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Mtg.Bankers Assn. Proposal: Enlightened Self Interest
Talk about foxes guarding the hen house. The Mortgage Bankers Association came out with its recommendations
for the future role of the US AAA in the mortgage market. Not
surprisingly, they want to continue to use and abuse the privilege of
the AAA guaranty. They want to recreate the GSE structure.
In an introductory letter Chairman Courson has this to say about the people who were behind the plan:
“Our Council, featuring some of the best minds in our industry,
has spent significant time looking at the secondary market – what
worked and what didn’t -- and came up with these recommendations,” said
MBA’s President and CEO.
I am certain that Chairman
Courson is correct. The people behind this are some of the smartest,
most knowledgeable and are the best connected in the industry. They are
the Foxes. The list follows. These names want to have the US AAA. Again.
The
essence of the MBA proposal is to create new private companies, the
securities of which would by guaranteed by Uncle Sam. Their words:
The
centerpiece of MBA’s recommendation is the creation of a new line of
mortgage-backed securities (MBS). Each security would have two
components – a loan level guarantee provided by a privately owned,
government-chartered and regulated mortgage credit-guarantor entity
(MCGE) and a security-level, federal government-guaranteed wrap.
That
is the exact definition of the GSE's. They want to remake what did not
work. The MBA proposal is very specific regarding the guaranty role of
the taxpayer:
The wrap would be an explicit government guarantee focused on the credit risk of these mortgage securities, similar to that on a Ginnie Mae security.
On the issue of a Regulator the MBA suggested:
"The MCGEs’ regulator should be strong, empowered and adequately funded through the GG insurance premiums".
In other words they want to pay/own their own Regulator. Good touch. They are running straight into the wind with this.
The
estimates for the GSE losses of $200 billion are two low. There is
little consideration in that number for losses relating to the Agency’s
Prime loan book. The number could be double the estimate. The net
losses from TARP and AIG will be small compared to Fannie and Freddie.
The GSE’s collapsed into a hole of bad credit. They did it to chase
profits for shareholders. From the NY Times re: Richard Syron CEO of Freddie:
"More
than two dozen current and former high-ranking executives at Freddie
Mac, analysts, shareholders and regulators said in interviews that Mr.
Syron had ignored recommendations that could have helped avoid the
current crisis."
Mr. Syron’s response:
“This company has to answer to shareholders, to our regulator and to Congress, and those groups often demand completely contradictory things.”
The
GSE structure is textbook conflict of interest. It puts taxpayers at
risk to private shareholders. We can’t recreate that conflict. Next
time it will kill us.
I do respect the members of the MBA. I
understand that they have an axe to grind. I expected more from them.
Their proposal is enlightened self-interest. They should have supported
an expanded Ginnie Mae. We are at least five years away from a time
when the Foxes can run free again.
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I've said it before, and I'll say it again: they're deep in psychological denial. This is the only sense I can make of ANYTHING that is happening now.
All the bigwigs in America are ignoring the facts because the facts screw with their egos. Everybody on that level is somehow convinced that they'll be able to party like it's 1999 forever, and the entire physical economy hasn't been destroyed.
They're crazy, all of them. Next stop: Canada.
GFI, Tks for the heads up on Ginnie buys in this weeks POMO. You are right. Full faith and credit plus a spread gets Ginnie out the door. F/F we have to buy a few Trill.
Bruce, note the Fed MBS buys this week - ZERO Ginnies. None. Funny there is a market for full faith and credit MBS that the Fed doesn't have to support, but not "kinda government backing" MBS.
Point being, these MBA clowns have screwed up the market so much that only the Fed will buy their crap without govt backing. Their solution? more govt backing. what a joke.
http://www.newyorkfed.org/markets/mbs/index.html
I'm new here but thanks to you folks its been a real eye opener
This is a nothing more than recreating the current FHA model, except removing the government (bagholder) from the credit decision. Could work, depending on the loan risk that the MCGE is required to hold - ideally first loss 10%+.
??? The MCGE is just a holding tank for the risk anyway. The proposal is to have the MCGE hold all the risk. Originator sells loan to MCGE, who, in exchange for delivery fees, guarantees the loans. the orginator is off the hook. The MCGE is on the hook. If the MCGE fails, the government is on the hook.
You think those delivery fees will be high enough to cover the risk? Hell no. Why should they be? Just charge enough to cover expected loss - unexpected/stress loss will be covered by the US taxpayer.
Look at the MI industry today - they undercharged for the risk they took, now they are begging the government for capital, and if they don't get it, they have to stop writing business.
This proposal is a joke. Under it, no one has an incentive to properly underwrite a loan, except the government, the ultimate backstop.
Sorry loan risk the Originator retains. They are trying to take what works for FNMA and Freddie and marry it with what works for FHA.
