Jul232014
Fired Ed DeMarco saved taxpayers billions
Ed DeMarco was a conscientious bureaucrat who was forced out of his position for doing a good job protecting the US taxpayer from looting politicians.
The list of evil0doers and nefarious characters of the housing bubble includes famous names like Anthony Mozilo, David J. Stern, and not-so-famous names like David Sparks, Michael T. Pines, Brent Arthur Wilson, Blair Christopher Hanloh, Robin and Chris Duncan, and many others. We had incompetence at many levels including famous names like Alan Greenspan and Robert Rubin, and millions of ordinary fools who bought the can’t-lose investment opportunity of the 00s, the housing bubble, and got burned.
While the deeds of the criminals and fools is titillating and instructive, it’s worth looking at the few really solid and upstanding individuals who did the right thing in the face of opposition and the temptation to go down the easier road. The one person who stands out the most in my opinion is former director of the FHFA, Ed DeMarco.
Back in 2008 and 2009 the political left was lobbying to give free money to loanowners by pressuring the GSEs to reduce principal balances. Ed DeMarco flatly refused to cave in to this pressure because he knew it would do nothing to help the GSEs, it would increase taxpayer losses, and it was morally repugnant to give money to people who foolishly overborrowed, particularly Ponzis living on cash-out refinances. When he said no, he immediately became a hero in my eyes.
The Man Who Took on Fannie Mae
How a career bureaucrat became the target of the housing lobby and the White House for trying to avoid a repeat of 2008.
By Mary Kissel, July 11, 2014 7:05 p.m. ET
He was a career bureaucrat who fought to protect American taxpayers, battled to reform potentially disastrous policies, and championed fiscal responsibility. Edward DeMarco was the loneliest man in government. …
Anyone outside of Washington might think he deserved a medal, but that’s not what happened. Instead, Mr. DeMarco was pilloried by members of Congress and excoriated by President Obama’s liberal allies. Former White House adviser Van Jones told the Huffington Post in 2012 that “you could have the biggest stimulus program in America by getting rid of one person”—Mr. DeMarco.
He did deserve a medal. He embodied everything taxpayers could want in a career bureaucrat, and rather than lionize him, he was forced out of government service. Shameful.
The White House didn’t press him to degrade lending standards, he says, but plenty of pressure did come from the administration’s proxies, including Realtors, home builders, the Mortgage Bankers Association, insured depositories and credit unions. Protesters organized by progressive groups showed up more than once outside Mr. DeMarco’s house in Silver Spring, Md., demanding his ouster. A demonstration in April last year brought out 500 picketers with “Dump DeMarco” signs and 15-foot puppets fashioned to look like him.
“My first reaction was of course one of safety,” Mr. DeMarco says of the April protest. “When I first saw them, I was standing a few feet from the window of a ground-level family room and they’re less than 10 feet way through this pane of glass, and it was a crowd of people so big I couldn’t tell how many people were out there. And then all the chanting and yelling started.”
His wife had gone to pick up their youngest daughter, one of their four children, at a friend’s house, “so I had to get on the phone and tell her, ‘Don’t come.’ ” Then he called the police, who eventually cleared the scene. “It was unsettling,” he says. “I think it was meant to be unsettling.”
Something the NAr is proud of, I imagine….
What did the protesters want, other than his resignation? “They wanted me to start forgiving debt on mortgages.” Ah, yes, the goal of housing advocates in and out of government ever since the fiscal crisis spurred by too many people borrowing too much money to buy houses they couldn’t afford: the multibillion-dollar do-over. Mr. DeMarco’s resistance made him unpopular in an administration that was anxious to refire the housing market.
This will be remembered as Ed DeMarco’s defining issue — and his finest hour.
The 54-year-old chooses his words carefully as he recalls his FHFA tenure, but his frustration is evident, particularly in light of recent events. His replacement at the agency, Mel Watt, announced in May that government will remain firmly in control of the mortgage market. Which means that Fannie and Freddie will be unleashed to embark on another affordable-housing push. Or, as Mr. Watt put it, they will maintain the government’s housing “footprint.” …
Treasury Secretary Timothy Geithner asked Mr. DeMarco to run the Federal Housing Finance Agency, the new entity that Congress mandated to run Fannie and Freddie until the politicians could decide what to do with the toxic twins. It was a natural transition, given that Mr. DeMarco had worked closely with the agency’s departing director, James Lockhart. He took over as acting director in August 2009.Mr. DeMarco started by scrambling to retain senior managers, who were fleeing Fannie and Freddie in droves. He gave them big salary hikes on Christmas Eve, creating “a tremendous amount of congressional outrage about compensation,” he says, with a wry smile. Even Texas Republican Jeb Hensarling, a reform advocate, dubbed the move “unconscionable.” Mr. DeMarco stuck to his guns.
