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Exploring the Causes of Financial and Housing Crisis

January 26th, 2011

Today, six members of the Financial Crisis Inquiry Commission, created by the last Congress to investigate the causes of the financial crisis are releasing their final report. Although the three of us served on the commission, we were unable to support the majority’s conclusions and have issued a dissenting statement.

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4).  Securitizers lowered the credit standards and promoted bad credit mortgage programs that they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

Housing Bubble In a November 2009 article, Brookings Institution economists Martin Baily and Douglas Elliott describe the three common narratives about the financial crisis.

The first argues that the primary cause was government intervention in the housing market.

This intervention, principally through Fannie Mae and Freddie Mac, inflated a housing bubble that triggered the current mortgage and housing crisis.

This is the view expressed by one of our co-commissioners in a separate dissent. The second narrative blames Wall Street and its influence in Washington. According to this narrative, greedy bankers knowingly manipulated the financial system and politicians in Washington to take advantage of homeowners and mortgage investors alike, intentionally jeopardizing the financial system while enjoying huge personal gains. That’s the view of the six majority commissioners.

WSJ subscribes to a third narrative a messier story that emphasizes both global economic forces and failures in U.S. policy and supervision. Though our explanation of the crisis doesn’t fit conveniently into the political order of Washington, we believe that it is far superior to the other two.  We recognize that the other two narratives have popular appeal: They each blame a clear entity, and thus outline a clear set of reform proposals. Had the government not supported housing subsidies (the first narrative) or had policy makers implemented more restrictive financial regulations the second there would have been no calamity. Both of these views are incomplete and misleading. The existence of housing bubbles in a number of large countries, each with vastly different systems of housing finance, severely undercuts the thesis that the housing bubble was a phenomenon driven solely by the U.S. government. Likewise, the multitude of financial-firm failures, spanning varied organizational forms and differing regulatory regimes across the U.S. and Europe, makes it implausible that the crisis was the product of a small coterie of Wall Street bankers and their Washington bedfellows. We believe the crisis was the product of 10 factors. Only when taken together can they offer a sufficient explanation of what happened:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay. However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?  > Read the rest of the WSJ article.

Housing Crisis Articles, Subprime Mortgage News ,

MBA Opposed Obamas Reduction in Mortgage Interest Deductions

February 3rd, 2010

The Obama Administration released the Fiscal Year 2011 Budget.  Needless to say this budget will deeply effect many industries negatively, but specifically in this article the mortgage housing industry. Under the government finance programs like FHA mortgages, borrowers are able to get access to affordable financing with a minimal down-payment and no penalty for earl pay-off.

How can Obama really think that eliminating the mortgage interest write-offs for higher income homeowners will be good for the real estate market and the economy?

Adam Quinones wrote a good article about how Obama’s new budget would be a disaster for housing sector and mortgage industry in general.  He scanned the budget proposal for terms like mortgage, mortgage loan security, housing, community, GSE, government sponsored enterprise, Fannie Mae, Freddie Mac, etc, etc.

HERE is the message from the President. Its five pages long and basically re-iterates the above statement. This is how he ends his message: “These have been tough times, and there will be difficult months ahead. But the storms of the past are receding; the skies are brightening; and the horizon is beckoning once more “HUD SAYS: “HUD’s budget proposal seeks to make targeted investments in people and places – instead of policies and programs –to effectively support HUD’s mission while being accountable to the American taxpayer. $6.9 billion in projected FHA and Ginnie Mae receipts contribute to the FY 2011 proposed $48.5 billion budget total and to the administration’s deficit reduction plans. Net of the $6.9 billion in projected FHA and Ginnie Mae receipts the Budget proposes overall funding of $41.6 billion, 5% below fiscal year 2010, and makes difficult decisions to cut funding for a number of programs.”

The carefully targeted investments in the Budget will enable HUD programs to: House over 2.3 million families in public and assisted housing (over 58% elderly or disabled); Provide voucher assistance to 78,000 additional families (over 47% elderly or disabled);  Assist nearly 5.5 million households, over 200,000 more than at the end of fiscal year 2009.  More than double the annual rate at which HUD assistance creates new permanent supportive housing for the homeless; Create and retain over 112,000 jobs through the Department’s housing and economic development investments in communities across the country.

THE MORTGAGE BANKERS ASSOCIATION SAYS:

The Mortgage Bankers Association (MBA) issued the following reactions and analysis to the fiscal year 2011 federal budget, as proposed today by the Obama Administration.  “Reducing the federal deficit is vital to the long-term health of the US economy and our industry.  However, we believe it can and should be done without negatively impacting the already-fragile housing market,” said Robert E. Story, Jr., CMB, MBA’s Chairman.  “Limiting the mortgage interest deduction and imposing additional taxes on lenders will only make economic recovery more difficult.”

