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Once upon a time, those who made loans would profit only if the loan were paid back. If the borrower defaulted, the lender would suffer.
That idea must have seemed quaint in 2005, as the mortgage lending boom reached a peak on the back of mushrooming private securitizations of mortgages, which were intended to transfer the risk away from those who made the loans to investors with no real knowledge of what was going on.
Less well remembered is that there was a raft of real estate securitizations once before, in the 1920s. The securities were not as complicated, but they had the same goal — making it possible for lenders to profit without risking capital.
The Dodd-Frank Act of 2010 set out to clean that up. Now, there would be “risk retention.” Lenders would have to have “skin in the game.” Not 100 percent of the risk, as in the old days when banks made mortgage loans and retained them until they were paid back, but enough to make the banks care whether the loans were repaid.
At least that was the idea. The details were left to regulators, and it took more than four years for them to settle on the details, which they did this week.
The result is that there will be no risk retention to speak of, at least on residential mortgage loans that are securitized. It remains to be seen if there will be a private securitization market at all, since the government-sponsored enterprises will have major advantages.
But if there is, the primary defense against a repeat of the lending orgy that took place before the collapse will be the wisdom of investors asked to buy the securities. Last time around, they showed no such wisdom.
Under Dodd-Frank, the general rule was to be that if a lender wanted to securitize mortgages, that lender had to keep at least 5 percent of the risk. There was an exception. The lender didn’t need to retain any risk in mortgages deemed to be supersafe. Those mortgages were to be known as Qualified Residential Mortgages, or Q.R.M., in the jargon that promptly developed.
In 2011, when the regulators first proposed rules to carry out the risk-retention law, the idea was that there would be a two-tier mortgage market. Mortgages deemed to be Q.R.M. would be characterized by substantial down payments that would minimize the risk of default, while the other tier would include riskier mortgages — although still safer than some of the ridiculous mortgages that characterized the boom — and could be securitized only if those responsible for either the loans or the securitizations kept some of the risk.
But when the final rule was adopted this week, that idea was dropped.
“The loophole has eaten the rule, and there is no residential mortgage risk retention,” said Barney Frank, the former chairman of the House Financial Services Committee and the Frank in Dodd-Frank.
One regulator involved in writing the rules told me that “between 400 and 500” members of Congress got involved in arguing against any requirement that would require significant down payments for loans to be classified in the Q.R.M. group. There are 535 seats in the House and Senate combined.
In bureaucratic speak, Q.R.M. will equal Q.M. That group, Qualified Mortgages, was also mandated by Dodd-Frank, to be established by the Consumer Financial Protection Bureau. Qualified mortgage rules, aimed at protecting borrowers, do exclude some of the most notorious mortgages, including no-document loans, negative amortization loans, interest-only loans and balloon-payment loans. But they do not require any down payment at all.
Fannie and Freddie were taken in by mortgage lenders before. That is one reason they went broke and had to be put under government conservatorship. But somehow, their guarantee is now deemed sufficient to avoid the actual lender having to take any risk.
“Since securitizers won’t be required to retain risk for private-label securities,” said Sheila Bair, a former chairwoman of the Federal Deposit Insurance Corporation, “investors will continue to be reluctant to buy their securities. So the government-backed ones will remain pretty much the only game in town. Of course, taxpayers will be holding the bag if, or when, there is another downturn.”
In the final weeks before the rules were formally issued, it was clear that the lenders had pretty much won all the arguments on residential mortgage lending. But there was an intense lobbying campaign from lenders to eliminate or minimize risk-retention requirements on another form of securitizations, called collateralized loan obligations, or C.L.O.s.
“C.L.O.s are a key source of funding for Main Street businesses and other corporate borrowers, and this funding could become more expensive and less available,” said Kenneth E. Bentsen Jr., the president of the Securities Industry and Financial Markets Association. Complaints about excessive regulation played a major role in shooting down risk retention as a way of disciplining lenders.
But genuine risk retention could be seen as a market-based approach, freeing lenders from government-imposed rules on who should be able to borrow, and on what terms. “You decide what is a sane loan,” Mr. Frank said. “But you have to risk your own money.”
That is the way it used to be, and the way it should be. But it is not the way it will be.
Remember this from 3 daze ago . . .
Time to make it easier for people to get loans with lower credit and lower down payments: FHFA looking seriously at making it easier for cash strapped Americans to take on mortgages.
If you had to write two chapters on the housing market between say 2000 and 2007 and one between 2007 and 2014 both would look incredibly different. One was guided by massive exuberance and a populist movement of giving money to anyone with a pulse. The latest chapter is one guided by big investors and low inventory. This long horizon now brings us to the present. Housing values are up solidly over the last year but not because the general public is diving in head first. This latest push came from a multi-year trend of “cash buying” and investor dominance. That trend has slowed. In order to get more interest again, the Federal Housing Finance Agency (FHFA) is looking at making it easier for the public to get loans. Ignore the fact that this agency has been rebranded since it failed fantastically in the last bubble and is now once again in charge of overseeing Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks.
Since many in the public can’t muster 5 percent for a down payment or have blemishes on their credit, the FHFA is looking at making things a tad bit easier for people to qualify. Instead of asking why so many have a hard time saving for a down payment or why people have lower credit scores, the banking/government hybrid is looking at making it easier for people to take on big debt with high leverage. http://www.doctorhousingbubble.com
That idea must have seemed quaint in 2005, as the mortgage lending boom reached a peak on the back of mushrooming private securitizations of mortgages, which were intended to transfer the risk away from those who made the loans to investors with no real knowledge of what was going on.
