Housing Policy

McPalin on Fannie/Freddie

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Writing in today's Wall Street Journal:

Along with the commitment of taxpayers' dollars, we should make market reforms to help ensure that we do not face this problem again. We will make sure the marketplace understands its obligations. Homeowners must be able to understand the terms and obligations of their mortgages. In return, they have an obligation to provide truthful financial information, and should be subject to penalty if they do not. Policies must be in place to ensure that homeowners provide a responsible down payment of equity in the initial purchase of a loan. In the future, Fannie, Freddie or any government organization should never insure a loan when the homeowner doesn't have enough of his or her own capital in the investment.

Lenders who initiate loans will be held accountable for the quality and performance of those loans, and strict standards must be required in the lending process. Every lender must be required to meet the highest standards of ethical behavior, with recourse if they do not perform.

Reforms are necessary now to make mortgage lending and banking organizations more transparent. We will require greater disclosure, so that complex derivative instruments and excessive leverage can't put the marketplace, and the financial security of your home, at risk.

We will push the nation's top mortgage lenders to provide maximum support to help cash-strapped, but credit-worthy customers. Lenders should do everything possible to keep families in their homes and business growing.

Whole thing here. Thoughts?

NEXT: Freddie Mac the Freeloader

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  1. I may be misreading this, but it seems like she’s calling for increased regulation of the lending process and a state-mandated higher standard for borrowers.

    But of course these measures are for our own good. And compliance costs won’t have any effect on capital availability.

  2. “Homeowners must be able to understand the terms and obligations of their mortgages.”

    Ummm, how about teaching people not to sign things they don’t understand? Also, I’m sure they meant “home buyers” as people who own homes are either already in trouble or don’t need help.

    “In return, they have an obligation to provide truthful financial information, and should be subject to penalty if they do not.”

    What if no one asks them for financial information?

    “Policies must be in place to ensure that homeowners provide a responsible down payment of equity in the initial purchase of a loan.”

    Suitable to whom? Is a dollar down payment suitable enough? $3.50?

    I could go on but I’ve already got a headache.

  3. How about staying the fuck out of the process and letting morons take a digger?

  4. I want to break it down:

    Homeowners must be able to understand the terms and obligations of their mortgages.

    Im okay with this. However, I think part of the problem NOW is that there is too much explanation of terms and obligations. Does it really take an entire book to explain a mortgage? My first mortgage, I tried to at least skim everything. 2nd and 3rd time around, I just signed without even looking.

    they have an obligation to provide truthful financial information, and should be subject to penalty if they do not.

    This is already fraud, right? Do we really need to change anything or is it just an enforcement issue?

    Policies must be in place to ensure that homeowners provide a responsible down payment of equity in the initial purchase of a loan.

    While a good idea, it seems like this policy should be set by the person taking on the risk – the bank.

    In the future, Fannie, Freddie or any government organization should never insure a loan when the homeowner doesn’t have enough of his or her own capital in the investment.

    Fixed.

    Anyway, blah blah blah, from that point on.

  5. OK, so fedgov will run all lending business, in the process keeping whole the Chinese bond holders, next in line fedgov will take ownership interest in auto industry, then the airlines come back for more, including hand off of all pension plans to the suckers (taxpayers), next the energy companies, the extractive industries….hail the O-bama-Mc-unified socialist states of america.
    Piece by piece, but I’d rather someone have the balls to pull a Hugo, just announce we’ve nationalized everything, the pigs at the top are in charge and you proles can drink warm beer if you can afford any, cause we’ve nationalized the breweries too and raised the price.

  6. Almost forgot, some treasury guy this morning stated that for our ‘investment’ the taxpayer will benefit on the ‘upside’.
    What upside?

  7. The Martket understands its obligation by people going broke. What bothers me most about this whole thing is the contrast to the savings and loan meltdown in the early 90s. A fair number of people went to jail over the S&L debacle. In contrast, no one is so much as being investigated over this. Why? Because the top people were political grandees from both sides. We couldn’t investigate them now could we?

    The whole lesson of this thing is that if you are going to fuck up, fuck up really big and include people from both parties. If you do that, Congress will come and bail your ass out with a few trillion of everyone else’s money and hope the thing goes away.

