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Uncle Sam Bets the House on Mortgages
September 18, 2009 by Neil · 3 Comments
Here’s a stunning statistic: Half of U.S. residential mortgages are being made by just three large banks, Wells Fargo, B of A and JP Morgan Chase. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged.
The government cannot simply keep printing money without making our money worthless. One side effect:
The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency’s cash reserves will drop below the minimum level set by Congress, FHA officials said. The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses. Since its creation in 1934, it has never used taxpayer money to cover losses at its flagship home-buying program. But rapidly rising defaults have burned through the agency’s reserves, raising the prospect that it would have to take dramatic action.
The same banks that made stunning errors and omissions in underwriting (cough, cough, Washington Mutual) are now guaranteed servicing and processing fees, on top of having these very loans guaranteed as well. Can the same banks now be trusted?
Would they underwrite mediocre to bad loans, just to collect these fees? (Did funds buy multifamily properties at overvalued prices with no basis in reality because they earned fees on the sales prices and management?)
Exhibit A of those bad loan types? The dreaded option-ARMs, now considered among the riskiest offered during the recent housing boom. These left many borrowers owing more than their homes are worth. These “underwater” mortgages have been a driving force behind rising defaults and mounting foreclosures. The mortgages differ from other ARMs by offering an option to pay only the interest each month or a low minimum payment that leads to a rising balance in the loan’s principal. When the balance of the loan reaches a certain level or the mortgage hits a specific date, the borrower must begin making full payments to cover the new amount. The loan’s interest rate also may have been fixed at a low level for the first few years with a so-called teaser rate, but then reset to a higher level.
An August 2009 U.S. Foreclosure Market Report said foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 358,471 U.S. properties during the month, a decrease of less than 1 percent from the previous month, but an increase of nearly 18 percent from the same month a year ago. One in every 357 U.S. housing units received a foreclosure filing last month..
The report said one in every 357 U.S. housing units received a foreclosure filing last month!
These three banks, which drastically curtailed their lending in the wake of the credit crisis, are now posting big jumps in fee revenue from mortgage banking. Combined, it was $14 billion in the first half of the year, up more than threefold from $4.1 billion in the year-earlier period.
The Federal Reserve is already advancing a far-reaching proposal that could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk. Bureaucrats wouldn’t set the pay of individuals, but would review and, if necessary, amend each bank’s salary and bonus policies to make sure they don’t create harmful incentives. These banks are benefitting from Uncle Sam’s generosity, and Uncle Sam is already plotting to implement sweeping curbs on pay. Uncle Sam should now ask for something in return: purge the toxic assets off your books and mark them to market.
And when I say “ask,” I mean like Tom Hagen asked Jack Woltz to give Johnny Fontaine the part in that war picture.
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