In The Great Housing Bubble, I wrote about how we could prevent the next housing bubble: 
Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:
- All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
- The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
- The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
- The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
The primary focus of my proposal was to limit lending to amounts buyers could afford to pay back. Eliminating toxic loan programs and keeping equity in the property help keep prices stable, but limiting debt-to-income ratios are critical to preventing delinquencies and foreclosures which ultimately ravage the housing market.
The parameters of the forming limitations on the debt-to-income ratio and combined-loan-to-value are essential to prevent bubbles in the housing market and to prevent the banking system from becoming imperiled in the future. People will commit large percentages of their income to house payments when prices are rising quickly; however, they do this out of fear of being “priced out” and greed to make a windfall from appreciation. These are the beliefs that inflate a bubble. Borrowers cannot sustain payments above the traditional parameters for debt service without either defaulting or causing a severe decline in discretionary spending. The former is bad for the banks, and the latter is bad for the entire economy. This must be prevented in the future.
Notice that excessive borrower is bad for both banks and the broader economy, and not because the banks are so important. The real problem with our economy today is that people are broke. They have a hangover from excessive debt the banks are unwilling — and perhaps unable — to purge.
Apparently, the economists at the federal reserve have come to the same conclusions I have, albeit four years later.
we find that a loan-to-income constraint is the most effective tool for dampening overall excess volatility in the model economy.
The full paper is below:
Household leverage in many industrial countries increased dramatically in the years prior to 2007. Countries with the largest increases in household debt relative to income tended to experience the fastest run-ups in house prices over the same period.
Banks completely lost their minds and ignored the amount of debt they were issuing relative to the borrower’s income. Banks everywhere simultaneously began running Ponzi schemes which imploded and took the world economy down with it.
The same countries tended to experience the most severe declines in consumption once house prices started falling (Glick and Lansing 2010, International Monetary Fund 2012).1
In a Ponzi scheme, the borrower comes to rely on fresh infusions of debt to service debt and fuel consumption. The borrower does not have the income to do either of those things, so the influx of new debt is essential to keeping the system going. When lenders withhold this debt, borrowers abruptly stop making debt service payments, and lenders respond by increasing interest rates, demanding repayment, and curtailing new debt issuances — a credit crunch.
Within the United States, house prices during the boom years of the mid-2000s rose faster in areas where subprime and exotic mortgages were more prevalent (Mian and Sufi 2009, Pavlov and Wachter 2011). In a given area, past house price appreciation had a significant positive influence on subsequent loan approval rates (Goetzmann et al. 2012).
This is the statistic that is most shocking. The more insane the market became, the most lenders relaxed their lending standards to contribute to the insanity. Lending snowballed out of control and fueled the rapid appreciation in price until the market collapsed.
Areas which experienced the largest run-ups in household leverage tended to experience the most severe recessions as measured by the subsequent fall in durables consumption or the subsequent rise in the unemployment rate (Mian and Sufi 2010).
I noted back in 2008 that the California economy is dependent upon Ponzi borrowers. Economists struggle to explain the lackluster recovery from the Great Recession, but in reality it’s quite simple. California’s HELOC economy collapsed due to the elimination of the free-money stimulus banks were giving loanowners. Even a massive government spending program is no enough to make up for millions of loanowners irresponsibly spending hundreds of thousands of dollars each.
Overall, the data suggests the presence of a self-reinforcing feedback loop in which an influx of new homebuyers with access to easy mortgage credit helped fuel an excessive run-up in house prices. The run-up, in turn, encouraged lenders to ease credit further on the assumption that house prices would continue to rise. Recession severity in a given area appears to reflect the degree to which prior growth in that area was driven by an unsustainable borrowing trend–one which came to an abrupt halt once house prices stopped rising (Mian and Sufi 2012).
