patrick.net

But this move is consistent with the contraction phase of a credit/asset bubble.

If they made the mortgage brokers liable for all the fees and debt from a predatory lending scheme, then I'd be behind it. The fund investors didn't put a teaser rate infront of a FB, the broker did it. If they passed a law making mortage brokers liable for fees for predatory lending, and if non-predatory, they have to return their fees for originating non-performing loans, you'd see a lot of cleaning up in very little time.

What's worse is that Jack Guttentag (Mtg. Prof.) has already said that the MB's are fighting disclosure on YSP (yield spread premiums) tooth and nail!

Un-freaking-real!

They're acting like a bunch of football jocks that got busted providing alcohol to minor girls at their frat house but somehow still refuse to believe this should affect their playing eligibility? I mean c'mon coach!

True... what we did was wrong (but did you see the gazongas on THAT one!) but look at all the "good" we do for the school!

It's like they're waiting to get their "10 laps" so they can go right back to the status quo. These guys just don't get it? There's nothing to go "back" to!

"you'd see a lot of cleaning up in very little time"

That's... r i g h t !

In any other end of financial services if you're fined and can't come up with the $'s the association just assumes you are forfeiting your license and you're banned for life. At the very least you'll become "radio-active" to prospective employers when you're deemed too big a liability and let go. It's just that simple.

What’s worse is that Jack Guttentag (Mtg. Prof.) has already said that the MB’s are fighting disclosure on YSP (yield spread premiums) tooth and nail!

What's a YSP?

Consumers need more education, not more regulations.

Consumers get plenty of education - from places like Quicken Loans, LowerMyBills, ditech, etc.

Yield Spread Premium is paid by the lender to the MB to steer business their way. In essence the broker is getting paid on BOTH ends of the loan! From the consumer (borrower) on the front end and from the lender as a kick back on the back end.

They're pissed as hell that we're even talking about making this mandatory on the GFE (good faith estimate)! Disclosure!?! Why is this even legal? Disclosed or not?

Consumer education doesn't work during manias.

GC,

Thanks. One gal that went "under cover" after 10 years in the industry said that some brokers "disclose" the YSP by simply putting a "1" in that column. So the avg. consumer sees that and says Oh, it's (one) dollar because it's POC (paid outside closing). It's not a dollar, it's a point! And Mr. Borrower will be paying on it for the next 30 years. No big, right?

How sleazy.

Consumers need more education, not more regulations.

Exactly right.....they need more education and they are getting it now free! Unless they start bailing people out.

There was no regulation on the way up, why should we be regulating on the way down? Let the markets run their course and let the chips fall where they may.

People need to take responsibility for their own bad decisions. While blame does go to those who profited from housing, the bottom line is that none of this could have possibly happened without a willing buyer. No one put a gun to their head! Whenever an expensive purchase is made, there are always risks and it should be up to the buyer to do their research. People should not be able to get away with their mistakes by declaring ignorance.

If someone goes to vegas and loses all their money, it is their own fault. Should they be entitled to a bailout because they "didn't realize" they could lose all their money?

What angers me the most is that because these are houses that they stand to lose, they tend to make it seem that they're going to be homeless if they lose the house; they are just going to have to rent again, they have jobs, they can afford to rent! Perhaps the bailout should include funds for all us renters to be able to purchase an overpriced house!

Let the markets correct themselves and let the people learn so that the next generation will learn the importance of saving and the dangers of debt, not undeserved rewards from it.

HARM, I agree with most of what you're saying. The bondholders are holding the bag. The key distinction in the proposed legislation is the point I think you missed:

investors in mortgage bonds should be liable for deceptive loans made by banks

The point is that banks were accountable in the old days of mortgages. But now that the chain is so fragmented, the bondholders only hold the credit risk and not the legal liability risk. That gets concentrated solely among the (sometimes fly-by-night) originators. But if the originator simply cashes in his chips, there's no recourse for those holding the "deceptive loans" except for maybe US taxpayers...

If the loan was truly deceptive, why should the bondholder be allowed to keep all those interest payments it obtained from our newly defaulted (and defrauded) borrowed? They should be the next

I think this makes a lot of sense. It should not apply to (and there's no implication here that it would) to all defaults. Only in the case of fraud.

People need to take responsibility for their own bad decisions.

