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Archive for July 12th, 2010
'Liar Loans' Make a Comeback
July 12th, 2010 | 
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By Stephane Fitch, Forbes.com
Did you think the housing collapse killed off “liar loans”–those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they’re back, and that may be a good thing.
All the rage during the peak of the housing boom, these mortgages went by names like “no-doc” (meaning no documentation of income required), “low-doc” or “stated-income” mortgages. In all cases, banks set aside their underwriting standards based on what borrowers could prove they were earning with pay stubs, tax returns and the like. Instead, lenders started trusting borrowers to “forecast” future income and underwrote loans based on those projections (using as a fallback the house itself as collateral).
In the height of the housing boom in 2006 and 2007, low-doc loans accounted for roughly 40% of newly issued mortgages in the U.S., according to mortgage-data firm FirstAmerican CoreLogic. University of Chicago assistant professor Amit Seru says that for subprime loans, the portion exceeded 50%.
Then came the housing collapse, with subprime loan defaults playing a leading role, particularly the low-doc “liar” variety. The delinquency rate for subprime loans reached 39% in early 2009, seven times the rate in 2005, according to LPS Applied Analytics.
Ashlyn Aiko Nelson, a public policy lecturer at Indiana University, studied the low-doc loan craze. She and two of her colleagues concluded that low-doc borrowers exaggerated their incomes by 15% to 19%. “Our sense was that investors knew that people were lying, but figured it was OK because house prices would keep going up and the homeowners could refinance,” says Nelson.
The most outrageous types of no-doc lending disappeared entirely in 2009. Many mortgage pros say they’re unaware of banks making any low-doc loans in recent months. (A Forbes editor was, however, approached by a leading bank recently with an offer to refinance his home without documenting his income.)
In fact, the financial reform package passed by the House of Representatives recently, and under consideration by the Senate, discourages them. It requires lenders who offer mortgages to borrowers without full documentation to post a reserve equal to 5% of the loan’s value before they are securitized. That rule, they say, will make low-doc loans even less appealing for banks going forward.
“There’s no large-scale bank that’s a real player in them,” says Tom Meyer, chief executive of Kislak Mortgage, a Florida-based residential mortgage lender.
Forbes has learned that banks are quietly reestablishing the no-doc and low-doc mortgage market. In fact, low-doc loans accounted for 8% of newly originated loan pools as of this February, FirstAmerican Corelogic reports.
Wall Street Funding of America, a mortgage lender based in Santa Ana, Calif ., was recently circulating offers to make low-doc loans to borrowers with credit scores as low as 660 on the Fair Isaac Corp. (FICO) scale, as long as the borrower was self-employed, seeking no more than 60% of the value of a home and had six months of mortgage payments in reserve. The lender was offering interest rates 1.5 to 2 percentage points over the going rate on conventional mortgages. A borrower with a credit score over 720 might get a slightly better rate, perhaps just 1.25 percentage points over.
On June 23 Wall Street Funding’s fliers caught the attention of Zillow.com blogger Justin McHood. Forbes’ calls to Wall Street Funding were not returned. (We’ll update you if they are.)
In New York City mortgage broker GuardHill Financial tells Forbes that it is making no-doc loans on behalf of four of the 50 lending mortgage lenders it represents (whose names GuardHill declines to disclose). Perhaps $100 million of the $2 billion in loans GuardHill handles this year will be low-doc, says Dave Dessner, its sales director. The banks extending these loans are small community and regional outfits attracted to their relatively high interest rates (anything from 25 basis to 200 basis points over a conventional loan’s interest rate). The lenders intend to keep the loans in their portfolios rather than securitize them.
Dessner insists it would be a mistake to associate the loans GuardHill and its bank network are originating with the doomed liar loans that lenders stuffed into mortgage pools between 2004 and 2007. “I’d be on my soapbox railing against those loans,” says Dessner. “The people in government who are now screaming about liar loans aren’t looking at the quality of the loans we’re making.”
GuardHill serves all kinds of borrowers, including a goodly number of self-employed folk, successful artists and financiers who tend to garner wealth in windfalls but don’t have a sheaf of pay stubs to staple to a conventional loan application. Case in point: One of Dessner’s people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge’s fund did poorly last year, so as a sign of good faith for his investors he’s drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.