I am quite relieved to see the federal reserve finally gets this. Their verbose explanation is a fancy way of saying lenders were running a Ponzi scheme.
much of the run-up in U.S. house prices and credit during the boom years was linked to the influx of an unsophisticated population of new homebuyers. Given their inexperience, these buyers would be more likely to employ simple forecast rules about future house prices, income, etc.
Most bubble buyers were kool-aid intoxicated fools. In their defense, they were merely believing the “experts” from the NAr who were telling them house prices only go up, their running out of land, buy now or be priced out forever, and so on.
Historical episodes of sustained rapid credit expansion together with booming stock or house prices have often signaled threats to financial and economic stability (Borio and Lowe 2002). Times of prosperity which are fueled by easy credit and rising debt are typically followed by lengthy periods of deleveraging and subdued growth in GDP and employment (Reinhart and Reinhart 2010). According to Borio and Lowe (2002) “If the economy is indeed robust and the boom is sustainable, actions by the authorities to restrain the boom are unlikely to derail it altogether. By contrast, failure to act could have much more damaging consequences, as the imbalances unravel.” This point raises the question of what “actions by authorities” could be used to restrain the boom?
There is no question something should be done to prevent asset bubbles in general and housing bubbles in particular. Houses have historically been a reservoir of retirement savings, although lenders have worked to ruin that with unrestricted mortgage equity withdrawal. The stability of house prices is paramount if we are to have a functioning economic system.
Intuitively, a loan-to-income constraint represents a more prudent lending criterion than a loan-to-value constraint because income, unlike asset value, is less subject to distortions from bubble-like movements in asset prices. … the ratio of U.S. household debt to disposable personal income started to rise rapidly about five years earlier, providing regulators with a more timely warning of a potentially dangerous buildup of household leverage.
For this to work, the banking industry must accept that fact that financial innovation is folly. Part of the reason everyone ignored the obvious warning signs of excessive debt is because they believed the financial innovation meme. If industry insiders come to believe the next Ponzi loan program is a viable financial innovation, we will watch the debt-to-income ratio grow wildly out of control, and we will be assured everything will be okay — until it isn’t.
In our view, it is much easier and more realistic for regulators to simply mandate a substantial emphasis on the borrowers’ wage income in the lending decision than to expect regulators to frequently adjust the maximum loan-to-value ratio in a systematic way over the business cycle or the financial/credit cycle.
It is very much simpler to focus on regulating debt-to-income ratios. It’s a simple, measurable mathematical relationship that’s hard to ignore.
Needless to say, I fully agree with the conclusions reached in this paper.
Why their model works
The reason limiting debt-to-income ratios works is because beyond a certain point, rising debt service becomes a Ponzi scheme. Remember, debts are supposed to be paid off. People forget that simple fact and take on debt as if it is something to be endlessly serviced. Those that embrace the debt-service mentality try to surf on the edge of the abyss.
Treading financial water occurs is when the amount a borrower pays toward principal on debt is matched by taking on new debt. When the amount of new debt exceeds the amount debt was paid down, particularly if debt was used to pay debt, the borrower is Ponzi borrowing. There is a point beyond which a borrower cannot pay down debts without continued borrowing, a point where the debt service exceeds the ability to income to support it. This is the dilemma of insolvency, and the brink of insolvency is the Ponzi limit.
Unfortunately, the Ponzi limit is fluid. Many borrowers creep up on the Ponzi limit without knowing it. Lenders often extend credit to borrowers beyond their ability to service it putting the sum of all credit lines beyond the Ponzi limit. Once borrowers cross this unseen threshold, lenders begin to raise the borrower’s interest rates and force them to Ponzi borrow in order to make ends meet. At that point, the borrower is insolvent, but ongoing Ponzi borrowing can mask that for a time.
Once borrowers have gone Ponzi, there is no hope — they can’t borrow their way out of debt, and they can’t afford to earn and pay their way out either. It is only a matter of time before insolvency leads to delinquency and forgiveness of debt usually through a bankruptcy.
