Why Regulators Can't Permit Black Swans To Exist....

Black Swan:
Regulatory Perspective

Just in case you missed it, there was an article in the April 24, 2013 edition of the New York Times which said much , indirectly, about why the federal government needs to be out of the mortgage lending guarantee business; and also, that if the federal government remains "on the risk" in the mortgage business why "Black Swan" financial services players, especially credit unions, are sitting ducks - and more likely dead ducks. The title of the article was "Down Payment Rules Are At Heart Of Mortgage Debate" and the journalist was Peter Eavis.

Senior economist (a certified Robusterian*) and policy advisor for the Federal Reserve Bank of Boston Paul S. Willen was quoted for the "we-know-better-than-you" theoretical elite:   "If our goal is to prevent foreclosures, I can't think of anything more effective than requiring a down payment".  (* see "robust"... meaning "written by an idiot".)

Dealing with the facts
... and the truth.

The counter argument - that down payments do not significantly reduce the rate of default on properly underwritten loans - was voiced by Professor Roberto G. Quercia, Director of the Center for Community Capital at the University of North Carolina at Chapel Hill.  

Mr. Willen had his august title, position, and sense of self-importance to bolster his opinion; Professor Quercia had the data and the facts on his side. (But as credit unions know from experience, sometimes the facts are only an inconvenience to a federal regulator.)

As the NYT article described, Quercia had, since 1998, been studying and tracking  the performance of a large group of mortgages in a special program for low-income borrowers, typically those with a low or no down payment.* From 1998 through last year, 5.5 percent of the mortgages ended up in foreclosure.  Sub-prime mortgages made during the last housing boom, regardless of down payment size, had far higher foreclosure rates, roughly 25%.  Losses to borrowers in the study group which had made a 20 percent down payment were lower at 3.9%, but not significantly lower when the loan was carefully underwritten. *(For the record, those loans with little or no downpayment were charged 1/2 to 1% more to compensate for the implied extra risk, which proved to be more than adequate to cover the slight increase in losses.)

So, what's the point...

Headline Miracle....

From the front page:

" LOCAL MAN SURVIVES FATAL CRASH"

                               - The News Herald

(Why it's worth following hometown newspapers...)

From The Field....

"He tried to cover up the issue with a slight of hand..."

(Now the way I see things a "sleight of hand" is when you get tricked; a "slight of hand" is when you get slapped...  I have some experience with both.)

Mortgage Reform.... Politics

"What problems?"

Stale Mates?

Sure you feel that this has gone on way too long with little result. Sounds a bit like the current state of our National political system - much talk, much arguing, much posturing, but not much movement nor progress ....

Let's try one more shot at seeing if we can agree on reform:

         The State Of The World As We Now Find It! 
                            (.... and yes, "life is not fair".)  

1. Borrowers love and prefer 30-year fixed rate mortgages.  OK? 
2. 30-year fixed rate loans are a dangerous "investment" for a financial institution due to IRR.  We witnessed what can happen if you "book" lots of them with the S&L Crash. OK?
3. Most prudent institutions, therefore, sell excess 30-yr fixed mortgages to Fan/Fred, which in theory have the sophistication to evaluate, monitor and guarantee the mortgages purchased, relying upon rating agencies, economists, and honest mortgage brokers to assist. OK?
4. Fan/Fred are "bankrupt", because "things were not as they seemed" in the mortgage market . Many of the players in the mortgage process were not honest - including some individual borrowers and perhaps some credit unions. OK?
5. The collapse of Fan/Fred and the subsequent conservatorship of both by the FED, has left the U.S. taxpayer as the only available buyer of 30-year fixed rate mortgages. The FED is "the market". OK?

   

   "Countrywide Federal"

6. It is difficult if not impossible to change human nature. You can not legislatively "reform" dishonesty, greed, nor stupidity - even with 2,200 pages of mandates.  OK?
7. In 2013, nothing has really changed from the mortgage lending processes of 2008 except "the innocent"(borrowers and lenders!) are now being punished and penalized for the sins of the guilty - with more punishment waiting in the wings. 
    
8. Unchanged, we are primed to repeat the

   

   We're on the same track...

   errors of the past; and, as many of you have pointed out ( Dennis Moriarity has usually been the most brutally accurate and succinct.) tremendous financial and political forces are aligned and fully-funded to make sure the status quo survives.  OK?

If this is the state of the world as it is, there appear to be two realistic shots at reform...

Mortgage Reform.... Complexity

Lots of detritus
being slung around...