“This guy made $5 million in 2007 and 2008. He’s liquid for $10 million, and he’s borrowing 20% LTV (loan-to-value),” says Dessner. A no-doc loan to that kind of borrower shouldn’t be political dynamite, especially at a time when the Federal Housing Administration is making 95% LTV loans to low-income borrowers with poor credit and little savings, he argues.
Indiana University’s Nelson says the return of a sensible level of low-doc lending may be a good sign. “The market may have overcorrected a bit by shutting these down entirely,” she says. “If the lenders are hewing to the original idea, where they could get a better spread making loans to insanely wealthy people who don’t mind paying a little higher rate, that may be a good thing for everybody.”
Posted in Banks, Corruption, Economic Crisis, Financial System, Fraud, lending, Lies, loans, Mortgage Fraud, Mortgage Loans | 
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Dylan Ratigan Wants To Know How Jobs Can Ever Be Created With 'The Insolvent Banking System Sucking Up All The Money Like A Giant Squid'
Visit msnbc.com for breaking news, world news, and news about the economy
Posted in Banks, Corruption, Economic Crisis, Economy, Financial System, Fraud, Government |
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Americans' Credit Scores Sink To New Lows
Skittish Lenders, Bad Credit Slowing Economic Recovery
Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.
”I don’t get paid for loan applications, I get paid for closings,” said Ritch Workman, a Melbourne, Fla., mortgage broker. “I have plenty of business, but I’m struggling to stay open.”
FICO’s latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO’s 300-to-850 scale weren’t as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.
More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual’s score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.
On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9 percent, which is notably above the historical average of 13 percent, though down from 18.7 percent in April 2008 before the market meltdown.
There’s also been a notable shift in the important range of people with moderate credit, those with scores between 650 and 699. The new data shows that this group comprised 11.9 percent of scores. This is down only marginally from 12 percent in 2008, but reflects a drop of roughly 5.3 million people from its historical average of 15 percent.
This group is significant because it may feel the effects of lenders’ tighter credit standards the most, said FICO’s Jennings. Consumers on the lowest end of the scale are less likely to try to borrow. However, people with mid-range scores that had been eligible for credit before the meltdown are looking to buy homes or cars but finding it hard to qualify for affordable loans.
Workman has seen this firsthand.
A customer with a score of 679 recently walked away from buying a house because he could not get the best interest rate on a $100,000 mortgage. Had his score been 680, the rate he was offered would have been a half-percent lower. The difference was only about $31 per month, but over a 30-year mortgage would have added up to more than $11,000.
”There was nothing derogatory on his credit report,” Workman said of the customer. He had, however, recently gotten an auto loan, which likely lowered his score.
Studies have shown FICO scores are generally reliable predictions of consumer payment behavior, but Workman’s experience points to one drawback of credit scoring: lenders can’t differentiate between two people with the same score. Another consumer might have a 679 score because of several late payments, which could indicate he or she is a bigger repayment risk.
On a broader scale, some of the spike in foreclosures came about because homeowners were financially irresponsible, while others lost their jobs and could no longer pay their mortgages. Yet both reasons for foreclosures have the same impact on a borrower’s FICO score.
In the past too much credit was handed out based on scores alone, without considering how much debt consumers could pay back, said Edmund Tribue, a senior vice president in the credit risk practice at MasterCard Advisors. Now the ability to repay the debt is a critical part of the lending decision.
Workman still thinks credit scores alone play too big a role. “The pendulum has swung too far,” he said. “We absolutely swung way too far in the liberal lending, but did we have to swing so far back the other way?”
Posted in Credit, Credit Rating Agencies, Debt, Economic Crisis, FICO, Financial System, lending, loans |
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FT Jumps The Shark (The IMF)
The use of the swap lines has subsided, but the speed and scale of their use at the time seems to have inspired some creative thinking at the IMF. Thus was born the MSL, or Multicountry Swap Lines, which would be intermediated by the Fund. Since no legislature has said you can’t have such an open-ended facility with no limits on size, it would seem that you can.
So when the next crisis comes, the IMF’s contingency plans will almost certainly have been pre-approved, and quickly put into effect. When you are making a one-way bet against risk assets, consider the avalanche of official money that will crush you at the moment you expect to cash in.
This, of course, implies that the IMF can actually fund such things.
Yes, I know, Bernanke loves swap lines. But anyone who thinks that such didn’t attract attention (e.g. Mr. Grayson, for one) is simply nuts. It did, and further, the premise of a swap line is that it is a short-term liquidity facility with no credit risk.
Well, that goes out the window and fast if it’s used as a funding mechanism.
