Friday, September 13, 2013

Today's links

1---Executives From Biggest Subprime Lenders Are Peddling Risky Mortgages Again, Huff Post

The new Holy Grail for some lenders, according to Robbins: a mortgage that complies with new rules yet “creates some opportunity to lower the bar a little bit and allow consumers the opportunity to buy homes [who] really deserve them.”
Robbins is one of several executives identified in the Center’s investigation who have gathered up their old teams and gotten back into the mortgage business. Others have tapped the same private investors who backed out-of-control lending in the previous decade.
The lenders vary in how willing they are to accept lower down payments, weaker credit scores or other factors that can make a loan more risky.
New Penn Financial allows interest-only payments on some loans and lets some borrowers to take on payments totaling up to 58 percent of their pre-tax income....

Pollock is among at least 14 founders or CEOs of top subprime lenders whose post-crisis employers want to serve consumers who might not be able to qualify for bank loans....

Five years after the financial crisis crested with the bankruptcy of Lehman Brothers Holdings Inc., top executives from the biggest subprime lenders are back in the game. Many are developing new loans that target borrowers with low credit scores and small down payments, pushing the limits of tighter lending standards that have prevailed since the crisis.
Some experts fear they won’t know where to stop.
The Center for Public Integrity in 2009 identified the top 25 lenders by subprime loan production from 2005 through 2007. Today, senior executives from all 25 of those companies or companies that they swallowed up before the crash are back in the mortgage business. Most of these newer “non-bank” lenders are making or collecting on loans that may be too risky to qualify for backing by the U.S. government. As the industry regains its footing, these specialty lenders represent a small but growing portion of the market....

Companies are expected to issue more than $20 billion of the non-guaranteed bonds this year, up from $6 billion in 2012, according to an April report from Standard & Poor’s. By comparison, in 2005, just as home values began to dip and foreclosures to rise, companies bundled $1.19 trillion in mortgage-related investments that were not backed by the government.ZA...

After Kurland’s departure in late 2006, to boost production, Countrywide “eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud,” according to a civil complaint filed last year by the Justice Department against Bank of America, which purchased Countrywide in 2008.....

Getting back on the horse
Another industry veteran looking to return is Thomas Marano, who led the mortgage finance division at Bear Stearns and was on the board of its subsidiary, EMC Mortgage. He then took over the mortgage subsidiary of GMAC, another top subprime lender. Lawsuits filed by federal regulators allege that Marano’s unit was so hungry for new loans to securitize that they weakened their standards and slipped bad loans into pools of mortgages that were resold to investors.
Asked recently about his plans, Marano said he’s toying with the idea of launching or buying a non-bank mortgage company.
“I’ve been modeling the numbers on … those opportunities and I’m intrigued with that possibility,” he told The Wall Street Journal. The mortgage business “is a pretty hot space right now so I’m really looking at those two options, really doing it on my own or doing it with someone who’s got more of the infrastructure established.”.....

The ‘toxic business model’
Dan Alpert, managing partner with the investment bank Westwood Capital LLC, says there is a reason why the same players keep getting back in the game: There was no meaningful effort by the government to identify bad actors and hold them accountable.
“Had there been prosecutions,” Alpert says, companies wouldn’t touch anyone deemed responsible “with a 10-foot pole. The only thing people are concerned about is the loss of their freedom. They can lose all their money and make more money, but they take it quite seriously when jail is staring at them,” he says.

2---What a surprise!!! Israel: Spying on Americans, antiwar
           Officials Reject NSA Documents as 'Libel'

3---JPMorgan Removes Lending Barriers in Booming U.S. Markets, Bloomberg

Bottom line:  JPMorgan decreased the minimum downpayment on mortgages made in Florida for primary residences to 5 percent from 10 percent and down to 10 percent from 20 percent for second homes, according to Bonitatibus. ...

During the crash, borrowers in California, Florida, Nevada and Arizona needed a credit score of at least 700 and could have a maximum loan-to-value ratio of 90 percent to qualify for mortgage insurance....Last month, the third-largest U.S. mortgage insurer limited rules so borrowers whose loans qualify for purchase by Fannie Mae or Freddie Mac with credit scores of at least 620 and a loan-to-value ratio up to 97 percent can get insurance coverage, according to Miosi.
(Standards easing due to CFPB's QM rule)

JPMorgan Chase & Co. (JPM), the nation’s largest bank by assets, is easing mortgage lending standards in housing markets hard hit by the crash where prices are surging.

The bank lowered some down payment requirements in Florida, Nevada, Arizona and Michigan because they will “no longer be considered distressed states,” it informed smaller lenders it buys loans from in July. The second-largest U.S. mortgage lender also loosened underwriting requirements for a refinancing program for Federal Housing Administration borrowers...

More than 10 percent of banks reported they loosened standards on “prime” or low-risk residential loans in recent months, according to the Federal Reserve’s July survey of senior loan officers. The average FICO score for closed loans fell to 737 in July, the lowest level since at least August 2011...