The problem with the Great Housing Bubble is insolvency. Lenders underwrote too many loans for too much money. Borrowers everywhere are insolvent, and the main mechanism for curing real estate debt insolvency – foreclosure — is being shunned by our government, lenders and borrowers alike. Thus our government encourages useless loan modifications programs and lenders allow delinquent borrowers to squat. These are not solutions to the problem; these are avoidance mechanisms to prevent dealing with the problem. The debt must be purged.
The fate of Ponzis
The Ponzis have two options once they are insolvent: (1) find another borrower who will loan them money, or (2) experience the The Unceremonious Fall from Entitlement as their lifestyle expenses are reduced to their income level regardless of their needs and wants.
Ponzi borrowing is not sustainable. Once borrowers cross the Ponzi limit, they will financially implode, and any lenders who extend credit to those borrowers will lose their money. Since lenders have so much money tied up in the Ponzis right now, they are working to expand the Ponzi scheme by getting the government involved as the bagholder for the bank’s Ponzi loans. The government and the central bank are the lenders and bagholders of last resort. It isn’t very likely private lenders will step forward to extend Ponzi loans any time soon. That leaves only one option for the Ponzis….
Unless Ponzis are given more debt, they will all succumb to the weight of their obligations. As each one exhausts their credit lines, bank losses will mount, and pressures on capital reserves will increase. Lenders will remain cautious and zombie-like. Since the spending of the Ponzis has become such a large part of our local and national economy, we may experience a long period of deflation similar to Japan as the Ponzis collapse. As I see it, we will not experience a robust economic recovery as long as the Ponzis keep their debts and banks keep pretending these Ponzis will pay them back. And since amend-extend-pretend has been officially sanctioned bank policy for the last four years, it shouldn’t be surprising the economy is weak, and we are constantly worried about tipping back into recession.
Nearly six years of squatting
When I saw the property records for today’s featured property, my jaw dropped. I have written endlessly about the can-kicking the banks are doing, and there is no better evidence than properties like this one. The first NOD on this property was issued in January of 2007. The borrowers stopped making payments at least three months before that, and the property wasn’t taken back in foreclosure until late June 2012.
Foreclosure Record
Recording Date: 05/23/2012
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 08/02/2011
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 01/08/2010
Document Type: Notice of Sale
Foreclosure Record
Recording Date: 10/07/2009
Document Type: Notice of Default
Foreclosure Record
Recording Date: 05/07/2007
Document Type: Notice of Rescission
Foreclosure Record
Recording Date: 01/31/2007
Document Type: Notice of Default
Today’s featured property was purchased on 7/1/1991 for $227,000. By 8/19/2005 the former owner had accumulated a debt of $513,750. Instead of paying down his mortgage, he more than doubled it. To further boost his fortunes — as if $300,000+ in free money wasn’t good enough, he was allowed to squat for nearly six years in a house that should have been foreclosed on and recycled in the hands of a responsible borrower.
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Proprietary OC Housing News home purchase analysis
1148 CARSON St Costa Mesa, CA 92626
$379,900 …….. Asking Price
$227,000 ………. Purchase Price
7/1/1991 ………. Purchase Date
$152,900 ………. Gross Gain (Loss)
($18,160) ………… Commissions and Costs at 8%
============================================
$134,740 ………. Net Gain (Loss)
============================================
67.4% ………. Gross Percent Change
59.4% ………. Net Percent Change
2.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$379,900 …….. Asking Price
$13,297 ………… 3.5% Down FHA Financing
3.54% …………. Mortgage Interest Rate
30 ……………… Number of Years
$366,604 …….. Mortgage
$95,246 ………. Income Requirement
$1,654 ………… Monthly Mortgage Payment
$329 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$95 ………… Homeowners Insurance at 0.3%
$382 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,461 ………. Monthly Cash Outlays
($247) ………. Tax Savings
($573) ………. Equity Hidden in Payment
$15 ………….. Lost Income to Down Payment
$115 ………….. Maintenance and Replacement Reserves
============================================
$1,771 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,299 ………… Furnishing and Move In at 1% + $1,500
$5,299 ………… Closing Costs at 1% + $1,500
$3,666 ………… Interest Points
$13,297 ………… Down Payment
============================================
$27,561 ………. Total Cash Costs
$27,100 ………. Emergency Cash Reserves
============================================
$54,661 ………. Total Savings Needed
The property above is available for sale on the MLS.
