Wednesday, August 08, 2007

The SubPrime Mess and Silly Senators

Let's face it, folks.

Subprime mortgage loans were granted by institutions who made money by making those loans. Then these questionable loans were 'packaged' and sent to another bunch of bandits who ALSO made money by re-mixing the packages and selling the neatly boxed-and-ribboned sewage to investors. (See Bear, Stearns as the prototype.) (AND see another take below.)

In between these transactions was a third group of banks who made money on the deals by 'warehousing' the sewage until somebody could build a pretty box and tie it with ribbons.

The people who borrowed the money either shouldn't have done so, or figured that 'hey, housing values go only one direction--up,' and they could always refi the damn thing. Yah, many of them were stupid, and many of them are still paying the notes, to their credit. But some are NOT paying (about 25% of them in some places,) and that's what made the balloons go 'boom.'

This is what's called The Free Market.

Of course, the prospect of losing money is now being managed, which brings us to this:

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, yesterday called on the companies' regulator to consider raising the caps placed last year on the amount of mortgages and related securities Fannie and Freddie can hold, as a way of ensuring that plenty of money is available to fund mortgage loans.

Sen. Charles Schumer (D., N.Y.) also called for higher caps. Both Fannie and Freddie are pushing for the same move. A spokeswoman for their regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said the agency will respond to the senators shortly.

At present, Fannie, Freddie, and FHA will accept loans to a maximum of $417,000 into their (taxpayer-guaranteed) portfolios. Dodd and Schumer want that maximum raised to (say) around $550,000. That would have two effects: 1) it would put more cash into the hands of the 'warehouse' banks, and 2) it would allow Fannie, Freddie, and FHA to purchase LARGER lousy credits, taking those LARGER lousy credits out of the hands of the originators, the warehouses, and the final-packagers.

Note well: each of those effects will be good for the warehouse banks and/or the originators, not to mention the purchasers of the aggregated sewage (the bond-holders). And each of those may place more risk on the taxpayers. But the biggest beneficiaries will be the bond-houses which 'packaged' the stuff, because their liabilities will decrease.

That's NOT the 'Free Market.'

While current regs prevent Fannie, Freddie, and FHA from purchasing nuclear-waste mortgages, you can be sure that Dodd, Schumer, & Co., are also going to push them to purchase that stuff--or move to create an "Emergency Loans" entity which will do just that.

Don't say you were not warned.

Another Take, from the WSJ:

Lou Barnes, co-owner of a small Colorado mortgage bank called Boulder West Inc., has been in the mortgage business since the late 1970s. For most of that time, a borrower had to fully document his income. Lenders offered the first no-documentation loans in the mid-1990s, but for no more than 70% of the value of the house being purchased. A few years back, he says, that began to change as Wall Street investment banks and wholesalers demanded ever more mortgages from even the least creditworthy -- or "subprime" -- customers.

"All of us felt the suction from Wall Street. One day you would get an email saying, 'We will buy no-doc loans at 95% loan-to-value,' and an old-timer like me had never seen one," says Mr. Barnes. "It wasn't long before the no-doc emails said 100%."

Mr. Barnes focuses the attention on the Packagers of Wall Street. Justifiably, according to the Street's article:

...banks are no longer the dominant lenders. After the S&L crisis in the 1980s and early 1990s, regulators insisted banks and thrifts hold more capital against risky loans. This tipped the playing field in favor of unregulated lenders. They financed themselves not by deposits but by Wall Street credit lines and by "securitization" of their loans -- in effect, the sale of the loans to investors.

HT: Calculated Risk.

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