patrick.net

Interesting take regarding the cause of the mortgage crisis:

http://sweetness-light.com/archive/thank-acorn-and-their-ilk-for-mortgage-crisis

Of course, we cannot assume that liberal politicians actually care about the poor.

Well given that we bail out plenty of companies ("too big to fail") that don't even have an implicit guaruntee from the govt., I'm sure the govt. will have no problem bailing out FNM.

Of course, I think ALL bailouts are outrageous and unjustifiable and terrible and sickening, etc., etc.

Ah yes ACORN. The law of "unintended consequences" hits again.

The law of “unintended consequences” hits again.

Unintended? Think again. ;)

(TOB will soon come back with the I-word.)

"desk full of blank forms"

True, but the primary focus at this point is to get people out of their ARM's (*not into "that dream house") If they were doling out Cash-Out Re-Fi's left and right I'd be more concerned.

Now Merrill is saying we could get another rate cut before March! Maybe HARM was right, (they'll be out of ammo before Feb. is out!)

@Hellokitty

People talk about ’strict underwriting’ as if it can exist. Basically all we have is large downpayments to protect lenders

Completely agreed. I've even heard of firms out there that will hire you on a "temporary" basis, for a fee, to provide a valid paystub trail. I don't know of this firsthand.

I've not seen any real numbers on the current refi boom, but I would be very hesitant to make any assumption that it represents a mass of ARMs digging themselves out of trouble. Most of these loans are beyond help, of course exception to prior points relative to fraud. Maybe some high net worths not willing to walk taking care of their 2nd & 3rd houses in there. Is anyone on this list able to characterize the current makeup of refi boom firsthand?

The bust will hurt boomers too much. This implies that the government will move heaven and earth to stop it, regardless of any longer-term consequence.

I've heard banks are holding off on foreclosure processes, that there are FB's who haven't made a payment in months and haven't heard a peep from their lenders. Is this really happening? Again, anyone out there with firsthand knowledge?

Maybe a stratagem to hold and push off paper on GSE's once higher limit is in place?

The probem still continues to be that people who owe more than their house is worth will still walk. Just the phsychology of being $100,000 in the hole would make someone give up. It almost doesn't matter what the rates go down to.

Assuming a bondholder who bought from Fannie holds securities that are not directly backed by Government, then Fannie's largest liability is from legal action against it from it's customers. Surely the cousnelors representing F'd Bondholders will endeavor to hold government responsible if Fannie is a cash poor target. Legal arguments will hinge on contract language, disclosures, ect. I'd guess the "government" will resist making bondholders whole if they can, and maybe throw the minimum cash required to keep Fannie operating with the stuff it got stuck with.

I begin to wonder, what do the secondary bond markets look like for the GSE backed securities? I understand these guys are still buying from origination channels, but are they able to sell them or are their books just stacking up for us taxpayers to come in and deal with? Is this regulated, is congress able to cut off their buying at some ceiling?

Fred and Fanny (hmm, did someone intentionally name them this way?) will never go bankrupt. They do fall into the category of too big to fail.

Thanks to the fiat system, we just need to bail them out through inflation tax.

Actually my portfolio had quite a bit GSE bonds in 2003 because they offered the highest interest rate (even higher than bank CDs) in an environment when interest rate was taking a sharp dive. I was aware of their accounting scandals but I assumed that the US government would bail them out.

Then Bush got re-elected, I dumped all my GSE holdings (some at a loss) to swap for gold and silver. Can't be happier with my decision.

Someone I've not seen on the radar screen but who clearly will become an indirect government bailout conduit. Pension Benefit Guarantee Corp, a little known GSE. Pension funds buy the wall tainted wall street paper en masse, paper burns hot with the walkaway, the government sponsored pension insurer bails them out, taxpayer wonders what happened. It will be no big suprise that to anyone that their books are a mess, they have no built in loss reserve capital, and their regulators are going in circles.

Agreed OO, inflation is the only bullet here.

Just remember the mortgage broker fraudsters than ran amok for 6 years all recently changed over to write FHA/FNMA/Freddie loans or they arent in business anymore. So we have the most motivated 'cream of the crop fraudsters' now writing government insured loans at the start of a housing crash/recession (major loss of home equity, not to reach 2005 level for 10+ years). So its a perfect storm that FNMA is sailing into with flying a flag of 'stricter underwriting' to protect it from the 3 converging hurricanes of sinking equity, reccession, and raised caps to 729k. Who here would lend THIER OWN money on a refi or purchase with zero or even only 10% equity.