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23 Responses to “Debt-to-income ratios must be limited to prevent future housing bubbles”
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Another excellent post.
What it all boils down to is the word ‘expunged’…….. ie., there will be NO true bottom until the big banks are fully restructured. Period!
In other news…
The same bureaucrats who back/own/control a company that spends $75k to build a car that sells for $26k is now in full control of the housing market. LOL
GM Is Losing Up To $49,000 Per Volt Sold
http://www.businessinsider.com/gm-is-losing-up-to-49000-per-volt-sold-2012-9
——————————————————————————————————————
I feel sadness for OC households who have all of their eggs in one basket.
Only the government would run a business to lose money on each sale. I suppose what they lose on each car they make up in volume, right?
Right!
One thing is for certain. Clearly, an ‘Ivy-league’ education is waaaaay over-rated.
Despite pleas to relax lending standards, high default rates are prompting further credit tightening.
Fannie Mae Tightens Mortgage Standards for Some Home Buyers
Fannie Mae, the largest source of money for U.S mortgages, told lenders that it’s tightening some of its qualification standards for people buying homes or refinancing loans.
The changes include a reduction of the maximum loan-to- value ratios for some adjustable-rate mortgages to 90 percent, from as much as 97 percent, and an increase in required credit scores for certain loans, the Washington-based company said yesterday on its website. Fannie Mae also will start demanding more tax returns from self-employed borrowers, according to Matt Hackett, underwriting manager at New York lender Equity Now Inc.
“This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago,” Hackett said of the tax-information demand, tied to an update of its underwriting software used by originators. Two years of personal and business returns will be required to verify incomes, up from one year of personal returns. “You’d be surprised how much of an effect this has,” he said.
Tougher guidelines from Fannie Mae (FNMA), which along with smaller rival Freddie Mac guarantees mortgage-backed securities financing about two-thirds of new loans, may add to challenges for a housing market that’s showing signs of recovering after a six-year slump. Pacific Investment Management Co., manager of the world’s largest mutual fund, said in commentary yesterday that while “record-tight” credit standards are impeding real- estate sales, they “will not last forever.”
To me, tighter Fannie Mae credit standards are a good thing.
What is the current FHA situation? Continued easy money?
The FHA continues its role as the substitute for subprime. Interestingly enough, the high up-front fees and high insurance costs drive the price of FHA money up to subprime levels. The effective interest rate on an FHA loan is nearly 2% higher than the face rate on the loan.
“…The effective interest rate on an FHA loan is nearly 2% higher than the face rate on the loan…”
Hmm, I guess it depends on what you mean by “interest rate.” Rates tend to be lower on FHA loans compared to conventional loans. The upfront MI of 1.75% is charged once – not every year. The annual MI on a 15Y loan at 3% will drop-off sooner than four years. The annual MI on a 30Y loan at 4% could take ten years to drop-off assuming constant FMV.
MI is included in the APR calculation. So perhaps that’s the best way to compare one conventional mortgage to a comparable FHA option.
“MI is included in the APR calculation. So perhaps that’s the best way to compare one conventional mortgage to a comparable FHA option.”
That is the best way. With the 1.15% mortgage insurance fee, the APR is boosted significantly.
I have friends who run/own their own firms. Everyone of them is doing well, but can’t get a mortgage (the size they’d want) because their returns show they’re living on much lower income than they really are. They have the temerity to complain about this. So, I have to buy my meals, vacations and cars with after tax income (33% reduced) while you get to buy/finance all of that with pre-tax income, and then you have the nerve to complain about mortgage standards keeping you from buying your dream home?
