Category Archives: banking

From CDO’s to BTO’s: Wall St. tees up the next financial disaster

Wall Street Greed CDO

Think Progress picked up on a piece from Bloomberg News which ought to be raising eyebrows on Main Street.  The banksters are at it again, only this time those pesky Credit Default Obligations which brought down our financial system in 2007-2008 have been repackaged and served up under a new label: Bespoke Tranche Opportunities.

As the Think Progress analysis reports, these derivatives were an extremely important part of the last mess:

“The Financial Crisis Inquiry Commission concluded that derivatives “were at the center of the storm” and “amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities.” In 2010, the total on-paper value of every derivative contract worldwide was $1.4 quadrillion, or 23 times the total economic output of the entire planet.”  [TP]

Let’s be careful here, not all of that $1.4 quadrillion is in BTO’s, but the newly labeled derivative has that same capacity to “amplify the losses” when the underlying value of the securities becomes volatile.  For those who would like this explained in really clear diagrams, click over to the Wall Street Law Blog and follow along with the  White Board Wine Glasses Explanation – one of the best I’ve discovered to date.

Now, we can move on to what makes these BTO’s a problem, beginning with their creation:

“The new “bespoke” version of the idea flips that (CDO) business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced.” [TP]

Now, why would anyone want to buy one of these products, much less order a special one?  In the Bad Old Days  fund managers could choose to purchase some tranched up CDO, those blew up, so why go out and order one tailored to their specifications?  Let’s return to the Bloomberg article:

“Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds.

The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe.”  (emphasis added)

Translation: Because interest rates have been kept low by central banks hoping to keep struggling economies moving ahead, banks haven’t been able to make what they deem to be enough profit off corporate and Treasury bonds, and therefore have started playing in the “financial product” game again (not that they ever really stopped for long) and have started making ‘bets’ (derivatives) in the Wall Street Casino – with ‘products’ (BTO’s) which aren’t subject to the reforms put in place by the Dodd Frank Act.

So, what’s the problem? A hedge fund manager wants to buy a structured financial product from a bank which has a higher yield than what he can get by investing in corporate bonds or Treasuries… what could go wrong?  Let us count the ways.

#1.  These securities aren’t tied to the performance of the real economy as corporate bonds would be.  In the jargon du jour, the BTO portfolio is a table of reference securities.  Here come the Quants again, there are formulas for determining the ‘value’ of these securities which may or may not be valid, and they certainly weren’t during the Housing Bubble.

#2. The yields are related to the the ratings.  Here we go yet again. One of the major ratings services, Standard & Poor, is ever so sorry (to the tune of a $1.5 billion settlement with the Justice Department) they helped create the Derivatives Debacle of ‘07-‘08, but that hasn’t stopped them from continuing to get involved in evaluating derivatives. [See the FIGSCO mess]

#3. The BTO encourages the same Wall Street Casino behavior we saw in the last Housing Bubble/Derivatives Debacle.  It’s explained this way:

“The trouble with this game is that the value of most structured finance products is opaque and subject to sharp and violent change under conditions of financial stress. So when they are “funded” in carry-trade manner via repo or other prime broker hypothecation arrangements, the hedge-fund gamblers who have loaded up on these newly minted structures are subject to margin calls which can spiral rapidly in a financial crisis. And that, in turn, begets position liquidation, plummeting prices for the “asset” in question, and even more liquidation in a downward spiral.” [WolfStreet]

Sound familiar? Sound a bit like Lehman Brothers?  Remove the jargon and the message is all too familiar – no one really knows the value of the structured product, and if the product is purchased with borrowed funds it’s subject to margin calls (people wanting their money back) which in turn leads to sell offs and the price for the “thing” drops off the financial cliff, and…. down we go. Again.  We’ve seen this movie before, and the ending wasn’t pleasant.

#4. The BTO is a way around financial reform regulations. The offerings, be they FIGSCO or BTO’s are being peddled at the same time the Financialists are trying their dead level best to (a) get Congress to whittle down the regulations put in place under the Dodd Frank Act financial reforms; and (b) figure out ways to get around the Dodd Frank Act provisions – witness the BTO.

The profit motive is perfectly understandable. If I can invest in something that pays more than a Treasury bill or bond, or more than a corporate bond, then why not?  However, at this point, as an investor, I need to make a decision – Am I investing or speculating?  If I’m investing then it would make more sense to take a lower yield on something that has a more credible value. If I’m speculating (gambling) then why not borrow some money and purchase some exotic structured financial product the value of which is far less credible (or even comprehensible) and “make more money?”

It’s speculation that tends to get us into trouble. This new round of creative financial products shows all the elements that got us into financial trouble the last time in recent memory.  Formulaic determination of value which ran head first into the wall of reality. Valuations which were based on “what’s good for business,” rather than on what might be other plausible outcomes.  Emphasis on speculation rather than investment – or on financialism rather than capitalism.  Short term yields as opposed to long term investment.

It was a recipe for trouble in 2007-2008 and it’s still a recipe for trouble in 2015.

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Filed under banking, Economy, financial regulation

Not So Safe, Not So Sound: Amodei, Heck and H.R. 3193

Occupy Wall Street bankersRepublicans have never liked the Consumer Financial Protection Bureau.  Nor have the members of the Republican Party in the House of Representatives stopped trying to find ways to gut the powers of the Bureau.  A voted taken on February 11, 2014 is an indication of that opposition.

H.Res. 475: “Providing for consideration of the bill (H.R. 3193) to amend the Consumer Financial Protection Act of 2010 to strengthen the review authority of the Financial Stability Oversight Council of regulations issued by the Bureau of Consumer Financial Protection, providing for proceedings from Feb. 13, 2014 – Feb. 24, 2014.” [rc 59] (223-193) Representative Joe Heck (R-NV) voting in favor of the bill; Representatives Dina Titus (D-NV) and Stephen Horsford (D-NV) voting in opposition.