10% equity will barely cover the realtor/escrow fees to sell a home in a FLAT market and so when you are looking at defaults in a declining market where they made 10% down payment that is a massive massive loss for the bank EVEN IF its a short sale and not a full blown foreclosure/trashout situation. 20% downpayment is not even enough to protect you.

@Hellokitty 11:34

Nice post, you've just articulated the underlying reason why nobody should be buy that paper on the secondary market, why nobody probably is, why the Fed is loosening in an historically rapid fashion, and why this loosening is having no effect. The fools buying the majority of the MBS are a different lot than the fools/sheeple buying houses. Dumb money is not flowing like it once was. We will not restore confidence in the credit markets under these conditions.

Assuming our financial regulators and global central banks are in absolute panic mode, which I believe they are, they should immediately proactively put a complete stop to current underwriting and eliminate this nonsense. And soon. The system is frozen, nothing they are doing is helping, and we are sinking! Overseas cash is reading the blogosphere, the old snakeoil financial sales pitches are no longer working.

PLEASE DO SOMETHING DRASTIC SOON MR PAULSON AND MR BERNANKE, YOU KNOW NOTHING. Get real with the real problem, for the love of money and Buddha.

Hellokitty, you've actually sent me into a Cramer meltdown.

"cream of the crop fraudsters"

In ways I'll bet that's true. The newbies (that might have had a shread of morals) have long since been blown-out and only the craftiest remain. It will take great skill to give these loans the appearance of conforming paper.

There have been stories of lenders backing out at the closing table demanding 20% down to fund the loan after originally having agreed to 10%. No room on the books for that!

HK,

I agree with you, the "investors" of mortgage loans are completely out of their mind. I wouldn't be interested in lending any of my own money to anybody taking out a mortgage in USD, spanning over 30 years, at a mere 6%, even if it is 50% down.

There's currency risk, inflation risk, employment risk associated with an upcoming severe recession /depression, RE pricing risk, all that for only 6%?

I need at least 20%+ to compensate for the risk of my money compared to all other investment alternatives I have. I honestly don't know who in the right mind will invest in a mortgage product TODAY at a mere 6% return.

NVR,

I happen to believe the PTB are doing everything possible to contain the meltdown and you're right it's been largely ineffective so far. What more CAN be done?

Shutting down the entire underwriting process will only cause further panic. At this point the only thing we can do is to minimize the "foreclosure/trashout situation" by accommodating those w/ a desire to salvage their homes/credit and make that somehow appealing to the broadest audience possible?

I'm a little slow to this realization so apologies, but I've just come to the conclusion that the only current buyers for US mortgage securities is the US taxpayer. That fact would be entertaining if it were not so disturbing.

DinOR, my point was simply they are not doing everything possible. I think they are being too cautious, hopeful, and optimistic.

A drastic situation calls for drastic measures, no? Our regulators need to man up and stand up to capitalists that got us here. Use the authority they have to address the situation. Hellokitty has hit it, and I think the answer has to come in housing finance now. I do understand there are complexities, but how about a mandatory 20% down payment required on all residential lending, maybe completely outlaw the ARM (c'mon, this thing has been a disaster and do we really need it?).

I know Peter P will howl (along with others) but regulation is needed now, simply put it's an emergency. Screw what the bankers REIC has to say, we don't need to work with them anymore, “thanks for playing guys, but your services will no longer be required”. Why are Paulson and Bernanke still meeting with these guys?

Immediately set up a new appraisal construct, require several independent appraisals on each transaction, somehow create incentives and liability that carries to the appraisers. Immediately require originators that are selling paper down the road to carry some of that risk and to maintain reserves against that paper, specifics are complex but possible. Immediately establish national, open source MLS system with checks and balances and real legal consequence to impropriety in use, it all must get transparent. New serious criminal code and consequences to any REIC player inappropriate behavior. Require independent employment background investigations on all borrowers, bulletproof ones. We need a real system of due diligence on borrowers, one that I would do myself if lending my own money. Unpleasant and unpopular ideas in some quarters, but the time has come for strong leadership and the much needed painful reform.

We simply must restore confidence in the credit market, and these measures are now required. The PTB no longer need return the phone calls of the mortgage bankers association, NAR, or the other players. C'mon, crisis time, get serious about it.

Is the current system set up to get this emergency legislation through in a timely fashion, maybe not. I'm afraid if they do not FIX the problems that those of you here on Patrick have identified so very clearly over these past years, nothing will stop a system slide to oblivion. This will not be pleasant for any of us and I would argue not really in any of our interests at this point.

