Readers have hopefully had the opportunity to read “The Center for American Progress Objects to Our Critique of Its GSE Reform Plan”, which contained an e-mail by David Min of the Center for American Progress presenting its bones of contention.
While we appreciate that the CAP has gone to the trouble to communicate with us directly, we are not persuaded by its arguments.
We’ll recap the e-mail and then address the issues individually:
1. You need to have some form of government guarantee to have a mortgage product that is fair to middle class consumers (his writing is a bit confused, at one point he uses “no” when he means “yes”, but this is the drift of his gist).
2. We’ve mistated who would eat “catastrophic risk” under the CAP scheme, since the Catastrophic Risk Fund and the new mortgage insurer investors would take losses first
3. Not all “banks” are behind or support the CAP proposal
4. This plan is the best option for the public and less lucrative to the financial services industry than a “privatization” model
Let’s dispatch these arguments in order.
Without a government guarantee, mortgage products would be a bad deal for average consumers. This belief is contradicted by the fact that every advanced economy in the world has a long dated mortgage market, and virtually all also have a high level of middle class homeownership, some like Australia even higher than the US, with no Freddie/Fannie equivalent or other form of large scale government mortgage guarantee program.
The credit guarantee has allowed the US to have unusually consumer favorable features in its 30 year product, namely both fixed rates and no restrictions on prepayments. Analysts outside the US (including former government officials) consider the US product to be unattractive to investor because it makes them bear all the interest rate risk. Thus the government guarantee effectively subsidizes features which the experience of the rest of the developed world says are unnecessary to have a healthy mortgage market.
In addition, there is evidence in the US that the private market will provide attractive products without a guarantee. As we and Dean Baker have stressed, the jumbo mortgage market is only at a modest rate premium to the Freddie/Fannie market, normally 25 to 40 basis points, post crisis more like 75 basis points. The market has admittedly been thin post crisis, but that has much more to do with investors sitting on the sidelines due to the lack of securitization reform than antipathy to this type of borrower (if a investor were to go into a non-guaranteed deal pre-reform and then stronger reforms were implemented, they would be the new standard and would probably lead to his pre-reform purchase being repriced downward. No portfolio manager wants to look like an idiot and take losses by stepping in front of an obvious risk).
There are other long standing niches that disprove the Min thesis. Loans to co-ops (a New York City staple) have never been GSE eligible, and they include middle class housing, particularly in the outer boroughs. A fair portion of the condo market is also not GSE eligible.
Moreover, a thirty year fixed rate mortgage is not always the best product for borrowers. An adjustable rate mortgage, particularly one with floors and ceilings on interest rate movements (which was a staple of co-op loans in New York in the early 1980s)
In addition, a thirty year fixed rate mortgage is not always the best product for borrowers. An adjustable rate mortgage, particularly one with floors and ceilings on interest rate movements (which was a staple of co-op loans in New York in the early 1980s) would in many cases be better for borrowers.
The government guarantee product also comes with not-widely recognized systemic risk. As we discussed back in 2007 and intermittently since then, Freddie and Fannie engaged in hedging on a massive scale to manage the interest rate risk of their exposures. This hedging was “pro cyclical”, which meant it increased the amplitude of interest rate movements. In 2002 and 2003, Fannie and Freddie hedging had reached the scale where it was economically destabilizing. And as John Dizard described in the Financial Times in 2008, this interest rate risk was also a hazard to Fannie and Freddie themselves:
At the beginning of this decade, derivative risk management geeks, interest rate swaps traders and central bank econometricians filled up entire server farms with what-ifs on the balance-sheet hedging activities of the GSEs. The essential problem was that the GSEs were balancing ever-larger portfolios of fixed-rate mortgages on tiny equity bases. Fortunately, as we all knew, the credit risks of those portfolios were limited because homeowners rarely default on their mortgages. But that still left very large interest rate risks.
The core problem for the housing GSEs is, and has been, the prepayment option embedded in US fixed-rate mortgages. That has meant that the term of the GSE assets extends or contracts depending on whether homeowners can refinance at an advantageous rate. However, most of the long-term debt on the liability side of the GSE balance sheets has a fixed term. So the GSEs must more or less continually offset this imbalance between the average maturity of their assets and liabilities through the derivatives market, specifically the interest rate swap market. Otherwise the mark-to-market losses would overwhelm their small equity bases.
This process of risk control on the part of the GSEs creates systemic risk for the fixed-income markets. GSE hedging tends to be pro-cyclical. As interest rates rise, the average term of the GSEs’ assets extends, since homeowners are not refinancing. As rates fall, the average term contracts, as homeowners prepay the mortgages on the GSE books. So the hedging activities tend to accentuate market moves. As rates rise and bond prices fall the GSEs are, in effect, selling fixed-income derivatives into a falling market. As long as the derivatives books are small relative to the size of the market, that is not a big problem. When the GSE derivatives books got big, that was a problem.
By 2001 Fannie and Freddie together had more than 10 per cent of the total market in dollar-based interest rate derivatives. That concentration of risk was worrisome for the central banks. As we wrote at the time, they were concerned that the banks and brokers who were the counterparties for the GSEs would need back-up for these commitments from the Federal Reserve Board. Worse, from the point of view of the Fed, and Alan Greenspan in particular, the GSEs’ management had financial incentives to continue to expand their books of business. They had the political clout, since expanding the number of homeowners had strong support across party lines in Congress.
To give a frame of reference, LTCM held 10% of the dollar interest rate swaps position at the time of its implosion. Roger Lowenstein’s When Genius Failed depicts this swaps position as the proximate cause of its demise.
Concern about the risks of the GSE’s hedging may have been one reason why that the Maestro pushed adjustable-rate mortgages, since an ARM product would not need to be hedged. So independent of other considerations, large scale GSE equivalents in the business of insuring the sort of product the CAP clearly prefers and the Treasury bizarrely treats as sacred in its report, the “pre- payable, 30-year fixed-rate mortgage,” will increase, not reduce, systemic risk
Taxpayers will not eat catastrophic risk. We need to back up and explain the CAP plan a bit (which happens to be close to a consensus plan; it’s virtually identical to ones presented by the Mortgage Bankers Association, the New York Fed and the Financial Services Roundtable; one later put forward by Mark Zandi differs only in cosmetic details).
Instead of having the GSEs, which were in a weird indeterminate state between public and private until the box was opened and they were revealed to be public (shame they handed out all that executive comp before they figured that one out), the CAP proposal claims to have a better version: the new GSE analogues will be private!
Peel the onion further and you see how questionable that is. The GSEs 2.0 are an even worse combination of public backstopping of private sector risk. We should know by now this movie ends badly and should be undertaken only when an entity is regulated like a utility (and that includes utility-company pay to the top employees).
CAP would replace the GSEs with Chartered Mortgage Institutions. They would get a BETTER guarantee than the GSEs ever had, an explicit guarantee of the CMI’s obligations, (note the detail later in the document carves out the CMIs’ own bond issues, but the government stood behind not only the Frannie bonds, but those of every major bank save WaMu. We can hardly be certain the resolve to let bond investors take their lumps will hold in a future crisis).
