Notorious R.O.B.

[...] This post was mentioned on Twitter by Robert Hahn, Real Estate Feeds, Peter Moulton, Peter Moulton, S and others. S said: Bring the Snark: Ken Harney and Consumer Financial Protection Bureau http://ht.ly/18msnb [...]

Rob there's a backstory on HVCC that's relevant here. Fannie and Freddie, and their federal regulator agreed to implement HVCC only after they were subpoenaed by NY Attorney General Andrew Cuomo as part of a wider investigation into the mortgage securitization process.

You may recall that Cuomo sued First American Corp. and its subsidiary eAppraiseIT in November, 2007, alleging that the appraisal management firm bowed to pressure from Washington Mutual to send work to appraisers who would “hit the numbers.” Washington Mutual was not named in the lawsuit, which is still pending, and all the companies involved have denied the allegations.

A week later, Cuomo subpoenaed Fannie and Freddie, seeking details about loans the companies purchased from banks, and information about appraisal practices. Fannie and Freddie agreed to abide by HVCC four months later, although they didn't implement the rules until May 1, 2009.

BTW, Fannie and Freddie weren't the ones buying up most of the subprime and Alt-A loans that were packaged into mortgage-backed securities — the vast majority of the “private label” MBS that funded this type of lending was sold to other investors besides Fannie and Freddie.

It's important to note that Fannie and Freddie play two roles in financing mortgage lending.

1. They guarantee payments on MBS that meet their own standards (which were and are much higher than those for subprime and Alt-A loans). You take that away right now, and the question is, are private investors still going to be willing to funnel money into mortgage lending? If not, everybody will basically be in the shoes of today's jumbo loan borrower.

2. Fannie and Freddie are also MBS investors. They did buy some subprime MBS which they have seen heavy losses on, but those investments constituted a small percentage of the total subprime MBS universe. Some would say the solution is not to get rid of Fannie and Freddie altogether, but to limit them to the MBS guarantee business.

So the answer to your question, “If I’m loaning my money out to someone, why in God’s name wouldn’t I check and doublecheck that the guy I’m lending money to is able to pay me back?” is not because “Fannie and Freddie were buying up their mortgages.”

For the most part mortgage bankers who were packaging the subprime and Alt A loans you are talking about into private label MBS not guaranteed by Fannie and Freddie had to sell those to somebody else. Who? People who believed the AAA ratings some subprime MBS and CDOs got from the ratings agencies.

Which is not to say Fannie and Freddie weren't part of the problem, but the problem and its solutions are much more complex than you portray them.

More recently, the government HAS been buying up huge quantities of MBS to keep interest rates low, although the Federal Reserve wrapped up its $1.25 trillion in purchases of Fannie and Freddie MBS in March. Those are loans that meet Fannie and Freddie's underwrting standards.

As far as rewriting the RESPA rules, I think it's a little disingenuous to suggest that the federal government will spend $500 million on that particular project — or that hiring a “top notch law firm” to conduct what is a public rulemaking process would serve taxpayers better or save them some money.

More and more government intervention and micro-management that stifles sustainable economic growth. Oh yay! And Matt, great points and insightful information (I'll have to check out your site/blog), but I'm still against big government due to the overall lack of efficiency or accountability.

Ahh, Matt, if you're going to get all serious and logical and stuff, I can't really bring the snark to full effect!

Okay, let's consider some of your points.

True that Fannie/Freddie were not the sole cause of the problem. And I do not excuse the idiocy, greed, and foolishness that plagued investors, borrowers, mortgage brokers, realtors, bankers, and so on. However, I don't think you can so easily discount the role of GSE's and our glorious superior minds in government:

In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. (Wikipedia: http://en.wikipedia.org/wiki/Subprime_mortgage_...).

And the HVCC is a Fannie “innovation” no matter how much Andrew Cuomo, in his desire to be governor of NY one day, tried to exploit the issue.

Finally, while it may have been true that the private secondary market for MBS was larger before the Crash, there is no doubt in my mind that today, without the Fed, working oftentimes through Fannie/Freddie, there is no secondary mortgage market.

Those people who believed the AAA ratings of subprime MBS, most of them were not people per se, but commercial banks and hedge funds and insurance companies. I would have been fine with letting all of them lose their shirts, despite the fearmongering about the global financial system collapsing around our ears. Maybe I just have more faith in capitalism than most.

But the larger point remains. Harney believes that the reason why bankers were making stupid loans was because there weren't enough Federal regulators looking over their shoulders. I believe that the reason why bankers were making stupid loans was because they were depending on the secondary market (aka, the Greater Fool theory of investing), which included the Federal Government, and continues to include the Federal Government, to take those stupid loans off their hands. Cut off that spout, and the stupid lending stops. Nearly overnight. Without needing to hire thousands of new bureaucrats at taxpayer expense.

As for RESPA rule writing… you don't actually believe that legislators or their staff or the people at HUD would actually write those do you? When there are literally hundreds of lobbyists (i.e., high-powered Washington DC law firms) who would hand them the language of the regulation to affix their name to? I'd much rather that we the people hire those smart lawyers to do the writing for us, in a public rulemaking process, than to have them be hired by various moneyed interests who would do it behind the scenes.

Bottomline is… if we don't need more regulators since we can simply shut off the government support for banks instead, and we don't need to rewrite the rules except at relatively low cost by hiring the lobbyists directly, I'm not entirely sure why we need a new $500m a year bureaucracy.

But then again, this is just my likely ill-informed opinion, and I'm always happy to learn the ways in which I am wrong.

Now, back to saving the galaxy from the Zerg menace.

-rsh