Fusion IQ’s Barry Ritholtz shares his thoughts on a report that five of the biggest mortgage lenders will pay a $30 billion settlement and pledge to do better going forward when it comes to foreclosure and mortgage-servicing homeowners.
A Dylan Ratigan Show panel explains how homeowners are demanding big banks pay for their role in the mortgage meltdown.
>>> if these were free-standing small businesses, they would go under, and the next guy that got hired to do it would say i’m not doing that for a dollar. it costs $5. and that would be painful, but we’d have a process where the market would provide $5 of service, i would think. we’re not getting there. we’re not going to get there naturally.
>> well, some testimony about the incompetence in the mortgage industry from a congressional hearing in maryland. that just part of what we need to address this country’s ongoing fraoreclosure and housing mess which is at the center of our decline in revenue collections and dysfunction in our economy. state attorneys general meeting in washington to talk about their fight to try to fix the nation’s dysfunctional housing system, floating a plan that would impose some new requirements on banks, but includes no financial or criminal penalties for past violations or any major reforms for what happens now. that plan not good enough for understandable reasons for many homeowners. protesters hitting d.c. monday to demand actual real solutions, including principal write-downs and mandatory loan modifications for banks who lent money they never had, were bailed out to collect their bonuses, and left the american homeowner on the hook. we’re breaking this debt down now with a man who helped organize some of those protests, george gayle, executive director of the national people’s action and dana milbank with “the washington post,” who himself is having problems with his mortgage and wrote a column about it recently. dana, fill us in.
>> well, i don’t want to complain too much for my own sake because i wasn’t in danger of foreclosure, but i had a whole battery of problems — the escrow account got all messed up. they didn’t make the payment to the homeowners insurance. they paid twice on the taxes. they gave me checks i wasn’t owed and fees and interest rates i wasn’t supposed to get. the point, though, is i talk to a lot of consumer advocates and said, look, this is happening hundreds of thousands of times, if not millions of times, and in many cases, it is driving people into foreclosure who would not otherwise be there. that, in turn, is driving down the economy further and making the housing market and the broader economy a struggle all the much further. the problem now seems to be not so much in the origination of these loans, but in the servicing of these loans. these guys have no incentive to get it right. they’re just trying to get maximum fees from people out there. in my case it was annoying. in many other people’s cases, it’s devastating.
>> yeah. george, the mortgage servicing industry, which is basically the four big banks– wells fargo, citi, b of a and jpmorgan, set up a business to collect payments and process paperwork in a bull market for housing. they are not staffed, they are not equipped, they are not designed to be a major customer service organization working with modifications and all the rest of it. how do you solve a problem where you have a massive demand for customer service when the people that would provide that service have no incentive to invest or step up for the very service that’s needed?
>> we need somebody to step in and actually make them do it. and three years into the crisis, i think homeowners are just shocked that nobody from the administration on down has really went toe to toe with the big banks and said you have to modify loans, you have to reduce principal, and if bankers broke the law in the process, they need to go to jail. so, yesterday, we had hundreds of homeowners pay an uninvited visit to the national association of attorney generals, to their convention, which was in d.c., and really demand. we’ve seen the document. we’ve seen their 27-page proposal, which is really an opening bid with the banks in it. it’s too weak. it would not modify mortgages or send bankers who broke laws to jail.
>> dana, put on your political analysis hat. we had this conversation 50 ways on this show, but do you have any insight why proposals like george is mentioning never even get brought up by democratic or republican leadership?
>> well, i’m afraid the answer is somewhat cynical, and of course, the banking industry is extremely well plugged in here in washington, and it is a matter of bipartisan failure. you had the obama treasury department not enforcing its own foreclosure laws. the foreclosure mitigation law became as a result a disaster as the mortgage servicers just basically ignored it. and now the republican answer isn’t to fix the program and crack down on these guys, it’s to toss out the entire program. there is potentially one solution. that is, if this new consumer financial products protection bureau actually gets in here and starts cracking down on these mortgage servicers. that’s not how it’s going to work out if the house republicans get their way. and in fact, we’re going to start hearing about this in hearings starting next week.
