Frustration Among Mortgage People
Poor payrolls in May, another weak Case-Shiller home-price report, and a big deceleration in manufacturing have pushed down hopes, stocks, bond yields, and mortgages, now near 4.50%. However, the data do not support a return to recession: the ISM service-sector index actually improved in May 54.6 from 52.8 in April.
Today's greatest frustration among mortgage people -- worse than all the new and self-defeating rules, worse than volume too low to make a living, worse than turning away good applicants -- is to watch the White House, Congress, and financial "experts" of all stripes discuss mortgage-market history, and attempt reinvention.
The Soviets did a more honest job with textbooks. Creationists have a better grasp of evolution. Little kids do better repeating a sentence down a long line of classmates. Daniel Patrick Moynihan: "You're entitled to your own opinion, but not your own facts." None of us wants to see a repeat of Bubble lending. However, our national leadership, which could not see Bubble lending when it was happening, still doesn't know what it was and who did it. Rather worse, it refuses to distinguish Bubble lending from the prudent standards prevailing from about 1995 back to 1934 (and beyond), and so reinvention has become a suicidal game of over-tightening and score-settling.
These guys, all of them, squirt the heart of the matter around the room like a watermelon seed, most from ignorance, too many on purpose. Really awful political axe-grinders, led by Peter Wallison and Edward Pinto of AEI, have invented this subprime definition: any Fannie-Freddie ("GSE") ARM of any type, quality immaterial, any fixed-rate loan above 80% of value, any Fico below 660 -- subprime!!!
A rose by any other name would smell as sweet.Got that. But names do matter.
Hence a brief history of subprime time. In the beginning, early 1990s, a subprime loan was by definition one that the GSEs would not buy. Sub-prime. Less-than. And the term had the attractive cachet to borrower dopes that its interest rate might be below "prime." Synonymous subprime terms: "B, C, D" credits, inferior to "A" (I never could figure them out -- I couldn't tell B borrowers from D, and none of them deserved a loan).
At the same time, "Alt-A" lending began on a parallel track: these were "A" loans, but not in the GSE playbook (a rental-property loan in Jumbo amount, for example). Alt-A subsumed prudent "stated-income" loans, the term appearing at S&Ls in 1980, the lending approach as old and solid as dirt: 25%-40% down, fine credit, good story about unusual income, deep and documented post-closing reserves.
In the late '90s, the used-to-be-great investment banks discovered that they could securitize trash, trick rating agencies, and sell bad paper at pretend high yields all over the world. Their appetite for subprime and Alt-A loans became ravenous.
By 1997, stated-income required only 20% down, then 10%, and by 2002, nothing. WaMu and World sipped and then sucked the Kool-Aid. The Alt-A book was similarly suborned (Lehman's ALS, Bear). But the worst, the absolute dead worst: loans subprime by construction, by their terms guaranteed to fail, the infamous 2/28 and 3/27. Fixed for a couple of years, then jump 6% above Libor.
The GSEs had nothing to do with the racketeering described above. They bought a trivial amount of AAA subprime securities, and too many loans with Ficos under 660, about 15% of their total (however, "A-minus" was not subprime). Through 2005 the flood of bad credit perversely caused bad loans to perform, but then they were first to default in waves, causing a whirlpool that has dragged in millions of "A" loans.
Today the GSEs are terrified for their lives, standards over-tightened for political protection. There are no S&Ls, and over-regulated local banks cannot fill the gap. The giant commercial banks have forever hated all other mortgage lenders -- embarrassed by them -- want the business all their own, but cannot handle the volume, nor carry the paper even when consumers are forced to pay into a new protection racket.
Get the GSEs back in the game, or take the (continuing) consequences.
This chart exposes the Big Lie blaming Fannie and Freddie for the disaster, and another fable: that "private" mortgage markets are the sloution. "PLS" = Private Label Securities; note early-default whirlpool.
By Louis S. Barnes
Capital Markets - Jun 3, 2011