Exactly. This is also why I am against food policing. People should be able to eat all the trans fat they want.

@DinOR,

No kidding. I didn't find one mention of YSP disclosure in that proposal, yet this is one of the biggest reasons why mtg. brokers have been overwhelmingly pitching this crap for 6+ years straight. The more toxic the loan, the greater the YSP. How's that for a perverse incentive structure? The worst loans generate the highest return (all behind-the-borrower's back, of course).

Am I completely off, or are these investors who "provided liquidity without responsibility'’ pretty much standard mutual funds, institutional and retirement investors, all via the likes of Freddie Mac and Fannie, Ginny Mae?

So these dolts in Congress want all of US to pay? Does this make sense?

By the way, the net result of putting liability on the bondholder is going to increase scrutiny of all these craptastic bonds and prevent many of them from ever seeing the light of day. Not only will credit agencies (Moody's, S&P) have to comb through MBS with a fine-toothed comb, but so will attorneys to spot potentially fraud before it moves down the pipe. Net-net, this will choke off more liquidity to both the fly-by-night originators and stupid borrowers...

allah,

Whatever else happens the "originators" need to un-ass those commissions. If the individual broker can't pay (which after Vegas jaunts and "elective" surgery for the Mrs.) I seriously doubt, then he's out. If the firm can't cover the fees on the defaulted loan, then THEY'RE OUT!

This isn't regulation, this isn't education and ain't no bail-out.

This is punishment! Heh-heh-ha!

So let me see if understand the proposal: I borrow money beyond my means. I spend it all -- perhaps in pursuit of the American dream of homeownership but also possibly on a nice car, nice vacations and a lifestyle that I was unable to afford (but by gosh surely deserved). And now, because I can't pay the money back, I get even more money because, well, someone gave me too much money the first time? Sign me up!

No, Sandibe. If you commit fraud you will be prosecuted. Believe it or not, there are bad seeds out there that committed plenty of fraud on unsuspecting people. There are plenty of greedy homeowners too but let's try to make the distinction.

I echo Sandibe's thoughts. So if a bank loans money for someone to start their medical practice and that Dr dispenses drugs to everyone in pain, is the bank liable ?

What we are witnessing is the classic as old as time - pass the blame - game. From a politician's point of view, SOMEONE needs to be punished. Cannot be the FBs - that will alienate the vote banks. Cannot be the Wall Str banks who sliced and dice the debt to make money on commissions, because they sponsor the campaign. So who else ? The actual people who gave the money ... YES ! They made us do it.

I am sure there is some Aesop Fable related to this.

Sandibe,

Exactly. This is the single biggest problem I have with this proposal. Aside from (a) basically giving sleazeball mtg. brokers & banksters a free pass (see DinOR's rants), it (b) more-or-less auto-confers "victim" status on FBs, regardless of what the circumstances really were.

Was Casey Serin a victim? Does he (and his lawyer) really deserve the right to sue the pants off some pension fund because they happen to be the final bagholders in a long-assed chain of deliberate, systemic fraud and risk-passing by the REIC?

Where was the "fiduciary responsiblity" of the f**king banks or the mortgage brokers when they originated the loans? Like DinOR says, if you can't make your MBS bondholders whole again, then why are you allowed to keep your license and just open up shop elsewhere? Why isn't your fraudulent ass in jail --along with Mr. Serin's?

No, Sandibe. If you commit fraud you will be prosecuted.

PAR, however much I wish this were true, it's simply not. The fact that CS is still operating his website, despite admitting to multiple counts of mortgage fraud in plain sight --hell, practically *daring* the authorities to prosecute his boney ass-- is sad proof of this. The feds obviously have no desire to go after small-time actors like him, and even *less* desire to go after the banksters & REIC, who are by and large, financing our elections.

bill gross at pimco has written a great piece on the subprime mortgage market's possible repurcusions has on our lives
http://tinyurl.com/2zfsv6

Interesting mixed signals:

http://money.cnn.com/2007/04/10/real_estate/alta_alive.moneymag/index.htm?postversion=2007041016

On the one hand, there is some pullback from MBS investors. On the other hand, Alt-A category loans, including no-doc, option ARM basically NINJA loans, are still widely available, at least anecdotally. This seems ridiculous in today's environment. There will be SO MUCH PAIN down the road. We are totally screwed as a nation and as an economy.