Less well remembered is that there was a raft of real estate securitizations once before, in the 1920s. The securities were not as complicated, but they had the same goal — making it possible for lenders to profit without risking capital.
The Dodd-Frank Act of 2010 set out to clean that up. Now, there would be “risk retention.” Lenders would have to have “skin in the game.” Not 100 percent of the risk, as in the old days when banks made mortgage loans and retained them until they were paid back, but enough to make the banks care whether the loans were repaid.
At least that was the idea. The details were left to regulators, and it took more than four years for them to settle on the details, which they did this week.
The result is that there will be no risk retention to speak of, at least on residential mortgage loans that are securitized. It remains to be seen if there will be a private securitization market at all, since the government-sponsored enterprises will have major advantages.
But if there is, the primary defense against a repeat of the lending orgy that took place before the collapse will be the wisdom of investors asked to buy the securities. Last time around, they showed no such wisdom.
Under Dodd-Frank, the general rule was to be that if a lender wanted to securitize mortgages, that lender had to keep at least 5 percent of the risk. There was an exception. The lender didn’t need to retain any risk in mortgages deemed to be supersafe. Those mortgages were to be known as Qualified Residential Mortgages, or Q.R.M., in the jargon that promptly developed.
In 2011, when the regulators first proposed rules to carry out the risk-retention law, the idea was that there would be a two-tier mortgage market. Mortgages deemed to be Q.R.M. would be characterized by substantial down payments that would minimize the risk of default, while the other tier would include riskier mortgages — although still safer than some of the ridiculous mortgages that characterized the boom — and could be securitized only if those responsible for either the loans or the securitizations kept some of the risk.
But when the final rule was adopted this week, that idea was dropped.
“The loophole has eaten the rule, and there is no residential mortgage risk retention,” said Barney Frank, the former chairman of the House Financial Services Committee and the Frank in Dodd-Frank.
One regulator involved in writing the rules told me that “between 400 and 500” members of Congress got involved in arguing against any requirement that would require significant down payments for loans to be classified in the Q.R.M. group. There are 535 seats in the House and Senate combined.
In bureaucratic speak, Q.R.M. will equal Q.M. That group, Qualified Mortgages, was also mandated by Dodd-Frank, to be established by the Consumer Financial Protection Bureau. Qualified mortgage rules, aimed at protecting borrowers, do exclude some of the most notorious mortgages, including no-document loans, negative amortization loans, interest-only loans and balloon-payment loans. But they do not require any down payment at all.
Fannie and Freddie were taken in by mortgage lenders before. That is one reason they went broke and had to be put under government conservatorship. But somehow, their guarantee is now deemed sufficient to avoid the actual lender having to take any risk.
“Since securitizers won’t be required to retain risk for private-label securities,” said Sheila Bair, a former chairwoman of the Federal Deposit Insurance Corporation, “investors will continue to be reluctant to buy their securities. So the government-backed ones will remain pretty much the only game in town. Of course, taxpayers will be holding the bag if, or when, there is another downturn.”
In the final weeks before the rules were formally issued, it was clear that the lenders had pretty much won all the arguments on residential mortgage lending. But there was an intense lobbying campaign from lenders to eliminate or minimize risk-retention requirements on another form of securitizations, called collateralized loan obligations, or C.L.O.s.
“C.L.O.s are a key source of funding for Main Street businesses and other corporate borrowers, and this funding could become more expensive and less available,” said Kenneth E. Bentsen Jr., the president of the Securities Industry and Financial Markets Association. Complaints about excessive regulation played a major role in shooting down risk retention as a way of disciplining lenders.
But genuine risk retention could be seen as a market-based approach, freeing lenders from government-imposed rules on who should be able to borrow, and on what terms. “You decide what is a sane loan,” Mr. Frank said. “But you have to risk your own money.”
That is the way it used to be, and the way it should be. But it is not the way it will be.
Remember this from 3 daze ago . . .
Time to make it easier for people to get loans with lower credit and lower down payments: FHFA looking seriously at making it easier for cash strapped Americans to take on mortgages.
If you had to write two chapters on the housing market between say 2000 and 2007 and one between 2007 and 2014 both would look incredibly different. One was guided by massive exuberance and a populist movement of giving money to anyone with a pulse. The latest chapter is one guided by big investors and low inventory. This long horizon now brings us to the present. Housing values are up solidly over the last year but not because the general public is diving in head first. This latest push came from a multi-year trend of “cash buying” and investor dominance. That trend has slowed. In order to get more interest again, the Federal Housing Finance Agency (FHFA) is looking at making it easier for the public to get loans. Ignore the fact that this agency has been rebranded since it failed fantastically in the last bubble and is now once again in charge of overseeing Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks.
Since many in the public can’t muster 5 percent for a down payment or have blemishes on their credit, the FHFA is looking at making things a tad bit easier for people to qualify. Instead of asking why so many have a hard time saving for a down payment or why people have lower credit scores, the banking/government hybrid is looking at making it easier for people to take on big debt with high leverage. http://www.doctorhousingbubble.com
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