DoJ to S&P: How dare you rate our mandated securities so highly, or something

posted at 8:01 am on February 5, 2013 by Ed Morrissey

In other words, no good deed goes unpunished.  The Department of Justice filed a lawsuit against credit rater Standard & Poor’s yesterday almost five years after the collapse of the housing bubble nearly destroyed the financial sector.  The DoJ blames S&P for giving mortgage-backed securities (MBS) unreasonably high ratings, which allegedly misled investors into believing them to be a safe bet:

The Justice Department sued Standard & Poor’s Ratings Services late Monday, alleging the firm ignored its own standards to rate mortgage bonds that imploded in the financial crisis and cost investors billions. …

The government was seeking penalties of more than $1 billion, another person close to the talks said, which would be the biggest sanction imposed on a firm related for its actions in the crisis.

S&P officials also were rattled that the government was pushing the company to admit wrongdoing that could leave it more vulnerable to pending or new lawsuits by investors.

If that isn’t full of hypocrisy and irony, there’s also this:

S&P said Monday that it “would be wrong” to contend that its ratings were “motivated by commercial considerations and not issued in good faith.”

This lawsuit is breathtaking in its hypocrisy.  After all, S&P didn’t issue mortgage-backed securities and insist that the housing bubble could go on forever.  The MBS blizzard came from the two GSEs, Fannie Mae and Freddie Mac. Congress authorized them to securitize the paper they bought from lenders in order to encourage riskier loans to buyers who otherwise wouldn’t have qualified for home loans. And that was motivated not by normal regulatory concerns or “good faith,” but by political considerations and a desire by both Democrats and Republicans to conduct social engineering rather than regulate rational markets.

It was Congressional intervention, not S&P, that fueled the irrational demand on both sides of the lending markets.  People bought houses they couldn’t afford, took out home equity loans on equity that never really existed, and lenders shoved money into the hands of people who couldn’t even establish that they had an income (remember No Income Verification-No Down loans?). S&P and other rating agencies may have erred in rating these bonds as highly as they did, but the Congressional intervention behind the GSE-issued MBSs left everyone with the very distinct impression that the government would stand behind these bonds.  And guess what?  They were correct.  In the end, Congress bailed out Fannie and Freddie.

This lawsuit is just an attempt to shift blame away from the real culprits: Congresses from 1998-2008.  Why? Because if Washington DC can blame the ratings agencies instead of the bond issuers and their enablers inside the Beltway, then they can circle back around again and start distorting the lending markets for their social engineering.  Plus, it’s not a bad revenge for that credit downgrade in August 2011, either.


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steebo77 on February 5, 2013 at 10:25 AM
The banks can’t lend if they can’t sell the loans. Let that sink in.
In my 13 years owning and running a mortgage company, the government never forced me to make a loan to anyone.
voiceofreason on February 5, 2013 at 11:05 AM

The government was buying the loans for the most part (or private institutions which had government guarantees to do precisely what happened).

I’ve also heard other mortgage dealers say they were “pressured” by the government.
This was one of the points of the community reinvestment act.

gwelf on February 5, 2013 at 11:21 AM

F+F still are buying mortgages with abandon.

To the libs – you can believe what you want – the facts are against you. The dems wanted to handout – the GOP wanted to push house ownership. What occurred was predicted well in advance by conservative economists who eventually got the Bush administration to realize their predictions of system wide default for F+F were coming. But alas Dodd and Frank were too beholden (bribed) by a few mortgage originators (Countrywide)to allow that news to go out. Someone earlier upstream noted the roll the dice comment. Facts are strange things.

S&P rightly noted that the paper and the CDOs were essentially backed 100% by the Fed govt – the gold standard in security. And as Ed notes, they were correct.

I have no love for S&P but lets face it – they played the game as the politicians wanted because free money for most of them (every democrat and a majority of the GOP) is how the system worked. Was it S&Ps job to say the US Govt was in danger of default? That is the question – and would anybody have listened to them. When they noted that the US debt is no longer as secure as we might like, they were lambaseted for playing politics -and perhaps they are. But perhaps they have noted that the game is changing and that the govts and central banks are no longer in charge – the global bond market is making the bribing of the voting public by our elected “public servants” (please let me gag on that one) a more expensive enterprise.

