Housing Bubble Bursting?

[Randolph Kinney]

Fed, Comptroller Publicly Chastised Few Banks Before Mortgage Bubble Burst

http://www.bloomberg.com/apps/news?pid=20601103&sid=aaaaiJy5auiY&refer=us

The witch hunt and finger pointing has started. Who is to blame for the subprime mortgage implotion? Who shall we blame for the bad economic affects?

March 14 (Bloomberg) -- The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8-trillion boom in the U.S. mortgage market -- whose bust now risks worsening the housing recession.

Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it.

Now, more lenders are being forced to shut and foreclosures are rising, threatening to scuttle any chance of an early recovery in housing.

Because borrowers are having difficulty paying in a time of economic expansion and low unemployment, Congress and consumer advocates want to know how regulators allowed lenders to write loans borrowers would never be able to repay.

After being rebuked for foot-dragging by Senator Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, federal regulators issued proposed guidelines aimed at subprime lending on March 2.

The subprime industry's woes have their roots in the tenure of former Fed Chairman Alan Greenspan. The Greenspan-led Fed cut its benchmark rate to 1 percent in 2003 and kept it there for a year, helping foster a housing bubble.

As Wall Street's appetite for high-yielding mortgage bonds drove demand for high-risk loans, lending standards declined. Subprime mortgages almost doubled to $640 billion in 2006 from $332 billion in 2003, according to the newsletter Inside B&C Lending.

Consumer advocates say the Fed has expansive authority and could have stopped abuses. The Truth in Lending Act gives the Fed rule-writing authority over disclosures for consumer credit among all financial institutions. The Home Ownership and Equity Protection Act of 1994 also gave the Fed a role in preventing predatory lending, according to consumer advocates.

In addition, federally regulated banks and Wall Street firms are often the financiers standing behind state-regulated mortgage lenders. New Century Financial Corp., the nation's second-biggest subprime lender, includes Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. -- all regulated by federal agencies -- among its creditors. Gramlich says the Fed should seek an expansion of its authority to supervise mortgage subsidiaries of bank holding companies.

"There is no question that mortgage brokers are on the street committing systematic fraud on the American homeowner,'' said Irv Ackelsberg, a Philadelphia attorney who testified at a Fed hearing last year in the city. He said there is a "lack of will'' on the part of the Fed to use its power to stop abuses.

 

[Randolph Kinney]

Bond Risk Jumps on Subprime Concerns, Credit-Default Swaps Show

http://www.bloomberg.com/apps/news?pid=20601014&sid=aj4hDyhKkfyQ&refer=funds

Sure does appear to be contagion.

March 14 (Bloomberg) -- The risk of owning corporate bonds soared for a second day on concern rising defaults on U.S. subprime mortgages may spread across debt markets, according to traders of credit-default swaps.


"The risk is that this is just the tip of the iceberg,'' said Bob Janjuah, head of credit strategy at Royal Bank of Scotland Plc in London. "The subprime issue isn't going to go away, if anything it's going to get worse.''

 

[hastalavista]

I significantly disagree with the statement that regulators took no action.

I'm engaged in a special assignment for one client; as a consequence, I have on my desk a stack of inter-agency (known as the agencies) letters, alerts and advisements in regards to sub-prime lending, appraisal independence, 3rd-party relationships and review, risky lending guidelines, etc., etc. For a fact, going back as far as 2003 (as far as my research needs to go for my purposes), the agencies were advising their regulated institutions about the safeguards needed in regards to sub-prime lending.

So, here's the question: How many Federally Regulated Institutions have failed because of the sub-prime meltdown?

 

[Randolph Kinney]

I significantly disagree with the statement that regulators took no action.

I'm engaged in a special assignment for one client; as a consequence, I have on my desk a stack of inter-agency (known as the agencies) letters, alerts and advisements in regards to sub-prime lending, appraisal independence, 3rd-party relationships and review, risky lending guidelines, etc., etc. For a fact, going back as far as 2003 (as far as my research needs to go for my purposes), the agencies were advising their regulated institutions about the safeguards needed in regards to sub-prime lending.

So, here's the question: How many Federally Regulated Institutions have failed because of the sub-prime meltdown?

I believe that was the point Denis. Let me quote one paragraph:

In addition, federally regulated banks and Wall Street firms are often the financiers standing behind state-regulated mortgage lenders. New Century Financial Corp., the nation's second-biggest subprime lender, includes Morgan Stanley, Citigroup Inc., and Goldman Sachs Group Inc. -- all regulated by federal agencies -- among its creditors. Gramlich says the Fed should seek an expansion of its authority to supervise mortgage subsidiaries of bank holding companies.

