Liz Warren to Banks: Stop Not Making Sense
Calculated Risk’s blog posted this five minute clip of MSNBC’s Rachel Maddow interviewing Elizabeth Warren, Chair of the Congressional Oversight Panel for TARP.
Warren’s command of the sound bite impresses; especially her evocative reference to the stampede of the Gucci leather shoed bankers in the corridors of Capitol Hill power, all up in arms against her suggestion that consumers need a protection agency. Why? To ward off scammer financial services companies looking to trick and trap us into fees and penalties amid 30-page contracts and small-print numblish none of us understands.
The banks doth protest too much, and say the problem with financial services scams comes not from them but from the ranks of the great “unregulated” lenders and credit card companies.
HousingWire reports on CFPA hearings in the Senate:
Many voices applauded the need for the new agency, including Edward Yingling, the American Banking Association’s (ABA) president and CEO, who noted an estimate that 94% of the high cost mortgages occurred outside the regulated banking sector.
“The most pressing need is to close the regulatory gaps outside of the banking industry through better supervision and regulation,” Yingling said in his testimony. “The need is for the same bank-like structure, supervision and examination to be applied to non-bank financial service providers.”
Michael Barr, the assistant secretary for financial institutions at the US Department of Treasury, testified in a written statement that the new agency should establish a clear mission focus for a market-wide jurisdiction, which would prevent financial institutions from choosing a less restrictive regulator. Barr also suggested that that the new agency should consolidate regulation, supervision and enforcement.
The New Warren Commission
Witness the collision of yet another certifiably brilliant mind with the thick, dull wall of bureaucracy.
As TARP Watch Dog running the Congressional Oversight Panel, Harvard University Law professor Elizabeth Warren has been a perfect pick. She chooses her battles and is ferocious as a non-partisan taxpayers’ advocate.
Now, it looks as if she’s destined for a new role. The New York Times reports.
Elizabeth Warren pitches a Consumer Commission as part of financial rules overhaul.
Most notably, she laid out the argument for a new agency in the journal Democracy in summer 2007. Presumably taking a cue from Ralph Nader, the essay was titled, “Unsafe at Any Rate.”
Some excerpts:
Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products.
They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products — a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.
The story continues.
So, we must assume that Warren believes her commission would work as a safeguard for consumers against the reckless and chicanerous come-ons of financial services companies.
What it won’t safeguard against is consumers’ reckless and chicanerous behavior when it comes to financial market bubbles–real estate or otherwise.
The Corvair of 2002-2006 was not the NINJA no-downpayment option-ARM. It was, more often than not, the person who took the loan to get rich quick.
Herb Allison Gets Promotion and a Raise to Run TARP
The President has nominated Fannie Mae CEO Herb Allison to take the helm of the U.S. Treasury’s Troubled Asset Relief Program.
- The Wall Street Journal reports on the nomination.
The 65-year old former chairman of TIAA-Cref and Merrill Lynch executive will probably get a raise. He’s been taking no salary in his current job, running Fannie Mae since September, when the Fannie and Freddie Mac got put under government conservatorship.
Altered States
It’s April 16, do you know where your money is?
Click on image for access to ProPublica "The Map of Bailout Recipients"
Orange County Register reporter Matt Padilla called attention to this analysis of Troubled Asset Relief Program fund allocations to date.
You gotta feel for Montana and Vermont, which just can’t seem to get in under the TARP like every other state.
Whistle Stop
Nick Thomas, an investment and financial analyst who contributes to an Oxbury Publishing missive called “Bourbon & Bayonets,” scooped us on this notion as we consider the Stress Tests that will determine which banks should qualify to get Son of TARP money.
This is the notion:
The site Wiktionary defines to “whistle past the graveyard” in two ways:
1. (idiomatic, US) To attempt to stay cheerful in a dire situation; To proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.
2. (idiomatic, US) To enter a situation with little or no understanding of the possible consequences.
Both meanings seem to apply these days as mentions of the bigger, badder and far more frightening relative of “recession” begins making the rounds in the media.
So, the question is, is the worst-case scenario for stress as bad as it might ought to be, specifically as regards home sales prices. Cost-to-rent and household income trendline comparisons have been proferred as the free-market cathartic to excess capacity, lack of affordability, and a restoration of order to real estate transactions sometime in the year ahead. Yale economist Robert Shiller has steered us toward expectations of a 36% price correction, largely based on those venerable trend anchors setting the norm for home prices across more extensive longitudinal time-period.
