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Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.


Setting Pay at Bailed Out Companies

January 03, 2010

New York Times Magazine Cover

Steven Brill’s long January 3, 2010 New York Times Sunday Magazine piece on Kenneth Feinberg’s experience in setting executive pay at the “TARP

7,” as he calls them, illuminates how wide the gulf between top compensation at financial companies and the plight of working Americans really has become.  This should be must-read material for anyone concerned with social justice in America.

It also highlights the discouraging lack of progress that has been made to date in cementing real reforms in the way financial companies are run and their leaders compensated.  If the near-collapse of the world’s financial system isn’t enough of a goad to get this done, what is?

The most telling part of this long piece is AIG’s representation that it would be unfair to force its executives to take the lion’s share of their compensation in company stock, because it is “essentially worthless,” as its vice-chair is quoted as saying.  The compromise Feinberg adopted retained the structure, but perhaps not the substance, of his original demand.  But all the worker bee suckers in AIG—and by extension all the other companies under Feinberg’s supervision—probably won’t have the chance to shift out of the “essentially worthless” stock in their ESOPs, or maybe in their 401(k)s, if they’re really unlucky.  And the folks who lost their jobs and homes as a result of these financial companies’ mistakes won’t get any “do-overs,” either.  

House Financial Services Chairman Barney Frank (D-MA) is at his best in this article, a refreshing voice of genuine progressivism.  We can only hope that his sensible and straightforward observations about this compensation adventure spreads to more of his colleagues.

Also in this Sunday Magazine is a provocative piece by Matt Bai considering the distance between the populist demands of the Democratic left and what Bai calls the President’s “progressivism.”  These two bookends of the Magazine offer a sobering start to the new decade.

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How Big a Problem is Mortgage Fraud?

December 27, 2009

Wall Street via Village Voice

Whether you find a recent post on the blog Seeking Alpha completely persuasive or not, it’s a useful reminder that at least part of the reason for the mortgage crisis was fraud, pure and simple.  (Thanks to former colleague John Fulford for linking me to this post.) Whether through predatory use of unsuitable products to churn mortgage debt through unsophisticated/greedy/ignorant homebuyers/refinancers, through total misrepresentation of a borrower’s qualfications in order to write a loan and earn a fee, or through blatant disregard of investors’ terms and conditions for qualified loans in securitizations, there can’t be any doubt that the mortgage system at the height of the housing bubble was riddled with fraud. 

Hopefully, aggrieved investors will prosecute those who defrauded them.  Hopefully, as Seeking Alpha suggests, we’ll see some perp walks and folks learning how to accessorize orange jump suits.  

But what to learn from all this, and what to do about it in the future?

  1. When investors require reps and warrants, they must put in place reliable quality control systems to actually check whether their counterparties are playing fair.  Folks inside every securitizer/investor/lender will push back on tough QC procedures—they alienate the client, they push business to others with fewer qualms, “my comp is based on what I sell, and your dumb procedures are costing me money.”  The example cited in the Seeking Alpha post make it clear that the fraud was there to be found from the start.  Why should it take a forensic review of the securities to ferret it out?  Unless the mortgage industry gets way more serious about how they review and manage counterparties, the sheer volume of the US housing market is an open invitation to commit fraud.  Chances of being caught are small, the cost of paying up can be negligible, and if the risks are sliced into dozens or scores of pieces held by hundreds of investors, who’s gonna know or even care? 
  2. Every player in the mortgage conveyor belt should get paid not for production but for long-term performance.  Brokers can be paid a portion of their fee on delivery, the rest over the first three years, when early payment defaults are most likely to show up.  If they underwrite solid borrowers, they will get paid.  If they cheat or cut corners, it’s their compensation that’s at risk.  The same right on up the chain.  During the height of the boom a secondary market colleague who should know told me one of his customers replied to voiced concerns about credit quality in the loans he was delivering, “Hey, we are simply a conveyor belt.  We move the loan from the originator to you.  The rest is not our problem.” 
  3. Housing and mortgage counseling by unrelated parties should be mandatory for any low downpayment or equity stripping refinancings.  First time homebuyers are especially vulnerable, but owners suckered by refinancing offers also ended up with toxic mortgages that are putting them out of their homes. 
  4. Disclosures at loan settlement should be clearer than they are today, and delivered to borrowers with plenty of time to review them.  The Federal Reserve Board recently closed a months-long comment period on changes to its Regulation Z, covering Truth-In-Lending disclosures.  They recommended a heap of really good changes.  They’ve received strong support from Consumer Federation of America, National Consumer Law Center, Center for Responsible Lending and others.  (Check out the Fed’s regulatory pages to see copies of these and other comments on the proposed rule.)
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New Sheriff In Town?

December 23, 2009

Shaun Donovan

With close to 30 percent market share and razor thin capital margins, the FHA is in greater need of tough oversight and management than perhaps ever before.  Happily, HUD Secretary Shaun S. Donovan and his FHA Commissioner, David Stevens, seem to understand this.  

In the face of fears that FHA’s rocketing share of single family financing is drawing in many of the unscrupulous brokers who plagued subprime lending in recent years, the agency has adopted a new “get tough” policy and is using its administrative authorities aggressively.