JPMorgan removed a minimum 640 credit score requirement for the FHA’s streamlined refinancing program in May, enabling more borrowers to get new home loans at lower interest rates, according to spokeswoman Amy Bonitatibus.....

The U.S. homeownership rate fell to 65 percent this year, its lowest level since 1995, according to Census Bureau data, as fewer people were able to qualify for a mortgage...

JPMorgan decreased the minimum downpayment on mortgages made in Florida for primary residences to 5 percent from 10 percent and down to 10 percent from 20 percent for second homes, according to Bonitatibus. ...

During the crash, borrowers in California, Florida, Nevada and Arizona needed a credit score of at least 700 and could have a maximum loan-to-value ratio of 90 percent to qualify for mortgage insurance with MGIC, said Sal Miosi, vice president of marketing at the Milwaukee-based firm.

Added Complexity

Last month, the third-largest U.S. mortgage insurer limited rules so borrowers whose loans qualify for purchase by Fannie Mae or Freddie Mac with credit scores of at least 620 and a loan-to-value ratio up to 97 percent can get insurance coverage, according to Miosi. ...

President Barack Obama’s administration has been pushing to expand homeownership opportunities as families rebuilding from the recession face some of the tightest underwriting standards. The president last month introduced new housing reforms targeted at middle-class communities.
Borrowers with foreclosures or bankruptcies resulting from a job or income loss can now finance a home purchase with an FHA mortgage as long as they demonstrate 12 months of timely payments, complete housing counseling and otherwise qualify. The FHA, a government mortgage insurer, previously required a three-year wait.
More than 7 million houses have been sold for a loss or lost to foreclosure since 2007, according to RealtyTrac

4---Why the Wall Street Perps Walked, Dean Baker

That is obviously true, but this is not the issue. The Financial Crisis Inquiry Commission (FCIC) found:

"Lenders made loans that they knew borrowers could not afford and that could cause massive losses to investors in mortgage securities. As early as September 2004, Countrywide executives recognized that many of the loans they were originating could result in “catastrophic consequences.” Less than a year later, they noted that certain high-risk loans they were making could result not only in foreclosures but also in “financial and reputational catastrophe” for the firm. But they did not stop.
"And the report documents that major financial institutions ineffectively sampled loans they were purchasing to package and sell to investors. They knew a significant percentage of the sampled loans did not meet their own underwriting standards or those of the originators. Nonetheless, they sold those securities to investors. The Commission’s review of many prospectuses provided to investors found that this critical information was not disclosed."

The question was not whether the top executives of mortgage issuers like Countrywide and investment banks like Goldman Sachs bought into the housing bubble, the question is whether they followed proper business practices in their lust to cash in. The assessment of the FCIC is that they did not. Issuing a mortgage that is known to be based on false information and then selling it in the secondary market is fraud and punishable by time in jail. Similarly, packaging loans into mortgage backed securities that an investment bank has good reason to believe are based on false information is also fraud and punishable by time in jail. (It's actually common for true believers in a bubble to also commit fraud. It is likely top executives at Enron believed that they were actually running a profitable company.)

The way prosecutors would construct a case to prosecute top executives would be by starting at the bottom. They would have gone to branch offices at major subprime issuers like Countrywide and Ameriquest and find out why mortgage agents were issuing so many mortgages with improper documentation. Since this was done by many agents, they presumably could have gotten one or more to report that this was a policy of the branch manager. Presumably branch managers told agents that they needed to issue certain numbers of mortgages and they did not care if the mortgages did not meet proper standards.

Prosecutors would then ask branch managers why they thought it was clever to tell their agents to issue mortgages without proper documentation. Since many branches engaged in these practices, presumably this was the policy of the company. This should have led to prosecutions at the main offices of these subprime issuers, if not the very top executives.

Serious efforts at prosecuting the investment banks would follow the same process. The people who put together some of the worst mortgage backed securities would be asked if they were really dumber than rocks and had no idea that many of the mortgages being put into the packages were fraudulent. If the prosecutors could demonstrate evidence of intelligent life at Goldman Sachs and Morgan Stanley they would then ask the lower level people whether they wanted to spend years in jail or would rather explain why they thought it was a good idea to put tens of millions of dollars of fraudulent mortgages into mortgage backed securities. This would presumably lead to testimony against higher ups at these investment banks.
There would be a similar process at the bond rating agencies. In the case of Standard & Poors, there was actually a famous e-mail in which one auditor complained that they would rate an issue as investment grade if it was structured by cows. A serious effort at prosecution would ask these auditors how they came to believe that it was their job to rate issues structured by cows as investment grade.

5---Five Years after Market Crash, U.S. Economy Seen as ‘No More Secure’Household Incomes, Jobs Seen as Lagging in Recovery, PEW

6---Consumer Sentiment Posts Sharp Decline, WSJ

7---Military Times Survey: 75% of Troops Oppose Strikes On Syria, zero hedge

8---WHO refuses to publish report on cancers in Iraq caused by US depleted uranium, Info clearinghouse

9---Don’t touch my repo, repowatch






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