MBA opposes the proposal to reduce itemized deductions, including the deduction of mortgage interest, for taxpayers reporting income above $250,000 (joint) $200,000 (single).  This would have a negative impact on the housing market, particularly in high cost states like California and New York, as it would increase the cost of mortgages for many potential homeowners, especially those in high-cost states.    MBA also opposes the proposal to tax carried interest at ordinary tax rates (as opposed to the capital gains rate, as it is taxed now), as it would discourage capital formation for lending.

MBA believes the Financial Crisis Responsibility Fee will reduce the availability and increase the costs of real estate loans to consumers and small businesses by discouraging large financial institutions from entering into new, private label commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS) transactions and significantly reducing the profitability of non-agency servicing.

Story also noted that the budget did not offer any indications of the Administration’s plans for the future of Fannie Mae and Freddie Mac.”MBA has been at the forefront of the debate over the future of the government’s role in the second mortgage market,” said Story.  “We rolled out our proposal in September and have been meeting with all stakeholders on Capitol Hill, within the administration, and across the industry to share our perspectives.  Our proposal would provide a new foundation for supporting the core of the mortgage market.  We look forward to continuing our discussions as the administration readies its suggestions.”

MBA has supported the administration’s efforts to improve risk management of the Federal Housing Administration’s (FHA), and thus strongly supports the additional $18 million budgeted to allow FHA loans to implement its improved risk management systems.  MBA also supports the $20 million budgeted to combat predatory lending and mortgage fraud at HUD, as well as additional funding for housing counseling and foreclosure avoidance.”We are pleased to see increased funding for several critical programs at FHA,” added Story.  “We support both the efforts to help FHA better manage its risk.  We also support additional funding at HUD and the Department of Justice to combat mortgage fraud.  I also want to add how pleased I am to see that FHA’s multifamily programs are continuing to show strong performance in the face of the current challenges in the housing market.”

MBA also found troublesome the following additional provisions in the budget proposal: Termination of program authority to allow expensing (for tax purposes) of real estate environmental remediation, or “brownfields” clean up costs.  Reduced federal support for terrorism risk insurance program.  Read the original article online.

Foreclosure News, Home Financing, Housing Articles, Loss Mitigation Articles, Mortgage Industry, Mortgage News, Subprime Mortgage News

Southern California Home Sales Up but Home Foreclosures Remain a Problem

October 13th, 2009

Southern California home sales rose higher last month, bolstered by late-closing summer transactions, low mortgage rates and buyers hoping to take advantage of a soon-to-expire tax credit. The region’s median sale price remained lower than in September 2008 but, for the first time in years, several counties logged year-over-year gains in the median price paid for resale houses, a real estate information service reported. Last month 21,539 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties. Getting a house loan with bad credit is often more difficult then getting approved for a note modification.

According to DataQuick, that was up 0.2% from 21,502 in August and up 5.1% from 20,497 a year earlier, September marked the 15th month in a row with a year-over-year sales gain, although last month’s was the smallest of those increases. Sales for the month of September have averaged 24,873, ranging from a low of 12,455 in September 2007 to a high of 37,771 in 2003, based on DataQuick’s statistics, which go back to 1988. Home foreclosures and loan modification plans dominated the housing transactions again this quarter even though REO sales were higher.

Foreclosure News, Housing Articles, Mortgage News, Subprime Mortgage News

Thrift Originations Drop

August 28th, 2009

The Office of Thrift Supervision reported that thrifts originated $62.4 billion in real estate financing during the 2nd quarter.  Mortgage loan production dropped from the first quarter’s $88.1 billion and tumbled from $107.5 billion in the 2nd quarter 2008. Most lenders have become more cautious as loan modification agreements and home foreclosures continue to rise.  Read the original article online at >Thrift Loan Originations Down

Foreclosure News, Subprime Mortgage News

HUD Suspends FHA Lenders

August 28th, 2009

Three FHA approved lenders approved to offer FHA mortgages insured by the Federal Housing Administration were suspended by the U.S. Department of Housing and Urban Development over “serious” violations. HUD announced their Mortgagee Review Board had suspended Golden First Mortgage Corp. The Great Neck, N.Y., company allegedly neglected to notify HUD of an Office of Thrift Supervision investigation into the activities of its president or his involvement in an OTS civil money penalty. Suspended lenders are not allowed to sell new FHA-insured loans while HUD investigates their FHA lending practices, the statement said.

FHA mortgage rates remain low and the Federal Reserve has ensured FHA lenders and banks offering HUD loans his commitment to making affordable home financing available to Americans. When shopping for a FHA lender, Lenders Nationwide recommends that consumers consider FHA mortgage companies that have a clean HUD record. Read the original Lenders Nationwide article online> 3 FHA Lenders Suspended

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