'Bazooka Backstop' targets mortgage mess
Commentary: Proposed fix makes trouble for jumbo loans
By Lou Barnes, Friday, July 25, 2008.
Mortgage rates are still stuck near 6.75 percent, the financial markets confused and locked up until a blast of argument-resolving data arrives next Friday.
Oil down to $123 and natural gas to $9.25 helped stocks for a while, but they still fell apart on no-bottom housing news and a sinking job market. The economy is obviously weakening, but rates are held up by fear that inflation is the greater risk -- even the stock market's Thursday elevator-shaft could not hold down long-term rates.
Let us take time for silly-season recognition of government worthies and their efforts to combat our problems. Stagflation? Credit-binge? Housing ex-bubble? Financial-system insolvency? Energy crisis?
We're hard at work on it. Whatever.
Highest marks to the Fed. In retrospect, Fed Chairman Ben Bernanke figured out the 1930 risks back in January. Rarely do courage, fast action and effectiveness meet so well as in the Bear Stearns intervention.
Treasury Secretary Paulson has been late to the game. Distracted by his China-trade offensive, the record shows his great and misplaced faith that the financial system would recapitalize itself. However, he's up to speed now: His "Bazooka Backstop" of Fannie and Freddie was prepared before confidence broke in the GSEs. His progress to out-in-front shows elsewhere: Fed examination teams now operate inside the big securities dealers and the GSEs. We may be in trouble, but we're not going to be surprised again by indolence among lesser regulators (SEC, OFHEO...).
Both the Fed and Treasury indicate knowledge that mortgage supply and system capital are inadequate, and are engaged in slightly panicky floating of new ideas (European-style mortgage "covered bonds," legal maneuvers to source bank capital from private-equity firms...), which will not work well enough or soon enough. Short of something big, like a nouveau RTC, the authorities are running out of ideas, forced to Band-Aids, and playing for time and miracles. However, the absence of illusion is good.
In the background the Fed has been working on new regulations: The first issued are a new set of mortgage rules, and a good job. However, early drafts included a proposal to force mortgage brokers to disclose their compensation -- just brokers, not bankers (commercial bankers have long hoped to squash competition). All mortgage retailers are paid and incentivized the same way, of course, no matter where they work, but brokers were guilty of a much higher fraction of defaulted loans.
In an astounding development -- unprecedented, unbelievable -- the Fed hired a market research firm to test the new disclosures on consumers. Repeated re-drafting and re-testing revealed counterproductive confusion among the public, and the Fed dropped the idea. Gold star, guys. Might test a few thousand other "disclosures."
Then there is this week's housing bill. Barney Frank and Chris Dodd's egomaniacal dream is going to fall flatter than Phoenix vacant land, so flat that it may convince Congress to let the pros handle this trouble. Barney Mae calls for $300 billion in foreclosure-intercepting mortgage re-writes, under-water balances to be cut to the reduced market value of the home -- if the owners don't mind a 1.5 percent annual fee and giving back 50 percent of any appreciation they might earn after years of defending a home that still has no equity. Send your keys straight to Barney.
Help for broken mortgage markets? Goodness, no: Make it worse for jumbos, the most badly broken of all. Super-Fannies got squashed by $125,000 to $625,500, and the secondary cap reduced from 150 percent of local median home price to 115 percent. Our home town, Boulder, with $650,000 median prices in a county with $350,000 median had briefly enjoyed $460,000 Super-Fannie money (the larger "MSA" controls, not the town) -- the only Front Range county with any benefit at all. Forget that.
Thank you, Fed and Treasury. Congress, enjoy your August vacation. We're safe while you're there. Do enjoy what your constituents have to say.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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Submitted by Lenn Harley on July 25, 2008 - 3:26pm.
I'm glad I'm not alone in my contempt for this housing bill.
So, the home owner is going to forfeit 50% of their equity. Do they get to deduct 50% of the new roof and new furnace that preserved what little equity accrued??
This is the most rinky-dink thing out of Congress in my memory.
Lenn Harley
Broker
Homefinders.com
http://www.homefinders.com
Submitted by Ki Gray on July 26, 2008 - 2:22am.
The one thing I wonder is that as the government bails out Bear Stearns and Fannie and Freddie there has to be a breaking point where they cant continue to bail out companies.
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Submitted by Joan Kuptz on July 27, 2008 - 12:51pm.
What about the new Freddie rules that investors can have no more that 4 mortgages including their primary residence? Had a client attempt to purchase an REO with 800 FICO and putting 53% down and could not get loan due to these arbitrary limitations. This type of loan should be reviewed on a case-by-case basis. We need investors such as he to reduce our market of this inventory. He is a good buyer who has great credit and yet he is left on the sidelines. Fannie does not yet have this rule but regardless the major lenders have adopted the Freddie rule instead.
Submitted by Eric Bouler on July 27, 2008 - 5:48pm.
Eric Bouler
Prudential Gardner
New Orleans,La.
www.neworleanscondotrends.com
Most of these bills are for show or to help some company out. Ths housing crisis is going to take time to work itself out. Some areas are doing fine but still get clobbered due to mistakes of other markets. How fast a market comes back is heavily dependent on the job growth of that area.
Boulder is far from middle America.
Submitted by George Percel on July 29, 2008 - 5:46am.
The current mortgage/real estate crisis was created by one thing: GREED! At the turn of the Century, in the wake of the dot com meltdown, when Wall Street was underperforming the idled investors/speculators, I prefer to call them commodity traders, entered the real estate market and decided to buy and sell real estate as they did pork bellies. The financial sector, not to be left out, created a number of “innovative” investment vehicles to churn more money into the real estate market. The perfect storm was created. Builders and developers reacted eagerly to fill the “demand” created by the commodity traders. The resulting “real estate boom” which was the sustaining force of our economy in the early part of this decade created an inconceivable spiral of price increases (can you say inflation), which at some point had to end. Many uninformed consumers, looking to make a quick buck, were duped by the mortgage industry, and unscrupulous real estate agents, into believing that this unusual market condition was the answer to their dreams for wealth.
Today, we have the son of S&L in spades. While Congress is trying to find a solution that will save everyone’s bacon, the consumer will be the one who suffers. I have no empathy for the commodity traders. However, I do have great concern for the end users, the folks who purchased a little more than what common sense would dictate, but are able to meet their current obligations. In many cases the loans they bought cannot be refinanced because the value of their property is lower than their debt, and a higher interest rate would put them into jeopardy. These are the people that need to be saved by forcing the lenders to extend the terms of their loans for 5-7 years at the original interest rate.
The non-performing loans should be written off by the lenders and the properties auctioned off at the best price someone is willing to pay with the stipulation that the purchaser cannot resell it for at least 5 years. They must occupy it or rent it. The existing oversupply of unsellable properties would be immediately altered. These properties would go a long way towards resolving the affordable housing crisis in most communities.
As in medicine, to cure a severe ailment drastic procedures must be considered. The housing market was “infected” and it must now be cured with drastic procedures. We must, once and for all, excise the commodity traders and lenders from the market and allow it to recover and function by its own merit. The unintended consequences of meddling in the real estate market by Government maybe worse than the cure. Government must assume some of the responsibility for being asleep at the wheel while Wall Street had its bash. It is unacceptable that they throw my tax dollars at the problem as the solution. Those who made handsome profits during the hyper activity should accept the yoke now.
Submitted by Mike Sweeney on July 30, 2008 - 8:03pm.
The main problem with the bill, of course, is it was written by politicians who have no idea on how the mortgage industry really works and what should be done to help
They all scramble to rush this bill through not fully considering the possible unintended consequences it will have.
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