>> if you were to look at what you think is most achievable, george, obviously, you’re an activist and you’re organizing around this issue, which i compliment and encourage. where do you think you could have the most impact and how can people help you have the most impact right now?
>> i really think this attorney general settlement and investigation is the big opportunity. it’s the best shot we’ve had in the last three years to really deliver justice to the american homeowner. so, what folks can do is plug in through a website called crimeshouldntpay.com. and homeowners across the country are organizing together to make sure the ags side with the american people, protect the bottom line of the american people, and stop protecting the bottom line of the american banks. the ags got an opportunity to be heroes here. they could be the first elected officials to really step up on behalf of the american people, and now we’ve got to make them do it.
>> but let’s be honest, what we’re seeing in the preliminary part of this ag settlement doesn’t reflect what you’ve just described.
>> no. i think the opportunity is there. do i think they’re leading at that level? no. so, we’ve got to up the pressure, put more pressure both on the ags and directly on the banks and force them to the table to negotiate in a real way. but i agree totally, the settlement does not go far enough. we’ve got to keep pushing. it’s particularly frightening because it’s an opening bid. as an opening bid, know the banks and the lobbyists and the power they have, they’ll continue to weaken that bid. we need to get the ags back to the table to come up with a stronger proposal before they go into negotiations with the banks.
>> got it. listen, thank you so much, george and dana. and thank you, dana, for highlighting your own story as an indication of somebody who is economically stable and well off and well connected being run around like a chicken in a maze, as everybody is through this banking system, reminding us of what that really means for people who are significant economic challenges and do not have the access to power that somebody like you does. crimeshouldntpay dot-org or dot-com?
WASHINGTON — Quiet discussions are going on between Washington and New York’s financial elite circles to chart a course forward for the mortgage market and the federal government’s role in it.
The loan-guarantee structure built during the Great Depression, which created the 30-year mortgage, spiraled out of control over the past decade as banks took advantage of the government backing to dump garbage loans on the taxpayer. The housing collapse led to the seizure of Fannie Mae and Freddie Mac, which the government now holds in limbo as banks continue to back up garbage trucks and deposit the waste of the past decade.
How to reform this system while maintaining continuity of the availability of affordable, 30-year mortgages is the question facing policymakers. How to make billions of dollars while doing it is the question facing banks.
Now, a leading liberal think tank has put forward a reform agenda similar to that of the banks. Last week, the Center for American Progress rolled out its plan to reform the government-owned mortgage giants currently propping up the U.S. housing market. Progressive critics have been quick to cry foul.
The U.S. government currently backs 90 percent of all new mortgages, with Fannie Mae and Freddie Mac the biggest players. The firms buy mortgages from banks, package them into securities and sell them to investors. If loans in the securities default, Fannie and Freddie take losses, rather than investors.
From 1968 to 2008, the companies, known as government-sponsored enterprises (GSEs), were officially private, for-profit firms, but an implied government guarantee led investors to believe they would be bailed out in the event of a crisis, a belief which proved true in the summer of 2008. That view distorted market incentives, encouraging the entities to take on big risks in order to score big profits.
The government took control of the mortgage giants under the terms of the bailout, which the Federal Housing Finance Agency currently expects to cost taxpayers $151 billion, although the total price tag could reach $259 billion if the economy sours further.
The CAP report is written by its mortgage finance working group, which features several housing experts otherwise unaffiliated with the think tank. The report recommends replacing Fannie and Freddie with new private, for-profit firms which buy up mortgages from banks, package them into securities and sell them to investors. The government would explicitly guarantee investors in these securities against losses, but would not guarantee the new firms themselves against losses. If the mortgages default, though, it’s still the government that loses money, rather than the firms.