And what would H.R. 3193 do?

(1) “Amends the Consumer Financial Protection Act to authorize the Chairperson of the Financial Stability Oversight Council to issue a stay of, or set aside, any regulation issued by the Consumer Financial Protection Bureau (CFPB) upon the affirmative vote of the majority of Council members (currently, two-thirds), excluding the Director of the Bureau.”

In short, any and all regulations issued by the CFPB could be “stayed,” or dismissed on the vote of only a simple majority of the FSOC.  Nothing like making it easier for the banking lobby to get pesky consumer protection rules set aside by reducing the number of votes on the FSOC from 2/3rds to a simple majority?

(2) “Requires the Council, upon the petition of a member agency of the Council, to set aside a final regulation prescribed by the CFPB if the Council decides that such regulation is inconsistent with the safe and sound operations of U.S. financial institutions. (Currently the Council is merely authorized, upon petition, to set aside a final regulation if it would put the safety and soundness of the U.S. banking system or the stability of the U.S. financial system at risk.)” (emphasis added)

Now we get to the meat of the matter. What is “safe and sound” and why is it not so safe and not so sound?  First and foremost — “safe and sound” is a shorthand term for PROFITABILITY.

In short, what the House Republicans are proposing is that any regulation issued by the Consumer Financial Protection Bureau which impinges on the PROFITABILITY of a lending institutions can be dismissed upon the “petition” (read ‘gripe’) of a member agency of the council — including the Comptroller of the Currency, an agency which did not exactly cover itself in glory during the time prior to the collapse of the financial markets in 2008.   But wait… H.R. 3193 is even a greater boon to the bankers.

(3) “Repeals: (1) the prohibition against Council set-aside of a regulation after expiration of a specified time period, and (2) mandatory dismissal of a petition if the Council has not issued a decision within such time period. Requires the CFPB Director, when prescribing a rule under federal consumer financial laws, to consider its impact upon the financial safety or soundness of an insured depository institution.”

There’s no time limit.  There’s no ‘statute of limitations’ after which the FSOC can declare a regulation made by the Consumer Financial Protection Bureau null and void?  Again, the old profitability test comes to the fore.

So, once more with feeling — Representative Joe Heck (R-NV) has voted in favor of a bill which would allow the banking sector to put the kibosh on any CFPB rule which might jeopardize the PROFITABILITY of a bank.   This, from a Representative of a state with the second highest foreclosure rate in the country — 1 in every 533 homes — where the national average is 1 in every 1,058. [LVRJ]  Not to mention the fact that the Nevada Attorney General just settled with Lender Processing Inc. over the ‘robo-signing’ mess created in our mortgage market. [News4]

Nothing says “I love you” to the financial sector more than saying, “Don’t worry about that pesky CFPB, the FSOC can overturn, dismiss, or stay any regulation which puts a crimp in your Safety and Soundness Profitability.

But Wait the GOP isn’t Quite Finished!

“H.R. 3193 makes necessary reforms to an unaccountable Consumer Financial Protection Bureau (CFPB). Specifically, the bill replaces the existing director who has sole responsibility for carrying out the CFPB’s mission with a Commission comprised of the Fed’s Vice Chair for Supervision and four members appointed by the President, with the advice and consent of the Senate.” [GOP HR 3193]

So, we would have an agency without a director — instead ‘governed’ by a committee, the members of which are subject to filibusters by the U.S. Senate.   It took ‘only’ two years to get the Senate Republicans to stop blocking the appointment of one director [HuffPo], imagine how much time could be consumed trying to get four commissioners selected, nominated, and confirmed?

“The bill eliminates the CFPB’s current exemption from the budgetary process and subjects the CFPB to the regular authorization and appropriations process.[2]  It also reins in CFPB salaries by requiring the CFPB to pay its employees according to the GS pay scale like other federal agencies.”

That second part is a nice touch, however it translates to putting the funding of the CFPB under Congressional control.  The CFPB is outside the Congressional claws and inside the protection of the Federal Reserve so that its education and enforcement missions are NOT subject to the whims of Congressional winds.

Once again, nothing says “I Love Bankers” more succinctly than allowing their allies in Congress to jam up the leadership of a regulatory agency and to let Congress bring enforcement to a halt by chopping the agency’s budget.

And… Representatives Joe Heck (R-NV) and Mark Amodei (R-NV) are  all for this?

On February 27, 2014 at 6:39 p.m.  Representatives Amodei (R-NV) and Heck (R-NV) voted in favor of the passage of H.R. 3193 [rc 85]  Representatives Horsford (D-NV) and Titus (D-NV) voted against this latest assault on the Dodd Frank Act provisions.

Background Information: Apuzzo, Bush Administration Weakened Lending Regulations, HuffPo, December 2008.   “Speed Kills,” Desert Beacon, December 16, 2011.  CFPB not out of the woods yet, WaPo, February 27, 2014.  “Cordray Confirmed,” HuffPo, July, 2013.   CFPB, Mission and Budget, 2014.

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Filed under banking, consumers, Economy, financial regulation, Politics

Bits and Interesting Pieces

Jig Saw Puzzle** That stalwart champion of free enterprise, Las Vegas’s own Sheldon Adelson, is complaining about his competitors offering lower room rates, and diminishing his profits. [LVinc]  Perhaps if he’d saved a bit of that moolah he pitched at GOP candidates in the last election…?

** If an endorsement from Governor Sandoval is supposed to be an effective repellant to ward off pesky intra-party competition — it’s not working, at least not in the run for 2016, in the Lt. Governor’s Office department.  Ray Hagar has more in the RGJ.  Muth complains here.  More from Ralston here.

** Governor Sandoval had an opportunity to help prevent the possibility of private guns sales to ineligible persons, and he blew it.

