Solving the mortgage crisis

An all-star cast of lending experts gathered Thursday and today at UC Berkeley to ponder the excesses that created the mortgage meltdown and what safeguards to build into the home-lending system going forward.

The 20-20 hindsight part was easy. Brad Blackwell, national sales manager for Wells Fargo’s mortgage operations, recalled having been taught four things to check about borrowers when he learned the business 25 years ago: ability to repay, willingness to repay, commitment to the transaction (meaning a down payment or equity in the deal) and quality of the collateral, the property securing the loan.

Some “very, very bright analysts”  developed models suggesting that the last factor alone was sufficient, Blackwell said, and so it seemed as long as home prices rose. By the peak of the housing bubble, many lenders (not including Wells, he said) had tossed out the old rules.

Stated-income loans waived the ability-to-pay rule. Subprime loans to borrowers with proven records of missing payments waived the willing-to-pay rule. And 80-20 piggyback loans and other forms of 100% financing tossed the commitment rule out the window.

“If you look at what happened,”  Blackwell said, “you had stated-income subprime mortgages at 100%” of the property’s value.

Of course, using pools of those loans to back complex securities is what initially caused the blowup. Paul Jablansky, a hedge fund manager who has consulted for congressional Democrats on the mortgage crisis, estimated that more than 40% of securitized subprime loans were headed for foreclosure over a five-year period, with total losses of $400 billion.

Jablansky helped create the plan backed by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, and Sen. Christopher J. Dodd (D-Conn.), who heads the Senate Banking Committee, to have lenders write down the principal balance on troubled loans so they can be refinanced into loans guaranteed by the Federal Housing Administration.

Having the feds team up with mortgage companies on loan workouts is a popular theme these days. Here are a few other suggestions by participants in the two-day mortgage meltdown symposium, sponsored jointly by real estate experts from UCLA and UC Berkeley:

Blackwell: Offer a simple menus of loans to avoid confusing borrowers. “A monthly adjustable negative amortizing loan is not something many consumers understand.”

Paul Leonard, Center for Responsible Lending: Make buyers of loans legally liable for fraud and errors committed by loan originators.

Audience member: Require mortgage originators to retain a financial interest in all securities carved out of their loans, so they share in any losses.

Today’s sessions include Federal Reserve Chairman Ben S. Bernanke, appearing via satellite and providing his views on the future of mortgage lending.

Click here for some presentations from the conference.

--E. Scott Reckard

Comments

[Dan]

~~~~~~~~~~~~~~~~~

Paul Leonard, Center for Responsible Lending: Make buyers of loans legally liable for fraud and errors committed by loan originators.

Audience member: Require mortgage originators to retain a financial interest in all securities carved out of their loans, so they share in any losses.

~~~~~~~~~~~~~~~~~~~~~~

If Paul Leonard or Generic Audience Member ever run for office, consider me as "boots on the street" for the campaign.

I'm almost literally nauseated at the thought of my hard-earned money being taken away from my children to pay for some greedy, irresponsible squatter.

Bottom line, sorry if it sounds harsh: if you can't afford your house, underwater or not, sell it, get out, face the consequences, AND DON'T ***EVER*** DO THAT AGAIN.

The problem is housing is an "emotional", "homesteading" issue -- WE CAN'T TOSS PEOPLE OUT OF THEIR HOMES, RIGHT?!?!?!

Sure can. We did it all the time before this crisis. Nothing personal, it's just business.

If that means my 401K has to go down to 30 percent of its original value before things turn around, I can live with that. As long as NO ONE gets a break on housing.

What if in 2012, 5 million Americans run up buttloads of credit card debt, say, $50K each? That's a $250B crisis.... should we bail out those happy spenders?!?!?

Where does insanity end, and common sense begin again?

[Rational Renter]

Sigh. This is all a phenomenal, horrendous, stupid waste of money. Prices are still going to fall. They are not supportable by incomes when lending standards have returned to normal. The government and the talking heads still talk about the need "to put a floor under prices" when in fact that is impossible.

But anyway, looks like we'll be out of this tunnel in 2015 instead of 2011. Hope we can endure the prolonged pain.

[Nick]

Unfortunately, any actual good ideas (like requiring originators to hold part of the loan) will likely get ignored by the policy makers, just like the lessons learned from past collapses are being ignored currently (1990's Japan, anyone?). I mean, Bernanke was in the news, today, saying that the government needs to back mortgages in the future, when it was the government's subsidized lending which was one of the prime offenders in causing the problem.

For what it's worth, here are some of my suggestions:

- Require mortgage originators to hold at least 20% of any loan on their books to maturity.

- Abolish the GSE's. Securitizing mortgages can be done by the market, and the GSE's are the embodiment of putting all your eggs in one basket.

- Curtail FHA lending/backing, and keep DPA abolished. Subsidized, below market rates make housing less affordable for everyone; get someone in charge there who understands this implicitly.

- Expand the Fed's oversight mandate to prevent systemic risk from inter-bank dependencies as a core directive, and require them to report to Congress on controlling it (with explicit details).