You don't need the gov guar and the resid you need the originator to retain really need not be all that large, particularly if they are also required to retain the servicing rather than monetizing it. What you would need is some enforceable requirement on underwriting standards, much like what Fan and Fred did for traditional loans. These would have to be met to achieve TBA status. Past that you need someone to gather the data and make it available. You break down some of the credit metrics in a fashion similar to how you break down the convexity risk and there would become "specifieds" for underwriting. Just as you wanted to avoid ABN originations in the last wave, you would pay up to avoid XYZ because of underwriting concerns. This can be done as long as the vested interests don't control it.
"What you would need is some enforceable requirement on underwriting standards, much like what Fan and Fred did for traditional loans."
Have you seen the performance of Fannie and Freddie's traditional loans? Not good. Especially the credit enhanced stuff (read: high LTV MI-insured). Last month the dq rate was almost 10% on that stuff. This was DU-approved for the most part.
The bottom line is, the model of originate-and-securitize is a loser. Originations MUST be forced to retain credit risk, at a minimum a 10% stake.
Retaining servicing doesn't do it. Servicer's don't carry much credit risk at all - any advances they make for delinquent loans they get back at liquidation, and they charge fees in excess of their advance costs.
And why would there be specified for underwriting/credit risk? I don't get it. Why wouldn't you just say "I want all the 800 FICOs at 50LTV"? At that point the originator is just noise.
You're the same guys that have been saying the stock market is going to collapse for the pas 3000 DJIN points, that 30 year treasuries are a rigged market for 10 handles and that high frequency trading is a vast GS conspiracy ?
For years, Major League Baseball has been trying to stamp out illegal substances that simply make players stronger. Think about how much of an advantage a batter would have if he knew exactly where every pitch was going to cross the plate before it left the pitcher’s hand.
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> The New Masters of Wall Street>
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>
> Click the link below to read the full story:
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>
Similar types of trading activity have been around for years. For example, every investment bank has an “index arbitrage” desk where traders try to make money on the pricing differentials between the underlying companies that make up the index and the price of the index itself, which often takes a little longer to update. Now another form of latency arbitrage is becoming popular for those that have the technology to take advantage of it.
http://www.securitiesindustry.com/issues/19_100/-23732-1.htmlThanks for the Forbes link. I saw the getco article in the WSJ last week.
Setting up an index arb isn't that hard to do and isn't that profitable unless you can get really fast. HFT is just a more competitive game of index arb in many cases.
"In other words they want to pay/own their own Regulator." Hmmm, the Federal Reserve is owned by the banks...ya think that's where the MBA got their idea?
Let's see - AmTrust:
OTS Cease and Desist Order
http://files.ots.treas.gov/enforcement/97037.pdf
Yeah, that's who you want deciding the future of mortgage finance.
Metlife, who were they? Oh yeah, First Horizon:
"First Horizon, struggling to shore up its balance sheet and conserve cash after losses tied to home loans, posted a first- quarter profit of $7.9 million after losing $248.6 million in the last quarter of 2007."
http://www.bloomberg.com/apps/news?sid=am4khjZBv.aQ&pid=20601103
Homestreet Bank:
http://pacific.bizjournals.com/pacific/stories/2009/05/11/daily74.html
"Seattle-based HomeStreet Bank today signed a cease-and-desist order with the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions, due to weakened financial conditions from loans to the residential and development industries."
Believe me, I could go on.
+10. Besides the contributors let's not forget what readership like this brings to ZH.
This proposal is not entirly stupid. If the name of the game is to allow the interest rate based prepayment risk on the funding to be moved to the market and allow the credit risk to be held elsewhere (say with the originators to prevent moral hazard) then doing this behind some sort of goverment regulated guarantee (can effectivly be a type of clearing house) in not insane, its only a version of what the FDIC does for deposits... Getting the detail right against policical vested interest, now thats a challenge!
I read the proposal - there wasn't ANY mention of the originator retaining ANY portion of the credit risk. In fact, the proposal seemed to be designed to specifically AVOID that.
This is where I agree with Bruce - any proposal that does not include originators retaining some credit risk is dead in the water. We might as well keep Fannie and Freddie afloat.
And Bruce, what the hell ever happened to the proposals for covered bonds? Apparently the European covered bond business is back from the dead, and this was one of the more intelligent things Paulson proposed, but recently I haven't heard anything.
Not that I would expect the MBA to push this idea - that would mean some of these deadbeats would have to retain credit risk.
See my note below - many of these clowns almost failed just on the little credit risk they did hold, imagine if they had to retain a piece of their agency loans? They would be toast.
Is that the same 200 billion loss Bubblicious Ben was talking about that was going to hit the economy in 2007 that wasn't any big deal and he was sure was contained. Boy they sure seem hung up on that number. Probably how much is in flat out purely fraudulant securities on faked mortgages.