| Thursday,
Oct. 9
Posted 2 p.m.
EDT
FLIP-FLOP:
First John McCain wanted lenders to pay for their mistakes, and now he wants taxpayers
to pick up the tab. The Republican presidential candidate
talked briefly about his mortgage-relief plan during Tuesday night's debate with
Barack Obama. As president, McCain said in response to a question, "I would
order the secretary of the Treasury to immediately buy up the bad home loan mortgages
in America and renegotiate at the new value of those homes -- at the diminished
value of those homes and let people be able to make those -- be able to make those
payments and stay in their homes."
I was so psyched. "He's
talking about bringing back the Home Owners Loan Corp.!" I told my wife.
I happen to be reading the history of the Depression-era HOLC, cleverly titled
"History and Policies of the Home Owners' Loan Corporation," by C. Lowell
Harriss. I bought it from an online bookstore in Ireland, because that was the
only copy for sale on Earth a few months ago. On Wednesday
morning, the McCain campaign posted a summary of the "Homeownership
Resurgence Plan" on its Web site. That summary made it clear that the
government would buy distressed mortgage loans at a loss to the investors who
owned them. Seems fair. Make a bad business decision, suffer the consequences.
The
McCain Web site explained that some borrowers would have to have a portion of
their mortgage debt forgiven. In these cases, it said, lenders "must recognize
the loss that they've already suffered." Later in the
day, McCain's economic adviser, Doug Holtz-Eakin, held a teleconference
with reporters in which he described the plan. He explained that "the taxpayers'
contribution would be, in some cases the difference between the values of those
two loans, something which would be the necessity for taxpayer contribution."
In other words, the federal government would take the loss -- not the lenders.
It's
like if Uncle Sam walked onto the lot of a car dealership and pointed at a brand-new
car that had been dented in a test drive, and said, "I want to pay top dollar
for that one." Just so the dealership will stay in business and keep sending
campaign finance checks. After Holtz-Eakin delivered his explanation
that contradicted McCain's earlier description, the campaign's Web site was changed.
You know that sentence that said that lenders must recognize the loss that they've
already suffered? It's gone. I'm dismayed by the quick flip-flop.
But I like the idea of the government buying distressed mortgages, just as it
did with the HOLC. Obama advocated
the same idea two weeks ago. I figure that if McCain, Obama and I all agree
on something, one of us must be right.
As for who takes the
loss, the lenders or the investors or the taxpayers: If all of us benefit from
a modern-day HOLC, it doesn't matter much. The HOLC, which existed from 1933 to
1951, owned one-fifth of the nation's residential mortgages at one point, and
foreclosed on about half of those. And when it was disbanded after 18 years, it
yielded a slight profit to the Treasury. Stay tuned for an
avalanche of words from me in the coming weeks. I've been working intermittently
on a megapost responding to patient reader Tom the Vet, who asked weeks ago if
he could buy a mortgage-backed security with his mortgage in it. I'm working on
a story describing the two presidential candidates' approaches to housing and
mortgages, and an article about the HOLC.
Wednesday,
Oct. 8
Posted 2 p.m.
EDT
VOLATILITY: Jaw-dropping
gyrations in rates continue. Today we got a surprise
Fed rate cut. And guess what? Mortgage rates went up. The
Fed coordinated a half-point rate cut with central banks in Canada and Europe.
Now the federal funds rate is 1.5 percent. But there was no corresponding drop
long-term bond yields and interest rates. The 10-year Treasury yield has climbed
about 27 basis points since yesterday's close. The 10-year yield finished at 3.51
percent yesterday and is 3.78 percent early this afternoon. Yields
on mortgage-backed securities went up, too, but not quite as much. This is a signal
that investors are becoming more comfortable (or less uncomfortable) with holding
Fannie and Freddie mortgage-backed securities. This newfound comfort is good news
for borrowers because it keeps mortgage rates in check. DEBATE:
Both presidential candidates talked about mortgages at last night's debate. I'm
going to write in depth about John McCain's proposal to have the government buy
distressed mortgages. I disagree with those who dismiss it as irrelevant or nothing
new.
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.
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