Sunday, July 11, 2021

Well It Isn't Going To Reset Itself

At the risk of sounding like a broken record, let me tell you a little story.

Starting in 2005 and lasting for four miserable years I was working as a bank manager for two of the larger banks in the country, Chase and then Fifth Third. I loved some parts of the job, helping customers find solutions to issues they were having or working with them on financial planning, that sort of thing. Customer service was always my favorite part and I was very good at it. What I didn't like was the pushing of products, the endless demand to open more accounts, checking or loans or credit cards. Banks back in those days, and likely still today, appeased the investing class by showing certain metrics and one of the most critical was new accounts. It didn't matter if they were good accounts or made sense, it was all about numbers. If I opened one checking account for a customer who would likely be with the bank for a long time, with a significant average balance, I would be chastised for only opening one account. On the other hand if I opened 8 accounts for the purpose of direct depositing seasonal paychecks for girls from Thailand who were temporary resort workers that would never have much money in the account and close them in a few months? I was praised on conference calls for my superior "production". That actually happened.

One new product we were supposed to push late in my career in banking was a simplified refinance product. It was a dumb product from most standpoints and often we were simply repackaging existing debt that was already held by our bank but you could bundle these loans and sell them to someone else, getting a quick profit. There were a lot of loans like that, loans that were never held or serviced by the originating bank and that changes how you approve or deny a loan.

Lending is all about balance. You weigh the risks of the potential loan versus the reward. Number one on the list of considerations is whether or not a prospective borrower will pay back a loan. Historically banks do not want to foreclose on your house, they want you to pay back the loan with interest as agreed. That is the purpose of the credit check and all that paperwork you have to submit. Banks are by nature, at the basic level, a very risk averse beast. Giving someone a couple hundred grand and then waiting to get that money back over the course of the next 30 years is a pretty risky deal, a lot can change in three decades so the underwriting process is designed to weed out people who either have failed to demonstrate they are responsible with loans (your credit score) or people who show signs of being unable to make the payments because they just don't have enough income (debt:income ratio).

By the mid 2000s, this careful balance was starting to skew and risk became less of a factor. Thanks to quasi-government agencies like Freddie Mac and Fannie Mae purchasing mortgages, bundling them and then selling them in the secondary market, it became more profitable for banks to issue lower quality loans. By 2007 if you could fog a mirror, you could get a loan. There were interest-only mortgages, meaning your monthly payment was only covering the interest and not touching the principle and there were less-than interest only payments where not only did you not pay down the principle, you didn't even pay all of the monthly interest so each month your mortgage balance went up! 

Broadly speaking, lots of people who shouldn't have qualified for loans were getting them anyway. People who couldn't afford the loan payments were approved. People who had shitty credit were approved. People with decent credit were getting loans far larger than a prudent underwriter should have allowed. The results were predictable. 

The end result was a massive number of low quality, high risk mortgages and they started to go bad all at once. Like someone flipped a switch, loans stopped. Banks found themselves owning thousands of homes with mortgages that were way under water. Panic set in and we entered what became known as the Great Recession. The government bailed out lenders and others were absorbed by their competitors, further consolidating the world of finance and banking. Most of the country was economically devastated, other than Washington D.C. where people were doing just fine. For some time after the crash, it was far more difficult to get a loan than it was prior to the crash.

It was a painful lesson for many banks and for America as a whole, with the entire economy collapsing for several years. We were just starting to see the light at the end of the tunnel when the coronavirus magically appeared out of nowhere. Funny how that works.

Obviously what we should do in light of the historical evidence of what happens when you make a bunch of loans to people who can't afford them and/or have proven to be irresponsible with credit is to....repeat the same cycle and assume this time it will end up differently*. Enter the regime of former Vice-President Joe Biden...


President Joe Biden’s move to fire the top U.S. mortgage regulator is triggering calls from fellow Democrats to use the agency to expand access to loans for lower-income people, who have struggled to buy homes since the financial crisis.

How would that look?

(David) Dworkin and other housing advocates want FHFA to allow Fannie and Freddie to take on more financial risk — meaning more government intervention backed by taxpayers — in the name of expanding access to mortgages.

Among their ideas: Giving Fannie and Freddie free rein to purchase mortgages with lower credit scores, allowing private lenders to make more of those loans; cutting fees; and expanding investment that supports the construction of multifamily rental properties.

