Bair spoke at the Wharton School today. She laid it on the line
regarding what she thinks should be done to reform the nation's
mortgage market and the role that the government plays. Everyone should
read this speech. Especially the current crop of “deciders” in Congress
and the Administration. I agree with Ms. Bair on almost all of her
points. Her speech confirms to me that she has a vision of what must be
done. She is the only one in Washington who has the guts to spell it out
for us. I have said in the past and will say again now that Sheila Bair
should be our Treasury Secretary. We need leadership. We have none.
I am convinced that what Sheila describes will happen in one form or the
other. It is not a question of “if” the government’s role in the
mortgage market will change. It is a question of by how much and how
fast it will change. We can do this over the next 10 years and suffer a
lost decade or we can accelerate the process. Ms Bair is in the sooner
versus later camp.
As you read through the speech (or the few snippets below) consider what
she is saying in the broader context of the US housing market. It is
clear to me that the changes to come will have a long-term deflationary
impact on the housing market and the related industries. Should that be
what’s in store, I am left wondering where the economic growth will come
from.
A critical task
lies before us: rebuilding U.S. mortgage finance on a sounder footing,
not only to restore the confidence of homeowners, investors and lenders,
but more fundamentally to restore balance to our broader economy.
If we are
willing to take bold steps, and return to the fundamentals we can
get back to a more rational world.
We must
recognize that the financial crisis was triggered by a reckless
departure from tried and true, common-sense loan underwriting
practices.
Traditional
mortgage lending worked so well in the past because lenders required sizeable
down payments, solid borrower credit histories, proper income
documentation, and sufficient income to make regular payments.
All told, over
$2.1 trillion in private securities backed by risky subprime and
Alt-A mortgages were issued between 2004 and 2006.
Market discipline
was tossed to the wind. It explains why trillions of dollars in
faulty mortgage paper was issued before the home price bubble finally
collapsed.
We need to have
some basic underwriting guidelines that apply to all mortgages. Basic
limits on loan-to-value and debt-to-income ratios, and consistent
documentation requirements should be set for any loans held by a
depository institution or sold to a securitization trust.
In 2009, the FHA
and the GSEs accounted for 95 percent of total U.S. mortgage
originations.
Does it make
sense for the federal government to subsidize homeownership
in an amount three times greater than the subsidy to rental housing?
In the end, these subsidies have helped to promote homeownership, but
have failed to deliver long-term prosperity.
Homeownership
was once regarded as a tool for building household wealth, in the crisis
it has instead consumed the wealth of many households.
The financial
crisis and the Great Recession it spawned threw 8 million people out of
work, reduced our GDP by about 3 percent, caused a huge increase in
federal debt, and virtually wiped out the entire net income of
FDIC-insured institutions for at least a two-year period.
We need to get back
to a world where our financial sector supports the functioning of
our economy, and not the other way around.
No, that is the wrong question and it simply indicates that she accepts the premises that created the problem in the first place.
The question to ask is simply, "what role shall the government play in the housing market" and the answer is, "NONE".
Government is force. There are only a few appropriate times to use it. Helping people buy things they cannot afford is not one of them.
So, even if she looks like a "maverick" she's still part of the problem. Sound and fury, signifying nothing.
and Secretary of the Treasury Geithner will have no choice no but to go along. The BP spill "response" solved that! That's why no matter what we all think we should all vote for democrats. THEY REALLY ARE CRAZY. In meantime can an "angry Ben" be far behind? I feel hire rates coming to a horror show near you....at least that's what the bond market is telling me.
EURO bullish signals I warned of over the past few weeks resulted in the recent rally and the daily chart remains bullish.
The DOW/SP500 counter trend rally suggested on June 13 continues, however ...
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
She is not Brooksley Born...................
You go Sheila- wish she and Eliz Warren would get together and form a party...
Like this line: "Homeownership was once regarded as a tool for building household wealth, in the crisis it has instead consumed the wealth of many households."
So true.... we thought it was so great when we were getting rich on home equity, but really wasn't it so much better when parents making a regular income could buy a decent house to raise a family for a price about double their annual income...no crazy leverage needed, no crazy commute no needed, no need to buy junker house in crime ridden neighborhood...housing was affordable. Every Fed subsidy just essentially printed "housing dollars" and increased the price of housing accordingly, lower interest rates just meant prices of houses and thus principle costs went up accordingly and the selling of crap loans in securitized market bubbled up places like Cali without any Fed help.
So according to Shiela, govt needs to get out of housing market lending but also needs to be a better referee to keep lending reasonable/solid and limit fraud...I like it this, not black/white for/against govt influence, just for govt to be involved where it can help and get out where it is a problem.