We are currently being saved by the Euro and the fact that China needs us to remain solvent to allow them to prop up their own ailing economy. Once China decides they cannot do that – they are done. They have no way to force payment and no way to prevent us from acting in our own interest as militarily they cannot stop us. It would be over quick. I would hate to be in their box.

Zomcon JEM on February 5, 2013 at 11:23 AM

And knowing that you had ready buyers in the GSEs for 1/3 to 1/2 of your loans freed you up to make more loans of lesser quality, correct?

steebo77 on February 5, 2013 at 11:23 AM

steebo77 on February 5, 2013 at 11:23 AM

I had buyers for all my paper, AAA to DDD. What’s your point?

voiceofreason on February 5, 2013 at 11:38 AM

voiceofreason on February 5, 2013 at 11:38 AM

1) The increased liquidity in the conforming loan space, provided by the GSEs, enabled lenders to make other loans of lesser quality and to make more of them.

2) You sold all of your loans. Doesn’t that make you just morally equivalent to the “banksters” you decry? You said you made loans in the DDD area – do you know how your lower-quality loans performed after you sold them?

steebo77 on February 5, 2013 at 11:41 AM

steebo77 on February 5, 2013 at 11:41 AM

You’re understanding of the industry is severely flawed. Liquidity in one class of loan has no bearing on the liquidity in another class of loans.

CRA loans were a small percentage of prime loans. Prime loans didn’t start the delinquency crisis which led to the overall crisis. Subprime and Alt A loans is where the delinquency crisis started.

As for my loans, they were all underwritten and documented to guidelines set forth by the investors (or I couldn’t originate them in the first place) because of this, and the fact that I played zero part in the securitization process, NO I WAS NOT the equivalent of the banksters I decry. Suggesting that is a very poor reflection of the so called knowledge you have of the industry and crisis.

voiceofreason on February 5, 2013 at 11:49 AM

You’re = Your. lol

voiceofreason on February 5, 2013 at 11:51 AM

voiceofreason on February 5, 2013 at 11:49 AM

So would you say that the government played no, little, moderate or a heavy role in the securitization of these loans?

Or is it just a coincidence that the securitization of these loans created the means for accomplishing a liberal public policy and was facilitated and guaranteed by government backed institutions like F+F?

gwelf on February 5, 2013 at 11:55 AM

It’s ironic – hypocritical as Ed pointed out -for the same liberals who decry the massive profits these fat cat banksters made to then support a party and president who bailed them out.

gwelf on February 5, 2013 at 11:57 AM

You’re understanding of the industry is severely flawed. Liquidity in one class of loan has no bearing on the liquidity in another class of loans.

That’s preposterous. Increased liquidity in the conforming space means you don’t have to carry conforming loans on your books all that long. This frees up capital for you to use in originating loans of other classes.

CRA loans were a small percentage of prime loans. Prime loans didn’t start the delinquency crisis which led to the overall crisis. Subprime and Alt A loans is where the delinquency crisis started.

And those subprime, etc., loans were fueled to a certain extent by lenders’ ability to put more capital to use in loan origination, thanks to the GSEs’ purchases of conforming loans.

As for my loans, they were all underwritten and documented to guidelines set forth by the investors (or I couldn’t originate them in the first place) because of this, and the fact that I played zero part in the securitization process, NO I WAS NOT the equivalent of the banksters I decry. Suggesting that is a very poor reflection of the so called knowledge you have of the industry and crisis.

voiceofreason on February 5, 2013 at 11:49 AM

But you originated loans of dubious quality (even if it was at the behest of specific investors), which investors may or may not have sold, or securitized and sold. Explain how selling loans and securitizing and selling loans are fundamentally different? You knew full well what was going on with the tranching and rating, correct? Yet you made loans of dubious quality anyway. You contributed to the problem, no?