Not that the IMF might not try such a trick. But wars have started over less, and the IMF should be well-aware of both that and that being “headquartered” here in the United States it has some rather unique risks in this regard, since the US is the vast majority of its funding (just as is true for the UN.)
Yeah, the “get us out of the UN!” folks have for years sounded like a bunch of shrill crooners. But are they really wrong, in point of fact? That all depends on what the UN – or IMF – is doing at any given point in time.
At the point the IMF decides that it would like to write its own appropriation bills without Congressional approval there might be some push-back in a form and fashion they don’t quite expect.
All lawful, incidentally.
At least I think it would be.
For examples one can look to Germany, where the challenge to the EU bailout fund has hardly gone away. Indeed, there’s a prima-facie case there that the alleged “fund” violates the German Constitution and was so declared in public by those who negotiated it.
Now this doesn’t necessarily guarantee that the court will uphold the law, but as MERS has discovered out in California and a number of other states, that which the “powers that be” construct in violation of said law can be, and sometimes is, struck down by the judiciary – much to the chagrin of those who thought they were “in control.”
Posted in Banks, Debt, Economic Crisis, Federal Reserve, Financial System, Government, IMF, International Monetary Fund, Money |
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Obama Economy Sends Americans to Their Mattresses
Home mortgage interest rates are the lowest in history, but house sales are plunging. Banks can make money easily because of the Federal Reserve’s low interest rates, but they’re not making many loans. Major corporations are sitting on something like $2 trillion in cash, but they’re not investing.
Unemployment is running at 10 percent, rounded off, for the 11th straight month, but few employers are hiring and a million people have stopped looking for work in the last year. Small-business hiring is at a nine-month low, and retail sales are tailing off.
Government policies designed to stimulate the economy seem to be having the opposite effect. Consumers aren’t buying, businesses aren’t hiring, and those fortunate enough to have some cash on hand don’t seem to be investing.
I call it the mattress economy.
People seem to be following this investment strategy. Step one: Go to Mattress Discounters and buy the biggest mattress you can find. Step two: Take it home, and stuff all your money in it. Step three: Lie down, and get some rest.
This hurts the economy, but it’s a rational response to the Obama Democrats’ public policies. And that’s not just the view of their political opponents.
Consider the complaint of Verizon CEO Ivan Seidenberg, head of the Business Roundtable, which has been playing footsie with the Obama administration for most of the last 18 months. “By reaching into virtually every sector of economic life,” Seidenberg recently wrote, “government is injecting uncertainty into the marketplace and making it harder to raise new capital and create new businesses.”
Or take a look at Obama backer Nate Silver’s fivethirtyeight.com website. “Why aren’t businesses hiring?” asks tax lawyer Hale “Bonddad” Stewart. “Uncertainty: There has been a tremendous amount of change over the last 12 months. Businesses are still trying to figure out what this means for their bottom line. Until there are firm answers, they will freeze hiring.”
In other words, the Obama Democrats’ vast expansion of the size and scope of government — and the threat that they may pass even more such legislation in a lame duck session of Congress after the November election — has chilled the animal spirits that John Maynard Keynes said were the driving force for economic growth.
Instead of stimulating the economy, the Obama Democrats’ policies have shocked it into immobility. People are lying on their mattresses, waiting for the next shock. At least one is definitely coming: The Bush tax cuts expire at the end of the year, which means that high earners can be sure they will very soon keep less of what they make.
Politicians up for re-election are taking notice. Congressional Democratic leaders can’t round up the votes for another stimulus package and have not dared to ask their members to vote for a budget resolution.
New York Times columnist Paul Krugman keeps beating the drum for even more increases in federal spending. But congressional Democrats are refusing to dance.
Democrats can plausibly claim that their 2009 stimulus package, passed less than a month after Barack Obama was sworn in, prevented a 1932-style downward spiral. But it didn’t hold unemployment below 8 percent, as they promised it would.
They can argue that Treasury Secretary Timothy Geithner’s stress tests prevented a meltdown of the big banks. The problem is that it didn’t get them back into the lending business.
And Democrats can claim that the General Motors and Chrysler bailouts are working out better than some of us doomsayers predicted. Unfortunately, the transfer of assets from secured creditors to the United Auto Workers — which I dubbed “gangster government” last year — has undoubtedly deterred investment in similar enterprises.
But the brute fact remains that even enormous government spending can’t revive an economy when government threatens to take away anything you earn.