These CMIs would be required to hold more capital than the old GSEs and would pay premiums into a fund called the “Catastrophic Risk Insurance Fund”. Now because it is called a “Catastrophic Risk Insurance Fund” we are therefore supposed to think it covers catastrophic risk. If you believe that, I have some AAA rated CDOs I’d love to sell you.
The fund is modeled on FDIC insurance. That alone should be a tipoff. FDIC insurance has never been fully priced to cover banking system risk. FSLIC premiums were inadequate to clean up the savings & loan crisis (the process of getting budget approvals for the cleanup was hugely contentious) and FDIC reserves fell even more obviously short in the crisis just past (witness the TARP, the alphabet soup of Fed facilities, the Fed’s not-so-hidden subsidy of super-low interest rates).
Having been at McKinsey when the firm was pushing securitization (the message to clients was “you are on this bus or you are under this bus”), the analysis was very clear. The economics of securitization worked thanks to regulatory arbitrage. The cost advantage, which was compelling, was due to saving the cost of bank equity and FDIC insurance. Basically, if you price the guarantee high enough to cover the true tail risks (which both risk models and human nature underestimate), which is what “catastrophic risk” amounts to, the true cost of the insurance is certain to be higher than what the premiums will cover.
Consider what is likely to happen: a credible “catastrophic risk” fund must accumulate huge reserves in a seemingly safe environment. This invites CMIs to lobby regulators for lower rates, since they are sitting on a huge fund and experience has shown that there is no apparent risk.
Put it another way: a full faith and credit obligation of the US is a full faith and credit obligation, meaning ultimately borne by the taxpayer. Yes, the CAP plan puts in first and second loss buffers (the “Catastrophic” Risk Insurance Fund and hopefully the equity and bondholders of the CMIs themselves) but the taxpayer shoulders any additional losses. Pretending otherwise is a major misrepresentation. Min sort of concedes the point, but argues all the protections will work:
Along with resolution authority, and the ability to issue “ex post facto” assessments if the Fund is running low, we strongly believe (although clearly one can never predict anything with 100% accuracy) that the taxpayer is fully protected.
I must note:
The GSE were fully domestic firms, and there were no legal impediments to resolving them (unlike the major dealer banks, which had globe-straddling operations). So “resolution authority” existed (Paulson’s conservatorship is a variant use of the same power), yet we didn’t go that route with the GSEs. Why? As the US’s top bankruptcy lawyer Harvey Miller said when he was stunned to be told to file for the Lehman bankruptcy, the resolution of even a mid-sized broker-dealer is highly disruptive to markets (and broker-dealers are very well regulated; to my knowledge, none of meaningful size has every failed to pay out to all its creditors in bankruptcy).
And the other issue all these schemes miss is that having more CMIs is unlikely to reduce the risk. Recall the scenes from Andrew Ross Sorkin’s Too Big Too Fail. Paulson told the Fannie Mae chief Daniel Mudd that he was going to put the company into conservatorship. He was stunned and argued his firm was sound (and it was in much better shape than Freddie). This wasn’t simply his view; the dean of US bank regulatory lawyers, the normally cool and collected Rodgin Cohen, exploded at his Treasury contact when he got word. Paulson said it didn’t matter, the markets would not believe him. And Paulson had already lobbied Fannie’s Congressional backers.
But Paulson’s view may have been well founded, and even if not, it reveals how regulators are certain to react the next time a big financial firm founders. When investors lose faith in a leveraged business, the spreads blow out and financing costs spike. A company that is in the markets often for funding will find it hard to roll its debt on affordable terms. If one CMI were to go under, a run on the others would be likely, particularly because the balance sheets of firms like this are opaque (financial firm balance sheets, and even more so those of insurers, include many line entries that are estimates based on multiple assumptions).
So official confirmation that one was in real trouble one could lead to a run on the rest. Putting one into resolution would be seen as confirmation that the solvency risk was real, and hence is unlikely ever to occur.
Not all “banks” are behind or support the CAP proposal
This is fairly easy to dispatch. This is more than a bit of a straw man, since we never said “all banks”, we used terms like “banking industry”. Min argues investment banks would not support the proposal. There are only two that hew to that model, Goldman and Morgan Stanley, out of 19 TARP banks. So per Min’s own argument, the overwhelming majority of the biggest banks would be backers of the plan. And there is not particular reason to think Goldman and Morgan Stanley would be opposed so much as indifferent, since they would still distribute and trade these guaranteed bonds. The other firms he mentions, hedge funds and REITS, are not banks.
Moreover, Lehman, which along with Bear Stearns, was particularly active in the private label mortgage business before the crisis, also lobbied in favor of Freddie and Fannie. The GSE allied themselves with private mortgage issuers to increase their political clout; what reason do we have to believe this won’t happen again? From “Too Big to Bail: The “Paulson Put,” Presidential Politics, and the Global Financial Meltdown,” by Tom Ferguson and Rob Johnson from the International Journal of Political Economy:
Fannie Mae and Freddie Mac never truly recovered from the scandals. Conscious of their political weakness, they deliberately allied themselves with Countrywide, IndyMac, Washington Mutual, Lehman Brothers, and other private firms that would find expanded GSE lending and guarantees useful.
This plan is the best option for the public and less lucrative to the financial services industry than a “privatization” model
First, any plan which gives an explicit full faith and credit guarantee is a subsidy to the mortgage industrial complex. A true privatization plan would not involve a subsidy. So it is hard to see on its face how this argument makes any sense.
Second, Min is effectively arguing it would be bad to go back to private securitization based on the experience right before the crisis. That’s true, but that’s also a straw man. The problem, as we have said over and over was that lax regulations, lack of enforcement, astonishingly short sighted behavior by major participants (what were they thinking when the quit adhering to the terms of their PSAs?), which was compounded by clever actors recognizing and worsening this dynamics through subprime short strategies that undermined price signals that would have encouraged investors to get out of the pool.
He and many others forget that we had a decade and a half of operation of the private label business with no major mishaps. So the business can work properly, and the FDIC has put forward a very sound pro investor proposal. So why is the CAP pursuing subsidies rather than supporting the FDIC plan, particularly when even advocates of the CMI scheme still anticipate that there will be some form of non-guaranteed mortgage market?
If the argument is really that a private market will result in mortgages that are too costly (that is, the subsidies are necessary for housing to be affordable), the evidence does not support it. Dean Baker did an analysis based on the assumptions of the Mark Zandi plan (which is pretty much the CAP plan) in which the GSE 2.0 scheme is called the “hybrid” plan. He finds, all in, that monthly payments by homeowners would actually be HIGHER using Zandi’s own assumptions (which are meant to favor the “hybrid” variant). Baker notes:
So, what have we learned about the relative merits of the private system and the hybrid model? Well the hybrid model will mean slightly lower monthly mortgage payments, but this benefit is likely to be offset by higher property taxes. The higher house prices in the hybrid model will mean that it will be more difficult for first-time buyers to come up with a downpayment. And, the wealth effect associated with the higher house prices in the hybrid model will mean lower savings and less growth.