Calculated Risk’s blog raises concerns about the FDIC’s Capital Assistance Program scenarios, perhaps because of a healthy measure of skepticsm about whence the assumptions on how to stress-test banks for potentially worsening conditions.
Here’s how he queues up focus on the respective “baseline vs. alternative more adverse” scenarios. Worst case is supposed to be covered by the more adverse range.
Click on graphic to access Calculated Risk's analysis.
Then, CR maps what the two scenarios look like.
Graphic: Courtesy of Calculated Risk
The issue is this. Is the only thing we have to fear fear itself? Or maybe we should be afraid that we’re not fearful–or realistic enough–for what’s still ahead? Housing and the mortgage-backed meltdown are the first wave. Credit cards and commercial real estate tidal waves are still ahead.
We have to begin to reckon with whether the leadership instinct to be contagiously optimistic is realistic enough to pursue a strategy that can match the magnitude of the challenge. We can’t just be whistling past the graveyard.
$75 Billion to $275 Billion for Housing Fix: Will it Work? Will it Help New Home Construction?
Can policy trump flagging confidence?
Photo: Courtesy of Reuters
The Obama housing rescue plan announced today is a bet that the answer is yes. From foreclosure-afflicted Mesa, Arizona, the President unveiled a plan to commit from $75 billion to $275 billion of U.S. Treasury and Federal Reserve funds on policy actions whose goal is to end a wealth-destructive stalemate between lenders and homeowners with troubled or potentially imperilled loans.
In an effort to break the forward momentum of a foreclosure tsunami economists and housing analysts predict could reach upwards of 8-to-10 million homeowners and deflate the value of millions of others’ No. 1 asset, the President and his team have designed a plan that has three principle elements aimed at helping 9 million people stay in their homes, as reported today in the Wall Street Journal.
The Obama administration’s plan has three main elements: an effort to help homeowners refinance; another effort to help stabilize the housing market through a $75 billion initiative aimed at reaching up to four million at-risk homeowners; and a third element that aims to drive down mortgage rates.
“The effects of this crisis have also reverberated across the financial markets,” President Obama said. “When the housing market collapsed, so did the availability of credit on which our economy depends.”
The administration pledges government money to separately entice homeowners, mortgage companies, and mortgage investors to rework loans. It would help a variety of homeowners, including those whose mortgage is more than the value of their home.
The housing plan is part of a broader effort by the government to address the volatile economy, and it comes after Congress passed a major stimulus package and the Treasury Department released its plan to shore up the banking sector.
- Here’s a link from the Journal to a transcript of President Obama’s prepared remarks detailing the new housing plan.
- Here’s a break-out of the plan toplines in bullet-point form, also from the WSJ.
- Here’s the version provided by the White House, from a link on The Big Picture blog.
Economists and housing experts’ concerns with the plan will take one of two essential points of objection. 1) While it may slow the damaging rate of foreclosures and ease the impact of adding new supply to an already glutted market of existing home inventory for sale, the plan does nothing to spark or prime the demand pump; and 2) While it may help homeowners who bought their homes in good faith and have gone underwater on their loans due to their home’s value declining, the plan aids too many people who took unscrupulous advantage of an easy-money era, either on the borrowing side or the lending side.
Here’s how housing economist/commentator Calculated Risk phrases his objection to part 2 of the plan:
For homeowners there are two key paragraphs: first the lender is responsible for bringing the mortgage payment (sounds like P&I) down to 38% of the borrowers monthly gross income. Then the lender and the government will share the burden of bringing the payment down to 31% of the monthly income. Also the homeowner will receive a $1,000 principal reduction each year for five years if they make their payments on time.
This is not so good. The Obama administration doesn’t understand that there were two types of speculators during the housing bubble: flippers (they are excluded), and buyers who used excessive leverage hoping for further price appreciation. Back in April 2005 I wrote: Housing: Speculation is the Key
[S]omething akin to speculation is more widespread – homeowners using substantial leverage with escalating financing such as ARMs or interest only loans.
This plan rewards those homebuyers who speculated with excessive leverage. I think this is a mistake.
Another problem with Part 2 is that this lowers the interest rate for borrowers far underwater, but other than the $1,000 per year principal reduction and normal amortization, there is no reduction in the principal. This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure – prolonging the housing slump. These are really not homeowners, they are debtowners / renters.