I could easily make a case (and it would probably convince most of your OWS cohorts) that you were nothing but a small-fry bankster.

steebo77 on February 5, 2013 at 12:01 PM

No, it doesn’t. You’ve just been so brainwashed into thinking this that you don’t even know how to debate it. You’ve just accepted it on faith.

Hilarious!

blink on February 5, 2013 at 11:49 AM

Liberals think that markets are unregulated unless the government isn’t trying to engineer outcomes.

Markets contain within themselves most of the regulation that is required for them to run well and to the benefit of all those involved in them. If we had a free market there may have been a housing bubble/crash but it wouldn’t have been as severe and most of the bad actors would have gone bankrupt (and those who didn’t would have lost all credibility in the market).

Liberals would rather look to more government solutions like Dodd/Frank rather than let bad actors in a market reap the whirlwind.

gwelf on February 5, 2013 at 12:03 PM

US went down…Texas went up!

workingclass artist on February 5, 2013 at 12:05 PM

If we had a free market there may have been a housing bubble/crash but it wouldn’t have been as severe and most of the bad actors would have gone bankrupt (and those who didn’t would have lost all credibility in the market).

gwelf on February 5, 2013 at 12:03 PM

And what’s more, the markets would have recovered, returning to more rational levels of valuation, had it not been for all of the government intervention and monetary manipulation post-crisis.

steebo77 on February 5, 2013 at 12:06 PM

S&P rated that GSE debt highly because it contain an implicit government guarantee that had been priced into their bonds for a very long time. In other words, the politicians said the taxpayers wouldn’t have to bail out these companies, but the markets didn’t believe them and had no reason to. And the markets turned out to be right.

Now that the GSE’s have been bailed out, the DoJ is saying that S&P should have rated them as stand alone companies rather than the private profit, public risk enterprises they were. If S&P had done that, then the GSE’s never would have been able to borrow at distorted and favored rates, and would have had to compete directly with truly private secondary lenders. That would have rendered the government’s involvement essentially useless and they would have been privatized, as they should have been long ago.

But the politicians would no longer have huge finance companies as sources of patronage, campaign cash and power. So they said nothing until their greed and stupidity killed the GSE’s along with the market itself. Now they’re abusing their power again to place blame on others for what they did.

RadClown on February 5, 2013 at 12:07 PM

gwelf, the government played zero role, other than a massive absence of oversight of those who do, in securitization. Securitization is done by the investment banks.

CRA loans represented a small portion of all fannie/freddie loans. CRA defaults in and of themselves would not have brought down the global economy.

Before the crisis, the majority of originations were done by non banks who weren’t affected in any way by CRA “pressures”.

The crisis started with defaults in subprime and Alt A loans. Banks didn’t originate these. And non bank originators couldn’t have originated enough of this paper to cause dire circumstances without the fraud of calling this paper AAA when it was CCC. An act that non bank originators had nothing to do with.

voiceofreason on February 5, 2013 at 12:12 PM

gwelf, the government played zero role, other than a massive absence of oversight of those who do, in securitization. Securitization is done by the investment banks.

voiceofreason on February 5, 2013 at 12:12 PM

What about GNMAs, Agency MBS and CMOs? Those are all securitized pools of mortgages issued by the government or its sponsored enterprises.

steebo77 on February 5, 2013 at 12:18 PM

blink on February 5, 2013 at 12:09 PM

I signed buy back agreements. I was on the hook for every and any loan that didn’t meet guidelines. And to the tune of the full face value of the loans plus costs. As such, all of our loans were underwritten in house as well as underwritten by wholesale lenders/investors.

voiceofreason on February 5, 2013 at 12:18 PM

Because Moody’s executives maybe bundled some donations for sleazy Democrats, perhaps?

MNHawk on February 5, 2013 at 9:12 AM

Probably a bit of that, but more maintaining the fiction that US Treasuries (ObamiNation edition) are worthy of a AAA rating.

Steve Eggleston on February 5, 2013 at 12:21 PM

steebo77 on February 5, 2013 at 12:18 PM

The GSE’s, like lenders, pool the loans for securitization. The actual securitization is done by investment banks. It’s up to the investment banks to do their due diligence and to represent the securities accurately. They and the ratings agencies didn’t do that.