Well, there have been some really great comments (particularly the ones I agreed with!) posted over the last three days. Thought it might be good to stop at this point and sort through some of that detritus (which is just a fancy word for... well never mind.)

Reform:
A-maze-ingly Difficult ! 

Quite often "reform" - which by the way is a synonym for "change" - gets waylaid, derailed, and defeated by the introduction of multiple, inconsequential or extraneous "concerns" - called "piling on" !!  Adding complexity always makes reform more difficult. Trying to solve just one problem is tough enough; trying to simultaneously solve several problems, geometrically explodes the degree of difficulty.  In which case, you usually end up with nothing - no change - or with a 2,200 page piece of legislative detritus which is worse than nothing !!  Comprendez?

Here's my list of the "Top 10" bits of detritus from the last few days...

Mortgage Reform..... The "Fix" Is In !

We're not that far apart on this,
are we ??

Well, let's take this little discussion of  regulatory overreach one more round. Every institution which originates mortgage loans is holding its breath for the "OMG-what-will-it-be-next" catalog of rules from the CFPB.  

Not that the CFPB is to blame. After all, the CFPB did not create the outrageous arrogance of Dodd-Frank, it is simply tasked with writing the rules to implement that arrogance.  Perhaps while fuming, we should not overlook the true culprit  by mistakenly "shooting the messenger" - at least not in the mortgage lending arena.... 

So, what would you say is "the true culprit", "the real root cause" of the recent mortgage madness which triggered the financial meltdown? The scope of this financial collapse was so large, that there are acres of opinions, oceans of accusations, and mountains of manure in which we can all wallow. There's plenty of guilt to spread around.  

We need to better
"police" the financial markets !!

The overarching arrogance of Dodd-Frank is that its supporters evidently believed they could properly identify, logically address, and legislatively correct all those myriad sources of financial mis- and malfeasance which led to the 2008 Crash.  And, what a masterpiece they put together in just 2,200 pages !  Dodd-Frank is a testament to delusional self-righteousness, fueled by a self-assuredness bordering on disdain.

And, Dodd-Frank's greatest fault is it missed the mark completely, it overlooked the entirely obvious...

Black Swan ?? ... Look In The Mirror !

You're causing problems...
Because you're different....

Well, I had lined up several more mortgage pieces for this week, but the comments from yesterday - particularly Doug Ferraro's - give me pause.  Hope you will go back to the 4/22/2013 blog and take a look at those comments.

First, Doug is one of the "best minds"('course that may not be saying much!) in the credit union movement and is the CEO (pretty young one at that,  for all you "Gen-Whatevers"!) over at Bellco CU in Colorado.  Doug, in his comment, goes through a litany of "it wasn't us", "we're being unjustly penalized" and over regulated for sins we did not commit leading up to the 2008 Crash .  CU's did not yield to the irrational, anti-consumer, mean-spirited predatory lending thievery prior to 2008, yet....

Sure, everyone claims they
are "different"...

The penalties of excessive regulation being imposed on us are going to "kill off" most, if not all, of the credit union movement. Why? Because our small size and non-traditional, "one-on-one", direct, personal, service and concern does not meet the traditional, Dodd-Frank, CFPB, NCUA "knows-it-all-but-understands-nothing", "we look foolish and inadequate, but admit no responsibility"  punitive regulatory "Hail Marys" being  implemented.  (Ran out of adjectives, but guess you get the point...)

The "bad guys" created the problem; the "bad guys" must be regulated; the "bad guys" are the only ones who can afford to implement the new regulations... so who wins ???  - "the bad guys"....

Mortgage Reform.....Practices

One can only fear that Congressional reforms to Fannie Mae and Freddie Mac - when and if ever adopted - will improve U. S. mortgage lending practices as much as Dodd-Frank has improved U. S. banking practices....


For all who despise "regulation", some quick advice:  "GET OVER IT !!"...  Unless you can say with a clear conscience and a straight face, that the 2008 collapse of the U. S. financial markets was just an accident, just one big misunderstanding... (if you believe that, better quit reading right now!)

A joke ?
The "tea-hee" market ?

Happen to be a great fan of "free markets": but if what has occurred since 2008 is the "free market in action", then "free markets" are a catastrophic joke.  But, before you start heaving "teabags", one other thought : If a market is to be free,  that market must also be fair.

The Ponzi Pigs Free Market!!!

Our financial system leading up to the 2008 collapse was not a free market, because it was not a fair market.



Here are eight mortgage practices which must be proscribed if we want to return to a free market in the U. S. :

Dancing In The Rain...

