Dodd-Frank Creates a Bizarro World Of Housing Finance

From: Real Clear Markets

In Superman comics there exists a Bizarro World where the inhabitants do the opposite of all things normal. For example, a salesman does a brisk trade selling Bizarro bonds: "Guaranteed to lose money for you".

A Bizarro World of home finance is being created by Dodd-Frank Wall Street Reform and Consumer Protection Act's new enforcement agency, the Consumer Financial Protection Bureau (CFPB). In this world a loan with little or no money down, a FICO credit score of 580, and a total debt-to-income-ratio of over 50% is defined as a prime loan, even though it has a nearly 30% likelihood of ending in foreclosure. Like the bond salesman in Bizarro World, this sets up for failure working-class families striving to achieve the American dream. In the real world a prime loan with 20 percent down, a FICO score of 720 (the average score of all individuals in the U.S.), and a 40% debt ratio has a 1.5 percent chance of foreclosure.

The Dodd-Frank Act was enacted following a mortgage meltdown, but perpetuates the same policies that made the meltdown inevitable. It was passed in 2010 with the stated purpose of "promot[ing] the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail', to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices." Like the 1992 act that promised to protect taxpayers from a bail out of Fannie Mae and Freddie Mac and did the opposite, the Dodd-Frank Act will lead to a similar perverse outcome.

One of the CFPB's core functions is to assure "that responsible, affordable mortgage credit remains available to consumers." This is not the first time Congress has attempted to legislate the availability of "affordable mortgage credit." Recall Fannie Mae and Freddie Mac's affordable lending mandates, the Department of Housing and Urban Development's (HUD's) National Homeownership Strategy with its goal of doing away with downpayments, and the Community Reinvestment Act (CRA) with its "flexible" underwriting. This increase in leverage allowed HUD to trumpet a self-described "revolution in affordable lending", ignoring the resulting in boom in home prices, thereby making them unaffordable

This time, we have the CFPB relying on the same affordable lending nostrums. These placate community activists still eager to make sure that low-income borrowers have access to mortgage credit with little regard for the failure rate, and a National Association of Realtors still interested in assuring that there's no shortage of credit for any marginal buyer who can be made eligible to buy a home.

In Bizarro World a prime loan has little to do with borrower qualifications or the actual riskiness of the loan. Irresponsible loans setting families up to fail are called qualified so long as they are approved by a government-sanctioned underwriting system.

In the real world a prime borrower puts sufficient money down so as to have skin-in-the game and demonstrates willingness and ability to pay.

In Bizarro World the government does not price for risk; instead credit is allocated by government agencies based on political goals. Here, the Federal Housing Administration (FHA) charges the same to insure a loan with 5% down, a FICO credit score of 580, and a total debt-to-income-ratio of 55% as for a loan with 20% down, a FICO credit score of 740, and a total debt-to-income-ratio of 30%.
In the real world lenders allocate credit by charging borrowers different interest rates based on risk, and protect their shareholders by operating at safe levels of leverage.

In the Bizarro World of Dodd-Frank Act, borrowers are deemed incapable of making a responsible decision and all financial institutions are presumed evil. Thus thousands upon thousands of pages of mind-numbing regulations are required to "protect" consumers. Beyond being complex and confusing, at times these regulations conflict. The evil financial institutions are presumed staffed by employees who never make a mistake. The resulting gotchas assure that the tort bar has plenty of opportunity make evil institutions pay. This favors ‘‘too big to fail'' institutions which Dodd-Frank vowed to end.

In the real world borrowers would be expected to act responsibly and risky lenders would be allowed to fail, regardless of size.

In Bizarro World home loans are another form of entitlement, where unqualified borrowers stamped "prime" by government underwriting systems allowed to avoid making monthly payments for 1, 2, or 3 years or more.

In the real word lending is a business based on credit standards and markets are permitted to correct.

The Dodd-Frank Act did little to restrict excessive borrower or government mortgage guarantor leverage. Instead it provided a clear path for the government to expand both, laying the foundation for the next bust and taxpayer bailout.