And let me reiterate, the delinquency problem didn’t start there. It started in subprime and Alt A. CRA paper was too small a market share to cause the meltdown.

Don’t get me wrong. I’m not a fan of CRA or anything “artificial” being foisted on any market. Having said that, the blame for the crisis cannot be laid on CRA paper.

voiceofreason on February 5, 2013 at 12:26 PM

gwelf, the government played zero role, other than a massive absence of oversight of those who do, in securitization. Securitization is done by the investment banks.

CRA loans represented a small portion of all fannie/freddie loans. CRA defaults in and of themselves would not have brought down the global economy.

Before the crisis, the majority of originations were done by non banks who weren’t affected in any way by CRA “pressures”.

The crisis started with defaults in subprime and Alt A loans. Banks didn’t originate these. And non bank originators couldn’t have originated enough of this paper to cause dire circumstances without the fraud of calling this paper AAA when it was CCC. An act that non bank originators had nothing to do with.

voiceofreason on February 5, 2013 at 12:12 PM

So you’re claiming that F+F and other psuedo-governmental institutions had no role to play in securitization in general? Or were implementing policies that correctly lead rating agencies to conclude that the government would bail them out?

It was all just greedy banksters and F+F were innocent fall-guys. And it was a massive coincidence that all of this was implementing a liberal redistribution policy.

gwelf on February 5, 2013 at 12:31 PM

Finally…..another scapegoat.

buh bye S&P…..AND…..McGraw-Hill.

Can you imagine the $$$$$$ we’re talking about in the losses of 2008-2009?

http://www.foxbusiness.com/industries/2013/02/05/government-unveils-civil-charges-against-sp-mcgraw-hill/

PappyD61 on February 5, 2013 at 12:35 PM

blink on February 5, 2013 at 12:23 PM

I stated that clearly. Over half of the originators pre-crisis weren’t affected by CRA. And that goes to support the position that CRA wasn’t the primary cause of the meltdown.

blink on February 5, 2013 at 12:19 PM

Of course it depends on the loan(s) being discussed.

Fannie/Freddie used to require 660 credit scores and up. They used to require written confirmation of job and income. They used to require sourcing and seasoning of sizable down payments. When these requirements are all met, it’s AAA paper.

When one is originating loans that don’t require proof of income, proof of a job, source and seasoning on down payments or down payments at all, and these loans only have a 580 credit score “anti”, you have paper that clearly isn’t AAA and could easily be CCC or worse.

This wasn’t GSE class paper. It was subprime and Alt A paper.

voiceofreason on February 5, 2013 at 12:37 PM

gwelf, fannie and freddie paper didn’t have the implied guarantee of the Federal government until after the crisis began. Just look at any GSE based mutual fund prospectus. The securities were not backed by the full faith and credit of the US government. That only happened after the crisis started. And it shouldn’t have btw. That is not an out for the ratings agencies or investment banks.

voiceofreason on February 5, 2013 at 12:41 PM

The GSE’s, like lenders, pool the loans for securitization. The actual securitization is done by investment banks.

voiceofreason on February 5, 2013 at 12:26 PM

Yet there would have been no securitization of those mortgage pools without the owner of those mortgages (the GSEs and the Treasury) asking that it be done.

Furthermore, Treasuries, Agencies, and Agency MBS are all exempt securities according to the SEC. Therefore, the due diligence process differs significantly from that of other securities.

steebo77 on February 5, 2013 at 12:43 PM

gwelf, fannie and freddie paper didn’t have the implied guarantee of the Federal government until after the crisis began.

voiceofreason on February 5, 2013 at 12:41 PM

Traditionally they traded at a very low spread over Treasuries (maybe 15 bps pre-crisis), so gwelf isn’t wrong about the market generally believing there was an implied guarantee. At the height of the crisis, before government support was made virtually explicit, the spreads got as wide as 270 bps or so. After the implicit guarantee was re-implied, the spreads narrowed down to 10 or 20 bps. Now Agencies are trading right on top of Treasuries, due to support being made explicit. Certain issues and maturities are even trading more expensive than Treasuries.