America has seen this kind of thing before. In the late 1930s, when Franklin Roosevelt raised taxes on high earners, encouraged lawless sit-in strikes by labor unions and took over utility businesses, the response was a “capital strike.”
Instead of creating jobs, businesses and investors put their money in mattresses. The result was a stagnant economy and double-digit unemployment-and a 75-seat Republican gain in the 1938 off-year elections.
Back then, the economy eventually perked up thanks to mobilization for World War II. No such mobilization appears on the horizon today. You may need to get a bigger mattress.
Posted in Banks, Debt, Economic Crisis, Economy, Financial System, Government, Money, Savings Rate |
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Krugman Tells Seniors (and Businesses) To Die
Yes, Senior Citizens, wake up: Paul Krugman, along with the other sycophants echoing his views, are trying to kill you.
Is that too strong a charge?
No.
Listen to Paul opine:
What should it be doing? Conventional monetary policy, in which the Fed drives down short-term interest rates by buying short-term U.S. government debt, has reached its limit: those short-term rates are already near zero, and can’t go significantly lower. (Investors won’t buy bonds that yield negative interest, since they can always hoard cash instead.) But the message of Mr. Bernanke’s 2002 speech was that there are other things the Fed can do. It can buy longer-term government debt. It can buy private-sector debt. It can try to move expectations by announcing that it will keep short-term rates low for a long time. It can raise its long-run inflation target, to help convince the private sector that borrowing is a good idea and hoarding cash a mistake.
The Fed has done pretty much all but the last. It bought government debt. It bought private (Fannie and Freddie are not government “agencies” as the law defines them) debt. It announced that it would leave short rates at 0-0.25% for “an extended period.”
But now Krugman crosses a particular line in asking that The Fed explicitly raise an inflation target – that is, intentionally seek to destroy the savings and investments of all Americans.
What Krugman refuses to understand (because he is a hard-core lefty collectivist) is that capital formation comes from savings. That is, new businesses form from surplus capital excess of requirements.
Such a policy as Krugman advocates shuts down the engine of economic prosperity and throws sand in the crankcase, doing critical damage to small business. Indeed, there are two things that reliably trash small business:
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Destroy savings and thus the foundation upon which capital formation rests.
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Threaten to, or actually do, put in place an uncertain but increasing tax policy, especially taxes that bear on employment, so that the small businessman has no means to figure out what an employee will cost him “all in” through the next five years.
The Obama Administration has done a lot of the latter, what with “health care reform” and all. I can’t tell you within any reasonable degree of certainty what it would cost me to open a small manufacturing concern when it comes to environment regulation (e.g. “cap and trade” threats) but more importantly, what it would cost me to hire employees. Health “reform” has turned employee benefits costs into a black hole, and for small businesses this is a critical problem – and one that has no solution.
Today The Fed is holding an alleged “small business lending conference” where the argument is basically “do something – do anything damnit!”
Well, do exactly what? When one has $53 trillion out in debt that requires service, why should we encourage yet more borrowing?
Low interest rate “promises” are idiotic. True capital formation doesn’t come from borrowing – it comes from saving. But low rates disincent saving – indeed, the entire point of this exercise is to try to drive capital from “safe” places into the stock market and other speculative bets. In doing so the very foundation of small business – capital formation – is destroyed.
Everyone wants to talk about how The Fed should “act” or banks should “lend.” But bank lending has been cut off both by the market and “low” interest rates, which has incentivized banks to simply make a risk-free return by borrowing at 0% and lending to the government at 3 or 4%! Since government debt has no reserve said Treasuries can then be “Repod” and the cycle repeated, levering up that return over ten “round trips” or so to 25 or 30% (net of expenses) – dramatically more than can be garnered by lending to any business.
The paradox is that if you want to incent small business formation and entrepreneurship you want interest rates to rise and you want that to happen in an environment of stable or even slowly falling prices and costs.
Why?
Because small business, formed with saved capital and not borrowing, thrives in such an environment. Operating off retained earnings both raw material and labor costs fall more rapidly than do prices, and yet retained earnings while being saved for future expansion earn not only a decent rate of return via interest but hold or gain their purchasing power!
The small-business explosion of the 80s and 90s was formed by such an environment. Many people simply ignore the facts – in the 80s interest rates were quite high and thus capital formation took place like crazy. What’s missing from the understanding is that once the shock of the end of the oil embargo wore off productivity increases and technology drove down costs, acting exactly as if deflation had taken hold in the cost of both raw materials and most importantly labor.