You have the largest banks acting as warehouse lenders to the subprime industry, which for the most part, is not under the FDIC, OTC, OCC, Federal Reserve System, etc. for regulatory control. These banks sidestepped their direct supervisory structure by making short term loans to corporations using their loans (account receivables) as collateral. They did not make loans to individual borrowers, the subprime mortgage broker or subprime whoesale mortgage lender did.

It reminds me of Peter Seller's line in the Return of the Pink Panther:

Blind beggar: I am a musician and the monkey is a businessman. He doesn't tell me what to play, and I don't tell him what to do with his money.

 

[hastalavista]

I hear you, Randolph, but here's the quote I focused on:

Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it.

How can the regulators regulate a non-regulated industry such as mortgage brokers?
How long has congress been unwilling to let the regulators have teeth in their oversight of Fannie/Freddie, a GSE?

This argument is a red herring as far as I'm concerned.

 

[Randolph Kinney]

Mutual Funds at Some Risk on Mortgages

http://www.nytimes.com/2007/03/14/business/14debt.html?_r=2&th&emc=th&oref=slogin&oref=slogin

Mutual funds held mortgage-related debt securities issued by the subprime lenders New Century Financial, NovaStar Financial and others at the end of last year, indicating that everyday investors are among those who will probably be hurt by the turmoil that is tearing through the residential mortgage market.

As delinquencies among risky borrowers have risen, the stocks of companies that specialized in these loans have collapsed. The value of the residential mortgages they issued, which Wall Street packaged and sold to investors, has also dropped.


While it is relatively easy to identify those who owned shares in New Century — it closed at around 85 cents yesterday after the New York Stock Exchange suspended its listing — figuring out who holds the mortgage-related debt of such issuers is more difficult.


Regulatory filings show that mutual funds that specialize in generating high income have bought subprime mortgage securities as the market ballooned.

The Regions Morgan Keegan Select High Income Fund, for example, a $1.2 billion portfolio run by Morgan Keegan, a regional brokerage firm based in Memphis, held $159 million, or 13 percent of its portfolio, in unrated mortgage-backed securities, or those below investment grade. Among the issues in its portfolio at the end of the year: a $3.4 million holding in home equity loans underwritten by New Century in 2006.

Legg Mason Partners Capital and Income Fund, a $3.4 billion fund, also owns home equity loans issued by subprime lenders. Some 1.1 percent of the portfolio consists of home equity loans, with $2.25 million issued by New Century; $3.6 million issued by NovaStar; and $2.7 million issued by Fremont General, the parent company of a lender who consented to a cease-and-desist order from the Federal Deposit Insurance Corporation a week ago. That order called for the company to stop “operating with a large volume of poor quality loans” and “engaging in unsatisfactory lending practices.”

 

[Pamela Crowley (Florida)]

Spread those losses!

 

[Randolph Kinney]

I hear you, Randolph, but here's the quote I focused on:



How can the regulators regulate a non-regulated industry such as mortgage brokers?
How long has congress been unwilling to let the regulators have teeth in their oversight of Fannie/Freddie, a GSE?

This argument is a red herring as far as I'm concerned.

I did say the witch hunt was on and that I asked "who shall we blame" and then quoted the article.

Sure, the regulator's hands are tied for state chartered institutions. However, the loophole is the regulated side making loans to fund the unregulated side and their lending practices. It also gives these regulated banks exposure to risk associated with subprime lending by having as collateral the subprime loans, which may decline in value depending on the markets.

In the case of New Century, some of these banks had to use their right of collateral to get back money that was owed to them. And some took a loss on that collateral too.

 

[Couch Potato]

I think the worrisome part of the graph, Randolph, is that it shows the growth is in the number of actual foreclosures. The numbers just in the delinquency stage look fairly constant (meaning the growth in actual foreclosures will probably continue.)

 

[Randolph Kinney]

Spread those losses!

Pam, lets say you are an individual investor and you have put your money into these mutual funds, Morgan Keegan Select High Income Fund and Legg Mason Partners Capital and Income Fund. Now you learn that they have subprime mortgages from New Century and other subprime lenders in their holdings.

Question: Do you stay in the fund or do you sell out? :new_all_coholic: