Unintended Consequences

Filed under: Market Comentary

Over the past several years we have seen the regulators scrambling to “fix” the US housing market with all sorts of plans and stimulus and new regulations.

It all started in 2008 when then Fed chairman, Hank Paulson (former Goldman Sachs Chief), was at the forefront of the negotiations for combining the nations too big to fail banks to help keep them afloat.  The newly combined banks were then given amazing sums of money to help them stay liquid so they could continue to lend, and more important help avert a total collapse of the US economy.

Since then we have seen a steady stream of attempts to repair the economy.

We have seen the government throw huge sums of money at loan modification initiatives (HARP, HAMP, HOPE, insert your favorite acronym).  There are endless reports and piles anecdotal evidence that loan modifications have been a long painful process that rarely results in a loan modification for the home owner (See NY Times, U.S. Loan Effort Is Seen as Adding to Housing Woes, Peter S. Goodman, and National Mortgage News, Servicer Blames Delays on FHA Guidelines, by Kate Berry).  Arguably the worst stories are that banks have no ability to help the struggling home owner that is current on their mortgage and all other bills, and for that very reason they have zero ability to get any kind of loan modification.

What ever happened to all the funds that were allegedly given to banks so they could not only modify many of their grossly upside down mortgages, but also give out some principal reductions.  Being in the mortgage business, I talk to home owners every day that are in varying levels of distress.  I know of nobody that has received a principal reduction through a loan modification process.

Then there is the Frank Dodd Act which has legislation to reform mortgage origination.  There is absolutely no question mortgage reform was needed.  But what we got put new limits on what loan originators can make on a loan, but that only regulates the very beginning of the life cycle of a mortgage.  The act did nothing to limit what the l bank can stack into their margins or what money is made in the secondary markets.  The mortgage reform portion of the Frank Dodd Act, which was rolled out in April of this year, has already proven to cost the consumer ~17% more in closing costs than before the Act.  For the same time period many of the banks are reporting very healthy profits for their mortgage divisions.

Then you have the new government agency put in place to essentially oversee Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA).  Last week there were reports that the FHFA Office of Inspector General (FHFA-OIG oversees the FHFA, which oversees Fannie and Freddie, huh?) was investigating the details of a deal put together, by FHFA, between Fannie Mae and Bank of America in which BofA paid $1.3 Billion dollars to Fannie Mae for $127 Billion worth of distressed mortgages BofA sold to Fannie Mae.  Yes, BofA reportedly paid approximately one penny on the dollar to rid its books of $127Billion in bad mortgages.  Thanks to FHFA that is now the US taxpayers issue.

Each of these attempts to revive the economy somehow turned into a huge win for banks, but helped a relative few US tax payers.  This truth is the seldom talked about shift in the American psyche from the mentality that banks are good and we, the US population, will do anything to make good for them, to the banks being the spoiled, overly coddled chumps that the US population will gladly stop paying.

The unintended consequence of many of the Federal stimulus programs is a huge shift from “I would be more likely to stop buying food than not pay my mortgage” to “why make my mortgage payment a priority when the banks have already been paid to take the loss.”

The Fed’s might need to fix this problem before they will make any significant ground toward healing the economy… and a few jobs wouldn’t hurt either.

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