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There's a new mortgage crisis brewing [Richard Bove]
CNBC ^ | 2015 February 23 | Richard X. Bove

Posted on 02/24/2015 4:49:11 PM PST by CutePuppy

In 2008, the nation entered into a financial crisis widely believed to have been caused by excesses in the residential mortgage industry. By 2010, the nation thought it had put in place a series of measures that not only would resolve the crisis but would insure that it never happened again. Yet, here we are in 2015 looking at another potential mortgage crisis. Only this time it is different. In 2008, funds flowed in waves into the mortgage industry. In 2015, it appears the funds are drying up.

The solutions to the problem in 2010 and thereafter included:

The belief was — and is — that the market would adjust to the new and somewhat harsher conditions, and that mortgage funds would flow into housing as before. Moreover, to stimulate this flow, the Federal Reserve began buying $10 billion in mortgage backed securities every week.

At some point the rules and regulations, fines and accounting changes made it evident to many bankers that they could not make money originating mortgages. ..... Further, the banks had no stomach for making unqualified mortgages, which could get them sued for yet tens of billions of dollars more. Plus, the Federal Reserve stopped buying mortgages and Fannie Mae and Freddie Mac began selling them. .....

(Excerpt) Read more at ...

TOPICS: Business/Economy; Editorial; Government
KEYWORDS: banking; banks; bove; cfpb; crisis; debt; deficit; economy; fannie; feddie; fhfa; financial; freddie; mortgage; richardbove; thefed
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Long time coming... Between beating up on the "banksters" for not making new loans to the "under-served" groups, and fining them billions of dollars for making or having made the "predatory" loans to the "unsophisticated and underprivileged" borrowers — which the government had required them to make under various administrations' "home ownership society" policies, like CRA etc. — banks don't have much choice but to curtail some of the operations altogether and/or pass the cost of these regulations to [some of] their customers***.

Several salient points in this communiqué by Richard Bove (equity research analyst at Rafferty Capital Markets) :

Federal Housing Finance Agency (FHFA), the successor of FHA and the agency that regulates Fannie Mae and Freddie Mac, became alarmed at mortgage loans not being made, so they "told mortgage originators to ignore the Consumer Financial Protection Bureau**'s qualified rules and create mortgages with as high as 97% loan-to-value ratios (LTV)." They also "ignored the Treasury Department's mandate to shrink Fannie and Freddie and required these two companies to increase the number of mortgages that they are guaranteeing."

Basically, one regulatory hand of the government ignored and told private sector to ignore what two [out of many] other regulatory hands of the government were doing or mandated to do.

Now that Fannie and Freddie are taking fiscal losses (due to requirements that they pay dividends to the Treasury as part of the bailout plan, and now the dividends began to outstrip their earnings), the politicos are getting concerned that Fannie and Freddie will need another infusion of capital in the event of continued large losses, instead of being eventually phased out of existence as part of the original conservatorship plan. According to Bove, the people who looked at F&F BS (balance sheets) see that "their equity is disappearing in payments to the U.S. Treasury while their guaranteed book of loans is growing." What is happening is that F&F are creating more unqualified mortgage debt obligations [now explicitly] guaranteed by Uncle Sam, while everybody, including the "regulators" and Congress, is whistling Dixie. The problem is that are again accepting the Depression era Rooseveltian philosophy of needing government agency / F&F for creating and backing mortgage loans. So now they feel as in Catch-22: if they stop expansion of F&F, the housing market (which has been pretty weak to date) may stop cold, and if not, F&F will happily go on increasing taxpayers' debt obligations.

What isn't mentioned in the article — because it's a different, though tangential subject — but is worth noting, is that the Treasury has been getting paid substantial dividends by F&F since conservatorship (as well as receiving excess profits annually from the Federal Reserve as it always had - in recent years, somewhere around $100B per annum, on average), which substantially reduced the budget deficit that Obama is so crowing about. In case of Fannie and Freddie, it's one hand getting the money that is visibly applied to the deficit, while the other hand, invisibly, creating more debt, i.e., borrowing LT debt to pay the current deficit.


** CPFB was the wet dream and the creature of Elizabeth Warren finally enshrined in Dodd-Frank, which embedded the liberal slush fund / regulatory quasi-agency within the Federal Reserve, so it can be self-financed and unaccountable to Congress and/or even future Presidents, and as such, extremely difficult to eradicate.

*** Also related: see today's headlines about JP Morgan starting to charge big customers for large deposits (i.e., negative interest rates, usually signifying disinflation or deflation and odious regulatory environment that are specifically targeting them lest they make a profit):
Banks don't want these clients' cash - CNBC / WSJ, 2014 December 08
Banks charging businesses fees a 'bad idea' - CNBC, by Kayla Tausche, 2014 December 08

1 posted on 02/24/2015 4:49:11 PM PST by CutePuppy
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To: CutePuppy

The recordkeeping required for originating mortgates, iinm, requires a small army.

