Microfinance Practice: Re: [MFP] RE: The Equal Credit Opportunity Act / USA

Daniel,

I have found really interesting your analysis of what was happening with the housing finance debacle and some of the underlying issues. However, I have observed the Washington, D.C. scene up close for a number of decades, and I would take issue with one of your closing observations:

"There are many reasons behind the collapse of the company [i.e., Fannie Mae] and the US mortgage market generally, but government mandates to serve minorities and the poor were not among them."

About two years ago I read a report that of the ten richest counties in the United States, seven of those counties were around Washington, D.C. This seemed puzzling, because:

a. The Washington, D.C. area is not really an important industrial center,

b. Most "big finance" is in New York,

c. The arts and culture are centered in New York and Los Angeles (not to denigrate the contributions of many other parts of the country, e.g., Nashville),

d. The centers of the "Cyber-economy" are spread around other areas, including much on the West Coast, and

e. Much agricultural production and processing are centered elsewhere, e,g,, also much on the West Coast.

Around the same time, I read (on MSNBC, I believe) that Merced County,California (where I come from) was of the ten worst places to live in the U.S., apparently (as I recall) owing to the unemployment rate, the percentage of mortgages in arrears, and the percentage drop in home prices.

At the risk of oversimplifying, it appears that all the "rent-seekers" and parasites flock to the D.C. area and live high on the hog as they suck up the life blood of the American taxpayer! Of course, my definition of the "parasites" and renter-seekers includes not just the "usual suspects", e.g., the corporations and the labor unions, but also academia, "civil society" (e.g., NGOs), seekers of corporate tax loop holes, petitioners for subsidies for "unconventional power", and so many of the others who insist that they are promoting or tweaking this government/GSE mandate or that "relief" or tax expenditure only because they are looking out for our best interest. (Please note that I am loathe to include the hardworking government professionals in this list, although there continues the push for the "political appointees" to get a sheltered "GS-type" slot.

Keep up the good work, but some of us old guys may at times remain skeptical of some of the conclusions.

Del

----- Original Message -----

From: danrozas@yahoo.com

To: MicrofinancePractice@yahoogroups.com

Sent: Wednesday, February 19, 2014 6:13 AM

Subject: [MFP] RE: The Equal Credit Opportunity Act / USA

Replying to several questions raised in the discussion. Hopefully might provide some clarity, though to be sure, the topic is awfully complex and hard to deal with short email postings...

First, on the infamous Alt-A: yes, "liar loans" (which required little or no documentation of income, assets, or both) would very much fall into this category. In general, Alt-A is a catch-all category that includes all kinds of risk profiles, but its key distinguishing feature is that Alt-A borrowers had to have reasonably high credit scores. In Table 3 of the blog, you'll see the breakdown: only 1% of Alt-A loans are marked as "bad credit" (FICO score < 620), whereas >50% of subprime fall in that category. Indeed, the average FICO score for Alt-A was in the mid-700s, which is above the national average.

Regarding credit quality: this gets a bit more complicated. The argument isn't that Alt-A loans were worse than subprime, though during the height of the crisis they were nearly as bad. The trouble is that this was -- at least at Fannie Mae and among many other banks/investors -- unexpected. Prior to the crisis, the performance of Alt-A was only slightly below that of "prime" loans (i.e. good credit history and no special risk features). In the data I had available when writing the analysis, the delinquency rate of Alt-A loans in Fannie's portfolio in Sep 2007 was 1.4% vs. <0.4% for prime (Fannie Mae didn't disclose prime separately, so I had to extrapolate). Bear in mind that by that point, the mortgage crisis was already ~10 months old. The gap in performance was far smaller prior to this. Unfortunately, I haven't seen any publicly-disclosed figures prior to that time, though my personal recollection is that the delinquency for Alt-A loans was in the range of 0.6% or so prior to the crisis vs. <0.2% for prime. So, from a strictly risk management perspective, it wasn't the high delinquencies themselves that were the issue, but the fact that they were so unexpected for this portion of the portfolio. Arguably, one should've seen it coming, but that's another discussion...

