Weekend Economists' 19th Nervous Breakdown April 6-8, 2012

[Demeter]

50. The Coming Housing Finance Train Wreck

http://www.nakedcapitalism.com/2012/04/the-coming-housing-finance-train-wreck.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

...If no one blinks, an ugly situation could get even worse. One the one hand, we have the complete lack of resolve on the part of the officialdom to fix the abuses in the private label securitization market, which prior to the crisis, accounted for 60% of mortgage financing. The weak risk retention rules in Dodd Frank don’t cut it, and the sell side (the major banks) have been completely unwilling to consider reforms, such as those proposed by the FDIC in early 2010, that would have addressed enough of the problems to entice investors back into the pool. (The FDIC’s plan include one year seasoning before a loan could be sold into a securitization, 5% risk retention, loan level disclosure, and no CDOs.)

Instead, we have wishful thinking from what Matt Stoller has called the hope and change school of “how we fix housing”. I got a call from a very earnest financial reporter a few weeks ago, and he seemed quite convinced that covered bonds, a conservative structure with a long history in Germany, would solve the problem. Given that securitization contracts proved to be meaningless – originators lied about what they were selling, trustees refused to intervene as required to do by contract in the light of clear problems with the loans (and are now trying to get their own get out of jail free cards per the example of Bank of New York in its settlement with Bank of America), and servicers scam borrower and investors – it is hard to fathom would anyone with an operating brain cell have anything to do with this market. I called an investor, who confirmed my dour views: “It isn’t the structure that the problem, it’s the people behind the structure.”

Private capital is on strike until better regulations are in place or memories fade, and the losses are so great that market participants say it will be a decade before there is another private securitization market in the US. This has more serious implications that you might think.

We now have a housing finance market that is almost totally on government life support. One private label was done last year. Administration officials complain that lending standards (which are a reflection of Fannie, Freddie and FHA standards) are too restrictive, as reflected in average FICO scores and down payment requirements (note I’m not entirely sympathetic, borrowers should have more in the way of down payments than was the norm in the housing bubble era. As Josh Rosner has said, a home with no equity is a rental with debt). Maybe they should have been a little more supportive of tougher requirements for mortgage securitizations when Dodd Frank was being crafted...

AND THEN, THERE'S THE POLITICS...YVES HITS A HOME RUN AGAIN! MUST READ AT LINK