The same general recommendation was put forward in September 2009 by the Mortgage Bankers Association, a major D.C. lobbying firm that includes some of the nation’s largest banks. And it’s easy to see why bankers like the idea — it means big money for Wall Street.
In the CAP report, these new Fannie-and-Freddie-like firms would be replaced with “Chartered Mortgage Institutions” or CMIs. In the MBA report, they’re referred to as “Mortgage Credit Guarantee Entities,” or MCGEs. But there’s a key, very profitable difference between these proposals and the current system: Banks could share ownership of the new firms, taking in fees created by securitizing mortgages that the government guarantees against losses.
“The ownership of at least one of the MCGEs could be in a co-op form with mortgage lenders as shareholders,” the MBA report reads. The CAP report explicitly suggests allowing banks to share ownership of the new firms, along with two other ownership structures, but does warn that, “a cooperative owned by very large originators could potentially become so dominant as to crowd out other CMIs.”
Even before the heated days of the housing bubble, Fannie and Freddie reaped enormous profits from its mortgage securitization and guarantee business. The CAP plan would allow banks to score the profits previously enjoyed by Fannie and Freddie, while sticking taxpayers with the risk.
“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.”
But even if financial firms were barred from owning the new Fannie-and-Freddie-like firms, the benefits from the government guarantee on mortgages will still flow directly to banks, and only indirectly to taxpayers. With the government standing behind any losses, banks that extend mortgages to borrowers would not have to worry about losing money if a borrower failed to repay the loan. That means plenty of risk-free fees for banks, as taxpayers explicitly assume risk.
The plan is not without benefits to consumers. Its proponents emphasize that the arrangement will keep mortgages cheap and readily available. If banks don’t have to take on any risk, they don’t have to charge much for loans, either. And some losses for taxpayers would be cushioned by an FDIC-like insurance fund, which the new mortgage giants would pay into.
Critics of the plan acknowledge that it would keep interest rates on mortgages lower than they would be absent a government guarantee. But they argue that subsidizing housing can be better achieved through the tax code, rather than a complex mortgage finance system that reinforces Too Big To Fail, by creating a new set of firms critical to the functioning of the U.S. housing market. And investors may not believe the government when it says it will not bail out the new firms — that was the official government stance on Fannie and Freddie for years. If the market views the new firms as too big to fail, critics envision the entire GSE disaster repeating itself.
The MBA report calls for “two or three” new GSEs at first, but would give the government the authority to charter additional firms. David Min, who heads CAP’s mortgage finance working group, told HuffPost that their plan doesn’t specify how many firms could act as Fannie-and-Freddie-like firms. “We can’t really predict,” Min said. “It depends on how much private capital comes in.”
Rosner, the former GSE analyst, said the CAP model only makes mortgages less expensive by increasing systemic risk. More direct housing subsidies would not have that problem, he said.
“If we’re concerned about people who will not have access to credit, take that out of the GSEs and housing finance and call it housing policy,” Rosner said. “If we believe that there are specific borrowers who need access to credit, then it seems to me those should be explicit government programs.”
In a March report, Raj Date, then head of the think tank Cambridge Winter Center for Financial Institutions Policy, argued that tax subsidies were a much more efficient method for promoting homeownership than a taxpayer-backed housing finance system, which creates enormous systemic risks. Date, now a top adviser to Elizabeth Warren at the Consumer Financial Protection Bureau, declined to comment for this story.
“[The government should] create transparent homeownership subsidies, or none at all,” Date wrote in March. “If . . . policy-makers decide to continue promoting artificially high levels of homeownership, more straight- forward cash subsidies (through refundable low-income tax credits, for example) would be both simpler than GSE intermediation and less prone to catastrophic error.”