- Direct the SEC to denote any securitized investment backed by a private loan (mortgage or otherwise) to be for qualified investors only, and prevent any non-qualified investors from purchasing them (eg: pension funds).

- Prevent large banks and any other organization with government backing and/or considered essential to the financial system from buying any investments open only to qualified investors.

That would be a good start...

[Mary C.]

The problem with tossing people out of their homes en masse when there are such a huge amount of foreclosures already is that it creates some really terrible financial and social problems for everyone in the towns and neighborhoods where it happens. Loan work-out programs aren't going to help many people, anyways, if they don't have the means to pay even a revised loan. The banks are taking absolutely huge losses on foreclosures because it piles on extra expense while degrading the value of the property to less than what it would be if they would just agree to lower the principal. I understand the moral issue involved, but this is the world we have made for ourselves. If the homeowners are willing to be responsible and pay their bills, the bank will probably break even or even make money. House payments are almost all interest, and I think over the course of 30 years, if the homeowner stays, the bank won't do that badly even with reductions in principal and interest.

As for Blackwell's four points of mortgage origination, I think he neglects to mention that No. 4, good collateral, also went out the window during the bubble. That may be why the situation is so bad. House values for old, pre-owned houses in very poor condition (sometimes marginally or even non-habitable), and in traditionally "bad" neighborhoods, were getting sky-high appraisals and funding from mortgage lenders. There really isn't a lot of "quality collateral" that justifies giving out the huge loans for homes in the urban (and sometimes far-flung suburban and rural) areas of California.

[tew]

Figures the "audience member" has the best idea.

Nice to see in print that Dodd has his clients (*) writing the legislation.

* The "voters" are required for him to keep his seat, but in general voters are not his clients. The Greenwich hedge fund operators are his main client base. They can ensure he gets to best PR to get the votes in exchange for the the laws they need.

[tew]

Dan,

You talk about a credit card bailout like it's some theoretical future scenario. Not sure where you've been, but...

http://getoutofdebt.org/3007/banks-agree-to-wipe-out-up-to-40-percent-of-credit-card-debt-but-watch-out

It's a fairly simple plan on the surface. It benefits from the fact that a large majority of Americans don't understand that allowing forgiven debt to go untaxed (while allowing the lender to write off the loss and thus reduce their tax bill) is a direct subsidy and thus costs taxpayers at large.

[Rational Renter]

Mary C. - you say the problem with allowing foreclosures en masse is that "it creates some really terrible financial and social problems for everyone in the towns and neighborhoods where it happens."

Boo hoo. I'm sorry. You/me/the country can deal. That neighborhood with all the foreclosures? It might have looked nice for a few years b/c of debt-fueled flipping, but it wasn't a sustainable situation. It was an illusion. Homes will be bought and maintained when they reach sustainable price points. Until then, keeping people in houses they can't afford doesn't solve any problems.

You know what happens in a recession/depression? Some areas start to go downhill. That's life. Trying to stop that is just another step in the wrong direction - toward this illusory fantasy land we're creating where no one (most especially the federal government) is accountable for their expenditures.

[kindergartengraduate]

It took an all-star cast of lending experts two days to come up with what was in practice 25 years ago! This is absurd. My 3-year-old nephew could have told you that and saved the trouble. Yes, require 20% down. That's a start, morons.

[Inland Empire]

Paul Leonard, Center for Responsible Lending: Make buyers of loans legally liable for fraud and errors committed by loan originators

Sure! Let's then drag in the lawyers and we can give them some money too! What an idiotic idea. Having a lawyer handle your sale doesn't guarantee all goes well. I just quit claimed some land that a nice lawyer in the South bungled on a previous sale that was more than 5 yrs. ago.
How about making the loan appropriate to the buyer for a start? We have heard enough stories about a self-employed person who makes $2000 a month getting "no income stated" loans on $650K houses with no down. As in, show your true income by way of tax returns then you get no more than appropriate for your income level.
And, yes, these loans are still out there.

[Carl Heldmann]

Some of what Brad Blackwell may have learned 25 years ago is not applicable in a country that no longer exists as it did 25 years ago.

Jobs disappear without notice, and with the disappearance of jobs and the job market as well, everything else that Blackwell espouses, goes with it.

What most experts seem to missing from their ivory towers is that the ability to repay loans depends on having the same or greater income that one had when they applied for the loan.

The jobs that have been lost due to outsourcing, due to the “Greed” of CEO’s, Banks (even the banks outsource), Corporate directors, and investors has had a greater effect on foreclosures than any “sub prime” BS.

I, as an expert out in the “trenches”, have been watching this problem fester for 15 years or more, wondering when the poop would hit the fan. Well wonder no more, right?

In less than 20 years, almost every decent paying manufacturing job in this country has been outsourced or the product replaced with a foreign substitute.

Try and think of even one product still made in America. Even houses (that are still made in America) are made more and more with “foreign” components

Too late perhaps, but true none the less is the adage “You reap what you sow”.

Boy, do you ever!
Carl Heldmann