present that protect consumers from many of the practices of the major financial institutions who control most consumers’ deposits and investments.

The Federal Reserve is attempting to force banks to clean up their foreclosure practices with a recent consent decree signed by 10 of the largest banking institutions. But that doesn’t protect consumers from the abusive practices that spawned all those liar loans and almost caused another Great Depression.

Professor Warren has been making headway with community banks on the necessity to oversee the largest financial institutions. In fact, she told a group of community bankers in San Antonio, Texas that they weren't the bureau's main target. Instead, the biggest part of its budget will be used to police 80,000 nonbank firms that are involved in payday loans, student lending, debt collecting and the mortgage business, but that now largely escape regulation. She also said the agency would be more focused on supervision and enforcement than on writing new rules.

The community banks "are worried, and I don't blame them for being worried," Ms. Warren says, in a recent interview. "So I try to talk to them about the regulatory philosophy of the agency, whether we're an agency that's going to come in and try to say rule, rule, rule or an agency that says let's focus on what we're trying to accomplish by using more of a principles-based approach. We're trying to make these markets transparent, which makes it easier for community banks to compete both with large financial institutions and with their nonbank competitors."

Her message is simple: the consumer “market” for financial products does not operate like a proper market because leading firms (bigger banks and also nonbanks, like some payday lenders) have figured out how to make a great deal of money by confusing their customers.

Of course, there are many honest players – mostly in credit unions and smaller banks.  But when the playing field has been unfairly tilted towards cheating, honest bank executives struggle to stay in business (or to keep their jobs).

“If someone attempted to sell boxed cereal in the same fashion that many financial products are now sold, that person would be drummed out of the cereal business.  The norms of that sector (and many other nonfinancial sectors in the United States) would not stand for this degree of deception and malpractice”, said one critic of the Republican campaign against her nomination.

Transparency is an issue with all financial markets, not just mortgages, of course. The multi-trillion dollar derivatives’ business is controlled by a self-appointed consortium of the major banks. And they are resisting providing a record of their transactions to a central clearing house, a provision of the Dodd-Frank bill that is still being developed.

Why? For the same reason that mortgage lenders could hide the true costs of mortgages until the latest reforms enacted by the Federal Reserve that regulate the disclosure of loan fees and costs.

And, as two Nobelists, economists George Akerlof and Joseph Stiglitz have researched, markets driven by nontransparent or ‘asymmetrical’ information—where insiders have access to information about the investments that general market participants do not—destroys those markets. It in fact drives out the honest investors, causing a general loss of confidence on all financial markets.

So we can see Professor Warren is on a virtuous crusade. She wants to save the financial institutions from themselves—and their own propensities to promulgate the ‘buyer beware’ policies so prevalent on Wall Street that almost caused their own downfall.

Harlan Green © 2011