  8. In the first 100 days of our administration, we will look at every agency and department and expenditure of the federal government and ask this simple question: Is it serving the needs of the taxpayer? If it is not, we will reform it or shut it down, and we will spend money only on what is truly in the interest of the American people.

    Yeah, right.

  9. Not one peep about reforming the fiat money system, which led to the housing bubble…

    Nor the government insistence that we have an “ownership society”, which means everyone gets rich watching his home value rise in the bubble

    Nor that the sub prime loans were politically pushed for reasons of “equality”

    Or the foreign debt due to the buddy buddy central bank system too big to fail now!

    No, the government itself had nothing to do with it…its those unethical mortgage lenders who did it…fingerprint them!

  10. We will push the nation’s top mortgage lenders to provide maximum support to help cash-strapped, but credit-worthy customers. Lenders should do everything possible to keep families in their homes and business growing.

    Is this statement not almost entirely conflicting with the previous statement that

    Policies must be in place to ensure that homeowners provide a responsible down payment of equity in the initial purchase of a loan. In the future, Fannie, Freddie or any government organization should never insure a loan when the homeowner doesn’t have enough of his or her own capital in the investment.

  11. Oh and buying off Congress doesn’t hurt either. Take a look at the amount of money Fannie and Freddie threw around to well placed Senators.

    Dodd, Christopher J
    S
    D-CT
    $133,900

    2. Kerry, John
    S
    D-MA
    $111,000

    3. Obama, Barack
    S
    D-IL
    $105,849

    4. Clinton, Hillary
    S
    D-NY
    $75,550

    5. Kanjorski, Paul E
    H
    D-PA
    $65,500

    http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html

    That is just the top five. You get down the list a bit and you find some Republicans. I would love to say that is a result of the Democrats being more corrupt. But the reality is, they are just the ones in charge and thus got to biggest bribes.

  12. doom
    Dooom
    DOOOOM

  13. Reinmoose,

    Not wanting to defend the idiocy, but one is a forward looking statement and one is backwards looking, trying to make the best of a situation already occurring.

  14. Lenders Legislators who initiate loans laws will be held accountable for the quality and performance of those loans laws, and strict standards must be required in the lending legislative process.

    Try that one on for size, Queeg.

  15. P Brooks,

    Sweet. I like it.

  16. This sounds like your standard McCain stump speech – a few bones thrown to the marketeers, but a basic endorsement of the current system.

    O’Bama’s proposal doesn’t seem too radical. Predictably there is more tinkering, meddling, penalties for dishonest lenders, etc. This was on his site (it’s funny how each plank says “Obama will…”):

    Protect Homeownership and Crack Down on Mortgage Fraud

    Obama will crack down on fraudulent brokers and lenders. He will also make sure homebuyers have honest and complete information about their mortgage options, and he will give a tax credit to all middle-class homeowners.

    * Create a Universal Mortgage Credit: Obama will create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief. This credit will provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.
    * Ensure More Accountability in the Subprime Mortgage Industry: Obama has been closely monitoring the subprime mortgage situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
    * Mandate Accurate Loan Disclosure: Obama will create a Homeowner Obligation Made Explicit (HOME) score, which will provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan.
    * Close Bankruptcy Loophole for Mortgage Companies: Obama will work to eliminate the provision that prevents bankruptcy courts from modifying an individual’s mortgage payments. Obama believes that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.

  17. It’s a given that the government will bail out the holders of Mortgage Backed Securities (MBSs) by making good on Fannie and Freddies debts. That reality sucks but it is pretty much what we have to deal with. The policy question is how do we proceed from that distasteful fact.

    In July, CATO posted some thoughts on the subject that basically is a recipe to bailout Fannie and Freddie and subsequent privatization that allows for genuine competition in the industry.

    This (IMHO) sound advice is not likely to be followed by our reps in DC, but is much more realistic than squashing the coming bailout.

  18. Don’t hold your breath for Obama to go after “dishonest Lenders”. The biggest crook in this whole mess was Franklin Raines, the former Clinton Budget Director, who lied about the fiscal state of the mess in order to get a big bonus. He over estimated earnings by 10 billion in order to maximize his bonus. If that were in private sector, Raines would be going to jail right now.