“Nobody — least of all Sandoval, a former attorney general and federal judge — wants felons or the mentally ill to get guns. But the fact remains, the governor had a chance to make it more difficult for that to happen, and he chose not to take it. And while this incident was resolved without tragedy or bloodshed, the next one may not be.”  [Sebelius]

Amen.

** There was the “transportation” of James F. Brown, and now Nevada’s Rawson-Neal Psychiatric Center is losing its accreditation.  [LVRJ] The Nevada Progressive has more + video.

** Talking Point Memo lists the “8 biggest losers”  should Congress fail to pass a comprehensive immigration policy reform bill.  And, might we add radical right wing Nevada politicians in a state in which the Hispanic population is projected to increase from about 687,166 in 2010 to approximately 802,432 by 2016? [StateDemographer pdf]

** Oh, my goodness and glory… Senator Harry Reid spoke about the effects of climate change and its association with wildland fire danger, and predictably the right wing goes off the rails.  From the Damned Pundit:

“Reid was stating the obvious. For decades scientists have been pointing at factors like warmer spring temperatures, lighter winter snowpacks and earlier growth creating an abundance of dryer fuel, and linking those factors to more — and more intense — Western wildfires.”

Here’s the predictable piece from the Elko Daily Freepers, a portion of the litany of “fact checking” provided in an attempt to advance the deniers’ fantasies: “Pay no attention to the fact there has been no appreciable global warming in 15 years despite a dramatic increase in carbon output from all sources — a phenomenon none of the global warming models can explain.”  Thus we are supposed to ignore this data from the Arctic studies?  Or, the Cambridge University study projecting that Arctic methane release could cost the global economy about $60 trillion over the next decades?

By the way, the old “prescribed burn” system which the EDFP writer would prefer to see restored — it’s not necessarily a thing of the past, witness the 2008 Prescribed Fire Guide (download) for forest and wildland management. [SJEl.org]

** So, why is Representative Steve King (R-IA Xenophobia) still on the House Subcommittee on Immigration?  NRDC would like to know.   Oh, wait — Rep. Michele Bachmann (R-MN6) is still on the House Permanent Select Committee on Intelligence.   There’s more on Representative Cantaloupe Calves here.

**  It’s really hard to gin up any sympathy for the Bankers when they do stuff like mistake a foreclosed home for the one across the street and remove all a person’s belongings — then they trashed or sold all her stuff, and the bank is now refusing to pay for  replacements. [Crooks & Liars] Original story from Channel 10 here.   The First National Bank of Wellston is “disputing” the lady’s $18,000 claim for replacing lost personal property.  Her response: “I’m not running a yard sale here. I did not tell them to come in my house and make me an offer,” she said. “They took my stuff, and I want it back.” [ColumbusDispatch]  The FNB of Wellston has $94,813,000 in assets, and $56,598,000 in outstanding loans, it has reserves of $590,000. [BankTracker]   This story has hit other  national blogs, such as Think Progress.

** Members of the Senate who are drafting taxation reform legislation have promised their colleagues they’ll keep their suggestions secret for the next 50 years.   Transparency? Accountability? Anyone? The story, if not the suggestions, have leaked already — into Politico and The Hill.

** Jobs, Jobs, Jobs — and by CBO lights, the GOP is on the hook for killing about 1.6 million of them.   [Politicususa]  Just think of how many more they can kill if they make good on their pledge to Shut Down The Government unless President Obama agrees to repeal Obamacare?

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Filed under Adelson, banking, ecology, Gun Issues, Immigration, Nevada politics, Taxation

Nevada’s Moral Hazard: The One With No Connection To Brothels

Foreclosure StreetNevada, one of the nation’s poster children in home foreclosures, is now tangled in the process of unwinding the results of the financial sector’s vulpine avarice.  Which home mortgages may legitimately be foreclosed upon and which are so defective that no legal process will rationally resolve the issues?  Bankers are lobbying for changes in NRS 106.210 and NRS 107.070 as included in AB 284 (pdf) of the 2011 session.

“At issue is Assembly Bill 284, a measure passed by the Nevada Legislature in 2011 and signed by Gov. Brian Sandoval that forces banks to prove they have the legal right to foreclose on a particular home before they take action. Most important, the law requires bank workers to sign an affidavit that they have personal knowledge of a property’s document history, or they will face criminal or civil penalties.”  [LVSun]

That “document history” part is important. A person doesn’t know the “document history” if the mortgage was robo-signed.  The “document history” may be unfathomable if the property documentation wasn’t properly registered with local government officials.  If the mortgage was signed, handed over to a servicer, later packaged with other mortgages into securitized asset products, sliced up into bits, and then re-sold to investors — we’ve seen this movie before and it didn’t have a happy ending…

Just how badly the financial sector had mismanaged the handling of mortgages can be quickly discerned from the numbers included in the Las Vegas Sun article.  Of the 5,350 foreclosure notices filed in August 2011, and the 4,684 default notices sent later, only 80 were compliant with the statute requiring that the banker demonstrate knowledge of the “document history.”

The issue also demonstrates how long it can take to fix messes created by free wheeling enthusiasts of financial creativity.  The housing boom lasted until 2007-2008, it’s now the end of 2012, and the bankers are only now returning to focus on their foreclosure mess.  It also provides an object lesson on the transitory nature of Moral Hazards.

Members of the financial community are oft heard speaking of Moral Hazards.  The New York Times explains: “…in economic terms it refers to the undue risks that people are apt to take if they don’t have to bear the consequences.”  For decades the formerly obscure term was applied to the “little guy.”

The Theory of Moral Hazard was applied to sales representatives, who it was said would not work hard to sell the manufacturer’s products if not given incentives like commissions to augment their enthusiasm for sales.  Later, it was applied to those “losers” who purchased home mortgages they did not understand with terms which were designed to create income for the mortgage sellers at the expense of the homeowner — whether the homeowner was financial capable of the increased expense or not.   In short, it is often argued under the matrix of Moral Hazards that the more trouble one might be in, the less help should be provided.