HARM,

This is exactly why I think the brunt of the blame (and the pain) belongs squarely with the MB's. They weren't in it for the borrowers (as is there entire claim for even existing!). They sure as HELL weren't in it for the lenders.

They were in it for THEMSELVES! This much, should be apparent! You're absolutely right, the compensation schedule was stood up on it's ear as they conned prime borrowers into Alt-A paper and Alt-A borrowers into Subprime paper! AND got paid BETTER the harder the f@cked these people!

Of all the parties in this equation (and they're all guilty) ONLY the MB's got to screw on BOTH ends! Now these guys got the notion they can just fold up their tent, move down the road and "tweak" their model ever so slightly and walk away from the mess THEY created? Huh-uh. HELL no.

Mutually-assured destruction and all.

LOL :lol:

@Person,

Like DinOR pointed out, so-called AAA-rated "prime" paper is really turning out to be not-so-prime after all. The housing bubble not only grossly distorted risk premiums & lending patterns, it also distorted perceived loan quality. I wouldn't assume large public/private pension funds are A-ok, just because they only bought "prime" GSE-issued paper.

AAA (2005) = Alt-A (2008)
Alt-A (2005) = BBB (2008)
BBB (2005) = ZZZ (2008) etc...

From Ben Jones' blog:

Sub-prime woes start to hit less-risky lenders

“‘There’s no question the credit problems we’ve seen in sub-prime are blending into Alt-A,’ said analyst Matthew Howlett. ‘It’s reflective of the poor underwriting that has gone on in this sector.’”

“Howlett said part of the problem was that Alt-A lenders had lowered their lending standards. ‘We’re going to see more Alt-A loans perform badly because they’re not traditional Alt-A loans,’ he said. ‘They’re sub-prime.’”

bruceb,

Thanks for the link to Bill Gross' latest musings. His main thesis is that either housing prices will continue downward, or the Fed will be forced to cut rates and stimulate the economy (read housing market), or some combination of the two. He completely neglects to mention the effects this will have on an already weak dollar and our very weak international trade position. The possibly brewing China trade war in the news right now makes one pause on this point.

In his construct, JBRs are fine either way. Either home prices drop a lot, or they drop a reasonable amount with lower interest rates. I'd prefer the former, as a lower principle is always preferred - one can always refinance to a lower rate if rates plummet later.

Guys, I'll try to make one more point on this and then I'm done. (Whenever I hear the pitchfork-sharpening machine revving up in the background, I just leave the blog for a few days...) First, anytime someone mentions the word "fraud" on this board, everyone covers their hats (and their wallets) with tinfoil and screams about Casey Serin.

First of all, the article says zero about giving brokerages or bankers a free pass; it also says nothing about bailing out individuals who commited fraud. Can we assume, like reasonable adults, that some degree of fraud has been committed in the last ten years during this boom? When people who don't speak english are approached at the San Jose flea market and sold mortgages at 10X household income, this might actually be fraud. Don't kid yourself by thinking it hasn't been rampant. (Stupidity has been rampant too, but let's try not to assume that it was 100% of one or the other.)

Here's how I see the old days:

borrower -> bank

The bank holds the risk, the legal liability and the fiduciary responsibility. If bank hires shifty brokers, forges signatures on docs, inflates borrower income, etc. They are held liable.

Here's how I see it today:

borrower -> broker -> originator/warehouse -> investor

IN THE CASE OF FRAUD, SPECIFICALLY...
who do you propose should be on the hook? The mortgage broker who is now back at his old job selling cell phones at the mall? Is he going to pay people back for writing those fraudulent deals? How about the originator or the warehouse? Well, they in fact are on the hook. So let's try to call up New Century and get them to pony up money for the specific case of fraud committed. Oops. We're 37th in line... I hope there's some left when get to the front.

Everyone wants fiduciary responsibility but you completely miss the point that this can actually create fiduciary responsibility. Not being on the hook for anything means you don't give two $hits about fiduciary responsibility. If you might be held liable, you might actually take a look at what you're buying. Don't confuse this type of institutional investor with mom & pop.

"no one had enough incentive to keep the brokers in line"

True, and it's also their defense (or soon will be). We can go on and fault the ratings services (Moody's etc.) In my mind though it's the MB's themselves that still have the most egg on their face b/c they are the ones with the most DIRECT interface w/the consumer!