A recent article in National Mortgage News chronicles this recent activity.  The Donovan quote from a consumer group meeting is actually from Consumer Federation of America’s annual Financial Services Conference earlier in December.  You can see the whole speech on C-SPAN.  It’s good to have a new sheriff in town!

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Next Steps for Fannie and Freddie?

December 23, 2009

Next Steps for Fannie and Freddie?

The Financial Times yesterday today published a summary piece on what’s likely to happen next to Fannie Mae and Freddie Mac.  The Obama Administration has committed to laying out options in its February, 2010 budget submission.  But the folks responsible for producing them may rue this promise made earlier in 2009 when the rest of the Administration’s financial modernization package was unveiled.

The government’s unprecedented and aggressive support for the the mortgage markets hinges almost entirely on the continued role the two companies play in the market.  The private securitization market is dead.  Recent research from JP Morgan suggests that it will remain that way from some time to come.

The Federal Reserve’s $1.25 trillion purchase program for Fannie and Freddie MBS is supposed to wind down in the first quarter of 2010.  But many observers doubt they will be able to do so in the face of likely political opposition to moves that could raise interest rates for consumers, as phasing out the program might do.

The two companies also are playing a crucial role in administering the Administration’s Making Home Affordable” mortgage modification program.  Once restructured, it isn’t clear how that capacity could be easily replicated.

Perhaps because they were the first crippled financial patients to go under the knife in 2008, the terms of their government assistance are significantly more onerous than those that Bank of America and other major lenders had to agree to.  The dividend on the preferred stock held by Treasury in return for its investments in the two companies—now totaling $112 billion—is 10 percent, for instance, higher than that imposed on other bailees.  Neither company is likely to be able to pay back what they owe, in addition to their divident payments, anytime soon.

It can be argued that the government has the two companies exactly where it wants them:  firmly under government control, but not on the government’s balance sheet.  They can be used to further public policy goals without interference from shareholders or private owners, at a time when the government has few similarly powerful direct levers to work in the economy.

So the question essentially should come down to this:  what is the rush to alter the current structure?  With many trillions of outstanding MBS under their guarantee, and a combined market share exceeding 70 percent now, a great deal of the housing market’s immediate and near future health seems likely to ride on the two companies and the market’s faith in their guarantees on the securities.  And the only way to guarantee that for the moment, it seems, is through the continued support of the current system, however creaky it may be.  The Financial Times piece summarizes a series of potential paths the Administration could choose.  Having spent many hours over the last year with colleagues in the progressive policy sector trying to develop a workable successor model, I’m skeptical of their chances for success in the short run.  I look forward to working with them, and hope that something durable and workable can emerge.  But mostly I’m anxious that politics and theory are not allowed to trump pragmatism when it comes to the question of timing.  Rushing to a solution merely for the sake of having one is not the right path.

Read more...

Next Steps for Fannie and Freddie

December 23, 2009

Next Steps for Fannie and Freddie

The Financial Times today published a summary piece on what’s likely to happen next to Fannie Mae and Freddie Mac.  The Obama Administration has committed to laying out options in its February, 2010 budget submission.  But the folks responsible for producing them may rue this promise made earlier in 2009 when the rest of the Administration’s financial modernization package was unveiled.

The government’s unprecedented and aggressive support for the mortgage markets hinges almost entirely on the continued role the two companies play in the market.  The private securitization market is dead.  Recent research from JP Morgan suggests that it will remain that way from some time to come.

The Federal Reserve’s $1.25 trillion purchase program for Fannie and Freddie MBS is supposed to wind down in the first quarter of 2010.  But many observers doubt they will be able to do so in the face of likely political opposition to moves that could raise interest rates for consumers, as phasing out the program might do.

The two companies also are playing a crucial role in administering the Administration’s “Making Home Affordable” mortgage modification program.  Once restructured, it isn’t clear how that capacity could be easily replicated.

Perhaps because they were the first crippled financial patients to go under the knife in 2008, the terms of their government assistance are significantly more onerous than those that Bank of America and other major lenders had to agree to.  The dividend on the preferred stock held by Treasury in return for its investments in the two companies—now totaling $112 billion—is 10 percent, for instance, higher than that imposed on other bailees.  Neither company is likely to be able to pay back what they owe, in addition to their dividend payments, anytime soon.

It can be argued that the government has the two companies exactly where it wants them:  firmly under government control, but not on the government’s balance sheet.  They can be used to further public policy goals without interference from shareholders or private owners, at a time when the government has few similarly powerful direct levers to work in the economy.

So the question essentially should come down to this:  what is the rush to alter the current structure?  With many trillions of outstanding MBS under their guarantee, and a combined market share exceeding 70 percent now, a great deal of the housing market’s immediate and near future health seems likely to ride on the two companies and the market’s faith in their guarantees on the securities.  And the only way to guarantee that for the moment, it seems, is through the continued support of the current system, however creaky it may be.

The Financial Times piece summarizes a series of potential paths the Administration could choose.  Having spent many hours over the last year with colleagues in the progressive policy sector trying to develop a workable successor model, I’m skeptical of their chances for success in the short run.  I look forward to working with them, and hope that something durable and workable can emerge.  But mostly I’m anxious that politics and theory are not allowed to trump pragmatism when it comes to the question of timing.  Rushing to a solution merely for the sake of having one is not the right path.

Read more...

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