Even the libertarian Cato Institute was willing to accept the possibility that corporate malfeasance, unaccountable management, and shoddy risk management played a role in the collapse of the U.S. financial system in 2007-2008.*  The question becomes how much Moral Hazard should apply to the corporate entities which engaged in the financial transactions that fueled and eventually blew up the financial markets?

State Senator Tick Segerblom (D-Las Vegas) places the Moral Hazard on the bankers: “If it comes down to a homeowner who had a mortgage, or a bank — who has the right to be there? I’ll go with the homeowner,” he said. “I’m not worried about the banks. They made their beds. They can sleep in it.” [LV Sun]

If the question is: Shall the unworthy who got themselves into a Big Mess by the dint of their own avarice be offered succor from the government, either state or federal? Then those who truly hew to the Moral Hazard argument are stuck with banks, mortgage institutions, and investment houses whose porcine appetites caused them to fall into the trough.  The only other way out of the mess is to attempt to claim that the bankers didn’t really do it (an obvious mirage) or that, as the libertarians would like to assert, the bankers were merely acting out the extrapolations of government policy (as if the bankers have no free will and cannot discern Moral Hazards when they see them.)

Unfortunately for the banking industry apologists, the first option flies in the face of economic reality; and, the second makes them look like first class fools.

*The Institute author, after having pointed out the core of the problems, promptly reverts to the anti-government “Devil Made Me Do It” argument holding that low interest rates, deposit insurance, and federal participation in the secondary market were the ‘real evils.’

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Filed under banking, Economy, financial regulation, Foreclosures

Simple Economics Made Complex: Capitalism vs. Financialism

The 2012 election at almost every level will be determined by turn out, and predicated on economics — micro and macro.  The problem for most voters is that we’re talking about two economies.  The economy of the financialists and the economy of the capitalists.  So far, the capitalists are winning.  Barely.

A capitalist believes that our economy works best when consumers have a choice of products from a variety of manufacturers or providers.  The economy expands as the demand for goods and services increases and providers seek to accommodate consumer needs.  A capitalist believes that capital should move from areas of surplus to areas of shortage, for small business lines of credit, for home loans, for student loans, for consumer credit, for business expansion, for commerce and marketing needs.

A financialist believes that the economy serves to accumulate wealth such that we create financial products and services which can be securitized and manipulated to create more wealth.   The financialists have been doing very well, thank you very much.  Not sure, then consider this chart:

That’s right, 93% of the increases in American income (wealth) in 2010 went to the top 1% of income owners in the U.S.  And the stock market has been doing quite well since 2009:

Of course, it’s not just stocks in which we find increased trading.  Other financial products, derivatives included, have been doing a thriving trade.

The traffic in derivatives hasn’t slowed much either.

So, while those whose income comes from the financial sector have been doing quite well, those in the “real” economy — the capitalist economy have been in something of a bind.

Note, Governor Romney’s complaint that the current economy means “stagnating” wages for middle class Americans he’s omitting a crucial bit of information:  When economic policies favor the accumulation of wealth in the coffers of the o.01%, it shouldn’t be the least bit surprising that middle class Americans aren’t seeing the increases in their bank accounts.

In short, the Financialists (and their presidential candidate Governor Mitt Romney) having secured a deregulated financial sector which rewards them disproportionately, are loathe to adopt any policy which might require them to pay more in taxes or to comply with any regulations on the financial product manipulation which constitutes their wealth accumulation strategy.

It’s up to the Capitalists in the 2012 election to secure a level playing field, or at least a more level field, one in which INVESTMENT is rewarded before SPECULATION.   One in which the economic reality of supply and demand means the supply and demand in REAL markets — not in esoteric “markets” for artificially concocted risk management products.

Let’s hope the Capitalists win.

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Filed under 2012 election, banking, Economy, Obama, privatization, Republicans, Romney

If You Aren’t Pulling The Wagon, Don’t Complain About The Load: Foreclosures in Nevada

Another day, another glossy flyer from Grover Norquist in my P.O. box reminding me that the President supposedly promised to staunch the foreclosure flood in Nevada.  Better information and analysis can be found in the Las Vegas Sun article on the faltering foreclosure reduction plans in the Silver State.  The article makes some important points, and falls nicely into the Must Read List.

One of the advantages of blogging is that there is no length limit to articles, and some areas can be explicated in greater specificity.  No surprise, here come’s additional information on the securitization issues related to the foreclosure processes.

Wonk Alert

Not only were banks administratively unprepared to deal with failing home loans, the system devised in the Securitization Boom wasn’t helpful either.  The New York Times produced some of the better graphics to illustrate what was going on during the Housing Bubble.

At this point we should recall that those mortgages being pooled were not being held by the banks that issued them.  First, some weren’t even properly registered.  The MERC mess was created by bankers who didn’t think county recorders were working fast enough to satisfy the financier’s demand for more mortgages to pack into the pools.  [DB]

“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Mr. Schneiderman said. By creating this “bizarre and complex end-around of the traditional public recording system,” Mr. Schneiderman’s lawsuit asserts, the banks saved $2 billion in recording fees.” [NYT]

It might have saved the banks some $2 billion in recording fees, but when it became obvious some of those hybrid adjustable rate monstrosities were going into default, one thorny question arose — Who owned the mortgage? When trying to determine how to re-negotiate an individual mortgage it is helpful to know who owns it.  On the other end of the scale, investors who purchased mortgage backed securities were told that all the loans were just fine and dandy — some, specifically Bear Stearns, told investors the firm would repurchase defective loans — that wasn’t what happened. [NYT]

Now let’s look at the next step in the diagram.  The mortgage backed securities shown in the first part of the diagram were used to create another layer of investment products called CDOs.   This isn’t as much of a problem for the homeowner facing the possibility of robo-signing and ‘who owns the mortgage’ MERC related issues, but it does illustrate how the faulty or defective  mortages contaminated the system when pumped into Wall Street Casino.