2 posted on 02/24/2015 4:52:17 PM PST by 9thLife ("Life is a military endeavor..." -- Pope Francis)
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To: CutePuppy

Great report.

3 posted on 02/24/2015 4:59:59 PM PST by SharpRightTurn (White, black, and red all over--America's affirmative action, metrosexual president.)
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To: 9thLife

We financed a piece of investment property two years ago that we owned outright, wanting to invest the funds elsewhere.

The application process was a nightmare, even though our credit is excellent.

With rates recently dropping, we are in the process of doing a re-fi with the same mortgage group (, and just in the two years seeing a significant increase in information we have to provide - even though our credit rating is over 800......

If this keeps up, no one will be able to finance any property. Period.

PS: The rates, service, and response from Amerisave staff are incredible - cannot recommend them highly enough. Other in the industry tell me they can’t touch the rates they offer. If you are looking for a mortgage or re-fi, PM me and I’ll give you a great person to contact. Not the same person who served us 2 years ago, but just as incredible. Don’t know her personally, but cannot recommend more highly.....give her a 12 on a 10pt. scale....

4 posted on 02/24/2015 5:04:30 PM PST by Arlis (A "Sacred Cow-Tipping" Christian)
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To: CutePuppy

So what did Bush and Congress give them 700 billion dollars for back in 2008?

Looks like it all went in their pockets. The American tax payer robbed once again by the banks

5 posted on 02/24/2015 5:26:55 PM PST by MadIsh32 (In order to be pro-market, sometimes you must be anti-big business)
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To: Arlis
even though our credit rating is over 800......

Congrats! Well above "average" but if you are disciplined, it's effortless - it's a state of mind.

If this keeps up, no one will be able to finance any property. Period.

In the last few years a lot of residential investment/rental properties have been bought for cash or with less than 20% financed, either by large PE firms or hedge funds (like Blackstone, or Colony American, and some were even created / spun off for this purpose, like the largest "pure" public REIT "American homes 4 Rent") or by HNW/UHNW cash-rich individuals / co-ops / 1031s etc., so the process entirely bypassed the whole morass of mortgage loan "system" as most people know it. It's pretty tough competition, though it seems like at this point these REITS are selling some chunks of appreciated properties in some areas and moving into other, more profitable for them, venues.

6 posted on 02/24/2015 5:38:50 PM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: MadIsh32
So what did Bush and Congress give them 700 billion dollars for back in 2008?

If you mean $700B of credit facilities authorized under TARP, then only about $450B maximum was loaned out maximum at any given time (though more in total as some loans were made after some earlier ones have been repaid), and everything has been repaid to the Treasury and Fed, with interest, though not every borrower repaid the money... i.e., TARP well paid for itself and helped save the economy from downward credit spiral.

By contrast, EU and ECB tried to do something similar in fits and starts, late and on the cheap, and they are still in much deeper trouble. Though they do not have the same centralized structural economic advantage that the US has.

7 posted on 02/24/2015 5:53:10 PM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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To: Arlis
If this keeps up, no one will be able to finance any property.

Homes have been way over priced for many years. It's why most nowadays are being purchased imported foreigners with lots of money or government employees, most of which are considered to have "secure" jobs with benefits etc.

Outside of those mentioned above, most buying can barely afford them even with two incomes and it only takes one bump in the road where that home becomes their worst punishing nightmare ever.

Welcome to the new America...

8 posted on 02/24/2015 6:15:46 PM PST by dragnet2 (Diversion and evasion are tools of deceit)
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To: 9thLife

JP Morgan Chase announced the closing of 300 branches (Or 5%) by 2017

9 posted on 02/24/2015 6:17:45 PM PST by griswold3 (Just another unlicensed nonconformist in am dangerous Liberal world.)
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To: griswold3

“JP Morgan Chase announced the closing of 300 branches (Or 5%) by 2017”

Not mortgage related. Bank branches are much less needed now. I can deposit checks on my IPhone for example. I ( and many other people) very rarely need to go to a bank branch to do business; even though I work in one!

10 posted on 02/24/2015 6:27:25 PM PST by HereInTheHeartland (Pants up; don't loot)
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To: CutePuppy

“There’s a new mortgage crisis brewing”

The debt shackle, clink, of a body mortgage, on every U.S. citizen, except the exempt...they’re special.