steebo77 on February 5, 2013 at 12:46 PM

gwelf, fannie and freddie paper didn’t have the implied guarantee of the Federal government until after the crisis began. Just look at any GSE based mutual fund prospectus. The securities were not backed by the full faith and credit of the US government. That only happened after the crisis started. And it shouldn’t have btw. That is not an out for the ratings agencies or investment banks.

voiceofreason on February 5, 2013 at 12:41 PM

I agree that the ratings agency shouldn’t have issued the ratings they did but I don’t think it’s unreasonable for them to imply that they would eventually be backed by the government (they were after all, and it’s not a leap to think the government would bail out institutions they steered and were implementing their policies).

You’ve also never addressed the comments and links posted by northdallasthirty earlier in the thread. Do you deny that F+F was implementing liberal policy? And that they were a major if not the major player in securitizing loans? Are you saying that the bubble/crash wouldn’t have been different at all if GSE’s didn’t exist?

gwelf on February 5, 2013 at 12:50 PM

Bottom line is this:

The government got increasingly involved in the mortgage game, cannibalizing much of the prime space. This, in addition to things like the CRA and other government pressure to make lower-quality loans, pushed private lenders/investors into the subprime, etc., space. Classic example of crowding out. Securitization of these lower-quality loans pretty much followed the example previously set by the GSEs. Securitization was nothing new.

steebo77 on February 5, 2013 at 12:51 PM

Question: would mortgage lenders have made so many subprime loans if the GSEs weren’t in control of so much of the prime loan space?

steebo77 on February 5, 2013 at 12:55 PM

Related question: would investors have purchased so many securities backed by subprime loans if the Federal Reserve, state and local governments, government pension funds, etc., weren’t buying up most of the higher-quality instruments in the market place?

steebo77 on February 5, 2013 at 12:56 PM

gwelf, fannie and freddie paper didn’t have the implied guarantee of the Federal government until after the crisis began. Just look at any GSE based mutual fund prospectus. The securities were not backed by the full faith and credit of the US government.

voiceofreason on February 5, 2013 at 12:41 PM

I think you have the terms “implicit” and “explicit” confused. Backing by full faith and credit is an EXplicit guarantee. The nature of the IMplicit guarantee, which has pretty much been there ever since the government stopped explicitly backing the GSE’s, is the assumption that the government’s not going to allow those companies to fold, no matter how much trouble they get into.

And guess what: THEY WERE RIGHT. Into fully half of an eleven trillion dollar mortgage market? No problem, bro! Bundling 70% of those into securities? Think naught of it! Oh, you’re insolvent? Here’s 300 billion dollars to tide you over. Getting delisted from the NYSE? Feh, we’ll just sue em when we get done with S&P, I’m sure.

The Schaef on February 5, 2013 at 1:08 PM

gwelf, the government played zero role, other than a massive absence of oversight of those who do, in securitization. Securitization is done by the investment banks.

Wrong.

Page 3
Fannie Mae and Freddie Mac fund the purchase of mortgages they securitize by selling the resulting MBSs to investors in the capital markets. An investor who buys a mortgage-backed security guaranteed by one of the GSEs will be paid the principal and any interest that is due even if borrowers default on the underlying loans.

This is ALL on Fannie and Freddie. Every last bit of it.

The crisis started with defaults in subprime and Alt A loans. Banks didn’t originate these. And non bank originators couldn’t have originated enough of this paper to cause dire circumstances without the fraud of calling this paper AAA when it was CCC. An act that non bank originators had nothing to do with.

And what, exactly, were Fannie and Freddie doing?

Page 23 – 24

Their charters require Fannie Mae and Freddie Mac to provide ongoing assistance to the secondary mortgage market and to promote access to mortgage credit throughout the nation, including for low- and moderateincome families and residents of central cities. Subsequent legislation, the 1992 Federal Housing Enterprises and Financial Safety and Soundness Act, required the Department of Housing and Urban Development (HUD) to establish affordable-housing goals expressed in percentages of total housing units financed by Fannie Mae and Freddie Mac.