They want to have their cake and eat it too. After all, they are special. They are the job creators and everything good about capitalism, right?
If they were really that prosperous, they would save the money to make up the difference in what they can’t finance with a large down payment. If they are spending everything they make, do they really deserve a dream home?
Barron’s Cover Calls Housing Bottom (Yet Again)
Barron’s is at it again, making a third call for a Housing recovery since 2008, saying “After an ugly six-year decline, home prices are starting to look up. Why the rebound is for real.”
The article has a number of problems with it, and I detail these below. But first, I want to get to a meta-journalistic error, and explain the fatal flaw of the article before it even begins: Using the same author who has made multiple Housing turnaround calls before — all too early, all wrong.
The mistake in doing that is the analysis begins with a chip on its shoulder: The writer is not looking objectively at the data, but rather, has something to prove. Human nature is such that we all want to be vindicated, to be proven right — hence, all objectivity is lost. This is clearly reflected in the errors and omissions within the article.
Thus, not only was the July 14, 2008 Barron’s cover story by the same writer — Bottom’s Up: This Real-Estate Rout May Be Short-Lived — terribly wrong, but it sets up the flaws in the following two pieces. Beyond the basics of Human psychology, we see this revealed by the latest article’s headline: “Happy at Last.”
Beyond the author’s desire to be right (rather than accurate), this latest article has three major flaws/omissions:
1) Foreclosure abatements have ended (never mentioned);
2) The impact of Zero percent Fed interest rates on mortgage rates (also omitted);
3) Home Builders stock prices are confused with home prices.
Also omitted from this list are several other factors: Weak job creation, flat wages, low household formation. But let’s just discuss these three for today. The article begins with a discussion of home prices, but leaves out the actual, causes (items 1 and 2 above), along with the seasonal elements. Let’s get into the details of these.
Barron’s mentions the drop in distressed home sales as a percentage of total units sold, but astonishingly, leaves out the reason for this: The voluntary foreclosure abatements that took place during the robosigning settlement discussions. The foreclosure machinery was idled for over a year while the resolution of this mass Banking felony was worked out. Its not that the RRE market has improved, rather, its that foreclosures were frozen due to government action. With that now resolved, foreclosures have begun moving higher again. They still appear lower on a year-over-year basis, but only if you ignore the context. The timing of this process is imprecise, but it is not unreasonable to expect significantly more distressed sales showing up before year’s end.
The current result of the abatements is simple: There are 25% less distressed sales than usual. They sell at 20-30% less than an identical home down the block. Distressed sales fell from 38% to 28% of existing home sales. The missing distressed sales account for a significant percentage of home price increases. To discuss distressed home sale and omit this context is, IMO, simply inexcusable.
Noticeably omitted from this discussion is the single most important element driving home sales: Zero percent interest rates, and their impact on Mortgage costs/purchasing power. It is even more astonishing that an article about a home price recovery can omit any mention of the Fed and Ben Bernanke. Mark Hanson has looked at this, and he notes that the Fed’s QE/Twist programs have driven mortgage rates appreciably lower, now down to 3.625% from over 5.0% when the Fed started theirshort term bond purchases. Anyone who uses a mortgage — ~70% of all buyers — have been gifted a 15% increase in purchasing power for a house on the same monthly payment. Despite this huge increase in buying power, home prices are up less than half of this. (Incidentally, I think Hanson is too bearish).
ZIRP and nearly free money are unsustainable conditions, and while we have been told rates will remain low til 2013, they cannot stay at zero forever. What happens to home prices when rates eventually start to rise? I imagine a short term spurt as some buyers rush to take advantage of rates before they increase. After that, the free lunch is over. The support that the Fed has been affording housing (and the banks still festooned with dubious mortgages) flips from a tail wind to a major headwind.