One Size Doesn’t Fit All

In addition to the problems associated with the Securitization Boom, homeowners faced a situation in which not all regional housing markets were created equally.  David McGrath Schwartz’s article mentions this crucial point.  One map from 2010 illustrates the point:

The “hottest” real estate markets in the Housing Bubble were those most likely to see the creation of the now infamous no-doc hybrid adjustable rate mortgages which were designed from the outset to encourage refinancing NOT repayment.   However, federal statutes must address national problems, so the initial programs were devised with the national — not the Nevada — issues in mind.

HAMP:  “The program was built as collaboration with lenders, investors, securities, mortgage servicers, the FHA, the VA, FHLMC, FNMA, and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.”  [source]   Problems for Nevada emerged immediately.  Many home loans in the state weren’t part of any of the eligible agencies.  Some didn’t meet the first lien qualification standard.  How to calculate the >31% of available income became problematic.   Worse still the American Bankers Association in conjunction with the Mortgage Twins (Fannie & Freddie) were adamant in their objections to any mention of reducing the principal of the loans to prevent homeowners from going any further underwater.  [ Examiner]

The notion of bankers being unwilling to accept any reduction in the principal in order to prevent foreclosures doesn’t seem to make sense, unless we remember that the banks didn’t have enough skin in the game.  Too many banks securitized too many mortgages while retaining too little ownership of them.

HARP:  The Home Affordable Refinance Program — “To be eligible, you must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, sold to those agencies on or before May 31, 2009. The current loan-to-value ratio on the mortgage must be greater than 80 percent. Having a mortgage that was previously refinanced under the program disqualifies you from the program. Borrowers cannot not have missed any mortgage payments in the past six months and cannot have had more than one missed payment in the past 12 months.” [WaPo]

Here we go again — if the loan was owned or guaranteed by one of the mortgage twins, then a homeowner would be eligible.   If not — good luck.

“This is a big deal because, although the Fannie Mae-Freddie Mac-FHA triumvirate controls more than 90% of today’s new mortgage originations, that wasn’t the case from 2001-2007. Last decade, non-GSE lending was a major part of the U.S. housing market.

For example, Alt-A mortgages accounted for 27.5% of mortgage originations in 2005. Today, each of these homeowners is locked out from HARP. HARP 3.0 would allow these Alt-A customers to (finally!) refinance their home loans.”  [TMR]

HARP 3.0 is still on the drawing boards.  The situation as of June, 2012?

Although at least one Senate Republican shows interest in a plan to expand the Home Affordable Refinance Program, the outlook for Congressional action remains doubtful and House Democrats are pushing the Federal Housing Finance Agency to make further HARP changes administratively. During a Senate Banking, Housing and Urban Affairs Committee hearing last week on legislation to expand HARP, Sen. Bob Corker, R-TN, said he was open to the proposal. “I hope that we’ll have a real mark-up on this bill,” he said.”  [IMF]

A HARP 3 bill was introduced by Senators Boxer (D-CA) and Menendez (D-NJ) in September 2012.  S.3522 “Responsible Homeowner Refinancing Act of 2012,”  was placed on the Senate’s legislative calendar on September 12, 2012 and no action has been taken since.

In short, the two major programs have been limited because (1) of the opposition of banks and the mortgage finance industry to any suggestion that the principal of the mortgages be reduced; and, (2) the fact that a full 27% of the mortgages issued during the Housing Bubble were not from government guarantors over whom the Federal government has any current jurisdiction.

Instead of bemoaning the slow pace and limited reach of home mortgage modification in Nevada, we should be demanding that the 112th Congress take action on bills like Menendez’s S. 3522 which would expand the reach of federal services to those holding non-GSE  or FHA loans.

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Filed under 2012 election, banking, Economy, financial regulation, Foreclosures, housing, Nevada economy, Nevada politics

Senator Rubio Comes To Nevada Bearing News From The Scarlett O’Hara School of Business Administration

Bill Clinton summarized the GOP theme for 2012: “We left him a total mess, he hasn’t cleaned it up fast enough, so fire him and put us back in.” [MST]  Now Sen. Marco Rubio (R-FL) is pushing the theme in Las Vegas:

Obama “doesn’t understand the free enterprise system,” Rubio said, arguing government is too big and is hurting small business and job growth with too many regulations and taxes.  [LVRJ]

Fact check time.  Actually in terms of the total number of regulations adopted, the Obama Administration is well behind the administration of President George W. Bush.  President Bush approved 931 regulations in his first three years, President Obama has approved 886.  [FC]  So, what would those “too many regulations” concern?

Investment Sector Regulations

The first, and most obvious source of Republican distress over regulations are those which seek to curtail the antics of the investment sector.  Implementation of the Dodd Frank Act means that financialists, eager to pick up where they left off before their pipe dreams of exploiting securitization in the housing market exploded like a pipe bomb, don’t care to have any restrictive oversight of their transactions in the derivatives market.   The MegaBanks would ever so much like to go back to the days before the Volcker Rule and be able to use insured deposits as a back stop for their proprietary trading.  And, the MegaBanks don’t want to write ‘living wills‘ in case their trading desks get out of hand (again) and bring the bank down into insolvency or illiquidity.

The banking sector is also feeling the heat from the Consumer Financial Protection Bureau — which is (to their horror) protecting consumers.   Most recently American Express felt the hammer come down on their illegal practices:

“The Consumer Financial Protection Bureau (CFPB) today announced an enforcement action with orders requiring three American Express subsidiaries to refund an estimated $85 million to approximately 250,000 customers for illegal card practices. This action is the result of a multi-part federal investigation which found that at every stage of the consumer experience, from marketing to enrollment to payment to debt collection, American Express violated consumer protection laws.” [CFPB]

Federal regulators also fined American Express $27.5 million for the illegal activities, and about 250,000 American Express customers will be getting refund checks.

