|Elizabeth Warren was originally slated|
to head the CFPB. This is the best picture
'Puter could find of her. It's stunning how
closely Sen. Warren resembles her ancestor
Chief Wahoo, noble mascot of MLB's totally
not racist Cleveland Indians.
Unless you're in the financial industry, like 'Puter is, you probably didn't notice yesterday that the Consumer Financial Protection Bureau ("CFPB") issued a final rule ("Rule") implementing various provisions of the Dodd-Frank Act affecting Regulation Z's implementation of the Truth in Lending Act. 'Puter can hear the sound of trillions of noses hitting keyboards across the universe. Nothing is quite so esoteric as the mortgage industry, except for perhaps government regulation of the mortgage industry.
Let 'Puter translate for you normal folks out there. The government told lenders what mortgage loans they should be making, and on what terms. That's a good thing, right, especially since those evil banksters and Wall Street One Percenters totally screwed America back in 2008, right?
Yes and no.
It is good regulators are acting to rein in the mortgage industry's worst abuses. Banks certainly needed a resounding thumping after taking enormous risks that jeopardized the world's economy in the Great 2008 Meltdown.
But CFPB's Rule has two critical flaws: (1) the Rule will harm, not help, most consumer borrowers; and (2) CFPB's Rule commentary signaled it has no intent of reining in the worst abusers of all: Fannie Mae, Freddie Mac and federal agencies.
Here's what the Rule does, in layman's terms, according to the New York Times:
The rules, being laid out by the Consumer Financial Protection Bureau and taking effect next January, will also set some limits on interest-only packages or negative-amortization loans, where the balance due grows over time. Banks can make such loans, but the new rules would not protect them from potential borrower lawsuits if they do so.
And mortgage originators will in most cases be restricted from charging excessive upfront points and fees, from making loans with balloon payments and from making loans that load a borrower with total payments exceeding 43 percent of income.
With the sweeping rules, financial regulators are trying to substantially overhaul the market for home mortgages by creating a legal distinction between “qualified” loans that follow the new rules and are immune from legal action, and “unqualified” mortgages that continue practices that regulators have frowned on. The new rules are also aimed at getting banks to lend again, something they have been slow to do since the financial crisis and since the Dodd-Frank Act required new limits on bank activities.
There's nothing wrong with giving consumer mortgage lenders guidance on what a good loan should look like, and immunity from suit if lenders follow CFPB's Rule. In fact, that's a good thing. But as always, the devil's in the details, particularly in the exceptions.
And when the New York Times delves into the details and exceptions, who should appear but Old Scratch himself.
The new rules will not necessarily lead to an immediate expansion of credit, Mr. Stevens said, because nearly all mortgage loans being made currently are being sold to government-sponsored enterprises like Fannie Mae and Freddie Mac. Their underwriting standards are not affected by the new rules.
In certain circumstances, the new lending rules can be bypassed for up to seven years, regulators said. New loans can be considered to be a “qualified loan” even if the borrower has a payment-to-income ratio of more than 43 percent as long as the loan is eligible for purchase or guaranteed by Fannie Mae or Freddie Mac, for example, or by one of several executive branch agencies, like the Department of Veterans Affairs.
The consumer bureau said that the exception was created “in light of the fragile state of the mortgage market as a result of the recent mortgage crisis.” Without the exception, the bureau said, “creditors might be reluctant to make loans that are not qualified mortgages, even if they are responsibly underwritten.”
Got it? This is the government's way of saying, "All animals are equal, but some animals are more equal than others." That is, private consumer mortgage lenders have to follow our new rules, but Fannie, Freddy and the rest of the unholy government enabler establishment are exempt.
And that simply makes 'Puter's two points for him. To wit:
The Rule will harm, not help, most consumer borrowers.
Because the private consumer mortgage lenders' primary sales outlets for mortgage obligations (Fannie and Freddie) are exempt from the Rule's requirements, private consumer mortgage lenders will still follow Fannie and Freddie's loan origination guidelines.Fannie and Freddie won't purchase consumer mortgage loans that don't follow to the letter their underwriting and documentation guidelines, and CFPB didn't require Fannie and Freddie to change one iota. Since Fannie and Freddie are private mortgage lenders' greatest source of capital, these lenders will continue to abide by Fannie and Freddy guidelines, not the CFPB's Rule.