MCSNet, my company, formed in the early 1990s in just such an environment – capital formation came via surplus from prior production, not from borrowing. The rapid improvement in technology made the per-unit-of-output labor cost drop dramatically over the next few years – an effective deflation.
This was a company that turned less than $100,000 in surplus saved capital (in total) into an operating concern that over the next five years sold into the tens of millions gross and, like most businesses, returned most of those sales back into the economy in the form of wages and purchases of plant and raw items that were then turned into products and services for sale.
Note that most “Internet” companies in the 1990s never made money on a fully-amortized basis. Why? Amortization of borrowing costs. Why do you think “EBIDTA” was so common as a means of reporting “results”? It’s easy to report a “profit” when one doesn’t have to include the cost of borrowed funds (or taxes, for that matter!)
Yet those costs are real.
MCSNet couldn’t avoid taxes, of course. The only (legal) way to avoid taxes is to be dead. Nor could we avoid depreciation; the reality of operating an Internet Business (especially in the 90s) was that every 18 months literally everything you owned for capital equipment had to be turned over due to the rapid advancement of technology, and yet the IRS doesn’t see so-called “capital equipment” this way.
But interest and amortization can both be reduced to zero by not using financial leverage!
So when you get to the end of the day, our “E” (really) was only reduced by “D” and “T” – there was no “A” or “I”.
This is how we turned a 60% operating margin four years running and a better-than-40% NET operating margin from the first day of formal operation until the firm was sold.
We want and need businesses like MCSNet. To get them firms have to eschew and get rid of “I” and “A”. It’s that simple, yet none of the so-called “pundits” and “economists” want to talk about this, because doing so means we stop acting like Wimpy and instead eat only the hamburgers we can pay for, forming businesses from surplus capital instead of Ponzi Debt schemes.
In order to return the economy to health we must decrease outstanding debt as a percentage of GDP. All paths that lead to less debt as a percentage of GDP are good on-balance, all paths that lead to more debt as a percentage of GDP are bad.
This does not mean that we should not prefer those less-painful alternatives to decreasing debt as a percentage of GDP. Pain is only enjoyed by sadists and masochists, and it appears that Krugman is in the former camp.
I am in neither.
Those so-called “pundits” and “economists” who urge greater and greater borrowing can do so only in an environment where savers are destroyed. That includes you Senior Citizens, it includes you Baby Boomers, it includes all who have as one of their precepts of life that thrift is a virtue, not a vice.
These very jackals declared war on you during the 2000s – remember the 2003 Bush exhortation to “go out and shop”? Remember 0% car loans, 125% car loan rollovers, liar loans to buy houses?
All of this was hyperinflationary as every dollar emitted as unbacked credit – that is, credit where there is either no asset of equal value behind the loan or where the asset value is insufficient to cover the money lent, is a naked short against the currency in question.
All naked shorting causes the price of what you short (the value of the currency, in this case) to be depressed. In this case what we did was decimate the value retained by savers, which are over-represented in the ranks of older Americans. We have destroyed the viability of Social Security and Medicare through intentional lies in the so-called “Consumer Price Index” through “hedonic adjustment” and “owner’s equivalent rent”, instead of simply measuring and reporting prices.
That illusion and depression of value can only happen through ever-increasing naked short interest! Thus, the puerile and insane acts of the last two years by The Fed, including “quantitative easing” and similar shenanigans, all in an attempt to prevent the massive naked short of the previous five years from unwinding and destroying those who had emitted that unbacked credit (primarily the large banks!)
But just as with naked shorting in the general market the game can only continue so long as you can find someone to buy your shorted shares. Mathematically all such games must end; you either run out of market participants to take the other side of your bet or worse, speculators become attracted to your activity and decide to attempt to force you to repudiate your policy, seeing the opportunity to bankrupt you (and make a windfall profit for themselves.)
Krugman, and those who advocate this sort of wealth-destroying warfare on those who value thrift and savings need to shut their pie holes.
It is precisely their “prescription” that has led us to the economic destruction we now find ourselves in.
America can’t afford any more of it.
Posted in Corruption, Economic Crisis, Economy, Financial System, Government, Paul Krugman, Senior Citizens, Social Security |
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proudly supports:
Bill Still For President
for Congress
Michigan 11th District
By Bill Still
There is only one answer for the world economic situation; monetary reform.
1. No More National Debt
2. No More Fractional Lending
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