Back in September 2012, the FDIC and CFPB ordered Discover to pay $200 million to 3.5 million card holders and fork over a $14 million civil penalty for deceptive practices. Discover also agreed to stop its deceptive marketing, to make restitution to customers who made purchases, provide refunds to customers without requiring more consumer actions, and to submit to an independent audit.  [CFPB]

Further, what may have the financial sector’s panties in a bunch are the proposed rules from the CFPB on home mortgages.  The CFPB explains:

Mortgage Terms: Under the proposed rule, creditors would have to make available to consumers a loan without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan. These options would enable a consumer buying or refinancing a home to better compare competing offers from different creditors, better able to compare loan offers from a particular creditor, and decide whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.

Interest rates and points: Consumers can pay points, which are expressed as a percentage of the loan amount, and fees to covers costs associated with origination or prepaid interest charges. While these points and fees come in many different names and combinations, they all should function similarly to reduce the interest rate and thus a consumer’s monthly loan payments.

Qualifications for mortgage initiators: Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators currently have to meet different sets of standards, depending on whether they work for a bank, thrift, mortgage brokerage, or nonprofit organization. The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable.

Steering: In 2010, the Federal Reserve Board issued a rule that was designed to curtail the practice of loan originators directing consumers into higher priced loans based not on the consumer’s interest, but on the possibility that the loan originator could earn more money. The Dodd-Frank Act included a similar provision banning the practice of varying loan originator compensation based on interest rates or other loan terms. The CFPB’s rule would implement the Dodd-Frank Act provision and clarify certain issues in the existing rule that have created industry confusion.

Mandatory arbitration: The proposal implements Dodd-Frank Act provisions that, for both mortgage and home equity loans, prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.

OK, now who wants to go back to a system in which mortgage terms were intentionally incomprehensible, when a homeowner could pay points and be essentially paying for nothing, when homeowners were steered into mortgage deals in the interest of the bankers, when there were no background checks of any kind on mortgage sellers and no required training, and when if serious problems arose there was no way for the “little guy”  homeowner to have his day in court?

Does anyone really want to go back to the “say anything” days of credit card marketing?  Money kept in the pockets of middle class working Americans by not allowing mortgage manipulation and credit card rip offs is money they could be saving or spending on their families — a far better way to grow this economy than by allowing the rip-off artists to game the system for their own benefit.

Health Care Regulations

Contrary to right wing radio talkers, there has been no government take over of health insurance in this country, and contrary to the hopes of the Single Payer advocates there is no government sponsored health care for anyone other than people over 65 who are enrolled in Medicare.

What we did get in the Affordable Care Act were requirements that health insurance corporations selling group or individual policies provide comprehensive health care insurance coverage.

Under the terms of the Affordable Care Act when the insurance corporation says it is selling you or your business a “comprehensive” or “basic” policy, the policy must include coverage of preventative health care services, inoculations, cancer screenings,  and between 80% and 85% of what they take in as premiums must be used to pay for HEALTH care — NOT executive compensation, advertising campaigns, or other non-medical administrative expenses.

So, would we like to go back to the bad old days of denial of coverage for pre-existing conditions (like being born with a food allergy, or having chicken pox), or for autism screening, for mental health care services, or when the insurance corporations could charge more for women’s policies just because they were women?

We could, for the sake of the MegaBanks and the large health insurance corporations, shave many of the Obama Administration’s new regulations, but the ultimate loser would be 99% of Americans who can’t afford to be ripped off, and shouldn’t be paying health insurance policy premiums for basic services they aren’t getting.

About Those Taxes

Let’s haul out this chart again, illustrating the point that the federal tax rates at their lowest rate at least since 1979.

The chart doesn’t conform to the received wisdom of some in the corporate media and many in the Republican Party — but that’s where we are.  There have also been some 18 tax breaks for American small businesses.  The President has also suggested a tax reform package which would cut taxes for those earning less than $200,000 per year.  [WH] The median income for a family in Nevada was $48,927 in 2011. [DoN]

So, where are all those regulations and taxes ‘hurting’ American small business owners?  The garage owners, the beauty shop operators, the small independent retailers, the lawn care services, the framing subcontractors, the dry cleaning companies, the small hardware store owners, the local lumber yard?

The Republicans need a cover story.  If a regulation impinges on the bottom line of Merger Mania Wealth Management LLC, then they decry all regulations as an impediment to economic growth.  If a regulation requires Bleedem Health Inc. to report a higher “medical loss ratio” then all regulations are detrimental to our economic growth rate.   It’s the old “de-regulation mythology” of the last three decades — and we saw where it got us in 2007-2008.

The Republicans need a narrative.  “Tax and spend” Democrats has served nicely.  No matter that the tax rates are the lowest since the Eisenhower Days, no matter that the rates can be graphed to illustrate the point.  The narrative remains because it serves the interests of large corporations and major banking operations.   Tax dollars appropriated to subsidize multi-national oil corporations are ‘beneficial,’ but tax dollars expended to train workers for 21st century jobs or veterans who seek college degrees ‘create a culture of dependency?’

We DO understand the free enterprise system, and we understand that it works best when there’s a level playing field, with rational controls to prevent exploitation, and consideration given to our entrepreneurs and our labor force of the future.   The short-term vision of the current GOP leadership mirrors the myopia of our current corporate titans — what works to increase the Quarterly Earnings Report is good.  Tomorrow we’ll leave for later.

This Scarlett O’Hara School of Business Administration combined with the  Mr. Magoo Department of Finance perspective is more destructive of American economic progress than the tepid regulations of the Dodd Frank Act and the implementation of the Affordable Care Act provisions combined.

Perhaps they just don’t understand the free enterprise system?