A man of courage and conviction is hard to find in Washington.
In 2012, he rolled out an extensive “strategic plan” for the two companies, mischievously subtitled “The Next Chapter in a Story that Needs an Ending,” that promised “to gradually shift” risk from taxpayers to private insurers. FHFA announced plans to raise the federal insurers’ guarantee fees, shrink their mortgage portfolios, and reduce their loan limits so private insurance competitors could re-enter the market.
(See: DeMarco prepares for final shutdown of GSEs)
“I wasn’t trying to price Fannie and Freddie out of the market so much as get the price closer so that the taxpayer capital is getting an appropriate rate of return and that, more important, we start selling off this risk,” he says….
Isn’t that what we want in an administrator in his position?
What really earned the enmity of Democrats was his refusal to write down principal for “underwater” borrowers whose homes were worth less than their mortgages, and his opposition to a housing slush fund (“a housing trust fund,” he says, teasingly correcting me). Some 80% of those underwater homeowners were still making regular, monthly payments. “To create an incentive for them to declare a hardship to get that principal written down was a huge risk to the taxpayer,” he says. “And the longer-term implication of doing this is that it would have raised some serious questions about what a future investor could expect about how a mortgage contract was going to work.”
In other words, principal reduction was moral hazard on steroids.
Mr. DeMarco isn’t against government support for housing—if done properly. “Is providing leverage or loosening the underwriting standards to provide credit to households with little down payments and poor track records of managing credit really helping that family,” he says, “or is it setting that family up for increased risk of failure?” That’s not a question that wins friends in Washington.
The drumbeat for Mr. DeMarco’s ouster culminated in the Senate confirmation of Mr. Watt, a North Carolina congressmen whom Senate Majority Leader Harry Reid pushed through after killing the filibuster. (Mr. DeMarco hasn’t taken a job since leaving the FHFA: “I’m going to take a little time away to recover and to gain some fresh perspective.”)
Housing advocates cheered. One of Mr. Watt’s first acts was to announce that he would delay a series of planned loan guarantee-fee increases. In May he said he’d leave the loan limits for Fannie and Freddie guarantees at $625,500, which allow the twins to put taxpayer money behind McMansions. Mr. Watt’s FHFA has also tasked Fannie and Freddie with finding “underserved, creditworthy borrowers”—in other words, government will again be recruiting borrowers for mortgages they may not be able to afford.
(See: Mel Watt poised to reflate the housing bubble)
Mr. DeMarco is skeptical of such an approach, though he’s polite when he speaks about his successor. Assuming that only government can foster homeownership among people “below median income,” he says, “suggests a troubling view of markets themselves.”
He notes that homeownership rates in the U.S. today are the same as they were 50 years ago, despite all the government efforts to promote affordable housing. “Let’s say it was a failed effort,” he says. “To me, if you go through a 50-year period, and you do all these things to promote housing, and the homeownership rate is still bouncing around a two-percentage-point band, I think the market’s telling you we’re at an equilibrium.”
(See: Titanic failure of American housing policy, home ownership rate hits 18-year low)
Yet here we go again. “At some point, we’re going to have another serious problem,” he says. “I never would have thought that the last problem wasn’t serious enough to drive lawmakers to say we’ve got to fix this once and for all, no matter how hard it is.”
In my opinion, Dodd-Frank was good law; the ability-to-repay rules will prevent reckless lending, and the new mortgage regulations should prevent future housing bubbles, but we’ve done nothing to wind down the GSEs, and the too-big-too-fail banks are even larger, so there is still work to do.
It’s unfortunate Ed DeMarco won’t be guiding this effort. He is a rare good bureaucrat in an environment where such good work isn’t rewarded.
[listing mls=”OC14155040″]
Mortgage applications rise 2.4% as roller coaster continues
Mortgage applications increased 2.4% from one week earlier, after a series of drops and a few peaks over the last few weeks, according to data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending July 18, 2014.
The Market Composite Index, a measure of mortgage loan application volume, increased 2.4% on a seasonally adjusted basis from one week earlier.