I don't expect Moody's to come down and rate e a c h_and_e v e r y stinking re-fi in the broker's pipeline of loans. It's equally unreasonable to expect institutional fiduciaries to grade this slop as well. There were breakdowns at several levels (and I'm not leaving the consumer out of this) BUT the MB had the greatest and most immediate economic benefit from this meltdown with the least amount of capital at risk.

Reckless investors shouldn’t receive any sympathy, Frank said.
Ohhhh.... I think we have found the ultimate "smoke test". We have all been wondering where the MBSs have been hiding. I believe someone on this board pointed out an overseas mutual fund they had was 40% invested in MBSs. Once Congressman Frank realizes that every pension fund and retirement account is "liable" (this is speculation), he may tone down his retoric. At least now we may actually find out where the bodies are buried.

In the last thread bruceb Says:

> Bill Gross at Pimco has written a great piece about
> the subprime mortgage housing market and it’s
> possible repercussions http://tinyurl.com/2zfsv6

I thought Randy might like to take a look at the URL since Gross also talks about Second Life.

Gross includes an interesting chart that shows that lenders were easing lending standards from 1991 to 1994 (I knew that rates were dropping from 1991 to 1994, but didn’t know that lenders were easing standards).

The tighter lending standards is just one more thing to add to the reasons why this crash currently underway will be worse than anything we have seen in the past.

P.S. This would be a good article for Patrick to link to on his main page…

FAB, I agree - I wondered also whether or not Bill Gross was checking in on this blog and others for material for this latest report of his.

PAR,

By and large... agreed. In that case the compensation model was totally out whack! Some guy (and I think I've seen him once or twice) that used to cell phones at the mall should *not* have been making 100-200-300K per year and those dollars would have been A) that much less the borrower was in the hole B) more of a risk premium to the investor or C) held in reserve by Mr. Cell Phone's employer to buy back loans he wrote that defaulted in the first year!

Anyway you slice it, these MB firms were giving out WAY too generous pay-outs with too little thought as to the consequences of the reckless hiring practices and internal policies.

PAR,

In short, they're all going to take in the @$$ (I just want to see the MB's take it first!) Once they're totally depleted, then and only then should we move upstream. There's plenty of "deep pork" to go around! :)

PAR,

Perhaps I was misreading you, so let me try to understand/paraphrase what you're getting at:

First of all, the article says zero about giving brokerages or bankers a free pass; it also says nothing about bailing out individuals who commited fraud.

I didn't see any proposed penalties mentioned for brokerages or bankers, only the MBS bondholders. But, hey, it's just some Bloomberg staffer's summary, so maybe there are some. I'll have to locate and read the actual bill (when it exists) to know for sure.

As far as "bailing out" individuals, you could say allowing them to sue MBS bondholders could be considered an indirect type of bailout, even if the taxpayer is not directly involved. If the individuals were really defrauded (and, yes, there are definitely cases where this was true), then should they be allowed to sue for damages? Perhaps, but why sue the MBS holder vs. the mortgage broker? (You know, the guy who "filled in" those income/doc sections for you, while glossing over all the fine print?)

This is why I meticulously avoid mutual funds holding any MBS. Sure, over the past few years, I lost out on mucho gains, but I still haven't done too badly.

PAR said:

Everyone wants fiduciary responsibility but you completely miss the point that this can actually create fiduciary responsibility. Not being on the hook for anything means you don’t give two $hits about fiduciary responsibility. If you might be held liable, you might actually take a look at what you’re buying. Don’t confuse this type of institutional investor with mom & pop.

Again, I'm all for creatin' some serious "FR" where none currently exists! The problem is, how to create it for the right people (perps)? Institutional managers may do the actual MBS buying (Fidelity, Vanguard, Pimco, etc.), but Mr. & Mrs. retail investor are the ones liable to take the financial hit if the investment Co. gets sued, no? I seriously doubt this proposal means Fidelity's CEO is going to be paying for legal fees out of his own salary & stock options, or am I missing something?

Barney Frank is a showboat and not much more. I would not vote for Barney Frank if I lived in his district.

SP,

That may have been Nouriel Roubini from an early CNBC interview. He said something almost identical to that just a few hours ago.