An assumption within this $75-to-$200 billion bet is that this massive redistribution of money, debt, and equity among those who struggle to pay their loans doesn’t backfire. If people who are capable of paying off their mortgages suddenly start mailing it in to get some of the government beneficence, the cure could start a massively more lethal sickness. Society depends, somewhat fragilely on the fact that most responsible homeowners covet a good credit rating, and regard paying their mortage as fulfilling an unbreakable promise. This ethic will get a good test as aid to so many homeowners seems only a missed monthly payment or three away.
Here’s the New York Times’ David Leonhardt on that sensitive issue:
A plan that does not aim to help all underwater homeowners, or anywhere close to all of them, has many advantages. About $500 billion worth of mortgage debt is now underwater, and the number may eventually get close to $1 trillion. A plan that tried to put this debt back above water would be vastly more expensive than the one Mr. Obama announced today. It would also deliver less bang for the buck, since a great majority of underwater homeowners are likely to continue making their monthly payments.
Likely to get high marks from most ideological sides of the spectrum are the initiatives to increase funding to Fannie Mae and Freddie Mac aimed at stoking liquidity and getting banks to resume lending, per the WSJ sum up.
· Promoting Stability and Liquidity: In addition, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.
· Increasing The Size of Mortgage Portfolios: To ensure that Fannie Mae and Freddie Mac can continue to provide assistance in addressing problems in the housing market, Treasury will also be increasing the size of the GSEs’ retained mortgage portfolios allowed under the agreements – by $50 billion to $900 billion – along with corresponding increases in the allowable debt outstanding.
· Support State Housing Finance Agencies: The Administration will work with Fannie Mae and Freddie Mac to support state housing finance agencies in serving homebuyers.
· No EESA or Financial Stability Plan Money: The $200 billion in funding commitments are being made under the Housing and Economic Recovery Act and do not use any money from the Financial Stability Plan or Emergency Economic Stabilization Act/TARP.
The Associated Press reports on how Wall Street investors reacted initially to Obama’s new housing strategy. After the wild, gravity-borne gyrations that occurred in the moments U.S. Treasury Secretary Timothy Geithner opened his mouth last week to speak about what would happen with TARP money, a flat market is a virtual Wall Street thumbs up on the plan.
Clearly, if Obama’s plan can at least fulfill its promise of keeping 9 million people in homes they own, it will redound to stabilizing the most treasured asset among those who account for two-thirds of the U.S. economy, consumers.
Most denizens of housing — be it in for-rent, for-sale, market rate or low income — would count that as a good place to start.
Housing Plan: Details Slow to Emerge
Today, President Barack Obama will sign into law the the American Recovery and Reinvestment Act of 2009 from Denver. Tomorrow, he heads into one of the several vortexes of the housing storm, Arizona, and he’ll unveil a plan that aims to slow and stop the tide of foreclosures that are so quickly eroding home prices.
Will there be a plan? Or another plan to make a plan, like U.S. Treasury Secretary’s “framework” for trying to stabilize the financial system. President Obama’s rhetoric is not different than the Fix Housing First coalitionists whose claim is that problems with housing are the “root cause” of the economy’s woes.
Where they diverge is on what to do about the root cause of the disease.
Few details have come to light about the housing strategy. Only that the program will draw on already-approved TARP funds of from $50 to $100 billion, and that it will try to turn down the stress level on mortgage loans that are in trouble of getting sucked into the foreclosure maelstrom.
Here’s a New York Times story that maps out the issues and early indications of what will be addressed. Here’s the gist of the article:
The plan to subsidize lower interest rates for distressed homeowners would involve the government and the lender each contributing matching amounts to reduce a person’s monthly payment, possibly by several hundred dollars a month.
Supporters contend that the measure will be comparatively simple to execute and less expensive than many other options that have been considered. Mr. Obama’s top advisers have vowed to spend at least $50 billion to help homeowners keep their houses, and they already have the authority to tap the remaining $350 billion in the Treasury Department’s financial industry bailout fund.
The President is between a rock and a hard place on three levels. 1) Time is of the essence–things will get much worse if nothing is done to stem the flood of home foreclosures; 2) A misstep can go wrong in several ways–having no effectiveness and wasting huge amounts of money, and contributing to the moral hazard mentality that somebody will be there to backstop even egregious examples of greed and ignorance in the name of homeownership; and 3) If nothing is done, the problems may get worse, but eventually they’ll sort themselves out, find their bottom, and begin to improve.
