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OpEdNews Op Eds    H2'ed 3/28/14

Government Backing for Toxic Mortgage Securities? The Economic Scam of the Century

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This is such an outrageous, in-your-face ripoff, it shouldn't even require a response. These jokers should be laughed out of the senate. All the same, the bill is moving forward, and President Twoface has thrown his weight behind it. Is there any sort of illicit, under-the-table, villainous activity this man won't support?

Not when it comes to his big bank buddies, there isn't. Now check out this clip from an article by economist Dean Baker. Baker refers to the Corker-Warner bill, but the Crapo-Johnson fiasco is roughly the same deal. Here's Baker:

"The Corker-Warner bill does much more than just eliminate Fannie and Freddie. In their place, it would establish a system whereby private financial institutions could issue mortgage-backed securities (MBS) that carry a government guarantee. In the event that a large number of mortgages in the MBS went bad, the investors would be on the hook for losses up to 10 percent of its value, after that point the government gets the tab.

"If you think that sounds like a reasonable system, then you must not have been around during the housing crash and ensuing financial crisis. At the peak of the crisis in 2008-2009 the worst sub-prime MBS were selling at 30-40 cents on the dollar. This means the government would have been picking up a large tab under the Corker-Warner system, even if investors had been forced to eat a loss equal to 10 percent of the MBS price.

"The pre-crisis financial structure gave banks an enormous incentive to package low quality and even fraudulent mortgages into MBS. The system laid out in the Corker-Warner bill would make these incentives even larger. The biggest difference is that now the banks can tell investors that their MBS come with a government guarantee, so that they most they stand to lose is 10 percent of the purchase price." ("The disastrous idea for privatizing Fannie and Freddie," Dean Baker, Al Jazeera)

Just ponder that last part for a minute: "The bill would make these incentives even larger."

Do you really think we should create bigger incentives for these dirtbags to rip us off? Does that make sense to you? Here's more from Baker:

"The changes in financial regulation are also unlikely to provide much protection. In the immediate wake of the crisis there were demands securitizers keep a substantial stake in the mortgages they put into their pools, to ensure that they had an incentive to only securitize good mortgages. Some reformers were demanding as much as a 20 percent stake in every mortgage.

"Over the course of the debate on the Dodd-Frank bill and subsequent rules writing this stake got ever smaller. Instead of being 20 percent, it was decided that securitizers only had to keep a 5 percent stake. And for mortgages meeting certain standards they wouldn't have to keep any stake at all.

Originally only mortgages in which the homeowner had a down payment of 20 percent or more passed this good mortgage standard. That cutoff got lowered to 10 percent and then was lowered further to 5 percent. Even though mortgages with just 5 percent down are four times as likely to default as mortgages with 20 percent or more down, securitizers will not be required to keep any stake in them when they put them into a MBS."

Hold on there, Dean. You mean Dodd Frank didn't "put things right"? What the heck? I thought that "tough new regulations" assured us that the banks wouldn't blow up the system again in five years or so. Was that all baloney?

Yep, sure was. 100% baloney. Once the banks unleashed their army of attorneys and lobbyists on Capital Hill, new regulations didn't stand a chance. They turned Dodd Frank into mincemeat and now we're back to square one.

And don't expect the ratings agencies to help out either because they're in the same shape they were before the crash. No changes at all. They still get paid by the guys who issue the mortgage-backed securities (MBS) which is about the same as if you paid the salary of the guy who grades your midterm exam. Do you think that might cloud his judgment a bit? You're damn right, it would; just like paying the ratings agencies guarantees you'll get the rating you want. The whole system sucks.

And as far as the new Consumer Financial Protection Bureau, well, you guessed it. The banks played a role in drafting the new "Qualified Mortgage" standard too, which is really no standard at all, since no self-respecting lender would ever use the same criteria for issuing a loan or mortgage. For example, no banker is going to say, "Heck, Josh, we don't need your credit scores. We don't need a down-payment. We're all friends here, right? So, how much do you need for that mortgage old buddy, $300,000, $400,000, $500,000. You name it. The sky's the limit."

No down payment? No credit scores? And they have the audacity to call this a qualified mortgage?

Qualified for what? Qualified for sticking it to the taxpayers? The real purpose of the qualified mortgage is to protect the banks from their own shifty deals. That's what it's all about. It provides them with "safe harbor" in the event that the borrower defaults. What does that mean?

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Mike is a freelance writer living in Washington state.

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