So why is everyone lining up behind the GSE 2.0 plan? Because, as the Zandi analysis shows, they all believe (or think it necessary to convince third parties) that it will lead to higher house prices. This is ALL about propping up the housing market and the TBTF banks while appeasing calls to Do
Something about the GSEs But as John Hempton showed, that’s not necessary. He set forth a very simple path to getting the GSEs’ role reduced, and it can be done very gradually if the authorities are concerned about spooking the housing market.
It is depressing, but I suppose should be no surprise, to see how many people like Min who deem themselves to be independent have chosen to blind themselves to the banking industry’s continued efforts to get its nose deeper into the taxpayer trough.
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As a rule, CAP is actually worse than the Obama administration, which is really saying something.
If we had the impossibility of linguistic libel laws, someone would be able to bring suit against them to get them to remove the word “Progress” from their name.
Driving the Podesta brothers out of the Democratic Party power structure should be priority number #1 once this administration is over with.
From the point of view of one side of the class war, they try to make “progress”.
Corporatism, financialization, globalization, the Bailout, “austerity”, debt slavery, mass murder, the restoration of feudalism: That’s the line of “progress”, according to which we’ll arrive at the End of History.
Yves,
Thanks for your reply.
I’m not going to take on all of your arguments here. As I pointed out, my email was not meant to be a “response” so much as it was a conversation starter. I will have a longer defense of my position, and if you’d like to publish that, rather than emails that weren’t intended to be published, as representative of my position, outstanding.
That being said, I do want to point out one serious dispute I have with your analysis.
You claim that every advanced economy has long-dated mortgages and that they don’t feature government support. This is inaccurate in both respects. I have not heard anyone make the first claim: only the US and Denmark feature long-term fixed rate mortgage finance; most other countries have short duration loans (Canada is for example a 5 year standard product, UK has ARMs ranging from 2-7 years).
As to the second claim, I believe this is based on the work of Dwight Jaffee, who primarily cites Europe (and ignores Canada, which explicitly guarantees up to 70% of its market). In Europe, as you may have observed, the ENTIRE mortgage market is backstopped by implicit guarantees. They simply don’t let banks fail, let alone the covered bonds that are so important to their mortgage finance. This implicit guarantee is recognized by all the major rating agencies and other analysts, and moreover is priced into covered bonds (which have historically traded at spreads over their risk-free rates LESS than the GSE spread over Treasuries). And was most recently evidenced by the sweeping bailouts in the UK, Ireland, Denmark, Italy, and Germany, among others.
In fact, EVERY advanced economy features significant levels of govt support (either implicit or explicit) for their mortgage markets, due most likely to the high capital intensity of housing and the unwillingness of most investors to finance long-dated assets without a govt guarantee (something that has been reinforced of course by the PLS debacle).
And again, to make clear, this represents only my own views and not the Center for American Progress or the Mortgage Finance Working Group it has convened.
Final point, and then cheers:
This whole debate comes down to the following question: is a government guarantee necessary for the U.S. to have a mortgage market that contains all of the “good things” (consumer friendly products, broad liquidity, etc.) that we take for granted today. Obviously, Yves thinks the answer to this question is no. I disagree, and I think there’s a ton of evidence for my position (including, but very much not limited to, the international comparative point I make above).
If you think that a guarantee is necessary (and/or that an implicit guarantee already exists), then the question is how do you design that to minimize risk to the taxpayer, minimize moral hazard, etc. We think that the FDIC model is a pretty good one, and so tried to replicate key features of that model (including a structure that is designed to encourage a lot of CMIs, rather than simply 1-2). But of course we are open to suggestions on this structure. What I am less open to is the claim that a privatized market will provide broad liquidity and consumer-friendly products, because I think it stands in contradiction to the evidence.
Anyways, I guess I need to get back to being a fascist corporatist shill, so cheers to you all, and if you’re interested in engaging on substance rather than ad hominems, please feel free to email me at dmin@americanprogress.org.
“Anyways, I guess I need to get back to being a fascist corporatist shill,”
Truth will out, I guess.
Dave,
You haven’t answered any of the points Yves mentioned. None of that was ad hominem.
You haven’t answered the truly important questions:
1. What’s so great about a fixed-rate mortgage?
We can’t seem to do it without putting the tax payer on the hook. Maybe we should let it go.
2. What’s so great about 30-year mortgages?
People fail to realize how much interest they are paying on a 30-year mortgage, fixed or not. It’s roughly double the purchase price.
3. What’s the downside of letting the 30-year FRM die?
Housing prices go down, which is great for people trying to buy. People pay less interest in the long run on shorter mortgages.
4. What’s so great about securitization in general?
It seems like a game of pass-the-trash onto pension funds.
If you’re honest, you have to admit the point of the 30 year FRM is to inflate housing prices. The point of that is to satisfy interests firmly vested in the housing industry — construction, real estate, banks, local governments collecting property tax, etc.
And it’s ideological. Someone with a mortgage is less likely to go on strike or threaten to quit. It’s also a result of Bush’s “ownership society” ideology, as well as Democrats’ breadcrumb strategy. Republicans thought they could increase their base, since some facile statistics showed that their base consisted mostly of homeowners, so more homeowners means more Republicans. Scoff at the logic of that if you must, but that and Democrat’s “Progressive” strategy of increased homeownership why the GSEs are on life support.
You’ve made a plan for how to save the 30 year FRM, but not why we should bother to do so.
Well, it beats raising the proles’ incomes. It’s fake/bad retirement planning, etc.
Another one who for all his wonkducation can’t even use the term “ad hom” correctly.
The evidence record of the big banks and financialization is long-standing, overwhelming, and dispositive. They’re nothing but criminal enterprises. So anyone who still supports such enterprises and continues to advocate the Bailout is also a criminal. There’s nothing at all ad hom about calling such a cadre what he is.
Ad hom means “someone disagrees with me,” right? ; )
I’ll give Dave the benefit of the doubt. I’m sure he thinks he’s doing what’s right. Hell, most right-wingers are true believers too, not just cynical manipulators (not counting politicians).
I think he’s just starting from a faulty assumption — i.e., everyone should have a home — and working his way backwards. He thinks making credit more accessible is the way to go, when the obvious solution is to raise wages, let housing prices fall, or both.
I find myself for the first time defending the “let markets decide” ideology, and it feels weird.
In that case, the first assumption he starts from is the corporatist “order” and the bank-dominated land dispensation.
Then only starting from there might he think, “how can we maximize home ownership?”
Needless to say, if a society really wanted to provide decent shelter for everyone, it wouldn’t have corporatism and and it wouldn’t alienate all land in the form of either de jure or de facto REO. There are far better, more practical, more rational, most of all moral ways of distributing the land.
