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| We're not that far apart on this, are we ?? |
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.
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| 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...
Because the real culprit, the root cause of the mortgage madness and the resultant financial collapse is none other than the 30-year fixed rate mortgage! No other country - developed or otherwise (except Denmark!) - underwrites mortgages with this sort of absolute financial lunacy. (Most countries use a 5-year ARM.)
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| Mortgage Russian Roulette ! |
Well, over 90% of all the 30-year fixed rate loans being made today ( and all of the bad ones from the past being held by the bankrupt twins - FanFred) are being guaranteed by you, me, and Ben Bernanke! Feel good about that?
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| The new CEO of "Countrywide" !! |
Dodd-Frank in about a half page could have ended this financial insanity by simply eliminating the federal government guarantee of any fixed rate loan with a term over 15 years. With no "Uncle Sucker" available to "back" the financial insanity, local financial institutions would have to make fair, consumer focused ARM's. Just like institutions do in every other country in the world !
Shared interest rate risk between lender and borrower, local origination, local underwriting, local ownership, local servicing of the mortgage - and local accountability and responsibility for both the credit risk and the interest rate risk.
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| Don't Worry !! We'll "fix it" !! |
The "fix" was always in at Fannie and Freddie. Now with the complete federalization of the U.S. mortgage market - we're really "in quite a fix" with the GSE's, don't you think? And, Dodd-Frank fixed nothing....
As they say: "If we ain't broke yet, don't fix it".... and the Country will be shortly.
7 comments:
Absolutely correct about the 30 Fixed Mortgage and the ticking time bomb current Fed policy is creating. What does Ben The Magnificent think will happen when the investors in current 30 mortgage paper get hit with the massive losses to their investment when hyper-inflation that Ben is laying the ground work for with his Fed policy. Maybe Dodd-Frank II?
Thank you for your observation about 30 year mortgages. However, there are good reasons for an active secondary market in mortgage paper.
Thy to make locally made and held mortgages to your members even if properly underwritten and adjustable and see how the Duke Street Mafia responds!
Your blog this morning was excellent in pointing out that we had a regulatory created problem and that we try to fix with and new and more complex regulatory solution. Rube Goldberg would have a field day with one of his cartoons about the lunacy of this situation.
Everyone that participated in the mortgage foolishness of the early 2000 has something to own up to.
We never ask people to own their part of the problem. No recovery can be made until you understand the role you (not specific to you but the global you) played in the problem.
Humans are instinctive being by nature. They have the unrealistic assumption that the can control their environment and never experience pain or loss, yet it is these institutions and tools that people put their faith and trust into that fail them and bite them in the ass when they think they have discovered the philosopher's stone. All financial manias start with the group chant: "This time it is different!" It never is and we seduce ourselves into believing a false narrative that we can get something for nothing. People are considered fools that warn against the bubble. Recommending prudence is never looked upon with favor in the face of a mania!
We fail to understand the moral lessons of Aesop's fables. When the grasshopper fiddled and did imprudent things instead of acting in a prudent manor, he was told by the ants to go back to your fiddling around and see how that serves you! Only in the modern PC version do Ants take the grasshopper in. PC will be the end of this great nation just as it has destroyed all other great nations.
Our institutions like Fannie and Freddie failed us because we asked them to do things that they were not designed to do. Once they were prudent packagers of investment grade mortgages. We demanded that they reduce their prudent standards. We forced the mania to start!
Demanding reform is not the total answer. Demanding that we conduct ourselves in a prudent manner would work better. PC is forcing all manner of imprudent behavior which will cause the decline of this great nation.
Demanding people practice prudence will go a lot further to correcting the problem than establishing a CFPB. Don't make me go all Joseph Shumpeter!
So I do have to ask and I suppose you have anticipated this and are ready for it "Why is Europe and their fi's in such a mess? I mean if they don't do 30's shouldn't they have weathered the problems and be looking down their nose at us? I do agree with your assertion about 30's being problematic in certain circumstances and if the culture changes and suddenly it's ok to vacate your contractual obligations cause the guy on the billboard said so. I used a VA 30 year to pay for our home and in the 360 periods never missed a payment cause in my mind I had an obligation and I was scared of the missus all 122 lbs of her. Most of my neighbors paid their 30 years mortgages too without default. But what about Europe? I think its deeper and goes to a process that changed and suddenly said its ok to screw your lender cause the guy on the billboard....
In a very stable interest rate environment where the 30 year coupon is enough to cover the underlying investment, there is nothing wrong with the 30 year mortgage. This type of interest rate assumption worked well from the 30's to the late 60's. Your VA loan was not at the high in the early 80's because you would have refinanced the mortgage several times on the way down. Our next financial crisis will happen once the Fed is forced to raise rates. Someone is holding an investment that is becoming worthless with each up tick in the interest rate. Jim's description of the toxic nature of a 30 mortgage is a accurate description of an investment relationship of massive wealth destruction.
It was 7% and the mortgage was made in 1973. Just saying if you have a dinged up ethic and no problem screwing the holder of a mortgage you will do it. With that kind of ethic if you think the value isn't there you will walk away no matter what the length of the mortgage is because thats the way the new world rolls. It aint right but that is the NEW morality. And if someone says "thats just business" I will puke into my computer.
So you were part of the problem in the late 70's and early 80's for many credit unions that brought investment grade bonds that went underwater. Bet if rates went down in 74 to 5% you would have refinanced.
Gonna have to explain that last one...????
....also see reference on "Complexity/Detritus"....
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