Would you care to dance ?

"Life isn't about waiting for the storm to pass...

it's about learning how to dance ecstatically in the rain."

From the Field...

Chewed to pieces...
Bleeehhh !!

"We've worked hard to get the word out to everyone and the information has been widely decimated within the branches..."

(... disseminated ???)

Unauthorized Withdrawals.... Using Bad Language !!

Safe and noun...

Might as well tell you one more tale about a classic, credit union "unauthorized withdrawal" event. Yesterday it was the inagile, "can't-quite-keep-up-with-the-pistol", helmet head; today it's the inappropriate use of bad language.

CU branches which serve university communities always deal with a group of highly-educated, and often exotically eccentric, members.  It usually takes an equally exotic and equally eccentric CU branch staff to meet the service expectations of such a diverse member base. 

Thought Full...!!

We have quite often found that our staff in such branches are the spouses or "significant others" of grad students and doctoral candidates - working at the CU to financially hold the family together, until those advanced degrees are completed.  Many of these staff members have already earned advanced degrees in their own right - and are very savvy, intense, sophisticated folks!

Well, our story begins late one afternoon at the university branch, when a young man jogs into the office sporting a pastel-blue jump suit, Reeboks, and a NY Yankees baseball cap. He approached the counter and proceeded to hand one of the tellers a note...

Haiku For You

Still Warm

Soft night memories,

A chocolate strawberry,

Bluebirds in a tree.

A Black Swan....

Beavers really should understand
"tail risk" !

Despite the exquisitely accurate and devastatingly convincing efforts of Nassim Taleb, the tyranny of false prophet economic risk analysis is alive and well; and, the financial stability of the U.S., therefore, remains "statistically at risk". Dangerously, there appears to be a fanatically dogmatic, econo-terrorist "sleeper cell" of  "propheteers" embedded and still beavering away within the Duchy of Duke Street.  (Credit unions beware !!)

If you're not familiar with Mr. Taleb, you should pick up a copy of his book "The Black Swan" which was first published in 2006,  just before the collapse of the U.S. financial system.  In the book Mr. Taleb correctly predicted the crash and handed the "economics as a mathematical certainty" crowd their heads in a hand basket, even reducing "the once sainted" Alan Greenspan to the point of looking fumblingly foolish.  (Bring any person or Agency to mind ?)

As one commentator said:  "Taleb is the real thing.  He rightly understands that what brought the global banking system to its knees isn't simply greed or wickedness but... intellectual hubris." (Bring any person or Agency to mind ?)

So, what is a "black swan"?...

From The Field...

Congratulations ! You Won !

"Really like the new low-cost life insurance products. They're going to be a great benefit to the members and they're an easy "sale".  Been telling members that the monthly premium is about the same cost as a lottery ticket; but the insurance is better, because if you live long enough you'll always collect ! They seem to like that idea !"

... "if you live long enough you'll always collect".... 

(H-m-m-m... may need to think through that one a little bit...)

Foolish Thoughts.....

Foolish folks look out at the ocean and can't imagine the potential beyond the horizon... nor think of the complexity below the surface waves...... nor see beyond the end of their "knows"!     Can you still be amazed ?

"Here comes the Sun..."                          


                  

Rules To Live By...

Got that ?

Remember this one important fact:

If your parents do not have children, neither will you.

Run, Credit Unions, Run....

"UNITE FOR....
     
    ..... GASPS,
                ..... GROANS,
                   .... GRIMACES,
                           
     ....... FOR GOOD!"

... AND FOR KIDS !!!
(... NOT "KID" GOATS, REAL KIDS !!)

From The Field...

That's spelled potatoe
with an "e" !

"Got invited to the first annual, county-wide Spellig Bee for Scholarships competition.  We quickly demonstrated we were "numbers people" and didn't make it out of the first round."

( Yes, can clearly see that....)

Bad Economics .... Enough Of This SIRRT !!!

M-I-C-K-E-Y  S-I-R-R-T !!!

Know you're tired of talking about something as obscure and obtusely silly as the Supervisory Interest Rate Risk Threshold (SIRRT) ratio; but  it is a regulatory Bushmaster - of unknown origin - now pointed threateningly at the heart of every credit union .  

Welcome to the "Newtown" NCUA!

SIRRT is now the vital
" bottom line"
at NCUA !

As you will recall from the 4/2/2013 post, SIRRT is the new delusional ratio made-up by  the NCUA to determine the "threshold" at which CUs develop an acute case of "heightened interest rate risk".  What NCUA has determined, if we cut directly to the chase, is that the "heightened" IRR threshold occurs when the average CU has more than 10% of its assets in mortgages and investments with a maturity > than 5 years - which is patently absurd from any objective, historical or statistically honest interest rate risk perspective. 