So, in a sense, the President is in a race with the likelihood that sooner or later this mess will become less of a mess inevitably. He and his team want to have something to do with things getting better faster if they can.
We’ll see about that tomorrow when he pulls the curtain up on his housing recovery strategy.
Obama’s Next Move on Housing Crisis
Here’s a Bloomberg report on plans to use $50 billion in TARP money to try to stabilize the tide of foreclosures and declining home prices. President Barack Obama is expected to unveil the plan on Wednesday this week.
Bloomberg video on Obama’s plan for a housing rescue.
Credit: Bloomberg/YouTube
Housing Strategy Due in Two Weeks
Tally-ho. The Senate passes an $838 billion stimulus bill that now needs to get reconciled in conference with an $820 billion bill the House passed two weeks ago. Today Treasury Secretary Tim Geithner proposes a shock-and-awe program of spending into the trillions of dollars until lenders, investors, and mattress stuffers feel they can belly up with money pour into the ailing economic pipeline.
Housing industry players were angling for inclusion in these packages, but it seems they’ll get their day in the sun once TARP II and Stimulus 2.0 are water under the bridge.
The Wall Street Journal reports: Obama Pushes Stimulus Plan, Aims to Help Homeowners
Mr. Obama declined to detail the administration’s specific plans for the housing crisis, saying he didn’t want that strategy to get “buried” on the day U.S. Treasury Secretary Timothy Geithner announced his broad financial-market rescue. He said he would make an announcement on housing “in the next couple weeks.”
“Unless we address this in a serious way, we are not going to be able to get the economy back where it needs to be,” Mr. Obama said.
As debate continues about the best way to get home buyers off the sidelines even as layoffs pile up and consumer confidence plummets, a Harvard economics professor compares and contrasts a $15,000 tax credit vs. a 4% mortgage buy-down.
One of the great problems with any interest rate subsidy program is that costs accrue only over time, and initially reside off-balance-sheet. Remember the old fiction that Fannie Mae and Freddie Mac were providing a service to homebuyers at no cost to the government? Some proponents of interest-rate subsidies even suggest that as long as the subsidized lending rate is higher than the current Treasury rate, the government is actually making money off the deal. Such logic conveniently forgets default risks and other costs. Financing trillions of dollars of mortgages would require the government to borrow trillions, pushing interest rates up and raising the cost of the national debt. Borrowing to bet is generally not a good financial strategy for governments.
Standard economic reasoning tells us that if the market has priced 30-year mortgages appropriately, so that their rates reflects default risks and other costs, then the gap between the market rate and the subsidized rate reflects the cost of an interest rate subsidy program.
Current mortgage rates are about 5.35 percent, which is 135 basis points above one proposed subsidized rate. Americans today have about $10 trillion worth of mortgages. If everyone refinanced into the subsidized rate, this would mean an ongoing annual subsidy of $135 billion a year, which would last as long as the mortgages do. The great virtue of the tax credit over the interest rate subsidy is that a one-time cost of $35 billion or $50 billion is a lot less than a perpetual $135 billion annual subsidy stream.
One way or another, get the U.S. Mint printing presses in good working order.
Too This, Too That–Geithner Mans Up for Battle with Financials Tailspin
Here’s the New York Times’ David Brooks in a sneak preview sum up of the new U.S. Treasury Secretary Timothy Geithner’s plan for use of the second half of the $700 billion financial system rescue plan.
Tim Geithner
Geithner’s plan is huge but also disciplined. It’s designed by someone aware of government’s limitations.
Geithner has been working the financial meltdown for a while. The basic lesson he has drawn is that the federal government has been too constrained. Occasionally, policy makers would step on the accelerator and bail out a bank, but then they’d step on the brake, worrying about moral hazard or inflation.
It’s time to be heavier on the accelerator, he says: “It goes against the basic instincts of anybody who is understandably worried about using taxpayer money carefully, about moral hazard, about long-term credibility issues. But if you don’t do it now, the market will know you’re going to have to do it later.”
Some economists leave the impression that the banking sector is a rotting corpse, hopelessly polluted by valueless toxic assets. Geithner takes a different view. He agrees that many bankers did things that are “reprehensible and deeply troubling.” But the big uncertainty is not inside the banks; it’s in the broader economic climate.
Geithner’s plan includes a “comprehensive housing program,” which he says will be announced in the next couple of weeks.