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Filed under 2012 election, banking, Economy, financial regulation, Health Care, health insurance

Berkley Better on Banking

Granted, it’s no surprise a progressive blog would endorse the candidacy of Rep. Shelley Berkley (D-NV1) for the Nevada Senate seat — but this isn’t a patellar reflex test.   Anyone who has been reading this blog for over a week knows that this is the place wherein a person should expect a heavy dose of “Please Can We Save Capitalism From The Wall Street Wizards Who Feel Entitled To Have Taxpayers Cover Their Losses While They Reap All The Profits.”  Or, can we please just save Capitalism?

Representative Berkley summed the regulatory situation up nicely,”As we rebuild our economy, we must put in place common-sense rules to ensure Big Banks and Wall Street can’t play Russian Roulette again with our futures. Wall Street may be bouncing back, but we know from experience they’re not going to police themselves.”

She’s located the problem creators precisely.  Big Banks and Wall Street investment firms played fast and loose with the U.S. housing market.  The aftermath is still visible on the Nevada landscape.  Foreclosures are still  moving forward in the Silver State.   And, yes, we do know that the Big Banks and the Wall Street investment firms have little inclination to rein in their trading activities if such action might cut into their revenues — and bonuses.

Personally, I didn’t get all I wanted from the Dodd Frank Act.   I’d have been a far happier camper if synthetic credit default obligations were flat illegal.  I’d have been happier if the betting with credit default swaps was more severely curtailed.  I’d have been gleeful if the act had made securitization more rational.  However, we did get (1) clearinghouse oversight of some derivatives, (2) a consumer protection bureau to supervise the more egregious practices of some mortgage marketers, (3) a rational system to determine systemic risk to our banking sector, and  (4) an orderly liquidation authority provision to replace the bankruptcy/bailout mentality on Wall Street and in Washington, D.C.

Representative Berkley supported the Dodd-Frank Act, on December 11, 2009 she voted in favor of the bill.  Representative Dean Heller (R-NV2) voted against it. [GovTrack]   There is more than a little irony in the protestations coming from Senator Heller about being “against bank bailouts,” when his vote was one to preserve the bailout/bankruptcy option status quo on Wall Street.  Far from being an affirmation of ‘bail outs,’ the Dodd Frank Act provides a resolution process to wind down banks which have the potential to cause chaos similar to the Lehman Bros. collapse.

To pound on this point a step further, the opposition to the orderly liquidation authority came from Wall Street and the Big Banks, and early in the game from Big Bank allies at Treasury and the FED.   The crucial question concerned who would get burned in the event of a meltdown.  Under the old system a Big Bank facing insolvency or illiquidity faced two options — (1) either collapse into bankruptcy; allowing the counter-parties to dodgy portfolios to grab their collateral and run, while battalions of bankruptcy attorneys fought endlessly over the remains; or (2) get “certified” as a Systemic Risk and have the Treasury Department organize a bail out.   The Big Banks calculated that the Treasury and Federal Reserve wouldn’t want a repetition of the Lehman Debacle and would ride to the rescue.

The arguments from the Big Banks were predictable — the new statutory requirements for the liquidation process weren’t  sufficiently transparent; this coming from Big Banks which had squealed the loudest about opening their books for inspection.  The new liquidation authority would cause increased bank consolidation — which was happening already because larger, better managed, banks were buying up the flotsam and jetsam in the wake of Washington Mutual, Wachovia etc.  And, finally new regulations were unnecessary because such commercial banks as Wells Fargo and Bank of America weren’t dependent on proprietary trading for their major income.  The latter is an interesting proposition because it’s perfectly possible to have a commercial bank with solid conservative management owned by a bank holding company which is a complete mess.

So, instead of a resolution authority which allows regulators to keep the bank stabilized while finding buyers for the good stuff, fencing off the bad junk, and preventing the counter-parties from running away with their stash before any other creditors can even get in line — the Big Banks wanted “better bankruptcy laws…” and the Good Old Days …with bailouts.  Then Representative  Heller was happy to oblige.   Not only did he oblige once, he obliged twice — voting against the conference report on the Dodd Frank Act H.R. 4173 on June 30, 2010. [GovTrack] Representative Berkley voted in favor of the conference report on H.R. 4173 (111th).

Want a Senator not quite so obliging and beholding to the interest of the Wall Street Wizards and the Big Banks?  The choice would be Berkley.

References and Additional Recommended Reading Hardee, North Carolina School of Law, “Orderly Liquidation Authority, 4/4/2011. (pdf) Guynn, St. Louis Federal Reserve, “The FDIC’s New Resolution Authority under the Dodd-Frank Act: Will it Work and Can It Prevent “Too Big to Fail”? Sept. 2010. (pdf) Erickson & Fucile, “Dodd Frank Reforms After 2 Years,” Center for American Progress, July 20, 2012.  Hal S. Scott, “The Reduction of Systemic Risk, Capital Markets Regulation, Nomura School of Business, Harvard University, (pdf).  American Academy of Actuaries, “Federal Insurance Regulations and Systemic Risk, links to articles.   Frank, “Wall Street Reform and Consumer Protection,” U.S. House, Summary.   H.R. 4173 (111th Congress) Bill Summary and History, GovTrackCongressional Research Service, “Financial Regulatory Reform and the 111th Congress,” June 1, 2010.  SIFMA, (Dugan, Ryan) “Bloomberg View Op-ed: Ryan and Dugan – Too Big to Fail? Then Get a Living Will,” June 27, 2012.

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Filed under 2012 election, banking, Berkley, Economy, financial regulation

Greenboard Diagram: When could a bankruptcy become a bailout?

And this is the reason to oppose any repeal of the Dodd Frank Act orderly liquidation authority for banks and financial institutions.   Those best served by the bankruptcy option are the bank executives, bank shareholders, other banks, creditors, and the battalions of bankruptcy attorneys who will sort the mess.   Those least well served are the American taxpayers.

The resolution option lets capitalism be capitalism — the well managed and strong survive and it is assumed that all investments, even shares of bank stock constitute a risk for which the American taxpayer should not be on the hook.