To clarify Min’s oddly defensive comment, here’s the definition of ad hominem, from the taxonomy of logical fallacies.
David Min said “consumer friendly product…”
OK if you like to start off the conversation with bulls-eye marketing terminology that diminishes human value and abdicates all responsibility from the issuer, don’t be surprised when you get blow back.
Check into studies that show even at conception of product design, the different out comes, that occur when the word *citizens* is replaced for *consumer*.
Skippy…Shezzzz…the formulation of products is biased from conception only for the want of accurate definition. how many of the world problems would have been avoided by the usage of *ONE WORD* (consumer vs. citizen)!
PS. try it out for F&*^ sack, you would be amazed!
Mr. Min,
You needn’t concern yourself with the angry revolutionary types on this blog. They just care about the issues and the details more than your average person. If you present your facts logically and empirically you are fine, and they will acknowledge as much. In other words, take the ad-hominem with humor and grace. If you think it’s bad enough to where it keeps you from posting then you are as bad as they say you are.
Cheers :)
The Fascist corporate shill thing was in response to a commenter on the earlier post who called him that.
The crux of the biscuit is that RE prices need to be allowed to fall. This in turn would promote investments with less risk that are more likely to draw investors. The investors would not be as concerned about default; they would understand that the property is priced to sell to another home buyer.
Let’s be honest what this is about: preserving the status quo. We don’t need more credit, we don’t need more houses. There are plenty of houses now, thanks to previous malinvestment.
The solution to increasing homeownership rates is not extending more credit! Eliminate Fannie & Freddie and put the entire shadow inventory on the market and the homeownership rate will SKYROCKET because prices will appropriately PLUMMET. Thus, the real goal here is to preserve the housing ponzi as though it were legitimate.
If the government must guarantee private debt, why not guarantee debt directed towards some real wealth-producing industry in software or manufacturing which could create real jobs and actually produce something for which there might be market demand? The expansion of debt in the housing industry EXACERBATES capital flight from the US because it makes US labor artifically expensive by artificially inflating the cost of living. All of this is for the benefit of the parasitic elite, further enabling them to scavenge the corpses of the (former) middle class through debt enslavement. So yes, in view of your support of this system I would say the term “fascist shill” is not an ad hominem but rather an accurate description, and perhaps too kind.
The government guarantee of debt is a guarantee that the house will always win. Once enough players realize this, there will not be very many people left at the casino.
David,
Thanks for replying, but you recounted my argument inaccurately. I have NEVER said that other countries do not support their housing markets or provide tax breaks. What this post says clearly is none have done it on any meaningful scale with government guarantees of mortgage. That’s a very different statement than the one you attribute to me.
Yves,
Look in your own back yard. Canada guarantees a large proportion of mortgages. No tax breaks though.
I’m in the process of trying to reach the economist in Canada who is the reigning expert on this topic. My banker friends who also happen to be Canadian say it is not a large percentage but I want to get the data.
Very late response. Not going to respond to everything said here, but just a few points.
1) Yves, Canada explicitly backstops a very high amount of its mortgage debt. 45% of all mortgages are insured by one of 3 MIs (CMHC, a govt-owned entity, Genworth, and AIG Canada (now owned by a pension fund), and by law, mortgage insurance must be reinsured through the federal govt. This data can be found at http://www.americanprogress.org/issues/2010/08/pdf/canadian_banking.pdf or if you want an independent source, CMHC’s website and/or John Kiff’s IMF paper. 25% of mortgages are securitized by (or guaranteed by) CMHC. So as much as 70%, most of which is cycled through CMHC which looks very much like Ginnie with Fannie/Freddie like missions, is explicitly guaranteed by the Canadian federal government.
2) Our proposal was not a CAP proposal but rather the product of a working group convened by CAP (19 stated members, of which 3 I think were CAP), and I was noting that none of these were fin services, nor did any of our dedicated funding come from the financial services industry. I don’t know who’s on CAP’s board, just as I suspect most of you working folks out there don’t know who’s on your Board. For what it’s worth.
3) On the 30 year fixed rate mortgage, and why i think it’s important, I guess I’ll refer to this: http://www.americanprogress.org/issues/2010/11/pdf/housing_finance.pdf. One point I’d raise: the value of a 30 yr FRM (which takes rate risk and refi/liquidity risk off the borrower) is at its highest during periods of house price declines, interest rate volatility and illiquidity. We had none of those basically from 1982-07, which is why people could refi and sell their homes so freely. Given that there’s a lot of uncertainty on the horizon, I think the cost certainty a 30 yr FRM provides to consumers is very important, particularly given that we’ve taken on so much risk in other areas (medical emergencies, unemployment, retirement funds, etc. etc. etc.).
4) I raise the intl point (about Europe backstopping its mortgage markets implicitly) because I think it’s important. There’s simply no modern example of an advanced economy with a mortgage market that doesn’t rely on huge levels of govt support. When you look at the very limited liquidity and products (very onerous for consumers) that were available pre-New Deal, you maybe get a sense of why that is. I don’t think jumbo data is relevant to this debate, because jumbo serves the wealthiest borrowers, and to a very high degree, its pricing and product characteristics are based on various markets (hedging, rate locks, etc.) for agency securities. The question is what happens if you take away the GSEs and don’t leave anything in their place, leaving a $5.5 trillion hole in the mortgage market. No one knows the answer for certain, but I suspect you see a sharp liquidity pullback (bye bye middle class mortgage access) and a reversion to more profitable, less consumer-friendly products (such as the 2-7 year IO 50 percent down loans that dominated the pre-New Deal era and still do in commercial real estate). On the lender side, I think that handing over a $5.5 trillion market segment (or whatever the big banks decide to take of that) to the private sector is almost certainly going to disproportionately benefit the TBTF guys, since they have the balance sheet capacity and the securitization mechanisms to really take over that market (and if you think Goldman is TBTF now, wait til they take on another $1 trillion+ of systemically important mortgage debt).
This is all a very shorthand for what are very big, complicated and often very empirical arguments. I hope to put out something longer (and footnoted) on this in the near future. I think my main point here is that even if you disagree with our proposal (and I do hope we can convince folks of it: I think the New Deal legacy of affordably priced and sustainable mortgages for working Americans is an incredibly important factor in 20th century US socioeconomic mobility, particularly given that it worked really really well until we started deregulating the financial system) labeling it as a “pro-bank” proposal is not a fair way to present it (particularly since the overwhelming majority of proposals have all proposed a similar explicit guarantee, simply because there are such large questions about whether PLS and deposit-backed lending can pick up that slack.
Thanks for being engaged on a very important and unfortunately somewhat inaccessible debate.
Modelling your Catastrophic Risk Insurance Fund on the FDIC just proves Yves’ point.
From 1996 to 2006 most banks paid nothing in premia to the FDIC, because the fund was “over-reserved.” Now the FDIC is forced to raise premia on the “good” banks that didn’t fail to make up for under-reserving over the past decade.
