By Mike Whitney
Last Thursday, the Wall Street Journal ran an article titled “Burdened by Old Mortgages, Banks Are Slow to Lend Now“, in which, author Nick Timiraos said that the reason that housing has been so slow to recover is because Fannie and Freddie “have been forcing banks to take back an increasing number of loans that the banks made during the boom years.” According to Timiraos, the banks have “grown wary of making new loans” and “are ratcheting up credit and documentation standards for new mortgages.”
From the WSJ:
“Mortgage credit is tighter than it should be,” said Treasury Secretary Timothy Geithner at a Senate hearing in July. “And the main reason for that is because banks…feel much more vulnerable now to what people call ‘put-back.’ ”
This play-it-safe stance by banks threatens to undercut the Federal Reserve’s latest effort to push down mortgage rates by buying up mortgage-backed securities. Even if rates keep falling, many people will find it much harder to take advantage.”
Timiraos does have a point. Certainly housing and the overall economy would be doing better if credit was expanding at a brisker pace. But does that mean the banks should ease lending standards again like they did before the meltdown? And, does that mean the banks shouldn’t be held accountable for the bad loans they made? Timiraos seems to think so. Take a look:
“So far, Fannie and Freddie have asked banks to repurchase $66 billion in mortgages made between 2006 and 2008, according to an analysis of federal filings by Inside Mortgage Finance, an industry newsletter. The balance of outstanding demands from both companies at the end of July was up 37% from a year earlier. Most of these loans have defaulted, so banks face losses when they take them back.”
Is this the most convoluted argument you’ve ever heard? The author admits up-front that “Most of these loans have defaulted” which is a tacit admission that the underwriting was either shoddy or fraudulent, right? And, yet, he seems to think that someone else should stump-up the doe for the losses. In other words, John Q. Public.
Keep in mind, that taxpayers have already bailed out Fannie and Freddie to the tune of $142 billion, and that the agencies (GSEs) currently guarantee 95 percent of all mortgages, which is a massive subsidy for the banking industry. (The gov is giving the banks free insurance.) But even that is not enough for the banks. They want more. They want taxpayers to pony-up for the losses on loans that were made to applicants who were never really creditworthy to begin with. Can you believe the arrogance? Here’s more from Timiraos:
“Loan officers say their job used to be fairly straightforward: Determine that a borrower could reasonably repay the loan. Today, they say the goal is to shield themselves from a put-back. This means asking borrowers for reams of documentation—tax returns, bank statements, pay stubs, and appraisals—in order to deliver loans that can’t be questioned.”
Boo hoo. Yes, Mr Timiraos, as unfair as it sounds, loan officers do have to do their jobs and check “tax returns, bank statements, pay stubs, and appraisals”. That’s how you figure out if someone has the means to repay the debt or not. It’s also how you avoid lending trillions of dollars to unqualified applicants and inflating behemoth credit bubbles that crush the economy.
“Put-backs” (making the banks repurchase the garbage mortgages they dumped on Fannie and Freddie) are not an attack on the banks. This isn’t a “Gotcha” operation. It’s merely a way of protecting the public’s interest by returning loans that exhibit “substantive underwriting and documentation deficiencies”. Isn’t that just a nice way of saying “fraud”? (If the gov was serious about this, they’d file criminal charges, which is the best way to make sure the same thing doesn’t happen again.)
And, another thing, if a bank feels like a “put-back” is unfair, there’s a process in place for appealing. So, everyone gets their day in court, if they so chose. In effect, Fannie and Freddie are saying, “Hey, Mr Bankster, I’ll gladly insure your dogshit mortgages for nothing provided you don’t rip me off.” As it turns out, that is too much to expect from the banks. They figure that if the government was stupid enough to guarantee their mortgages to begin with, then they should have to pay for the losses. That’s why they’ve dispatched their lobbyists to Capital Hill to twist arms in order to ease current regulations. Here’s an update on The Bankers vs the People via Reuters:
“Just four years after toxic U.S. mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a U.S. housing regulator may be making it easier for banks to make bad loans without suffering losses.
The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) – the government-owned companies that guarantee home loans made by banks – to hold lenders accountable when mortgages go bad.
Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle.
At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad.” (“Housing regulators loosen rules, but at what cost?”, Reuters)
So the banks win again. Looser regulations mean that Uncle Sam will get stuck with more of the red ink while the banks get off Scott-free. It also means that lenders can start cranking out more dodgy loans without fear of reprisal. Put the two together, and we’re back to Square 1, back to where we were before Lehman Brothers folded. Financial sector lobbyists have carried the day. They’ve increased the vulnerability of the system and put the economy on a glide-path to another spectacular crash. Of course that’s probably just fine by Timiraos, since the banks will be lending again.