| Tuesday,
Oct. 7
Posted 4 p.m.
EDT
SEESAW:
Mortgage rates were heading up -- and then Fed Chairman Ben Bernanke talked about
the economy. Rates reversed course, and they stand about where they ended up yesterday.
That's
good news, because rates have fallen quite a bit since last week. Bankrate conducts
its weekly mortgage rate survey every Wednesday, so I don't know exactly where
rates are today. But judging by what's happening to bond yields, it looks like
the 30-year fixed has fallen three-eighths to half a percentage point since last
Wednesday. Back then, the 30-year fixed averaged 6.41 percent. Today, it's probably
around 6 percent or a little lower. Now, if only more people
were able to qualify for loans.
In a speech today, Bernanke
said that the outlook for economic growth has worsened and that the Fed needs
to consider whether it should reduce the target for the federal funds rate. Don't
be surprised if the Fed cuts the target for the overnight rate at its next scheduled
meeting Oct. 28 and Oct. 29. It might even drop the rate before then.
Monday,
Oct. 6
Posted 4 p.m.
EDT
HISTORY LESSON:
During the housing boom, state and local governments sought to restrict the types
of mortgages that ended up at the core of this $700 billion bailout. But the Bush
administration, congressional Republicans, and the rating agencies quashed those
efforts. We'll pick up the story in late 2002 in Georgia,
although we could look further back in North Carolina. Six
years ago, Georgia enacted the Georgia Fair Lending Act, which made lenders and
mortgage investors legally
liable for any predatory loans that they underwrote or bought. The law didn't
ban any type of loan, but it allowed borrowers to sue if they believed they had
been taken advantage of. In reaction, Standard & Poor's
-- yes, one of the bond-rating agencies that has been blamed for this whole mess
-- decreed that it
would not rate any mortgage-backed securities that included loans covered
by the Georgia law. Standard & Poor's announcement threatened to shut down
the state's entire mortgage industry. I wrote back then: "A
few (Georgia) mortgage brokers and lenders say they will stop lending altogether,
or restrict the types of loans they offer, in reaction to Standard & Poor's
announcement. They make subprime, loans -- mortgages for people with flawed credit
histories -- as well as low-documentation and interest-only mortgages to people
with excellent credit. None of the lenders are household names. They include EquiFirst
Corp., AmeriQuest and BancMortgage Financial Group." Subprime,
low-doc, interest-only. Those are the loans that got us into this mess, and those
are the loans that Georgia's legislature restricted. But Standard & Poor's
wielded more power than the legislature, and had the ability to virtually shut
down Georgia's mortgage industry. It threatened to use that power. What
happened to those lenders I mentioned in that story? EquiFirst survived by selling
itself to Barclays Bank, and now EquiFirst does no subprime lending. It concentrates
on FHA-insured mortgages. AmeriQuest was sued by attorneys general of 30 states
and settled for $325 million before closing shop for good in 2007. I'm not sure
what happened to BancMortgage Financial. As I wrote back then,
Standard & Poor's objected because investors "could lose the value of
all the Georgia loans in (a) mortgage-backed security, and also could be liable
for punitive damages. With each Georgia loan carrying the possibility of unlimited
punitive damages, it is impossible to calculate the risk of having Georgia loans
in a mortgage-backed security, says Frank Raiter, managing director of Standard
& Poor's residential mortgage ratings group." Ironically,
Standard & Poor's never got the hang of calculating the risk of any mortgage-backed
security -- not just for loans covered under Georgia's anti-predatory lending
law. They rated subprime and Alt-A mortgage-backed securities as investment quality,
when they were anything but. Georgia backed down and watered
down the law. Meanwhile, Rep. Bob Ney, R-Ohio, introduced
a bill that he dubbed the "Responsible Lending Act of 2003," which
would have invalidated all state and local laws that sought to curb predatory
lending. Ney later was convicted of accepting gifts in exchange for doing the
bribers' bidding in Congress. That law wasn't passed, but the
Comptroller of the Currency pre-empted the Georgia law, invalidating the portions
of the law that the Bush administration disagreed with. So much for federalism
and states' rights. Standard & Poor's never got its
comeuppance for sticking its nose into a state's legislative business. On April
17, 2007, an S&P executive testified
before Congress that "as long as interest rates and unemployment remain at
historical lows, and income growth continues to be positive, there is sufficient
protection for the majority of investment grade bonds." She
couldn't have been more wrong about that, and it appears that her company couldn't
have been more wrong about the dangers of subprime lending. Georgia's legislature
had better judgment, but S&P had more power -- and misused it.