Advocates want FHFA to immediately do away with Trump-era limits on Fannie and Freddie's purchases of “high-risk” loans — characterized as having some combination of low credit scores and high debt-to-income or loan-to-value ratios.

Allowing the companies to purchase and guarantee more of the loans could lead to lenders issuing more of them, which would extend credit to more low-credit-score, low-income borrowers without requiring higher down payments to compensate for the risk. Fannie and Freddie would pick up the tab if the loan defaulted.

The key to all of that is in the last sentence: "Fannie and Freddie would pick up the tab if the loan defaulted." In other words, you will get to pay the defaulted loans of people who should never have been given a mortgage in the first place. How could that possibly go wrong?


Digging a little deeper. David Dworkin is the "president and CEO of the National Housing Conference". His staff appears to have a combined zero years of banking experience, lots of non-profit bullshit jobs but no real world experience. People like Dworkin are just mouthpieces to provide quotes to the media, the real direction comes from the board of the NHC and that includes representatives from the Mortgage Bankers Association, Bank of America and Wells Fargo.

Why would representatives of big banks and mortgage lenders be pushing for more crappy loans? Because the government, in other words you, will pick up the tab for bad loans, not these banks. Wells Fargo and Bank of America would get to lower their underwriting standards and make awful loans to people who shouldn't be getting a mortgage and then wash their hands of the mortgages when they default. Issue a loan, sell the loan to Fannie and Freddie, move on to the next unqualified applicant. Rinse, repeat. 

I understand that this is a little bit inside baseball for many people. What you need to take away from this is the following:

- Banks don't give mortgages to people who have failed to demonstrate responsibility with credit in the past or an ability to repay a loan now. Banks don't want your house, they want you to repay your loan.

- However banks will cheerfully issue mortgages to people who have no way of repaying them and/or a poor history of handling credit if the government will purchase those mortgages and remove the risk factor. It is a win-win for them. They churn out low quality loans and generate income from selling those loans without the mitigating risk of potential defaults. 

Hopefully I am not portraying banks as good actors in this scheme, because they aren't. 

Something I return to again and again is that most of our fellow Americans, Democrats and Republicans alike, view politics in a deeply skewed manner. Most garden variety liberals think that Big Business is bad and we need more government to restrain it. Most NormieCons think Big Government is bad and we need more free markets to prosper. What neither side gets is that Big Business and Big Government are the same damn thing. Big Government loves Big Business because Big Business enriches politicians. Big Business loves Big Government because the dot gov types help Big Business to be more profitable. The last thing Big Business wants are free markets. They want state controlled markets that give them advantages in return for political donations. At Executive Board meetings for the National Housing Conference, non-profit types and corporate shills sit side by side and figure out ways to loot the American tax payer.

We are told that initiatives like using Freddie and Fannie to "help" low income Americans is a matter of "justice" and "equity". The article twice mentions the "the racial wealth gap" as if giving blacks mortgages they can't or won't repay will make them wealthier. How exactly does it increase wealth to have blacks and mestizos getting mortgages that they end up defaulting on, thus making their poor credit even worse? Encouraging them to be responsible with credit? That would help. This won't do anything to help them and in most respects will make things worse. 

What it will do is vastly improve the profit of the major banks and mortgage lenders who will make shitty loans and then dump them onto Freddie and Fannie, and ultimately the American tax payer. In return, these banks and businesses will shower contributions on the politicians who made this windfall possible. As I pointed out before in Everyone Else Should Pay For My Poor Decision Making!, the top leaders in both parties tend to have a lot of campaign cash coming from the financial services sector. If you think that banks and investment firms are giving Chuck Schumer and Mitch McConnell alike millions in campaign contributions without a firm understanding that no matter which party is in power, the banks are protected, then you are kidding yourself. 

You can see the end result of this from where we stand today. It doesn't take a crystal ball, just a modicum of awareness. Lots and lots of crappy mortgages being issued to people who can't handle them. Many or most of those will go into default and the tax-payers will be on the hook, which will be wrapped up into more make-believe money. Of course since "low-income" is often code for "not White", there will be Congressional hearings and legislation to bail out these good folk who got in over their heads through no fault of their own. More money will flow to help keep them in their homes, magical bullshit money printed up out of thin air. 