Of course, our govt has done opposite, too involved in providing subsidies for housing, too hands-off in policing lending. And the reason is obvious to me, govt subsidizing house lending helps banks, FIRE industry...while govt policing lending standards/limiting fraud, only helps "small" people...guess who gets their way, Sheila or the FIRE guys?
Where was she two years ago when these lending practices were going on. Tool for the Fed. Talk is cheap two years after the fact.
Sheila Bair who with Barney Frank a little over a year ago contrived to fund Timmay's PPIP.
She is not who she presents herself to be, she is a bankster in bair's clothing.
You know we've gone over the top when someone advocating sound lending practices is a rarity. You can be confident that nothing will change - the 2-year election cycle works against meaningful change of any kind.
Now will anyone in government come out for Mark-To-Market at the the FED, at every bank, pension plan and financial services company?
Exactly. All she is doing is advocating a system where people live within their means.
Like, duh.
But somehow this is radical? I suppose it is, compared to the prevailing keynesian worldview.
Blowhard f*cking politicians and bureaucrats. No one should trust any of them, ever (Dr. Paul excluded). I'd rather see one swinging from a tree limb than listen to anything it has to say. THEY ARE THE PROBLEM.
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'They' can say all the right things all the time... and 'their' actions are not aligned to what they say.
Obama, Bernanke, SEC, CFTC, FDIC, FBI, CIA... CNBCBSABC...
Even the market realizes it is jabber jawing to pander to whatever is politically correct. Wake me up when criminal charges are filed and people are taken away in handcuffs.
Obama rhetoric was pretty decent before he got elected, this is just the same sort of rhetoric coming out of Bair mouth...we need action not words. "Yes we can?" no...we want "Yes we will"
So, let's do a rundown...
First Cramer, then Alan Greenspan, and now Sheila Bair are having thier "come to Jesus" moments.
One wonders who the last holdout is going to be...
Those who bought gold during the past few years....
the equity market
I'm still waiting for her to explain the FDIC's involvment in the WaMu and Indymac takeovers. I don't even really need to hear about the rest, I just want to know how what's she's saying in that text above has any relevance if she can't even clean up her own agency (or for that matter, even start the ball rolling).
HA-LA-LU-YA!
Sorry Bruce ;
I dont buy this ladies speech, i dont trust her, volker looks same, then suddenly he says to big to fail must stay.
The system is corrupt to the core, its not only mortgages, everything as a system, deficit, spending, social security,fed, congress.
You forgot alien abductions and possession by demons. Much as I love this site, I am constantly reminded that the law of diminishing returns applies to everything, even hairball conspiracy theory.
Great post Bruce. I agree with you and Sheila, but the context has changed.
1. Most households are flat broke.
2. Other than health care/government, income security is a bad joke.
For a number of reasons, housing/CRE will be in a bear market for a generation. So what?
What only a few of us understand is that the paper is toast. It doesn't matter whether value is destroyed through deflation, hyperinflation, or most likely A then B. Mortgage owners will recover, at best, 20 cents on the dollar in purchasing power.
We need to deal with that reality, write off the debt, and get pricing right. Until that is done, we are in a lost decade..., or two..., or three.
what is it Michael Hudson says, A debt that can't be paid, won't be paid.
Time for global jubilee.
Wow. Can you be in charge of humans from this point forward? You just stated reality is so few sentences.
Bruce, I share your dream. (So does Whalen, he loves Bair) But, sadly the others who posted above me are right. She doesn't fit with the "agenda" at work right now. She won't get a shot till the current leadership blows itself and the country up in a massive Keynesian debt meltdown. The broken country will be looking for leaders with common sense ideas again and hopefully she will be at the top of the list.
And if I recollect correctly, she is against passage of the Volcker rule.
I don't think she's a fan of the derivatives legislation either. However, she does seem to operate closer to reality than the dynamic duo of money printing and their chubby, diet coke drinking, bloated-tick looking side kick.
Agreed. Compared to the others she seems like the voice of rationality and sweet reason.
Duh! In the good old days, when banks could fail, they had to make sound commercial lending decisions. Now they are merely rubber-stamping political decisions. Is it any surprise that it all falls apart, and as long as the pols are in income transfer mode, it will not get better.
CYA on D.R.U.G.S. Why doesn't she come out and say " I'd close half ofthem but the FDIC is broke?" Won't happen.
Talk is cheap. Florida is a leading foreclosure state. It is now a better business decision to not pay the mortgage, taxes and insurance and go rent in Florida. Period. Unless you own your house outright and then you are screwed because of falling property values and Oil. And do the "bank/lender/servicer thingys" want to own the property there now? Probably not. A perfect economic and environmental storm. Answer? I have no idea at this point except have a cocktail, and watch from the sidelines. This whole world is getting a little gross and sad and boring. Housing prices only go up when demand goes up. Is the goal to have the "bank/lender/servicer thingys" own everything? Florida has one major hurricane this summer/fall.....watch the carnage unravel. It is already unwinding fast.