Devil is in the details, I haven't thought too much about it, but I bet with the collective intelligence here we could rapidly come up with a drastic and workable set of REIC reforms that would be interesting. Maybe not in time at this point, but a fun exercise to save the world? :-)

To sum, clearly the time has come for emergency and complete REIC reform. A temporary shutdown of underwriting might cause some additional panic, but we are there guys. Putting more paper that will only burn on the market is not what we need to be doing right now. Period. Where are our regulators? We need some leadership and independence from them, now.

"The market is solving the problem, credit standards are improving, subprime loans are hard to get anymore". NOPE, I don't think so folks.

Brutal day on Wall Street!

No sign of the PPT today - that can only mean one thing: emergency Fed rate cut tomorrow! :)

NVR,

Excellent post, and you'll get no argument from me where serious and severe regulatory changes simply must take place. Many of the formerly bullish posters here all seemed to work off the general premise that "high prices" (that many couldn't afford or were unwilling to go that far in debt for) was our only "tune".

I've always maintained that this simply was not true. Until we get the REIC from all sleeping in the same bed these issues will continue/worsen. I'll further agree that the PTB absolutely need to STOP all discussion w/ REIC dudes. Total waste of time. It's the same thing as asking Dennis Kozlowski about about corp. accounting? Why?

The only thing we differ on is that I can't live w/ the embarrassment of totally shutting down mortgage lending. Haven't the rest of us been through enough? :(

It's "in the bag".

DinOR,

I'll give you the total shutdown piece, unrealistic probably and might do significant damage across the board. Honestly, I was probably throwing that one out there for effect more than anything else. I will say this though, it would send a very clear signal to the markets that this thing is serious and we are serious about addressing it. What would be the systemic effects of say a defined 30 day shutdown? Fix the system.

It's also just occurred to me that the PTB have been operating without the benefit of insight and information that those of us here have. I don't think they really understand the range of detail on the reality of the housing market, like we do. It's clear now based upon their not getting ahead of the issue, earlier statements, "containment", "it's only a problem of 800K over inventory (or whatever the number Al pulled from his nethers), ect..

So, is it possible that they still do not, on this very day, understand where housing is truly heading? I suspect their internal numbers say they have a bottom pegged at a worst case 15% decline. We know better here. Maybe they don't want to contemplate or understand what happens in a 30% plus decline environment? Point being, are they still in a denial stage themselves? Who exactly are the housing experts informing our regulators? Who is this person if there is one?

Our regulators actions are probably based on an assumption of a bottom in housing that is overly optimistic. Their actions to date dictate such. They are still missing it! Tragedy ensues.

So what can we do about this?

Our regulators actions are probably based on an assumption of a bottom in housing that is overly optimistic.

Pluto entered Capricorn just a few days ago. This is just the beginning. :twisted:

NVR,

One of the very easy solutions we could introduce w/ zip effort would have been to have CountryFried etc. simply have to keep every 14th loan they write on the 3rd Tuesday of every month.

We've talked about making these clowns "eat their own cooking" a number of times. Since they won't know when the random "spot search" of loans will take place it's to their benefit to make sure nearly everything they underwrite will likely fly. If FRE/FNM generate the sampling date by a roll of the dice they will (would have) to stay on their toes. Better yet take a drawing at OFHEO and have THEM tell Freddie about 2 hours before it goes down.

The mortgage firms wouldn't know a thing about until the loan gets kicked back. Imagine further having company-wide training on what was/wasn't done correctly?

That's one of our suggestions and since it works in automotive/electronics etc. there's no reason it shouldn't work here.

DinOr

That's would certainly seem a simple to enforce, elegant regulatory change that I can't poke any holes in. The lenders would have to maintain some loss reserves against, simple enough to come up with that calculation. The potential loss liability might also carry through to all third parties associated with the transactions, the brokers on the retail and wholesale side, the appraisers even.

We might set up up a joint access workspace with edit controls and change tracking and put together a set of "suggestions", and I think I can get it in front of our appropriate legislators (not sure who those are at this point) in DC pronto. I've lived here over 30 years, I know a few people. To some degree they are owned by industry and maybe it falls on deaf ears, but maybe there is some recognition this is serious enough to do something substantive. And looking back, maybe it might be good to have tried to do something instead of just documenting the whole and living through the whole mess.