Finally, the Home builder’s issue. The elements that drive their stock prices are very different than what drives home prices. The builders have written-downs over-priced land purchases; They have already taken their lumps on their foolish funding of bad buyers. And, they have moved aggressively into the construction of multi-family and rental units — perhaps the hottest sector in residential real estate. We saw the same erroneous logic during the initial phase of the RE crash, from 2006-09 — every uptick in Homebuilder was met with a cheer from the Housing turnaround crew. They were wrong then, and they are most likely wrong now.
I could speak to the decline in inventory, but let me point out what Jonathan Miller of Miller Samuel has explained: A big part of the reason for the inventory decline is low home equity. “Sellers are buyers after they sell, but if they don’t have enough equity for the next purchase, then they sit.” Hence, the decrease in inventory is due to a negative factor — stuck sellers. It is not the positive that it appears to be.
One last aside, I have to mention this astounding WTF line in the article: “Some keen observers of the real-estate market, such as Moody’s Analytics’ Mark Zandi . . .” Really? Zandi is a very nice guy, but with no disrespect, I do not think there is a single US economist who has been less right about Housing than Zandi. His annual housing bottom calls placed him in our pantheon of PWBC — they have been nothing short of horrific. Anyone who thinks Zandi is a keen observer of real estate is, well, likely to have called a bottom in Real Estate 2008. And 2009, and again in 2012.
The nicest thing I can say about Housing is that after an enormous amount of government & Fed action, it has stabilized. The rate of decline has fallen, but it is driven not by market forces, but unnatural ones.
As the expression goes, a broken clock is right twice a day. If Barron’s keeps putting articles on its cover calling for a recovery in Housing, they will eventually get it right.
Just not this week . . .
What? A solid line in the sand requirement that people should be able to afford their home first? Brilliant!
It will never happen. Too many special interests would stand in the way. I subscribe to BR’s take on Exotic Financing (which in this case would include allowing high debt to income ratios) – fine, you can explore using these financial tools, providing that you surrender your FDIC insurance….
Here’s an article sourced at a site of one of the “smart guys” left in the mortgage biz.
http://themortgagereports.com/11091/fha-may-waive-its-3-year-foreclosure-waiting-period
If this is the case, then I’ll bail on my home and buy again at a lower price. Here on planet Zero Consequence that’s how we roll.
Soylent Green Is People
Thanks, I will use that post. If this requirement is waived by the FHA, strategic default will run rampant, and demand will explode. Of course, supply dumped on the banks will explode too, but since they will amend-extend-pretend their way out of trouble, this will be seen as a benefit.
Wow. Three years already seems like such a short period of time. If it’s dropped, you would think they’d at least require the slightest “proof” of some hardship that caused the default.
The only question for a strategic default candidate at that point would be, “Realistically, how long will it take my credit score to recover and return to ~740 in order to receive the best pricing?”
Best pricing is somewhat of a non-issue. FHA insured loans have very strong pricing because the Government insures the lender against loss. Typically you’ll find a 640 FICO score borrower getting 3.5% -0- point FHA financing, 3.25 if you pay a bit in fees. FICO below 640? You’d still get 3.5% but perhaps at a bit higher fee.
FHA is an insurance program, not a loan product. Banks still must decide if you’re “worth the risk” of booking the loan. If FHA insurance is offered for strategic defaulters less than 3 year out, the funding bank might add an overlay of their own to keep from approving these loans. Just because Wells doesn’t do the loan though, someone else invariably will. There’s a great deal of juice in FHA loans and plenty of thirsty lenders willing to squeeze as much out of this market as possible.
SGIP
I could see banks using overlays at first, but there are far too many hungry lenders operating out of small shops for those loans to go unwritten. Someone will make a business model out of issuing FHA loans to strategic defaulters, and they will likely do quite well. Realistically, strategic defaulters are probably not bad credit risks. They didn’t quit paying because they were irresponsible or incapable. If given the right circumstances (a chance of equity), it’s likely most of those people will diligently pay their mortgages.