Posted
11 a.m. EDT
COUNTRYWIDE
PACT: The owner of Countrywide promises to modify hundreds
of thousands of mortgages to settle a lawsuit. Bank
of America, which acquired Countrywide in July, says up to 400,000 people will
get reductions in interest rate or principal. The settlement affects borrowers
in 11 states: Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan,
North Carolina, Ohio, Texas and Washington. A lot of borrowers
got pay-option ARMs and made the minimum payments -- payments that didn't even
cover each month's interest. Their loan balances went up each month, even after
making payments. This freed up money that they spent on vacations and cars. Meanwhile,
the values of their homes went down. Under this settlement, their loan balances
will be reduced so they won't owe more than their houses are worth. Some
borrowers who behaved responsibly, but whose home values went down, will have
principal balances reduced, too. Bank of America says mortgages
will be modified so that customers' monthly payments won't exceed 34 percent of
gross income. Prepayment and loan modification fees will be waived. But
there's a fly in the ointment. This settlement is for mortgages that Countrywide
services. But Countrywide and Bank of America don't necessarily own these mortgages
or the securities based upon them. In some instances, modifications will require
approval from investors. Approval won't necessarily be forthcoming.
Friday,
Oct. 3
Posted 4 p.m.
EDT
ANOTHER STEP:
Now that the $700 billion bailout of Wall Street and the wooden arrow industry
has passed, some say the federal government needs to save the banks. What?
You thought this bailout was supposed to save the banks? It's not. Not really.
The bailout is intended to get money moving among banks by restoring confidence.
But soon it will become clear that the banks need injections of money so they'll
have money to lend. I'm trying to think of an analogy here.
You know me -- big on analogies. Congress just replaced the oil pump. Now the
car needs oil. At least, that's the thinking of Dick Lepre,
a sage mortgage broker in San Francisco. "The thing that has to be addressed,
apart from liquidity, is capital," he says. "I think there needs to
be an injection of capital in the banking system." The
government can do that, he says, by investing money in financial institutions
in exchange for preferred stock. After (and if) the banks recover a few years
hence, the government can sell the preferred shares on the open market. The government
could possibly make capital gains on these deals. Brad DeLong,
economist at the University of California at Berkeley, advocates a form of this
idea, which he calls the Swedish
Plan. He explains it as a process "by which the government invests in
the major banks of New York and elsewhere and essentially takes them over and
runs them for a few years, and then when they become profitable again sells off
its stake to private investors," and adds that it "would be much more
effective and a much better use of the public's money." The
bailout bill that passed the House today fixes a different problem. Financial
institutions own distressed mortgage-backed (and other asset-backed) securities
of undetermined worth. "Nobody knows what they're worth because nobody knows
what the default rates will be and nobody knows what the loss severity will be,"
Lepre says. As a consequence, banks are reluctant to lend to one another. The
government will buy some of these securities of unknown worth. When a bank gets
these securities off its balance sheet, other banks will be willing to lend money
to it. That's how the thinking goes. But will the bank have money to lend? Lepre
doesn't think there's enough capital in the U.S. banking system for the healthy
institutions to buy all the moribund ones. He thinks the next administration will
have to tackle this issue by pumping money into banks in exchange for preferred
shares. | 