The Refinance Index increased 4% from the previous week. The seasonally adjusted Purchase Index increased 0.3% from one week earlier.
“Consumers took action on the lowest mortgage rates we’ve seen since the beginning of 2013,” said Quicken Loans vice president Bill Banfield. “The jump in application volume is a welcome change after a few sluggish weeks of mortgage activity.”
The refinance share of mortgage activity increased to 54.4% of total applications, the highest level since March 2014, from 53.6% the previous week. The adjustable-rate mortgage share of activity remained unchanged at 8% of total applications.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) remained unchanged at 4.33%, with points increasing to 0.23 from 0.20 (including the origination fee) for 80% loan-to-value ratio loans. The effective rate remained unchanged from last week.
Delusional optimism flowers early this year.
Fitch: Housing market getting ready to grow
Expects second half upturn, leading to strong 2015
Citing recent “encouraging economic and housing data,” analysts from Fitch Ratings expect an accelerated upturn in housing in the remainder of 2014.
In Fitch’s The Chalk Line report for Summer 2014, Fitch analysts Robert Curran, Monica Delarosa and Robert Rulla write that the projected growth in housing will last throughout 2015 and lead to a much stronger year than 2014 is proving to be.
“Demographics, attractive affordability/housing valuations, and a slow, steady easing in credit standards should sustain and ultimately accelerate the upturn,” the analysts write. “The latest economic and housing macro statistics are generally encouraging.”
The analysts say that 2014’s performance is fighting an uphill battle after an unexpectedly strong winter put a significant dent in the housing market in the first few months of the year.
“The spring selling season was underwhelming enough that this, along with more guarded expectations for the next few months, will lead to more modest growth for macro housing statistics before the year is through,” said Robert Curran, Fitch’s managing director and lead homebuilding analyst.
Fitch is now projecting single-family home starts to improve 9.5% to 677,000 in 2014. It is also projecting new home sales to advance about 8% to 465,000 and existing home volume to decline 5% to 4.835 million, “largely due to fewer distressed homes for sale,” the analysts write.
Who pays these people?
What demographic trends are they referring to? The retiring baby boomers who will no longer be trading up? The large number of over-indebted Millennials?
What data are they looking at? A declining labor participation rate? Part-time job growth? Stagnant wages?
I could see 2015 getting a boost from an improving labor market if rates stay where they are, but saying that the second half of 2014 will accelerate seems to be wishful thinking. All of the sales and inventory metrics say things are slowing down. After Labor Day, you’ll have the usual seasonal headwinds to deal with when school begins and holidays start to take over.
Black Knight: Foreclosures hit lowest level since May 2008
The national inventory of loans in foreclosure declined again in June, down 1.5% for the month, almost 36% for the year, making this the 26th consecutive month of declines, Black Knight Financial Services reported.
As a result, the foreclosure inventory at its lowest level since May 2008.
Black Knight’s “first look” at June 2014 month-end mortgage performance statistics is derived from its loan-level database representing approximately two-thirds of the overall market.
Black Knight saw foreclosure starts rise for the second month in a row, although starts are still down 19% from this time last year.
The delinquency rate increased slightly on a month-over-month basis, up 1.55% in June, still down approximately 15% from last year.
The monthly mortgage prepayment rate, which is historically a good indicator of refi activity, rose again in June, the fourth consecutive month it has done so.
The average loan in foreclosure has been past-due on its payments for 997 days, hitting yet another new high.
Existing home sales down 2.3% from last year
Existing-home sales in June touched their highest level so far this year as the supply of available homes for sale continued to improve.
The National Association of Realtors (NAR) reported a 2.6 percent month-over-month rise in existing-home sales last month to a seasonally adjusted annual rate of 5.04 million. May sales were revised slightly upward to a rate of 4.91 million.
June sales were at their highest pace since October 2013, though they remain 2.3 percent down from the 5.16 million pace set a year ago.
NAR’s chief economist, Lawrence Yun, credited the monthly increase to gains in inventory levels of existing homes for sale, which climbed 2.2 percent in June to 2.30 million, the highest level in more than a year.
“This bodes well for rising home sales in the upcoming months as consumers are provided with more choices,” Yun said.
On the other hand, he noted that new home construction needs to pick up by at least another 50 percent for a complete return to a balanced market, especially with supply-choked regions like the West seeing continued upward pressure on house prices.