The FDIC is just proof that government funds aren’t capable of pricing catastrophic risk insurance correctly.
We seem to be running out of private insurance companies too, so someone better start doing it right.
“UK has ARMs ranging from 2-7 years”
Well, that isn’t right. My own two not untypical mortgages had stated terms of 25 and 15 years respectively, with floating rates (after an initial 2 year fixed period in the case of the latter mortgage), and prepayment penalties around 5% of the outstanding balance. In practice, plenty of mortgages have been paid back early, as people trade up, but that’s a function of their willingness to stay highly geared to the property boom we’ve had here (since forever).
You can check out some typical current offerings here, http://bit.ly/7Yj2AM , if you’re that keen. BTW the impressively conservative LTVs are a post-crash phenomenon.
As for the implicit government guarantee: that is causing some annoyance over here, as it wasn’t invoked because of any screw-ups in the UK housing market, but rather because of a)the stupid recent changes in the funding models of our mortgage banks and b)contagion from the international capital markets.
I’d be interested in this. My understanding was that variable rate mortgages, with fixed rates for 2-7 years, dominated the UK, but admittedly this is from reading papers and what not, rather than being an actual British homebuyer.
Are you saying something different or rather are you saying that you had a 2 year fixed rate on a 25 year mortgage? If the latter, then I think we just got mixed up on terms, as I was referring specifically to a long-duration fixed rate, as this was in the context of the 30 year FRM. Every country has a long-duration amortization period (generally 25-30 years), but only the US and Denmark have long-duration fixed-rates.
“My understanding was that variable rate mortgages, with fixed rates for 2-7 years, dominated the UK, but admittedly this is from reading papers and what not, rather than being an actual British homebuyer.”
That is a much more accurate claim. I was responding to what you said here:”UK has ARMs ranging from 2-7 years” which sounds like you think our mortgages are much shorter-term than they actually are, and that they vary more or less from inception.
The nearest thing you have in the States to our standard product is probably the so-called “Hybrid ARM”.
“The credit guarantee has allowed the US to have unusually consumer favorable features in its 30 year product, namely both fixed rates and no restrictions on prepayments.”
Until a massive, criminally motivated acceleration in prices makes those “benefits” turn into uselessness. I can almost hear a mortgage broker/autobody painter, circa 2005: ” 30 year is ‘da best you can do, it’s conservative and safe and sound, hell you can refi, cash out or sell in 5 years.”
Nope, it was like like spinning wheels in the mud, and most weren’t going anywhere but into default/foreclosure and or financial ruin.
please tell me this “David Min” above is not the real person. He picks apart one argument he disagrees with, ignores the rest, and in an ad hominem manner calls criticisms of his views ad hominem.
Then he invites us to email him? Puh LEEZ! Something needs to be done but we should all admit any current proposal is a rough draft and open to improvements. Taking constructive criticism defensively and as personal attacks smacks of 3rd grade immaturity.
Without TBTF, those responsible would have lost their jobs, their homes, their careers, their fortunes, and most of all to them, their reputations. Instead we have the middle class bailing them out and we still lose our jobs, homes, careers, and fortunes. Anybody who suggests otherwise is either ignorant of the facts or getting their pockets lined by the TBTFers. Why do more of our middle class dollars have to go to guarantee irresponsible TBTF loans that if anything, raise the prices of future mortgages making homes less affordable? Why are Democrats screwing over the middle class, making homes unaffordable, and propping up the rich, all in the name of progress?
“Why are Democrats screwing over the middle class, making homes unaffordable, and propping up the rich, all in the name of progress?”
helps prove my point that to $ave the Rich: Vote D or R!!
David Min mentioned in his initial reply that CAP’s “membership contains no financial institutions”.
CAP’s board includes at least four other people close to the financial industry, including leaders of hedge funds, investment banks, and savings & loan firms. (http://littlesis.org/org/33398/Center_for_American_Progress/board)
CAP doesn’t disclose who its funders are, but there are a number of reported donors from finance and real estate. (http://littlesis.org/org/33398/Center_for_American_Progress/donors)
This isn’t the first time we’ve heard concerns that CAP is dominated by so-called “Wall Street Democrats”. Why can’t CAP add some clarity by disclosing who its donors are? Wouldn’t it suck if all that bonus money was corrupting groups dedicated to “progressive ideas and action”?
In the recent crisis a lot of private companies (like AIG) became ward of the state. So unless we solve the problem of private companies requiring tax payer support, this debate about GSE/CMI’s does not seem to be of much consequence – because in the end there is implicit guarantee for all – private firms and GSE’s.
Regarding the current promotion and hyping of covered bonds and the push to kill Fannie:
Why don’t these people ever look at the example of WaMu and BAC in regard to the failures of covered bonds? Obviously all the rating agencies and the SEC, DOJ, Treasury and all the guys at Goldman & SIFMA and the ABA did a great job of pushing this financial methamphetamine before and during the subprime crisis … and now the same zombies are back for another toke off the pipe … hoping that no one will give a shit about the reality of what happens when worthless mortgages are pooled into toxic waste derivatives that get sold back to pension funds ….
I don’t have time to dig into this…
See: Chartered Mortgage Institutions are fully private institutions, not owned or controlled by originators (other than potentially through a broad-based cooperative
structure), chartered and regulated by a federal agency.
As history, including the current crisis, repeatedly demonstrates, private capital
experiences a “flight to safety” during market downturns, flowing towards safe sovereign-backed instruments such as U.S. Treasury bonds and away from mortgages and other private investments. Without a government guarantee, there is no reason to think that countercyclical liquidity will be available when needed.
The inability of a purely private mortgage finance system to meet the housing needs of a modern economy is also evident from the experience of developed
economies around the world. While the exact particulars vary from country to country, every advanced economy in the world relies on significant levels of government
support, either explicit or implicit, in their mortgage markets.9
9. Some observers have claimed that Denmark and Germany, which rely
upon covered bonds issued by private issuers, do not provide government
support for their mortgage markets.
Guess I’m naive but why does all investment have to flow through “banks”? If we really want a flourishing real estate market where people are able to buy and invest in properties to live in then the government should provide clear means testing requirements and give that .25% money directly to the people instead of filtering it all through the toll booth collectors that are huge behemoth banks. If not, then the real goal is not the real estate market but the interest on real estate loan market and we know who makes all the money in THAT market. The large bank system in this country is a huge scam and the problem with organizations like CAP/ThinkProgress is all their “thinking” is inside a little box created by their funders and the plutocrats who are bleeding us dry. Enough bullcrap Mr Min, think outside the box!!
Bullseye, Cheers.
The banks should become regulated public utilities, and the executives should be paid accordingly.
If the rich want to play the ponies, let them do it with their money, and not ours.