In terms of outreach to minorities & the poor: it's not as though Alt-A had no minorities or poor people represented -- pretty much any loan pool would include some minorities & poor. But in Alt-A, these groups were UNDER-represented compared to the overall portfolio, so that buying Alt-A loans made it actually more difficult for Fannie Mae to reach its "housing goals" -- the government mandates for serving marginalized groups. And yet, it was these Alt-A loans that made up the largest share of losses at the company, at least as of Dec09.

Perhaps the saddest part of the commentary is the outcome of the loans that explicitly targeted the minority & marginalized groups -- products essentially developed to meet the minority lending targets set by regulations. Were these high-risk loans? Yes. But they were significantly smaller share of portfolio (in part also because the loan sizes were smaller), and their risk was well known and priced-for. But the most important factor is that these loans -- while they served people with poor credit and often had low downpayments -- didn't feature the kinds of risks common to subprime & Alt-A. These were mostly fixed rate loans, no "exploding ARMs," no interest-only, full documentation of income, and so on. Their performance, while certainly problematic, was better than subprime, and actually on a similar level as Alt-A. The tragedy is that on the street, the borrowers who qualified for these loans were so often steered into the subprime product instead, at the expense of the borrowers, but to the benefit the mortgage brokers, the subprime lenders, Wall Street -- i.e. the whole poisonous chain...

Ok, so this is long enough for a post. For those interested, you'll find a lot of data in the blog (here it is again: http://www.danielrozas.com/housing/2012/06/11/affordable-housing-goals-and-the-collapse-of-fannie-mae-debunking-the-myth/). Just to be clear -- I'm no apologist for Fannie Mae and the mistakes it made, which were many. But I think it behooves us to learn the right lessons, and not those that happen to fit convenient political preconceptions. There are many reasons behind the collapse of the company and the US mortgage market generally, but government mandates to serve minorities and the poor were not among them.

Daniel

---In MicrofinancePractice@yahoogroups.com, <DFitchett@...> wrote:

    It would be interesting to know how the definition of "conforming loan" (i.e., mortgages which conform to certain standards and requirements in order to be eligible to be purchased by Fannie, Freddie, Federal Home Loan Bank, Farmer Mac and other GSEs) may have changed over the last twelve-fifteen years.

    For instance, currently the FHFA's maximum conforming loan size for a single family unit is $417,000, except for about 60 or 70

"Metropolitan Statistical Areas, Micropolitan Statistical Areas and Rural Counties" in the Continental United States, Alaska, Hawaii, Guam and U.S. Virgin Islands,where maximum conforming loan limits for mortgages acquired in 2014 by FHFA agencies may exceed $417,000, and go up to $625,500.      ( http://www.fhfa.gov/Default.aspx?Page=185 )

    In "Alice in Wonderland" isn't there a line from the Queen about words meaning what she wants them to mean?

Del

----- Original Message -----

From: Normand Arsenault

To: MicrofinancePractice@yahoogroups.com

Sent: Tuesday, February 18, 2014 11:32 AM

Subject: RE: [MFP] RE: The Equal Credit Opportunity Act / USA

For your information:

WELLS FARGO EDGES BACK INTO SUBPRIME AS US MORTGAGE MARKET THAWS

CNBC News - 14 Feb 2014

http://www.cnbc.com/id/101417200

WELLS FARGO EDGES BACK INTO SUBPRIME AS U.S. MORTGAGE MARKET THAWS

REUTERS - 14 Feb 2014

http://www.reuters.com/article/2014/02/14/us-banks-subprime-insight-idUSBREA1D07820140214

Subprime lending is back in the US. To avoid the taint associated with the word "subprime," lenders are calling their loans "another chance mortgages" or "alternative mortgage programs."