I've been hearing rumors that the Feds are planning on evacuating the entire state of Florida, along with parts of Louisana, Alabama, etc. And this would be regardless of whether or not a hurricane hits.
lol Ninja, please. Go back and look at what you just wrote.
Heard that rumor also but try evacuating Cubans in Miami. Sorry Charlie. They been through that crap before. You would have to kill them all. And since there are no real nos. since half of So.Fla. is illegal that would be a hilarious try. They really ain't got enough manpower to do that - I know everyone thinks they do but they don't. And, that is an opinion from inside the military.
So this is what it has come to, anyone who even gives lip service to common sense economic principles is considered a maverick.
She is as crooked as her neck is.( I seen a cocked head interview of her on pbs) She proudly makes frequent calls to Uncle Buffett for friendly advise.
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yes, if she was not part of the fed/squid team she would not be assigned to this post.
She needs to drown
"Traditional mortgage lending worked so well in the past because lenders required sizeable down payments, solid borrower credit histories, proper income documentation, and sufficient income to make regular payments."
Like Duh!!!
Let another 20% to 30% of buyers enter the market and prices rise. What a concept!!!
She's just pointing out the obvious for political gain. All I see is problems with no solutions. In fact, she doesn't even really point out the problems, just the symptoms of the problems. Example:
"Traditional mortgage lending worked so well in the past because lenders required sizeable down payments, solid borrower credit histories, proper income documentation, and sufficient income to make regular payments."
Indicates that we had the exact opposite during the problem years, which she is right about. However, it's merely a result of loose monetary policy, not morality of loan officers as she claims with the line: "We must recognize that the financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices.".
I'm not impressed impressed Sheila...
Excellent but unfortunately almost irrelevant post. Her big picture POV will not be the lead story on the nightly news or column 6 page 1 on the NYT. She may as well be a blogger for the all the effect her speech will have.
As long as you have an unwritten "No more Lehmans" and you have the conniving scoundrel Ben bernanke as the Fed Chief, nothing will change.
Bailouts, Moral Hazard rules ..
Everything is TALK .. WHERE IS THE ACTION.
DOES SHE HAVE THE GUTS TO SAY THE TRUTH OF BAILOUTS, HOW IT HELPED CERTAIN INSTITUTIONS WHICH PERPETUATED THE MISRY SHE IS TALKING ABOUT, WHAT COULD BE THE REPERCUSSIONS OF THE LOW INTEREST POLICY, mbs PURCHASE .. OH MY THE LIST IS ENDLESS
.
you've got the wrong agency there killer.
blah blah blah blah blah whatever, don't speak with your mouth full Sheila.
Pffft. It's not about underwriting rules, it's about the entire fucking securitization process.
Can someone explain to me why ordinary people should be buying land at 10x leverage or more? I mean, what the fuck?
Well, it's only about the underwriting rules if you hope to sell the loan to someone else, or hold them to term yourself. (Jim Grant says that Hudson City Bankcorp does this) I don't think those small Norwegian towns will be buying CDOs again any time soon.
Securitization works great when the average down payment in the loan pool is 45% :
http://www.housingwire.com/2010/04/21/private-label-securitization-marke...
So, I'd suggest that it really is about convincing a possible client or the Bank President that the underwriting is sound.
I enjoy your objectivist slant, so I'll try to answer that. In the long forgotten last century, in small towns and rural areas, real estate actually was the most common path to financial security. Prices didn't change much. There were few fads and fancies, and if you did most the maintenance, investment in a small apartment building or CRE had a decent chance of success. None of that in any way excuses the wretched excess of the recent past.
Look at it this way. If your savings are a few thousand, it really doesn't matter what sort of investor you are. Even time spent reading ZH won't increase your lifetime yield enough to matter. If you can get into a leverage real estate deal, that might be a life changer. I'm not trying to change your mind, just provide some not too ancient context.
People can live without many things, but they can't live without hope. In a few times and places, real estate gave them hope. In other settings, that niche is filled with lottery tickets. Who is John Galt?
Does it make sense for the federal government to have any involvement whatsoever with the housing market?
FIFY, She-bear. Always asking questions whose answers we already know.
Reminds me of Brooksley Born (http://en.wikipedia.org/wiki/Brooksley_Born).
Another case of insight without power? Not her fault, just sayin
I'd say insight without power describes quite few ZH posters.
This. Seeking refuge in gold is the ultimate cry of powerlessness, baby. The winners accumulate vast wealth during times of crisis... while the losers think only of protecting their tiny nest egg.