I think this is a comprehensive response and very impressive indeed, but I continue to have a problem with the assertion that you and Baker make about the jumbo market. The jumbo market is not necessarily a fair analog because the transactions costs as a percentage of the loan size are much smaller. Transactions costs can make a difference. Servicing is expensive, and having fewer loans in the same size securitization is probably going to make a difference. Please understand that I am not saying they do. I have no independent certainty about this; I just suspect that they do. There may be other differences like prepayment preferences for jumbo borrowers as well. I would like to see a relatively full analysis of all the possible differentiating factors before I start to believe in this theory.
Also, many of the super-jumbos are given out on a “relationship” basis by the banks and are not even a high margin strategy. In fact, some of my colleagues with super-jumbos above $5M got a lower rate than I did because the bank wants the client’s deposits and investing business even more than they want mine. I don’t know how this affects securitization, but if the same bank is buying off unwanted pieces from its own origination, it is in effect still subsidizing this loan in return for a relationship.
Finally, your theory about why the market for jumbo securitizations is currently thin might be correct. Then again, it might not.
So then, what is the cost of the guarantee? 75 basis points? 100?
If we’re capitalist and love the free market, why not let the free market sort out what is and is not a profitable loan, and let government regulate the quality of the underwriting?
When since 2000 has a government backstop done anything but increase moral hazard. Bizarrely, in the comments, Min points to the FDIC as a model, a point Yves addressed and debunked in her post. During the initial run of bank failures, the FDIC was running out of funds and needed a replenishment of its funds to cover the costs of taking over banks whose real assets were often only 60% of their stated value. The FDIC would have been completely overwhelmed many times over if the government, as Yves notes, had not intervened with the TARP, the Fed bailouts, and mark to fantasy accounting changes.
Essentially, we had, and probably still have, a situation where the entire banking sector is insolvent. It was only government intervention and backstopping that gave this zombie system the simulacrum of life. Without these, the FDIC would not have been able to cope. Its funds would have been exhausted and where could it have turned to for further funds? Not other banks, because they were all insolvent. I think Min doesn’t grasp what “systemic” really means. It means the whole sector. And we know such a sector-wide event can occur because we saw it happen in September-October 2008.
Nor does any of this address the issue of regulatory capture, that is government regulatory intervention before a problem becomes systemic. In the run up to the meltdown, we saw years of deregulation and non-regulation. Nor was this a case of no one could have known since many of us, in fact, were predicting the consequences. Further, as Bill Black has noted, Treasury and the FDIC broke the law in not exercising PCA, prompt corrective action, in taking over and resolving insolvent institutions.
So Min is advocating that we adopt another mechanism, like the FDIC, which failed to prevent a systemic crisis, had insufficient funds to deal with the crisis when it came, did not exercise its legally mandated responsibilities in resolving it, and ultimately relied on taxpayers footing the bill for it.
The CAP is a policy workshop of the Democratic party, a party which is just as corporatist and kleptocratic as the GOP. It is unsurprising that this organization would come up with a proposal that would privatize profit and socialize losses, and in doing so promote looting.
My counterproposal is, if there is to be a government backstop to the mortgage market, then turn it into a public utility offering a few vanilla products to borrowers. If government ultimately has to shoulder the risk anyway then let it also reap the profit. In this regard, the pre-payment option is less of a problem. It becomes less about cash flows and more about social goods. If we see a good in premitting borrowers to pay down debt as quickly as possible, then continue it. If not, modify or eliminate it.
I lack experience to truly join this discussion (as you can tell by my name). It is very cool to see a two-sided discussion of this issue. Thanks to David Min for wading in, and let’s hope that he might be persuaded by Ms. Smith’s points.
One question about 30 year mortgages how many actually go that long. Most folks move several times during 30 years, so the morgage does not last 30 years. (Ignoring re-fis for the moment). One could provide that for the first 5 years there is a prepayment penalty (as I had on a mortgage in 1978) so that no prepayment penalties are new, really just a product of a desire by the mortgage industry for more fees.
Why not tack a surcharge for 30 year fixed and for no prepayment penalty, onto the base interest rate of say a 5/30 readjusting every 5 years. For both the surchages the quants on wall street should be able to invent derivatives to hedge the risk to the banks, and the banks just pass the cost thru.
Conventional wisdom says they are held for 7 years on average. What happens to them then, I don’t know.
I suspect that the house is sold so except in times like the early 1980s where mortgages were assumed the mortgage is paid off at closing. Back then re-fis where unheard of as interest rates were rising.
WM Covered Bond Program
I thought these were burned up in the Great WaMu Fire?
See: The Federal Deposit Insurance Corp, after inquiries from dealers, told investors that covered bond assets would be included in the WaMu debt acquired by JPMorgan (JPM.N) after the troubled Seattle-based savings and loan institution was shuttered by regulators.
Taking covered bond assets, while leaving unsecured creditors out, provides a much-needed precedent for U.S. investors who will soon be asked to buy more of the debt, analysts said.
WaMu pioneered the program in the U.S. with euro-denominated issues in 2006. Bank of America Corp. followed — issuing euro- and dollar-denominated bonds — but investors questioning how the debt was structured and regulated largely abandoned the U.S. market as the credit crunch set in.
==> We need more covered bonds… yah…. America needs a new wax coated dream which can be held aloft towards the sun — we can all fly like zee large and most beautiful golden eagles from places like Greece:
Daedalus warned his son not to fly too close to the sun, nor too close to the sea. Overcome by the giddiness that flying lent him, Icarus soared through the sky curiously, but in the process he came too close to the sun, which melted the wax. Icarus kept flapping his wings but … but it didn’t friggn mattter and who really gives a crap about this PR related to wax-coated covered bonds and the newera of mortgages…. never F’ing mind?
Although this may seem off topic, I feel it’s worth looking at some history related to the origin of this GSE mess — which is related to re-engineering Fannie and the mortgage market.
Item 1: 09/27/2006
WaMu Settles Groundbreaking European Covered Bond Sale
“This program should make our debt more sought after on a global basis, ultimately reducing our company’s cost of funds, as well as increasing our investor base beyond the US,” Killinger said, noting that the company also successfully issued a EUR 1.5 billion five-year unsecured bond in late August.
The company’s rating agencies have worked cooperatively in support of WaMu’s program. The company also worked collaboratively with the FDIC and the Office of Thrift Supervision (OTS) as it developed its European covered bond program.
Covered bonds differ from traditional mortgage-backed securities in that the loans used to secure the obligations remain on WaMu’s balance sheet, allowing the company to maintain control over the assets.
>> The covered bonds are issued by WM Covered Bond Program, a special-purpose entity which, in turn, purchases floating rate US dollar denominated mortgage bonds issued directly by Washington Mutual Bank.< Watch for the increasing push to fold all the GSE’s into pools of shit that will be traded by wall street, rated by Fitch, S&P, Moody’s and blessed by congress — and watch …
Obviously this is not related to pension funds, money markets, derivatives and accounting and stuff like that ..
Ok,breaks over… doubt if anyone cares..
