Mortgage Disaster, pt 2: Failed Refutation

Carl at NOFP tries to "refute" my Mortgage Disaster post and fails - mostly because the facts speak for themsleves.

Says Carl:

If you look at page 23, T2 says that the largest sector, by value, at risk is prime mortgages. Commercial real estate is second. Neither of those are the type of transactions of which you complain.

The debate centered on responsibility for the mortgage crisis: GSEs vs. Wall Street. GSEs didn't do much Commerical Real Estate (CRE). Wall Street and insurance comapnies did and they are hurting plenty.

That "the largest sector, by value, at risk is prime mortgages" says nothing, since I'm discussing the current crisis, and past/current delinquencies.

Further, I fault your interpretation of T2 given that the T2 charts on borrowing power (page 9) seem to prove my point--that much of the crisis was demand driven.

This makes sense only if Carl means the demand, by Wall Street, for reallly bad mortgages.

Once upon a time, before Wall Street got involved (see the graphs for timing), there was a word that originators had for people who wanted to borrow 9x their income, or have mortgages payments equal to 95% of their monthly take home. That word was "NO". People can have all the "demand" they want - if the lenders had said "no" it would not have mattered. The originators/lenders did not say no, because Wall Street paid them to say yes, as noted here:

The big money for unscrupulous brokers, however, lies in steering borrowers into higher cost loans. A prime, fixed-rate loan at par may earn a broker a fee of one percent or less, but a hybrid adjustable rate mortgage (ARM) can pay four percent or more.

The Center for Responsible Lending (CRL) has said that inflated YSPs are included in 85 to 90 percent of all subprime mortgage loans.

Borrowers of hybrid ARMs, nicknamed "exploding" or "toxic" ARMs, often get stuck with prepayment penalties that penalize a borrower for paying off a loan early

Carl further says: That's why T2's page 29 chart shows that 25 percent of prime mortgages also are underwater.

This is more distraction than argument.

In the first case, for prime loans being underwater is just a function of having bought high in the bubble. A prime loan on an underwater house need not turn delinquent, since it's payments are fixed at a low rate relative to the borrower's income, and the borrower having put 20% down makes "strategic default" less likely. It requires a very significant decrease in house-hold salary to cause a default in this case.

In the second place, Carl conveniently ignores 3/4 of the chart on page 29, reproduced below:

As noted before, due to fixed reasonable payments, prime borrowers must experience significant decrease in income to be forced into delinquency.

On the other hand, virtually every underwater Option ARM will inevitably be forced into delinquency when the loan recasts - a process that involves taking the loan from negative amortization to fully amortizing in a shorter term. Low interest rates engineered by Bernanke wil not save these people.

For a quick example of an Option ARM recast, see here:

Lower interest rates do exactly nothing for these people because the original "option" period typically had rates as low as 2% on simple interest, and thus payments could be under $1,000/month on a $600,000 loan during the "option" period...

When the loan recasts five years after origination (assuming that comes first) even if you can get a 4% interest rate based on current low "adjustable" rates you are now financing $750,000 and must amortize the 4% over the remaining 25 years....

Your payment goes from under $1,000 a month to $3,945.62, a near-quadrupling, overnight.

This logic applies to all those who got Option ARM loans and paid the minimum "option". Estimates are that 80% of Option ARM borrowers did so.

And since, as previoulsy noted, the Option ARMs happened in the "bubbliest" areas, California and Florida, these will be large amount loans, most above the conforming limits of the time ($417,000), and therefore most funded by Wall Street.

Subprime and Alt-A borrowers have been given some reprieve by Bernanke's fixing of low interest rates. That cannot last forever.

Carl continues: And you haven't justified your concern for the leverage standards of investment banks. How did that cause the crisis?

Yield Spread Premium explains it. It is the causal link between the sudden explosion of I-Bank money and the suden explosion of lousy underwriting.

(In the background, non-blogger obloodyhell maintains his psychotic notion that the I-Banks did all of this only because the GSEs showed them how, and that therefore the GSEs - and Democrats in Congresses that passed no laws relating to the GSEs - are responsible. Suuuure!)

Mortgage Disaster: Who Did It, and When

Who Did It

This presentation has been making the rounds. It has some amazing graphics: An Overview Of The Housing/Credit Crisis And Why There Is More Pain To Come

(NOTE: In the following, clicking on any image will casue a larger version to open in a new window.)

As to who did it, this chart is the most concise and specific thing I've seen yet:

The GSEs may have been active during the bubble, but the failed mortgages driving our crisis com mostly from the private sector. The driven by Wall-Street securitization are 51% of all failed mortgages, more than 2.5 times that of FNM and FRE combined.