I think it's fair to say that most of the information these people have access to comes from the REIC suits and influence peddlers running around DC. They could use another voice.

skibum :
that can only mean one thing: emergency Fed rate cut tomorrow! :)

From skibum's keyboard to Merrill Lynch's report.

From MSN Investor market dispatch ...
The [ISM] report was so bad that Merrill Lynch predicted the Federal Reserve would be forced to cut rates again before its March 18 meeting.

It will be funny if Fed is cutting down to 1% before the end of the year.

Then what? Apart from printing money to buy our own mortgage sh*t, what else can Fed do once the rate hits the bottom?

I don't know that there aren't "any" holes that couldn't be poked in it? There's always someone willing to game the system. That's where the "fudge factor" comes in.

STILL... seeing way too much crap from XYZ Firm. O.K mister smarty pants, your getting every 10th loan kicked back! This would even eliminate the need for useless non-rating "rating agencies". Investors would quickly devise their own rating system by identifying:

1-100 = AAA
1-75 = AA
1-5 = a default waiting to happen

If the firm offers multiple products to a broad spectrum of FICO's well then they're broken down accordingly. When approached from the supply side there's no need for rocket science.

For those of us that remember when "getting qualified" meant at least a 3 month long ordeal where NOTHING else in your life was a priority, having a "kick-back" feature sounds silly.

I blame the "re-fi craze" when the process was whittled down to the time it takes to get thru the drive-up window at Taco Bell.

About who is buying the mortgage securities.

We have wondered for a long time about who exactly are the bag-holders. It turned out to be everyone. In every country, you can find an idiot who provided some sort of crack to the US house junkies. The US cities themselves have seen their parked funds somehow got pulled into this mess.

I have always said that I do NOT get the bond market. I have no idea why people are loaning money to US govt, companies and for mortgages at these ridiculously low interest rate. Why is anyone buying US 10yr treasury note at 3.75% ?

Are bond buyers STILL out of their mind ? Or is this a rational decision that I don't get ? Mish argues for deflation and hence justifies rally in US treasury. I know the Fed buys US treasuries as standard practice to manage reserves. Is the Fed propping up US treasury prices and holding the yields down ?

Whatever. If someone knows a good book on understanding the bond market, please let me know. I can understand string theory - at least I think I understand the idea - but bond markets, that is so beyond me.

I like Rick S. on CNBC last night-

"The Fed should cut rates to zero with a tightening bias and get it over with!"

I just returned from voting: straight Ron Paul ticket (included all the delegates).

Solar eclipse (in Asia) tomorrow. What gives? Will there be a major market event?

Paul,

Santelli is one of the only straight shooters they have! LOL! And yes I suppose the "tightening bias" would... be a given? :)

StuckInBA,

Everything I "thought" I knew about the bond market has been decimated in the last year or so. Maybe John Devaney formerly of U.S Capital Markets can explain all this stuff to us?

http://www.treas.gov/tic/mfh.txt

OK, the trend from Nov 2006 till Nov 07 (in $B)

Japan - reduced from 615 to 580
China - reduced from 393 to 386
UK - increased from 76 to 315 (looks like the biggest idiot, but why???)
Oil exporters - increased from 106 to 127 (understandably, too fast of a gush of USD to diversify)
Brazil - increased from 51 to 120 (why???)

DinOr,

Yes, I agree, Rick does a fantastic job. I've been lucky enough to have met him as we both live and work in Chicago.

Paul

Is UK trying to repay our debt for bailing them out of WWII? Why did they suddenly increase their purchase of USD Treasury by 4x in 12 months? Another oddity is Brazil, why did they increase their holding by more than 2x within 12 months?

Paul,

I'd have a beer w/ Rick any day! Oh and go White Sox (spring trng. starting up down in Tucson!)

UK includes Channel Islands and Isle of Man.

I don't know about Isle of Man, I know Channel Islands are a tax-haven destination where buyer's identity can be properly concealed. Since the Fed doesn't provide a breakdown between UK and Channel Islands, it is hard to say if there is something fishy with some sort of operations through C.I.

I just found it hard to swallow, that UK, which doesn't need to export to us (unlike Brazil and Oil Exporters), doesn't rely on us financially, and doesn't have a big US Treasury portfolio to begin with, would suddenly increase its holding of US Treasury by 4x. Their holding is now coming close to scale of that of China, a country that cannot help being sprinkled with USD every day.

Something is very fishy with the UK holdings. I searched high and low on the internet and couldn't find an explanation of why UK would want to hold more US Treasury, by 4x more within a year.