Irvine Renter – it would be interesting to see what the “affordability ratio” for housing would be in a place like Orange County if the above ratios were strictly enforced. To put it another way, how much house could a typical household in the OC buy if they were limited on their total debt? I suspect that in the OC this has always beend fudged – at least ever since I can remember, going back to the late 70′s, when I first started thinking about housing prices. Many people back then could not “realistically” buy a home – but they did. Rising wages in the 80′s bailed them out if they had fixed rate home loans.
” Many people back then could not “realistically” buy a home – but they did. Rising wages in the 80′s bailed them out if they had fixed rate home loans.”
That gamble has been going on for so long here that many think that’s just how the system works. It works until it doesn’t, then we have a huge number of defaults and foreclosures like we just had.
The law of unitended consequences strikes again.
Fitch: Challenges Ahead for Previously Strong Vintages
Adverse selection is leading to rating downgrades for “one of the strongest U.S. residential mortgage vintages,” the pre-2005 vintage, according to Fitch Ratings.
Residential mortgage-backed securities formed before 2005 “have historically performed well,” according to Fitch.
In fact, more than 93 percent have already been repaid in full, and principal losses account for less than 1 percent of the $650 billion vintage.
However Fitch has placed several underperforming classes from the pre-2005 vintage on “Rating Watch Negative.”
“Many high-quality mortgage borrowers are refinancing to take advantage of record-low interest rates, leaving the remaining mortgage pools increasingly concentrated with borrowers unable to refinance,” explained Grant Bailey, managing director at Fitch in a statement Thursday.
The remaining bonds are at risk for negative ratings pressure.
“While additional negative rating actions are likely, pre-2005 senior classes are by and large expected to retain investment grade ratings and recover full principal,” Bailey said.
If the regulation has no teeth, it will not be effect against the law breakers. The temptation of riches will overcome their decency if any. Possible the executive team will be personally responsible for all loss above $50 million with a prison time of 1.1 year for each 10 offenses to be served consecutively without the possibility of parole. The bank shall not reimburse nor pay for the personally liability. If the loss is over $500 million the board shall also be held liable with the same penalties. Attorney(s) on the board or executive position shall not be shielded under attorney-client privilege but treated as co-conspirators. The statute of limitation shall be the longer of 20 years from occurrence or 5 years from the date of discovery. The federal govt shall make all effort to recover the assets including seizure of personal account and corporate accounts which the person has access or controlling interest. That would stop almost all Ponzi schemes and force the board to oversee properly on the too big to fail banks.
Best to make laws simple so people can understand them.
The MBS was not to have guarantees but when pensions are failing the govt will step in. This is not the first time and it will not be the last time the govt step in.
The personal sanctions don’t have to be quite so stiff to be effective (I like your sentiment, though). Even small fines, if levied directly against the loan officers and supervisors, will seriously curtail bad behavior.
Look at the success of the Mafia. The mafia came into being because the Italian government has been unstable for centuries. The mafia put out the word to any would-be tyrants that if they stepped out of line, the mafia would go after them personally and their families. This kept brutal tyrants from stepping into the void of an unstable government and enslaving the people.
“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is it’s natural manure.” Thomas Jefferson.
If the fine is too small for the year, it will be considered the cost of doing business. This gives the large companies an unfair advantage.
Why steal the ewe when the punishment for stealing the flock is the same?
I think seizure of ALL the ill gotten gains (like drug seizure laws) with interest and a little prison time (1-3 years without parole) will stop much of the bad behavior.
Why punish the foot soldiers just follow orders? Why allow the big fish to get a pass for throwing the small fish or guppies under the bus? That would be business as usual.
BYT the mafia’s penalties were pretty stiff. However, going after their families might be doing them a favor with the prevalence of divorce. :}