Also holding back sales is a lack of wage growth, even as payrolls swell.
“Hiring has been a bright spot in the economy this year, adding an average of 230,000 jobs each month. However, the lack of wage increases is leaving a large pool of potential homebuyers on the sidelines who otherwise would be taking advantage of low interest rates,” Yun said. “Income growth below price appreciation will hurt affordability.”
CoreLogic: Student Loans Not Depressing Home Ownership
One of the pet reasons for explaining the lack of demand for houses among millennials is the presence of ever-escalating student loan debts. The thinking goes that college graduates are so mired in debt that they either cannot afford to buy or are too afraid to run up more debt, and so they stay living with their parents or find cheap places to rent.
However, Mark Fleming, chief economist atCoreLogic, isn’t buying it.
Citing a recent panel discussion at the Urban Institute on “Quantifying the Impact of Student Loan Debt on Homeownership,” and recently published reports by the Brookings Institute and Jeffrey Thompson, economist at the Board of Governors of the Federal Reserve System, Fleming draws the conclusion that while student loan debt undoubtedly affects financial decisions for those post-college, there is zero empirical evidence to back up the claim that these debts are keeping young people from buying their first homes.
For one thing, Fleming says, the monthly payback amount anyone has to spend on a student loan is based on a percentage of income. This percentage has remained virtually unchanged since the mid-1990s, but then, so have earnings—and members of Generation X didn’t shy away from buying houses just because of these obligations.
Student loan debt is at the $1 trillion mark, and there are more outstanding loans than ever. But Fleming says these facts alone do not show that student loan debt is a bigger burden for millennials, much less one that will prevent homeownership.
“Going to college still increases one’s earning potential,” Fleming said. “For those who had to finance college with loans, the burden of repayment relative to income remains the same today as in the 1990s.”
This, he says, begs the question: If young people in the 1990s found a way to buy a home while coping with student loan debt, then “why wouldn’t young people today, with the same relative burden, be able to do the same?”
Because today’s young people are subject to a 43% DTI cap that previous generations were not limited by. He’s based his entire analysis on the idea that nothing has changed, but something very significant did change, and he doesn’t realize it.
“…If young people in the 1990s found a way to buy a home while coping with student loan debt…”
Some possibilities
1) 1990’s: Mom and Dad could contribute cash to a down payment. 2014: Mom and Dad have heloc’d themselves up to their eyeballs.
2) 1990’s: Salaries for college grads were good and climbing due to mega changes in [computer] technology. 2014: College grads competing with grads in India and China.
3) Average Student Debt Increases While Wages Decrease
Since 1999, student debt has increased more than 500 percent. Unfortunately, average salaries for young people have not. In fact, since 2000, the average salary for young people has decreased by 10 percent. It’s no wonder that we are seeing millenials delaying starting families, making car purchases and ****buying homes****
Source: http://www.huffingtonpost.com/kyle-mccarthy/10-fun-facts-about-student-loan-debt_b_4639044.html
A lot of the data Ive seen seems to suggest that foreclosures at slowing down. However three days ago Larry mentioned that he expected foreclosures to rise again soon.
I wanted to write this post because a couple days ago, I ran into an agent at an open house who said something interesting. He specifically mentioned that he had a meeting at his office in which some bank representative told him that there is a large pipeline of foreclosures they were going to release. He actually told me to wait if I was thinking of buying a house.
Dont know how true his statement was, but I cant think of any reason he would lie about this… Anyone have any thoughts on this?
The agent may have been feeding you BS to make it seem like they were an expert with exclusive leads to deals at banks. A lot of fledgling agents use open houses as a way to build their client lists, as opposed to actually attempting to sell houses.
MR,
This may be the case, however there are a couple reasons why I dont believe he was feeding me BS. First I was standing right next to my agent as he said this. Secondly, he was holding an open house. Why would tell me to wait a little bit if he was trying to sell his house right now? Third, he was explaining to my agent who never had listings for REOs, that he should try to get involved in these REO listings to show me but also as a way to get more listings… Its rare for me to say this, but this particular agent seemed genuine and just wanted to pass some info along.
In areas like ours where prices are nearing the peak, when the loan modifications begin to reset later this year, the banks will likely not extend them again. This will either force the owners to sell or prompt the banks to start foreclosing again. Perhaps this agent understands what’s going on, or perhaps the bank rep he was talking to has loose lips. I believe there is a very plausible reason why this might be true.
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