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Filed under banking, Economy, financial regulation

The Mortgage Modification Morass

President Obama, currently in southern Nevada — one of the unfortunate centers of the foreclosure problems in the wake of the Housing Bubble Collapse — would like to promote more mortgage modification to assist homeowners who are having difficulty paying their mortgages.  [LVSun]

Unfortunately the same problem that got us into this mess (securitization) is precisely the source of the problem getting out of it (securitization).

Why, for example, would any financial firm ever opt to promote foreclosures if there were any possibility the homeowners could be assisted to fulfill their mortgage obligations with a little modifications?

Well, if the firm is a mortgage servicing company then there are at least four reasons (shown in the graphic above) which make it more profitable for the foreclosure process to continue, than for a mortgage modification to be negotiated.  [Credit Write Downs] [AllmandLaw]

“Obama focused his address on the need for Congress to approve his housing market plan to assist “responsible homeowners” that he presented in February. The plan would allow those homeowners a chance at a lower rate, saving them about $3,000 a year.” [LVSun] (link added)

Or, a bit more specifically:

“Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac (i.e. GSE-insured loans) will have access to streamlined refinancing through the GSEs. Borrowers with standard non-GSE loans will have access to refinancing through a new program run through the FHA. For responsible borrowers, there will be no more barriers and no more excuses.” [WH]

There’s another fly in this ointment.   While the President’s proposal is certainly better than the present position of the Congress in which Doing Nothing seems always preferable to doing anything,  the plan really doesn’t go far enough.  Congressional Republicans have been enthusiastic about opposing what little has been done (HAMP) on the grounds that the underfunded and limited program hasn’t been effective — as underfunded and limited programs often are in the face of massive problems.  A short list of problem creators:

The Foot Draggers: Those who (a)  invested heavily in mortgaged based securities during the Housing Bubble, especially in the upper tranches, have little incentive to support mortgage modification if any hope remains that they’ll get their share IF they hold out.  The MBS market, recently viewed though it was some small fuzzy brown thing walking on a dinner plate, is now “coming back.” [ChiTrib] (b) There is also the MERC Mess.  Investment companies, finding the efforts of local county recorders entirely too slow to satisfy the bankers’ voracious appetite for more mortgages more swiftly, created their own electronic recording system only to see it collapse in a heap of unresolved paper work which leaves homeowners wondering who owns what.  (c) Mortgage service companies who want to protect their margins. “We find that loss mitigation is costly for servicers, in large part because servicers currently lack adequate staff and technology; unfortunately, servicers have few financial incentives to expand capacity.” [ClFed]

The Inch Worms:  The foreclosure problem is a national issue, as illustrated by Realty Trac’s map shown below:

Click on the map to go to Realty Trac for more information.  About 93% of those facing foreclosure are single family homeowners [FDIC pdf] — not the “flippers” so often blamed in some conservative blogs.  Secondly, most of the mortgages in really serious trouble are those notorious adjustable rate monsters with reset rates designed to make homeowners refinance (thus stuffing the mortgage finance industry with new revenue) rather than pay off the existing mortgage.

Any plan which allows the mortgage sector to renegotiate loan by loan day by day inch by inch is insufficient to solve the problems.  Banks or other mortgage holders need to be required to deal with categories of mortgages not individual mortgage holders.   No doubt the bankers assault on this idea on Capitol Hill would be roughly analogous to the D-Day landings in Normandy.

The Principals:  Bankers and the financial sector recoil in horror at any proposal calling for them to take any cuts in the principal of a mortgage.  This is a bit hard to stomach since these were the same little Wall Street Wizards who paid zilch attention to the types of mortgages being sold to unsuspecting, and quite often unsophisticated borrowers, all in the interest of creating fodder for their CDOs and Synthetic CDOs… There are some real estate markets, and Nevada may well be one of them, in which the foreclosure problem will not be significantly mitigated until some banks take a cram down.

Calendar Watchers:  Forbearance is a lovely word.  The White House proposal addresses this as follows:

 “Move by Major Servicers to Use 12-Month Forbearance as Default Approach: Key servicers have also followed the Administration’s lead in extending forbearance for the unemployed to a year. Wells Fargo and Bank of America, two of the nation’s largest lenders, have begun to offer this longer period to customers whose loans they hold on their own books, recognizing that it is not just helpful for these struggling families, but it makes good economic sense for their lenders as well.”  [WH]

12 MONTHS?  And, notice that the Lady Bountiful Forbearance demonstrated by Wells Fargo and Bank of America is on loans which they hold on their own books.   First, why only 12 months? Why not just get rid of the resets on those nefarious ARM mortgages and turn them into good old fashioned fixed rate mortgages?  Or, why not allow 24 months or 36 months for ‘forbearance?’

And…not to bring up another sticky point… What about those mortgages which are on someone’s books somewhere that isn’t a bank?  Unless, of course, the argument is that if BoA and Wells-Fargo can do it, why then can’t some mortgage servicer?  At which point we revert to the dis-incentives for servicers to modify much of anything.

Perhaps the best that can be said of the President’s proposal is that it does try to do something, and it does answer the Grover Norquist mailer sent to Nevada households saying that the President “promised” to solve the foreclosure crisis — which no, he didn’t.  And, in the face of extraordinary opposition from bankers, mortgage servicers, bondholders, shareholders, investment houses, and the attendant army of lobbyists thereof, it might be the best option political practicable at the moment.  It’s certainly better than Governor Romney’s suggestion that we simply let things “bottom out.”

There’s one more trap coming from the financialists — any good news concerning the housing market becomes fodder for the argument that we really don’t need to do anything because “the market is coming back.”   Tell that to the underwater, out of luck, and nearly out of time, homeowners in one of those states shown in deep red on the RealtyTrac map.

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Filed under 2012 election, banking, Economy, financial regulation, Foreclosures, Nevada economy, Obama