True Cost of Fannie, Freddie Bailouts: $317 Billion

From: CNSnews.com

The Congressional Budget Office (CBO) says the real cost of the federal government guaranteeing the business of failed mortgage giants Fannie Mae and Freddie Mac is $317 billion -- not the $130 billion normally claimed by the Obama administration.

In a report delivered to the House Budget Committee on June 2, the CBO said a “fair value” accounting of guaranteeing the two defunct mortgage companies – known as Government Sponsored Enterprises (GSEs) – was more than twice as high as the Office of Management and Budget had accounted for.

“Specifically, CBO treats the mortgages guaranteed each year by the two GSEs as new guarantee obligations of the federal government,” the CBO report said. “For those guarantees, CBO’s projections of budget outlays equal the estimated federal subsidies inherent in the commitments at the time they are made.”

“In contrast, the Administration’s Office of Management and Budget continues to treat Fannie Mae and Freddie Mac as nongovernmental entities for budgetary purposes, and thus outside the budget,” the report stated. “It records as outlays the amount of the net cash payments provided by the Treasury to the GSEs.”

The total of those cash payments is $130 billion, and is normally reported as the cost of the bailout of the GSEs to date. However, the CBO said that merely counting the cash payments, and not the cost of federal subsidies granted to the GSEs, obscures their real costs.

Essentially, the CBO is accounting for the cost of the federal government guaranteeing the loans bought and securitized by the GSEs.

Currently, Fannie and Freddie rely on explicit federal guarantees to continue to secure below-market financing rates. Because Fannie and Freddie are insolvent, the federal government must make up their losses when the loans they have guaranteed lose money in default.

However, the CBO counts not only the amount of federal funds spent to keep the GSEs operating but the cost to the federal government to subsidize the mortgage guarantees issued by Fannie and Freddie. In other words, the CBO counts as a federal spending commitment the subsidy given by the government to the GSEs.

The CBO calls this approach “fair-value” accounting because it treats the federal government’s actions just like the actions of any other market participant, taking into account the market risk of guaranteeing a mortgage.

Typically, federal accounting does not do this because it is argued that because the government can print its own money, its risk is zero.

Fannie, Freddie, Ginnie and Their Pimps

From: American Thinker

Too much Fed credit encouraged too much building, so prices ballooned past their economic values on the effluvium of degenerating derivatives.  Now, we have foreclosures, upside-down homeowners, devalued and disappeared  mortgage-makers, failed and failing banks, and a cesspool of phony investment values camouflaged by a carpet of Federal fun dollars now owed by the taxpayers.  How come?

Because Congress pimped out the home mortgage industry and the Fed financed the business.  First, Congress; we'll leave Fed credit faucet Greenspan's enabling for another time.  Go back to 1977 and see passage of the Community Reinvestment Act (CRA) by compassionate legislators using other people's money to help poor folks who couldn't afford to buy homes.

Go way back in 1950, and people thought lenders were entitled to repayment and shouldn't lend to folks who couldn't repay.  Mortgage lenders demanded good credit for loans in slums where credit was risky and property wasn't worth foreclosing; they outlined those areas on their maps, calling it redlining an area.  

Progressives called it punishing the poor.  They felt poor people with bad credit were as much entitled to home ownership as anybody.  Earlier public housing was often trashed by residents; the hope was they wouldn't trash what they own.

Congressmen Barney Frank, Senator Chris Dodd, and others leaned on Fannie Mae, Freddie Mac, and Ginnie Mae to finance riskier mortgages, and on the regulators to push the banks into making the riskier mortgage loans.  The bureaucrats at Housing and Urban Development (HUD) wrote implementing regulations.  The famous Association of Community Organizations for Reform Now (ACORN) put a lot of effort (smiled upon by politicians) into bullying local banks into abandoning credit quality in favor of quantity with low or no down payments, cursory or no credit research, and other policies to move loan volume up among the poor.  The government's bank regulators added their encouragement.  Why not?  The risky loans were sold off to Fannie and Freddie; they didn't stay with the original lender and the banks collected a lot of income.  At this point, the consistent with safe and sound operation language you saw above got lost.