Absolutely embarrassing, but also quite frightening when the ratio is wielded so indiscriminately, like a regulatory Bushmaster, by The Unaccountables !   

But where do the  NCUA senior examiners (at least in the infamous Region 3), get "vital"charts like these?  Where does this "stuff" come from?

NCUA SIRRT-ified !!!

Take a close look at the heading on the last chart. These are official rankings by none other than those colorful "Alexandrine Robusterians*" at the NCUA "OCE" !! 

Better known, far and wide, as the....

From The Field....

Branch "orientation"
session...

"Ashley joined us last month as our newest employee - right out of school, no prior experience. That terrible "stomach bug", which has been making the rounds, hit the branch with a vengeance mid-month. Ashley was basically put in the infamous "sink or swim" situation."  

"I'm pleased to report that Ashley knows how to swim."

( A new leader is born... ! )

SIRRT II ..... Risky Business.

Silly WildAss Guessing

Talked a little last week about the Supervisory Interest Rate Risk Threshold (SIRRT) ratio which was created - apparently out of thin air - by "we can't tell who" at the NCUA. 

SIRRT is a seriously silly measurement which would be of little harm if credit unions didn't have to take the NCUA seriously - but we should and most of us try to do so.  SIRRT again is simply a credit union's mortgages + investments with a maturity greater than 5 years divided by the credit union's net worth.

In the Federal Register (Vol. 77, No. 22 - 2/2/2012, pg. 5158), NCUA has this to say about the numerous objections that CU commenters made about SIRRT: " The comments on the SIRRT ratio overlook the fundamental reasons for reliance on the ratio.  Net worth is the reserve of funds available to absorb the risks of a credit union, and it is therefore the best measure against which to gauge the credit union's risk exposure. A credit union where the SIRRT is at or over 1:1 is exposed to IRR at a heightened level."  "NCUA therefore concludes that the SIRRT ratio effectively partitions risk."

Bull Chip!!

NCUA is making stuff up in the above public statement... "fundamental reasons"... "best measure"...."at or over 1:1 is exposed to IRR"... "at a heightened level"... "effectively partitions risk." Three comments about NCUA's faux analyses (you can say it, but it don't make it so !); it's 1) not true, 2) it's amateurish, and 3) it's scary because a) NCUA is unaccountable for its silliness, b) these are the very same folks who missed on the Corporates and bankrupted the NCUSIF, and c) look how SIRRT is being used "out in the provinces" by NCUA examiners...

Please note this is an "official" NCUA
presentation slide recently shown in NC !!

  
Want to guess what one of the key ratios was in determining "RISKY STATES" ... that's right SIRRT( you catch on quickly!).

Say What ?? (D-NJ)

Say What ?? (R-NJ)

           

Do Cory Booker and Chris Christie know that NCUA has unilaterally declared NEW JERSEY "THE RISKIEST STATE IN AMERICA"??

And is this the real reason that........

"Here We Go Again" ....

Gives me the Willies,
just thinkin' about it...

Sounds like a good intro line for a country song doesn't it!  But that's not where we're headed....

Remember that little GAC brouhaha about "illegal investments" for the National Credit Union Foundation (NCUF) through Members Trust and "The Faz" saying stuff went out of the NCUA national exam office over his signature all the time about which he had no idea... Ha, Ha, Wink-Wink, Ho, Ho !!! (See 2/27/2013 post).

Nah, folks don't remember it because "stuff" gets swept under the rug these days when it comes to the Agency and no one seems to be "watchdogging" the follow-up story - a role which use to be handled by our trade associations....

As you'll recall from the 2/27/2013 post, Tom

Unite for Goats !!

Walker, CEO of Members Trust, had clearly done due diligence in spades with NCUA, to create this wonderful investment  vehicle for NCUF charitable endeavors. 
One of those "Unite for Goats" good news stories which CUNA has "themed-up" for 2013 !!

The capstone to Members Trust's research was the regulatory approval (see 11/3/2011 email) from Mr. Lance Noggle of the Office of the General Counsel (OGC) at the NCUA.... but evidently - a year and a half later - the NCUA OGC's own, in-house opinion wasn't good enough for The Faz!

Well, thought, why not just go to the source - Mr. Lance Noggle - and find out what the truth really is about the legality of all this?  But, ran into a little problem; guess where he is ...