"The GSEs Hold a Disproportionately Small Percentage of the Nation’s Seriously Delinquent Loans

While the government-sponsored enterprises (GSEs) own 56% of the nation’s single-family mortgages, the mortgages they own represent 20% of all serious delinquencies. In contrast, private label securities own 15% of the nation’s mortgages but 51% of the serious delinquencies."

The source of this given in the T2 presentation is Freddie Mac. This might seem a dubious source, but so far, it is the only breakdown of this type I have found.

At Freddie Mac is a document containing this figure:

The numbers are the same, though we get more information as to the sources used to compile this: "Sources: Federal Reserve Board, FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, First American CoreLogic (LoanPerformance); data as of December 31, 2008. Seriously Delinquent loans are at least 90 days delinquent or in foreclosure. Components may not sum to total because of rounding".

We may wish for another source, but I have yet to find one, after searching, and certainly I have found nothing to contradict this, and a lot of information that would explain or confirm this.

When Did It Happen:

Many have previously noted that the Big 5 Investment Banks received permission in 2004 to raise their leverage from around 12:1 to as high as 40:1. In addition, they were in large part left to be "self-regulating" at the same point. I believe that this was a turning, as shown below.

Wall Street Leverage became (briefly) Main Street leverage.

Again from T2:

"From 2000-2006, the Borrowing Power of a Typical Home Purchaser Nearly Tripled"

Look at the jump in 2004!

And more from T2:

"The Decline in Lending Standards Led to a Surge in Subprime Mortgage Origination"

"Source: Reprinted with permission; Inside Mortgage Finance, published by Inside Mortgage Finance Publications, Inc. Copyright 2009."

About Option ARMs, the most toxic of all loans, which Bernanke can only partially defang with low rates:


Below, note the text box and especialy the green line showing "when nearly all Option ARMs were written":

When these come home to roost, they will even more disproportoinately impact the Wall-Street driven loans - because the GSEs were kept out of the worst of them by the conforming loan limit:

And in case anybody thinks it's a coincidence, see here: Pressure from Wall Street Caused Spike in Predatory Lending:

Because investment banks provide subprime lenders with necessary funding, they wield a great deal of power in determining what sorts of loans are offered to subprime borrowers.

Kurt Eggert, Professor of Law at Chapman University, in testimony to Congress, April 2007: “I think we've had a presentation of the secondary market as mere passive, you know, purchasers of loans and oh, they may select a loan, but it's really the lenders who decide loans. But if you talk to people on the origination side they'll tell you the complete opposite. They'll say, you know, our underwriting criteria are set by the secondary market. They tell us what kinds of loans they want to buy. They tell us what underwriting criteria they want us to use. And that's what we do because we're selling to them.”

INVESTMENT BANKS PAID HIGHER PRICES FOR LOANS WITH PREDATORY CHARACTERISTICS:

Fremont General: “The Company sought to maximize the premiums on whole loan sales and securitizations by closely monitoring the requirements of the various institutional purchasers, investors and rating agencies, and focusing on originating the types of loans that met their criteria and for which higher premiums were more likely to be realized. The Company also sought to maximize access to the secondary mortgage market by maintaining a number of relationships with the various institutions who purchase loans in this market.”

The "premium" noted above was greater payment for more toxic loans was called YSP or YLSP - Yield (Loan) Spread Premium:

A yield spread premium (YSP) is the money paid to a mortgage broker based on an interest rate above the lowest rate the borrower qualifies for (called the par rate). Banks and mortgage brokers make money by setting interest rates above wholesale prices. However, the term "yield spread premium" only refers to mortgage brokers' rebates. Consumers are unaware of the premium a direct lender such as a bank earns when it sets rates to its borrowers above the par rate.

So there we have it. Who, When, and How.
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Fed to Hire former Enron Lobbyist to "Buttress its Image"

This is just too f'in beautiful.

From Bloomberg:

The Federal Reserve intends to hire a veteran lobbyist as it seeks to counter skepticism in Congress about the central bank’s growing power over the U.S. financial system, people familiar with the matter said.

Linda Robertson ... headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.

Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street’s demise. While she wasn’t tied to Enron’s fraud, her association with the firm may raise questions, analysts said.

With a pedigree liike that, how could there be any questions? We know this one is totally corrupt.

The FED joins AIG and Wall Street in total tone-deafness. Either that, or their confidence in Bankster ownership of the U.S. governement is so complete that they've stopped worrying about appearances. But then what was that part about "Buttress its Image"?
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