Rosner suggested two major changes to the tax system and two major reforms to the mortgage finance system. The actual home finance system would benefit from a standardized loan contract and a standardized, transparent private-sector securitization contract, he said, so that investors can know they’re investing in safe loans when they buy mortgage securities. A new, purely government-owned entity would stand ready to insure mortgages against default when capital markets break down, he said, so that the housing market can continue to function when Wall Street stumbles. In order to provide clarity to markets, this government body would publish information on what it would cost to insure mortgages against default every day, but not actually insure any loans until markets break down.
Rosner readily acknowledges that mortgages under his plan would be more expensive than the CAP plan, but notes that artificially-cheap mortgages fueled a destructive housing bubble in recent years.
“My investing clients would buy mortgages hand over fist if there were clear contractual definitions and if rates were allowed to meet market risks,” says Rosner. “That would mean that the 30-year fixed-rate mortgage would be trading at about 6 percent.” Mortgage rates are currently about 4.5 percent — significantly less expensive when applied to a $200,000 loan.
So Rosner suggests two changes to the tax system to make mortgages cheaper. First, the government should create a program similar to existing college savings plans that allows people to save money for a down payment on a tax-free basis. Second, he argues that the government should replace the mortgage-interest deduction, which costs taxpayers about $250 billion a year, with a tax break based on paying down a mortgage and increasing equity in a house. The mortgage interest deduction rewards borrowers for taking on debt, while an equity deduction would encourage borrowers to pay off their loans. Banks like the mortgage interest deduction because it encourages people to take on debt, and banks are in the debt business.
But authors of the CAP report insist that mortgages will not simply become more expensive without a persistent government guarantee, but say the convenient mortgage that has dominated the U.S. housing market for nearly 80 years will disappear altogether.
“The 30-year fixed-rate mortgage is a very difficult product from both an interest rate risk and credit risk perspective,” former Office of Thrift Supervision Director Ellen Seidman, one of 19 co-authors of the CAP report, told HuffPost. “It’s not going to happen without some kind of government backing.”
Instead, the report’s authors warn, the mortgage market will see shorter-term loans that are far more expensive, pushing homeownership out of reach not only for low-income borrowers, but for all but the very wealthy.
Rosner thinks the claim is ridiculous. “If there was demand for the 30-year product, the banks would have to meet that market demand,” he told HuffPost. “It’s been around for 80 years. People are not going to stop wanting this product.”
Some conservatives are similarly nonplussed. “The rate on a 30-year mortgage set in a true market would probably be somewhat higher than a rate when it’s subsidized by government guarantees, either explicit or implicit,” said Alex Pollack, a former Federal Home Loan Bank of Chicago president who currently works as a fellow for the right-wing American Enterprise Institute. “But it would be a rate without the distorting effects of that guarantee, in which with your slightly cheaper interest rate, you make the house more expensive.”
In his March report, Date noted that the government could still find ways to subsidize 30-year fixed-rate mortgages without simply guaranteeing banks against mortgage losses. “[The government could] create a transparent fixed-rate mortgage subsidy, or none at all,” Date wrote. “If policy-makers wish to continue to support the availability of long-term, fixed-rate mortgages, they should consider doing so directly (e.g., perhaps through a direct, subsidized rate swap facility sponsored by the Fed).”
But it’s also not obvious that losing the 30-year fixed-rate mortgage would actually have a significant impact on home affordability or accessibility. In Canada, for instance, mortgage loans are typically of a 5-year duration, but remain affordable, while Canada’s home ownership rate is nearly identical to that of the U.S.
“Prime Canadian homeowners are well served by their mortgage finance system, with accessibility and costs roughly in line with those in the United States,” economist John Kiff wrote in a 2009 paper for the International Monetary Fund. “Even though Canadian mortgage markets may seem less innovative than in the United States, consumers seem to be well served. In particular, homeownership in those countries is virtually identical at about 68 percent of all households.”
The U.S. Treasury Department is expected to issue its own report on the future of Fannie and Freddie in the next couple of weeks, after missing a congressionally-mandated Jan. 31 deadline. A Treasury spokesman declined to comment on the CAP proposal.