Wednesday, February 13, 2008

Sub-prime lending restrictions

As we know, the crisis in the housing sector of our economy has one cause, once all the bull has been pitchforked.

Lack of regulation in the lending sector allowed the almighty financial markets to collateralize mortgage debt.

As a result, investors around the world were able to effectively lend money to folks who wanted a 4/2 split level in Modesto but couldn't pay for it in nickels. Flowing from that availability of money, banks and brokers to come up with a bunch of complex mortgage products to distribute the cash to people who couldn't afford a down payment or a reasonable monthly principal payment.

They came up with ideas like negative equity mortgages (yes, for all the math whizzes in the house, that means getting paid to become a homeowner) and medical underwriting (can you fog a mirror? good, how would you like an interest-only ARM that resets in 3 years?).

Downstream from those products being aggressively marketed to a financially illiterate public, we've swirled into a crisis caused by the predictable result of creative financing for the cash-strapped: Foreclosures are up. Way up. No, lean back for a better view of that stack of envelopes containing house keys, not house payments.

I don't blame anyone who is sending in jingle mail and saving first, last and a deposit plus U-Haul rental fee. They were sold a peanut-butter-and-poison sandwich. However, some of the lenders seem a bit put out that the folks who have no equity in their homes who they chose as business partners are acting like this is a business deal gone bad.

A few of those stiffed lenders want to regulate their way into better underwriting standards so that the few responsible banks that actually kept the debt on their books won't get dragged into a mess like this again in the future. Of course, this is the kind of rule-setting that would have been nice to have before the game began and is now superfluous, the market having added financial underwriting to its practices just a few years too late.

However, when you want to close and latch and lock the barn door after all the horses are gone, the superheroes who will carry that out for you can be found...(trumpet blast) your friendly volunteer State Legislature! So we had a sub-prime lending reform bill carried that made it through two hearings before dying of sheer incompetence. This bill would have legislated underwriting that the most conservative lender might want to use, in addition to outlawing several proven financing techniques that get those of us with erratic but sufficient income streams into homeownership.

Bad bill, right? Well, those who had an interest in stopping it were happy to make a deal.

At the House Business committee meeting on January 29th, who to our wondering eyes should appear but Paul G. Decoff, new chief of lending for Thornburg Mortgage.

His lobbyist, JD Bullington, walked in the great man himself, to explain to the lowly Members on the committee that the bill had to include a carve-out for the Santa Fe-based 'jumbo ARM residential specialists' at Thornburg.

Because otherwise the sub-prime lending reforms, referred to by members throughout the hearing as 'the predatory lending bill', would affect the wealthy.

Apparently, in Saturday's closed-door re-write session, Thornburg demanded--and got--an exemption to the new regs for any loan valued above 300K.

Guess the committee didn't like that too well, because they asked a bunch of questions before tabling.

Perhaps the highbrows who 'offer financing to the sophisticated borrower' should study up on their French philosophy. I believe it was Anatole France who first said, "The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, to beg in the streets, and to steal their bread.".

It's not a conspiracy if they do it all right out in front of you.

1 comment:

Anonymous said...

It something totally OT, thank you so much for the February poem post over at TWW. It absolutely cheered me up far more than it really ought to have.

(Though my favoritest Dar Williams is still The Ocean.)