Yes, it was. Even so, the banks are back at it again, up to their same old tricks. Here's the story from Reuters:
"Just four years after toxic U.S. mortgages brought the global financial system to its knees and triggered the deepest recession since the Great Depression, a U.S. housing regulator may be making it easier for banks to make bad loans without suffering losses.- Advertisement -
"The Federal Housing Finance Agency released a little-noticed rule last week that makes it harder for Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) -- the government-owned companies that guarantee home loans made by banks -- to hold lenders accountable when mortgages go bad.
"Some experts said the new rules show that lessons of the housing crisis are already being forgotten, and could set up taxpayers for tens of billions of dollars of losses if the lending bubble re-inflates later in the credit cycle.
"At issue is when Fannie Mae and Freddie Mac can press banks to make them whole when mortgages go bad." ("Housing regulators loosen rules, but at what cost?," Reuters)
Can you believe it? The FHFA is actually accepting responsibility for mortgages where the underwriting was either shoddy or fraudulent. This is the kind of power the banks have. The agency is also assuring that the banks will create more of these garbage loans now that they know that Uncle Sam will be picking up the tab. That's what you call "bad incentives"! Up to now, the FHFA had been able to force the banks to repurchase the loans that showed "substantive underwriting and documentation deficiencies." But that's not going to happen anymore. The looser rules mean that the banks will return to their old ways and that future losses to taxpayers will tally in the hundreds of billions of dollars. According to Joseph Mason, a professor at Louisiana State University's business school, "Fannie Mae and Freddie Mac could lose even more than they did this time around." (Fannie and Freddie have already cost taxpayers $188 billion)
To repeat, the banks had changed their behavior because they were afraid of having to repurchase the dodgy loans they originated. (These returned mortgages are called "put-backs") Now the rules are being tweaked so the banks can shrug off the bad loans for which they are alone responsible. Here's more from the National Association of Realtors:
"The federal government is taking steps to ease a problem lenders have been complaining about for several years, and that's the buy-back risk they face if they underwrite a federally backed loan that goes bad and the guarantor of the loan -- whether FHA, Fannie Mae or Freddie Mac -- determines that the loan was never underwritten in compliance with their 'representation and warranty' requirements.
"Lenders remain concerned about the risk they face, and in fact earlier this year, in February, Bank of America announced it would stop selling loans to Fannie Mae because of its concerns over the company's buy-back policies." ("FHFA Gives Banks Reason to Revisit Overlays," National Association of Realtors)
So B of A is threatening to "stop selling loans to Fannie Mae"? Hurt me some more.
What's more important, is that the regulators had fixed this problem by imposing penalties on the lenders, but now they've backtracked and undone their progress. Now it's business as usual where the taxpayer-pinata gets clobbered with more toxic loans. Oh good.
And that's not all the banks are up to. They're also fighting "risk retention" rules because they don't want to pony-up the small amount of capital (5 percent of the loan's value) on high-risk mortgages that go into securitizations. It's like an insurance company refusing to keep money on hand to pay off claims. If you think that's fair, then you should probably be a banker. Now get a load of this excerpt from a "Letter to Bernanke on QE3" from Moe Veissi, president of the National Association of Realtors:
"Reducing mortgage interest rates in general through MBS purchases will have diminished impact if three important rules counter the availability of mortgage credit. As you have noted, mortgage credit is already tight. A recent survey of NAR members indicates that 53 percent of loans in August went to borrowers with credit scores over 740. To put this in perspective, only 41 percent of loans backed by Fannie Mae in 2001 had scores above 740. If the forthcoming Ability to Repay/Qualified Mortgage (QM), Risk Retention/Qualified Residential Mortgage (QRM), and Basel III rules only serve to further tighten credit, the impact of QE3 is likely to be diminished and only felt among those of substantial wealth and pristine credit. In short, those who need access to affordable credit the least.- Advertisement -
"While the Federal Reserve (The Fed) is no longer the purveyor of the QM rule, we believe there is still time for the Fed to weigh in with the Consumer Financial Protection Bureau (CFPB) and ensure that this rule does not serve to further tighten credit." ("NAR Submits Letter to Bernanke on QE3," Mortgage Professional)
How do you like that, eh? So according to Moe Veissi, making the system safer is too expensive. We just can't afford it. We need to make credit available to people who wouldn't normally qualify for a loan.
Sure, Moe, what could go wrong? It's not like we're going to blow up the financial system by lending too much money to people who can't repay their debts, right?