Something else to consider. What do we know about prices when people suddenly have more money available to spend? Prices go up. The imperfect but still useful parallel is student loans. The average 19 year old couldn't walk into a bank and get an unsecured loan for $50,000. By law the bank would have to take the application but it would be denied as soon as the banker hit submit. Why? Because a 19 year old lacks the income and credit history for that kind of a loan. However if the government is backing up those loans? All of a sudden lenders are happy to shell out unlimited sums of money without worrying about credit-worthiness or if the borrower can ever pay it back. As a result, students don't worry much about price and colleges responded by jacking up tuition year after year. Why? Because they could. 

With a finite supply of homes and skyrocketing lumber prices making new home construction very expensive, we will have a bunch of new buyers in the marketplace looking to purchase homes. This increases demand and that will in turn cause prices to rise even faster. Next will come pressure to intervene in the home construction business to encourage faster construction. We already saw that in the quote from the article: "...expanding investment that supports the construction of multifamily rental properties". "Investment" in this case is a fancy way of saying "tax breaks and government subsidies to build apartments and housing". Groups like the National Association Of Home Builders will certainly support making "investments" as well as making it easier for people to get mortgages. That is where the real power moves are happening. Biden eating ice cream or empty blustering from politicians on C-SPAN? That is meaningless. Where things are really getting done are behind the scenes with regulators, congressional committee staff and lobbyists jockeying for position at the Fed Gov trough, all trying to stick their snouts in the sweet, sweet magical money flow. 

Getting screwed in the deal? Us. Housing prices skyrocketing, inflation spiking. Housing is a huge part of the economy. Not everyone has an iPhone but just about everyone has to have a place to live. 

This is all part of the plan. To enact the Great Reset, things have to be a widespread dumpster fire. People living in a decent society aren't going to live in the pod. What better way to throw a society into chaos than to mess with the housing market that impacts everyone? Not to mention inflation being another tool for the Powers That Be to accelerate the Great Reset, there will be more on that later. 

While sane people look at this move, which not only seeks to replicate the disaster of the Great Recession but to double down, and wonder what the hell they are thinking, it is critical to understand that torpedoing the economy is not an unforeseen effect, it is the whole point. The process of home ownership, perhaps the central pillar of the American dream, has been working for a long time but the goal of Klaus Schwab and the other Great Reset architects is for you to own nothing, live in a pod provided by the government and eat the bugs while the oligarchs live like royalty. To accomplish that, they need to wreck the foundations of home ownership and repeating the 2008 housing crisis looks like a great way to start.


*I assume that the intent is another crash

11 comments:

  1. I'll always remember what both Thomas Jefferson & Henry Ford said about banks! By the way, the biggest joke is the FDIC. Also, I lived through the S&L crisis here in Ohio back in '85. The 60 or S&L's covered under the privately sponsored Ohio Deposit Guaranty Fund had long lines in front of the buildings & they weren't there to a free toaster!

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  2. Add into this the Commercial Real Estate Crisis that has been slowly simmering away and you have the recipe for a complete economic melt down.

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    1. And they keep on building new commercial space while existing space sits empty. That is going to get ugly.

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    2. A company i do work forhas 5 floors of a 25 floor building. They moved in back in 2016 when it was brand new. The other floors gave been empty, never had a tenant. The client has been working from home for a year. Other than the security guards thete are 2 IT guys in that whole structure. Three times over the years they have water lines burst resulting in flooding.
      Yet they are still building the sister tower next door.

      Exile1981

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  3. heads they win, tails we lose.

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    1. The system is rigged against us, the only thing we can do is try to get off the ride as much as possible

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  4. Replies
    1. On that both sides are in agreement, the question now is what happens after the fires burn everything down?

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    2. "money will flow to help keep them in their homes, magical bullshit money printed up out of thin air"

      Meaning home ownership will be gifted onto those least deserving from the standpoint of financial capability and responsibility. How well do you think those folks will care for those properties? Couple this with Obama's "Fair Housing" plan for the suburbs and we will see an infil by those in the Free Shit Army and an exfil by those able to RUN. AWAY. YET. AGAIN. Sooner or later, the cycle of black fight/white flight will hit a finite wall. We're getting close.

      Doc

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    3. Giving them free homes worked out great in the housing projects, you could just sense the gratitude and pride of ownership when you drove through.

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  5. You have it straight up - it's a stimulant straight to the system. There's always a crash.

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