The Mortgage Bankers Association's chief executive David Stevens (quoted in the first paragraph of the immediately preceding block quote) indicates that private consumer mortgage lenders won't follow the Rule for the vast majority of newly originated loans, meaning consumers won't see much change. Further, since private consumer mortgage lenders won't be abiding by the Rule, there will remain uncertainty as to whether mortgage loans sold to Fannie and Freddie will some day in the future come back to bite these lenders as the loans' originators.
There's still a bunch of uncertainty in the market, despite claims otherwise, meaning average Joe Borrower who can't get a mortgage loan now under Fannie and Freddie's standards aren't going to get a mortgage loan in the future. At least until the CFPB starts treating all animals the same.
The CFPB has done nothing more than spend their time and energy (and copious amounts of taxpayer money) coming up with a complex solution that changes nothing.
CFPB has no intent of cracking down on the Mortgage Meltdown's biggest malefactors and enablers: government agencies.
As Mr. Stevens noted in the quote above, as the New York Times admits and as 'Puter explained in the previous section, all government agencies involved in lending or guaranteeing consumer mortgage loans (SBA, VA, USDA, FHA, HUD) as well as Fannie and Freddie are exempt from the Rule. And that's the problem.
If Fannie and Freddie, together with bat-shit crazy government consumer mortgage loan origination metrics, didn't cause the 2008 Mortgage Meltdown, they surer than heck helped it along, and here's how.
Fannie and Freddie, as noted previously, purchase consumer mortgage loans originated by private lenders so long as the loans originated comply with Fannie and Freddie's underwriting and documentation standards. Guess whose loans complied with these standards, pre-2008 Mortgage Meltdown? Try Countrywide. And Wells Fargo. And Bank of America. Anyone who had sufficient capital and access to stock Fannie and Freddie documents could -- and did -- originate mortgage loans and sell them to Fannie and Freddie, leaving the taxpayer holding the bag.
And what of government direct lenders and guarantors? Here's a few of their greatest hits, still existing today:
VA guaranteed loans with no money down, and freely assumable.
USDA guaranteed loans with huge balloon payments and spiking interest rates.
SBA loans (secured by residences) that are undersecured at origination.
FHA guaranteed loans with as little as three percent down, or government payment of the down payment.
You need 'Puter to keep going? The government is guaranteeing repayment to loan originators loans made on the same crappy terms that caused the 2008 Mortgage Meltdown in the first place.
Sure, Fannie and Freddie complain now that they were duped by the big, bad banksters. But at the time, Fannie and Freddie's unqualified politically appointed executives were more than happy to look the other way as they reaped giant bonuses. 'Puter's looking at you, Jamie Gorelick. Banks have suffered, not as much as leftist hippies without the faintest understanding of mortgage banking would have liked, but suffer they have.
And sure, government just has to provide below market terms to bad credit risks then compound its error by gambling taxpayer dollars in guarantee of the debt. Otherwise, WHER WUD TEH CHILDRUNZ LIVS?!!?! OH NOES!1!!
It's simply not true that the government needs to backstop the secondary mortgage market by propping up Fannie and Freddie. It may have been true decades ago, but now there is a robust private market for consumer mortgages which would function better than Fannie and Freddie because the private market has risk. That is, private investment is voluntary, and private fund managers are keenly aware that investors can vote with their feet. Taxpayers, not so much, as Fannie and Freddie relied on.
And it's patently false that without poorly considered government loans championed by special interest groups all minorities, women and children would be homeless. There'd simply be a more robust market for rental properties. And in all likelihood, we'd either see rent control's demise or the rise of government run housing projects. Again. Either way, most people would be better off. Putting people incapable of repaying mortgage debt in a home is cruel.
Why should government (and government sponsored entity) employees be exempt from the ridicule and scorn heaped on private lenders? And why on earth should government (and government sponsored) entities be exempt from corrective action deemed necessary by our liberal "educated" elite betters are cramming down on the private sector.
So here's your takeaway to ponder this weekend, as you set about skinning and butchering hogs, or whatever it is you folks do when not reading 'Puter's brilliance.
The CFPB created a Rule that doesn't help the little guy, doesn't help the mortgage lending market and doesn't affect many of the entities most responsible for the problem in the first place.
La plus ca change ... .