I’ll probably be ex-communicated for this (sorry Yves) but I’m addicted now. I like the concept that FDIC and the Office of Thrift Supervision, in addition to FHLB, SEC, DOJ, etc. were all so helpful in helping WaMu cook their books — and obviously that whole process is starting up, all over again — with GSE tinkering and little plans hatching and finding new clever ways at looking at new ways to call fraud by new names. Follow the money baby! Do your DD!!!
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company’s federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMB and WMBfsb satisfied this requirement at June 30, 2007.
The principal sources of liquidity for the Parent’s banking subsidiaries are retail deposits, FHLB advances, repurchase agreements, federal funds purchased, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio and loans designated as held for sale. Among these sources, retail deposits continue to provide the Company with a significant source of stable funding. The Company’s continuing ability to retain its retail deposit base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on deposit products. Washington Mutual Bank continues to have the necessary assets available to pledge as collateral for additional FHLB advances, covered bond issuances and repurchase agreements.
Senior unsecured long-term obligations of WMB are rated A by Fitch, A by Standard & Poor’s, AH by DBRS and A1 from Moody’s. In the first quarter of 2007, Moody’s upgraded WMB’s unsecured long-term obligation rating from A2 to A1. Short-term obligations are rated F1 by Fitch, P1 by Moody’s, A1 by Standard & Poor’s and R1-M by DBRS.
Could the world be save in a huge BONDFIRE … *BONDFIRE OF THE VANITY’S*… is the seemingly irrational … actually the rational … choice?
Skippy…how was breaky (what did ya have) and lets go for a bike ride some day!
PS. I don’t ride in the nude.
Amen.
I’m still not sure… is there a connection between FDIC, Treasury, OTS, SEC, FHLB, rating agencies, covered bonds and GSE’s that want to roll out shitloads of covered bonds? I wish someone would chime in here … maybe Janet Reno or
Geithnerahhh, can’t think of her name, ahhh, shit, the one with the hair and guns… I’m draw’n blanks here, I wanna say Paulson, but … ahh… not the new one from Harvard, the VP Queen with mcCoy … Sarah… yah, yah… what was the point?“The Federal Deposit Insurance Corp, after inquiries from dealers, told investors that covered bond assets would be included in the WaMu debt acquired by JPMorgan (JPM.N) after the troubled Seattle-based savings and loan institution was shuttered by regulators.”
“Taking covered bond assets, while leaving unsecured creditors out, provides a much-needed precedent for U.S. investors who will soon be asked to buy more of the debt, analysts said.”
“Taking covered bond assets, while leaving unsecured creditors out, provides a much-needed precedent for U.S. investors who will soon be asked to buy more of the debt, analysts said.”
“The company’s rating agencies have worked cooperatively in support of WaMu’s program. The company also worked collaboratively with the FDIC and the Office of Thrift Supervision (OTS) as it developed its European covered bond program.”
“The principal sources of liquidity for the Parent’s banking subsidiaries are retail deposits, FHLB advances, repurchase agreements, federal funds purchased, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio and loans designated as held for sale.”
* Disclosure: None
“New class of too-big-to-fail GSEs??”
I’m just trying to catch up and I’m sure this is already posted:
“This whole cooperative idea, handing the banks the keys to the kingdom to become the new GSEs, that’s just a terrible plan,” says Joshua Rosner, a former GSE analyst who now works as a managing director for Graham Fisher & Co. “Why create a new class of too-big-to-fail GSEs? The banks have wanted to be the GSEs forever, and now they think they’ve finally got their chance.”
that was from: White House Allies Push Bank Lobby Line On Government Mortgage Reform @ Huff about a week ago.
==> That about does sum up this crap, but leaves out the mechanism of covered bonds as the tool of choice to make the poison appear sweeter; buttery yummy and tasty nough for any dumb ass hillbilly teacher union to buy into for new pension investments… kinda like them rubes in the Florida swamps a few years back … oh yah, that’s right,that wasn’t contained either, my mistake.
I bet all I have to do (or ya’ll) is tap in ABA, SIFMA, covered bonds and chocolate… maybe sex — and bingo, a shitload of congresswomen and senator names and lobby groups will pop up like a tsunami of flies on warm dog poop…
Has anyone sen, or posted this poop?
Part IV will begin by analyzing the proposal for “covered” bonds, backed by both a mortgage pool on a bank’s balance sheet and the financial resources of the bank itself. It will argue that covered bonds will not, and should not, constitute a significant portion of MBS in the US. By contrast, it will predict tremendous growth for a new middle tier of “qualified residential mortgages” (QRMs), as defined under Section 941 of the Dodd-Frank Act. Therefore, we believe it is very important for the regulators to apply strict criteria in defining QRMs.
==> That there large sack of fresh dog feces, is from January 28, 2011
TOWARD A THREE TIERED MARKET FOR US HOME MORTGAGES
Who is Pozen?
In 2007, Pozen served as chairman of the SEC’s Committee to Improve Financial Reporting.
qualified residential mortgages
Hmmmm…. nice
Section 941 of DoddFrank requires the federal banking agencies, including the FDIC, and the SEC to jointly prescribe regulations to require any securitizer to retain an economic interest in a portion of the credit risk for any assets involved in a securitization. DoddFrank also requires regulations addressing retention of credit risk for residential mortgages, and requires the agencies to define “qualified residential mortgages” which are exempt from risk retention. Section 941 authorizes the rulemaking agencies to consider whether additional exemptions, exceptions, or adjustments are appropriate. The regulations covering securitizations involving residential mortgages must be jointly issued by the foregoing agencies along with the Secretary of the Department of Housing and Urban Development and the Federal Housing Finance Agency. These regulations must be adopted within 270 days of enactment of the DoddFrank legislation. In order to assure consistency between the Rule and these required interagency regulations, the Rule provides that upon the effective date of final regulations required by [[Page 60291]]
Also see: The Rule is fully consistent with the position of the FDIC in the Final Covered Bond Policy Statement of July 15, 2008. In that Policy Statement, the
[[Page 60290]]
FDIC Board of Directors acted to clarify how the FDIC would treat covered bonds in the case of a conservatorship or receivership with the express goal of thereby facilitating the development of the U.S. covered bond market. As noted in that Policy Statement, it served to “define the circumstances and the specific covered bond transactions for which the FDIC will grant consent to expedited access to pledged covered bond collateral.” The Policy Statement further specifically referenced the FDIC’s goal of promoting development of the covered bond market, while protecting the DIF and prudently applying its powers as conservator or receiver.\6\
\6\ FDIC Covered Bond Policy Statement, 73 FR 43754 et seq. (July 28, 2008).
All this is from:
Federal Deposit Insurance Corporation
CFR Citation: 12 CFR Part 360
RIN ID: RIN 3064-AD55
NOTICE: RULES
DOCID: fr30se10-2
DOCUMENT ACTION: Final rule.