  19. doom
    Dooom
    DOOOOM

    You have a macro for that comment, don’t you?
    😉

  20. Was it future or previous earnings Raines overestimated or overreported? I mean, this was probably buoyed by general housing market optimism at the time and few questioned it. Sucks that his bonus was tied to making a $10bn claim like that.

    You could have made a lot of bread short selling them in the past two days.

  21. Current Tom. According to a house report they manipulated the accounting to make the earnings look better.

  22. Sure, you can be paranoid and actually read the documents. My boss is, so I just spent nine hours reading over the re-mortgage papers for our building. Then he will spend nine hours reading them, to make sure I caught and discussed all changes and incomprehensible legalese with the bankers. Then, at closing, we will read all the docs again to make sure nothing changed from the drafts to final (and past experience shows it has when a word processor pulls up the wrong draft.) Or, as the banker told us, we can do what 99.9% of other borrowers do and simply sign where indicated.

    What is needed is plain english that says “make your payments on time or borrower takes back the security.”

  23. What is needed is plain english that says “make your payments on time or borrower takes back the security.”

    And a line which says, “defaulted loans will adversely impact the earnings and future viability of your bank.”

  24. Has everybody missed that the article has at least two conflicting goals?

  25. The govt. had to step in as the bonds were tacitly backed by the govt. (this has always been the case – no wiggle room on this issue) This is why they got so big relative to their wholly private competitors, they could raise money more cheaply; when you have the US Govt promising to pay any bond you sell you can get a pretty low rate of interest.

    The issue is what we do looking forward.The govt’s choice is to nationalize the mortgage business or get out of the business of backing the debt of these entities. I’d divide them up into smaller entities then auction them off to the market and make clear that there will no longer be any govt backing. congress will fight this as Freddie and Fannie provided lots of money to members of congress and provided pork through projects in districts of members they favored.

  26. The big guys were giving loans to little guys that couldn’t really afford the home. The big guy was making the American dream come true. Therefore when the crap goes south, why should the big guys pay? He was helping the little guy!

    Very simple.

    I’m half kidding.

  27. we should make market reforms…We will make sure the marketplace understands its obligations…[Homeowners] have an obligation…Policies must be in place…In the future, Fannie, Freddie or any government organization should never…Lenders…will be held accountable…strict standards must be required…Every lender must be required to meet the highest standards…Reforms are necessary…require greater disclosure…We will push the nation’s top mortgage lenders to provide maximum support…Lenders should do everything possible…

    Until something REALLY goes bad, at which point we will start bailing people out left and right.

    But be forewarned! After the next bail-out, we have EVERY intention of delivering a stern lecture on the short-comings of the marketplace, the Administration, and carbon-based life-forms.

    I’m afraid it may be sterner than the current one. I’m sorry, but you force us to take these actions!

  28. I do think that’s their attitude.

  29. regarding clear debt instrument language. Yes, we need to make the language more clear but this will only help a little bit. When you get into a situation where an asset (be it houses or tulips) is going up and up many people will use debt to buy more so that when the price goes up on the asset they bought they end up making more money. Of course there is a big problem when the price goes down, and financial crisis will sometimes occur.

    This sometimes WILL happen in a market economy, no way around it. The problem is that if you institute rules and regulation then you can throw out the baby with the bath water. The Baby being innovation, efficiency, and productivity growth. It can be a tough balancing act. Most economists would advocate a private process (i.e. no govt control or ownership) that has in place rules of transparency.

    Fundamentally, capitalism gave us the extreme wealth we live in today and taking away the up and downs would take away much of what has driven the process that has given us so much wealth.

    People say that the 19XX’s were so much better (50s 70s you can insert decade) than now and that the capitalism/globalization/etc. is why we are no worse off. I don’t know any person, not one, who would willingly go back in time and live their life in some previous decade. The reason is that we have better medical care (even if you have no insurance, the ER now is a lot better than anything they had in the 70’s) ipods, internet, etc etc, and we have all that due to capitalism with all is warts.

    I’ve rambled enough

  30. Are you sure O’Biden didn’t write this?

  31. Not one word about the free market in this article. Noam Chomsky could have written it.

  32. Why do we even need these companies? Was no one able to get a home loan before 1968? WTF?

  33. Homeowners must be able to understand the terms and obligations of their mortgages.

    Simplicity would help a lot here. So would doing away with government regulations loading the mortgage portfolio with multi-page small-print “disclosures” that require a law degree to read.