11 posted on 02/24/2015 6:34:43 PM PST by Varsity Flight (Extortion-Care is is the Government Work-Camp: Arbeitsziehungslager)
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To: 9thLife

I could not refi my mortgage because I was an independent contractor physician, even though I could prove more then adequate income and assets. It was rediculous . We finally were able to do it last year but ONLY after I became an employee.

12 posted on 02/24/2015 7:13:53 PM PST by Kozak ("It may be dangerous to be America's enemy, but to be America's friend is fatal" Henry Kissinger)
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To: expat_panama

Ping. A little food for thought.

13 posted on 02/24/2015 7:26:53 PM PST by Lurkina.n.Learnin (It's a shame nobama truly doesn't care about any of this. Our country, our future, he doesn't care)
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To: CutePuppy

The problem in RE is the overhang of too high mortgages in underperforming, over financed properties.

Had government done nothing then:

1. Housing prices would have fallen.

2. Interest rates would have risen.

3. Smart money would have snapped up real bargains.

4. States and municipalities would have been forced to fix pensions/budgets based on reduced property tax revenues.

5. Market equilibrium would have been established years ago.

6. The economy would be hot, naturally hot.

7. Liberty would have grown.

Thanks to the DC Uniparty none of the above happened, but the stock market is booming.

14 posted on 02/26/2015 4:59:45 AM PST by 1010RD (First, Do No Harm)
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To: Arlis

Residential or commercial property?

15 posted on 02/26/2015 5:01:02 AM PST by 1010RD (First, Do No Harm)
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To: CutePuppy

The tide comes in and the tide goes out. Luckily, government chose the winners and the losers and saved us from a “downward credit spiral”.

1. Do downward credit spirals really happen?

2. If yes, are the caused or cured by government?

16 posted on 02/26/2015 5:05:36 AM PST by 1010RD (First, Do No Harm)
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To: Arlis

I think that those without credit scores qualifying will still qualify on the basis of color. There will be more bad loans mandated by the government. However, those with great credit scores and jobs that underpin the original premiss for racial preferences have so muddled the Nation at every turn so as to put everything at risk.

17 posted on 02/26/2015 5:39:51 AM PST by Jumper
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To: 1010RD

Excellent correlation between tax valuations and local tax expenditures, and liberty by extension.

18 posted on 02/26/2015 5:42:17 AM PST by Jumper
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To: Jumper

Thanks. It’s often overlooked and it shouldn’t be.

19 posted on 02/26/2015 5:48:20 AM PST by 1010RD (First, Do No Harm)
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To: 1010RD

The problem in RE is the same as it was before the financial/credit crisis : overregulation, same players forcing the same kind of rules that led to the crisis in the first place (many hands of federal and state governments trying to force lending to marginal or unqualified borrowers) while at the same time forcing same lenders keep much higher capital reserves (thereby reducing their lending capacity) and running "stress tests" and inspecting their MBS and other credit portfolios for "risk level" as well as reducing earning capabilities of such lenders by Frank-Dodd and CFPB regulations (e.g., against private trading and credit cards fees etc.) in already low-interest environment - in other words, there are now even more regulations of and penalties against financial/lending institutions and most of these are more draconian than were before the crisis, which also explains why there are fewer [smaller] banks than were before the crisis - the environment is simply not conducive to small lending. Even if it's "qualified" by one of the agencies today, doesn't stop them from suing and/or levying fines on the lender tomorrow ("been there, done that, lost their shirts"). Being sued or penalized for not originating the mortgage loan is a lot less likely and a lot less painful than for originating a "potentially questionable" mortgage loan, as the article clearly spelled out.

... as they did.

... as they did - Libor did sharply and credit froze (which is why it's been called a credit crisis, along with other names) until it became obvious that TARP allowed to net out (see one of the previous links for explanation of mechanism) most of the liabilities and/or backstop others for extensive period of time until it was no longer needed.

... as they did, after it became obvious that credit crisis was [nearly] over and they no longer needed or required to hoard the money to cover any credit/debt, legal or regulatory liabilities - e.g., Buffet was asked to use his unrestricted cash to provide credit/investment to shore up the balance sheets and viability of some financial institutions on very favourable to him terms; backstops were also used to help temporarily finance transfers of deposit-bearing accounts at institutions/banks/brokerages that would overwhelm puny resources of FDIC and SIPC and would cause run on the banks on unprecedented scale, with government liabilities in trillions of dollars.

Forced? Not any more than they are now, Detroit and Chicago and Puerto Rico and few mostly Dem states, that we all know, being prime examples. They can always find a few more taxes to levy or cut "non-essential" programs and/or ask the state/federal government to bail them out to preserve as much union-backed defined-benefits plans, with as little haircut to themselves as possible (e.g., Risky Rates: Government pension funds take chances with their employees' money. - B (sub), by Thomas G. Donlan, 2013 September 09 -   names   "Los Angeles, Chicago, Baltimore, Philadelphia, Buffalo, Rochester, Providence, and many other cities — and some states, notably Illinois and California..."     and     State of the States - B (cover), by Andrew Bary, 2012 August 27, with the table of all states, with lowest and highest unfunded liabilities (JPG)).