In 2009, Representative Scott Garrett (R-NJ) introduced legislation authorizing the sale of covered bonds by FDIC-insured banks. However, that legislation was opposed by the FDIC, which in 2008 issued a restrictive policy statement on covered bonds.63
63 FDIC, Covered Bond Policy Statement Federal Register, vol. 73, 43754-59 (July 28, 2008)
Hmmm, …. so what does this mean now: As noted in that Policy Statement, it served to “define the circumstances and the specific covered bond transactions for which the FDIC will grant consent to expedited access to pledged covered bond collateral.”
New link… getting weird… the lights are blinking:
Securitization: Will the ‘Wild West’ become a ‘Ghost Town’ or a ‘Thriving Metropolis’?
Dodd-Frank does create an exemption from the risk retention requirements for those mortgage products that are deemed to be “qualified residential mortgages” (QRM). Like much of the Dodd-Frank Act, rather than being prescriptive in defining terms, lawmakers have left it to regulators to define “qualified residential mortgages” with the condition that the term shall not be more broad than defined in the Truth in Lending Act. It remains to be seen how regulators will define QRM, but the Act specifically prohibits regulators from exempting assets issued or guaranteed by Fannie Mae, Freddie Mac or the federal home loan. Unless the GSEs are dismantled, or their charters meaningfully changed, this approach will require the GSES to maintain a retained portfolio of securitized assets.
Ok??/
mortgage products
that are deemed to be
“qualified residential mortgages”
Ahh yes, covered bonds that are pooled into big shit piles that are linked, backed and connected to various flavors of derivative dog shit, soon to be available fir your muni pension funds… Good luck America…. you been had, yet again!
Link from above?
Securitization: Will the ‘Wild West’ become a ‘Ghost Town’ or a ‘Thriving Metropolis’?
“So why is everyone lining up behind the GSE 2.0 plan? Because, as the Zandi analysis shows, they all believe (or think it necessary to convince third parties) that it will lead to higher house prices. This is ALL about propping up the housing market and the TBTF banks while appeasing calls to Do Something about the GSEs”
Exactly! Again Obama and Treasury are on a propaganda mission. The idea is simply this .. “Come up with a plan which can be spun into being friendly to the main street (propaganda) but in effect helps the TBTF banks (mission)”. It is simple as that. Look at the Fed, the masters in this deception .. QE2 was to ensure .. lower interest rates and lower unemployment .. and where are we unless you believe the latest unemployment figure..
ay ay ay
Statement of Michael H. Krimminger Deputy to the Chairman Federal Deposit Insurance Corporation On Covered Bonds: Potential Uses And Regulatory Issues Committee on Banking, Housing, and Urban Affairs, U.S. Senate; 538 Dirksen Senate Office Building
September 15, 2010
Unfortunately, H.R. 5823 would muddy the relationship between investors and regulators, transfer some of the investment risks to the public sector and the DIF, and provide covered bond investors with rights that no other creditors have in a bank receivership. As a result, this legislation could lead to increased losses in failed banks that have issued covered bonds.
Clarifying Rights and Responsibilities – To clarify the respective roles of investors, issuers and regulators, we suggest that any legislation establish a regulatory framework for the appropriate federal regulators to jointly establish standards for covered bond issuances by regulated institutions. One existing forum for setting such joint standards is the Federal Financial Institutions Examination Council, which includes the federal regulators and a representative from the Conference of State Bank Supervisors. H.R. 5823 provides an alternative approach – by making the Federal prudential regulators the covered bond regulators – which could also be workable.
==> Why do I have a weird feeling associated with the way in which WaMu and the FDIC were in bed with covered bonds and then the FDIC took an insolvent bank and brokered a deal behind closed doors .. and then some shitpile bank … who was that JP Morgan… memory fading … hmmm, it seems that FDIC may not have had the legal authority to take WaMu into receivership, because of the covered bonds… non-legal status… but that’s just my tinfoil hat talking, nonetheless, FDIC couldn’t legally insure the covered bonds that failed with WaMu … thus, FDIC and all those crooks, slipped WaMu’s obligations off the books … and now, FDIC wants to spin all the GSE shit off the books … and then have phantom banks trading shadow derivatives between each other while taxpayers become a new form of collateral … ay ay ay…. I’l make sense of this later; had an hour to kill….
As a result, this legislation could lead to increased losses in failed banks that have issued covered bonds.
Hello BAC and
Please note that any deposits that have not been claimed within 18 months of the failure of Washington Mutual Bank FSB was sent to the FDIC by JP Morgan Chase Bank as acquirer of Washington Mutual Bank, FSB on April 15th, 2010. The unclaimed funds will be sent to the appropriate states according to Federal Law (12 U.S.C., 1822(e)). For more information, please see:
BINGO!!! LOL! No wonder there’s such a push to get the covered bond wagon rolling ROTFLMAO!
Rules could be structured in a way that
investorsSIFMA and other lobby groups would not take part in thecovered bond marketBIG SCREWINGInterview with Rep. Scott Garrett on Covered Bond Bill Amendments — FDIC pushback leaves some big issues still in play
We would be concerned that if FDIC were in the position to have carte blanche on rulemaking, the rulemaking would overly favor the FDIC and the DIF (Deposit Insurance Fund) and protecting that — and not conducive to creation of an active covered bond market. In other words, we’re concerned that if [the FDIC has] total control of rulemaking, the rules could be structured in a way that investors would not take part in the covered bond market.
SIFMA and Scott in the same bed … say it aint F’ing so…
==> This just makes me happy doing this, hope I’m not pissing Yves off…
RBA measures for Basel III liquidity standards good news for asset-backed securities market
Forty percent of it can be made up of ‘level 2 assets’ (e.g. non-bank corporate bonds and covered bonds subject to a minimum -AAA rating or equivalent internal rating) subject to a minimum 15% haircut.
Ok, burned out on this…
test
That’s hilarious!
I mean how can somebody be so stupid as to believe we need government guarantees to ensure that the middle class has access to cheap, fair financing. That’s exactly what allowed for the bubble to grow to its proportions. With those guarantees comes limited to no risk for the financial institutions that profit from those loans. The increase in FHA loan limit, which was approved by many Republicans, not only put the country at bigger financial risk and increased its debt, but it also allowed the middle class to take on a greater debt. Government interference does not solve the problem, it is the problem. These policies promise a decrease in cost when they have the exact opposite effect.
http://www.wtffinance.com/2011/01/fcic-report-financial-crisis-could-have-been-avoided/
You and Peter Wallison are correct. Everyone else is wrong. It was all the government sector that caused the crisis.
What is PLS anyways?
We need two new mortgages. The first has a penalty for early redemption. A pre pay fee like most bonds have. The fee would be 2% in the first two years and decline to zero over the next 8 years.
The second mortgage would have no prepayment penalties. This mortgage would have a spread 1/2% over the mortgage that had prepayments.
This is so simple. Why will they not do this? As Yves says, the reason is that that this ‘plan” is still driven to drive up RE values, not to make the GSE’s sound.
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john
john@aquamationindustries.com