    In return, they have an obligation to provide truthful financial information, and should be subject to penalty if they do not.

    In my experience most people who buy a house don’t know enough to fake entries. The “we can get away with saying it this way” suggestions came from the “expert” who wants the commission for putting the loan through. Of course, I’m reasonably honest and have an excellent credit rating, so YMMV.

    We will require greater disclosure, so that complex derivative instruments and excessive leverage can’t put the marketplace, and the financial security of your home, at risk.

    Again, if instruments are so complex no one can understand them, disclosure is futile.

    cash-strapped, but credit-worthy customers

    Pretty much an oxymoron.

    Perhaps what we really need is a national “If you want to stay out of debt, spend less than you earn” initiative. But neither Democrats nor Republicans could come up with that without displaying monumental hypocrisy.

  34. Maybe one of Heather’s mommies could spend a few mnutes teaching her how to balance a checkbook. With special attention to the “negative numbers are bad” part.

  35. Once upon a time, a 30-year mortgage with 20 percent down was the norm and the housing market was hunky-dory. Now everyone thinks they deserve to be a homeowner because they made it to age 25 and shouldn’t be “throwing away their money on rent”, but instead can borrow against the bubbling appreciation of their house. This could be a giantic disaster. Arnold Kling at CATO has a good analysis: http://www.cato.org/pub_display.php?pub_id=9630

  36. Perhaps what we really need is a national “If you want to stay out of debt, spend less than you earn” initiative. But neither Democrats nor Republicans could come up with that without displaying monumental hypocrisy.

    Reminds me of my favorite Jeff Flake quote (after being the lone ‘Nay’ on a bill supporting ‘Financial Literacy Month’):

    “Congress is in no position to teach Americans how to manage their finances.”

    http://www.azcongresswatch.com/?p=1465

  37. I like the admonition expressed on one California (Libertarian as a matter of fact)official’s website: ” Cut. Up. The. Credit. Cards. You. Fools.”

  38. If the government is going to subsidize or aid potential home buyers as a means to make the home buying market more “equitable” it ought to just do that for the relatively small number of borrowers who have a problem getting such loans.

  39. Don Mynack,

    FYI: Fannie Mae was created during the 1930s.

  40. Lenders who initiate loans will be held accountable for the quality and performance of those loans

    Another case of maing bullshit regulations out of the air so that the next buyer is absolved of doing ANY due diligence. When the originator packages the loan into a security, the prospective buyer of said security should be doing their due diligence as to the quality of the loan.

    Once again, politicans do everything to make intelligent concepts like “Buyer Beware”, “Don’t put all your eggs in one basket”, and “Save for a rainy day” pointless advice if not downright illegal.

  41. How can anyone take any campaign talk seriously regarding mortgage reform when the campaign managers for both McCain and Obama are former subprime mortgage lenders.

  42. “In return, they have an obligation to provide truthful financial information, and should be subject to penalty if they do not.”
    Like foreclosure?

    “Lenders who initiate loans will be held accountable for the quality and performance of those loans”
    You mean like losing money when they make bad loans?

    “Lenders should do everything possible to keep families in their homes and business growing.”
    Wasn’t part of the problem that they were doing too much?

  43. Don Mynack,

    FYI: Fannie Mae was created during the 1930s.

    And turned into a government sponsored enterprise in 1968 to help LBJ finance the war in Vietnam. It had a ~3 billion line of credit guaranteed at the time. Banks were happy to make imprudent loans, the FMs were happy to buy them, and buyers of the FMs securities (MBSs) happy to purchase them because everybody assumed that the government would not allow them to fail. They were correct. Together the FMs now have trillions in liabilities all assumed since the 1968 change into a GSE.

    But you knew all of that, didn’t you?

  44. Correction to my previous – The last sentence in the first paragraph should read

    Together the FMs taxpayers now have trillions in liabilities all assumed since the 1968 change into a GSE.

  45. I will add that all divedends that Fannie and Freddie have payed to shareholders in the past are not recoverable. All the profit without any of the risk. What a friggin’ deal! I will cut no slack to either party over this monstrous fuckup.

  46. Obama’s reforms seem modest, reasonable, and wholly inadequate.

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