... as it has, save for bad old and new taxes, mandates and regulations, some of which were clearly described in the article.

All because the deposit-bearing and credit institutions (banks, brokerages, money-market funds, ccredit unions etc.) and scores of non-financial businesses would fail (as they started to do as they no longer could obtain financing or credit or get any sort of liquidity from their assets, marked-to-market/marked-to-zero to meet payroll or accounts payable) resulting in Depression-era unemployment and additional government obligations while the Fed and the governnment looked blithely on? How about the bear raids and run on the banks that already started to happen (see Reserve Primary Money Market Fund "breaking the buck" and consequent run, though unseen by most because it was electronic and was met with immediate action by the Fed**)

Exactly how would not providing temporary liquidity (i.e., TARP/TALF) to shore up financial institutions — which cut short the financial credit and liquidity crisis — would produce such wonderful, "naturally hot" economy? Based on what parameters or history***? What is "natural" about US government's tax, spending and regulatory policies?

Why are fiscal and regulatory policies which have the primary role in economy ignored or never mentioned in these discussions of economy's problems? Would we have fewer programs (stimuli, cash-for-clunkers, Obamacare, "infrastructure" etc., etc.) regulations, taxes or more if we had the Depression-era financial, housing and unemployment situations? Anybody seriously think that whatever feeble recovery is now (thanks to the Fed's low interst rates and QEs temporarily and partially absorbing piiles of new government debt) it would be allowed to grow "naturally" and would become "hot" despite all the socialist policies of Obama administration and Democratic/split Congress as well as half the industrial world still being in recession or near it and in disinflation, with other countries governments and their central banks playing "competitive currency devaluation" games, and most of the countries' populations having lost and still losing equity and real purchasing power compared to 2008?

The fixation on the Fed and monetary policy as the end-all and be-all of the economy, while ignoring the fiscal and regulatory policies, is only playing to Obama's and Dems' hands - they will take credit for anything that's good (like recently saying "You're welcome", taking credit for lower gasoline prices that he worked so hard to increase) and implicitly or explicitly blaming the Fed for subpar employment growth or anything else, no doubt being joined by the chorus of "Paulist" conservatives and libertarians who made their careers using attacks on the Fed as their stepping stones in politics.

Here's a simple example: European Union's (EU) "eurozone" (EMU) has the Europran Central Bank (ECB) and single currency - euro. All eurozone countries' economies should therefore be similar, right? How do you explain Germany and Greece or Spain? Same currency and same interest rates, entirely different governments' fiscal policies and respectively, their economies (think Texas and New Jersey or Illinois - same Fed's monetary policy, same QE, same TARP, same interest rates, different taxes, different regulations, different deficits, different economies etc.) See The State of Greek Business - FR, post #44, 2012 February 08,   and   The great euro Putsch rolls on as two democracies fall - FR, post #29, 2011 November 13

Exactly how would liberty have grown in the Depression-era environment, where even more people would depend on the government money and services? Did liberty grow under Franklin Delano Roosevelt and his policies? How would it grow under Obama who would use it to create evem more socialist programs and regulations than he was able to do using "the worst economy since the Depression" to push his agenda? More likely he would nationalize or come close to it, the banking system and some other "essential to financial security" industries, just like he did, or attempted to, with insurance, student loans and so on.

What's wrong with the stock market booming, if it's based on real profits? As long as we point out the real reasons for it and don't give credit where it is not due, we should be OK. Of course, GOP is notoriously bad at that, except couple of times in the 80s and 90's, thanks to few individuals who knew how to do it.


** Defusing A $5.5T Run On The Banks - FR / NYP, by CP, posts #1, #12, #24, #25, #32, #36, #38, 2009 February 15

Father of money market funds charged with fraud - FR, posts #10, #11, 2009 May 05

TARP repayments of $194 billion exceed outstanding balance of $190 billion - FR, posts #7, #14, #18, #34!, #35, #41!, #42!, #44!, #46, 2010 June 12

Taxpayers Face Heavy Losses on Auto Bailout | Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion - FR, post #25, 2009 September 09

*** When One Man Was the Central Bank | Rand Paul Draws Liberal Fire As The Left Discovers Its Inner Love Of The Fed - FR, post #16, 2015 February 25

20 posted on 02/26/2015 12:25:41 PM PST by CutePuppy (If you don't ask the right questions you may not get the right answers)
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