Since then, regulators have set annual targets for all mortgages and, beginning in 2005, separate goals for home purchases (as opposed to refinanced loans). Those goals apply to low- and moderate-income families (defined as those with income at or below an area’s median income), families who have very low income (no more than 60 percent of the area median), and underserved areas (generally census tracts with large percentages of low-income people or minorities). Since 2001, slightly more than half of the loans purchased or guaranteed by the GSEs have counted toward those goals. Regulators have also set targets for mortgages on affordable multifamily rental housing, expressed in fixed dollar volumes for low-income renters overall and for low-income renters living in poor neighborhoods. In pursuit of those targets, Fannie Mae and Freddie Mac purchase mortgages on multifamily rental properties—which account for about 10 percent of the housing units they finance—and issue multifamilyhousing MBSs.

But wait, there’s more!

In order to achieve government-set housing goals, the GSEs employed increasingly lax underwriting standards that contributed to their increased exposure to risky debt. However, by enforcing less-strict standards and investing in subprime securities, the GSEs made it easier for those with poor credit scores to obtain mortgages, thereby aiding them in reaching their affordable housing goals.

The GSEs’ underwriting standards did not become more lax because of a lack of government regulation. Rather, the government pushed the GSEs to lower their standards in order to increase the availability of home mortgages for low-income Americans. The government first urged lenders to help low-income individuals get home loans when Congress passed the Community Reinvestment Act of 1977. This Act was passed in response to growing concerns that lenders were not providing loans to individuals from certain neighborhoods and encouraged lenders to lend to individuals with poor credit to assist them in purchasing a home, regardless of his or her creditworthiness. This government pressure continued to grow, particularly in the 1990s. For example, a 1992 federal law required that a “reasonable portion” of the GSEs’ mortgage purchases support low-income individuals seeking to buy a home. Over time, that gentle urging was transformed into government-set quotas promulgated by HUD, requiring that a certain percentage of the mortgages that the GSEs purchase were made to the “underserved population.” In 1996, the quota was set at 40%, and it continued to rise until 2008 when it reached 56%. Many commentators have argued that through these regulations, the government was promoting lower lending standards. The lower standards made it possible for nearly anyone to get a mortgage, even individuals with poor credit histories and little income. Therefore, the increased access to home ownership helped the GSEs reach their affordable housing goals—in 2004 nearly 63% of Americans were homeowners.

Others contend that these goals gave the GSEs an excuse to deviate from prudent underwriting standards so that it could take advantage of a more profitable but high-risk segment of the housing market. Between 2005 and 2007, 57% of the mortgages acquired by Fannie Mae were characterized as subprime (because borrowers had FICO scores of less than 620). Over this same period, 61% of the mortgages acquired by Freddie Mac were characterized in this same way. As of June 2008, Fannie was liable for $619 billion worth of subprime and Alt-A loans, while Freddie was liable for $392 billion. As of August 2008, the GSEs held or guaranteed a combined total of over $1 trillion in unpaid principal balance exposures on subprime loans.

And guess what? They were also buying up OTHER peoples’ MBSs to re-sell.

The GSEs’ venture into the “private-label” MBSs—i.e., securities typically issued by Wall Street investment banks—resulted in their over-exposure to nonperforming real estate mortgages that ultimately lead to their bailout. In the early 2000s, the GSEs began purchasing private-label MBSs in addition to their own continued issuance of MBSs. Traditionally, private investors invested more heavily in private-label MBSs. However, the GSEs gradually became significant purchasers of these securities, grabbing 40% by 2004. Consequently, when the securities plummeted in value, the GSEs suffered significant losses.

Now, Obama puppets, tell us; why, exactly, would S&P NOT rate anything that Fannie and Freddie securitized or resold as 100% good when it is backed by the full faith and credit of the US government?

So what your screaming ignorant child Obama is doing here is sueing people for actually trusting the government.

Which means that he and his Obama Party, his desperate lying Obama Party base, misrepresented the value of these securities to the market.

This is where the lies of the Obama become pathetic. But not nearly as pathetic as the desperation of his supporters.

northdallasthirty on February 5, 2013 at 1:14 PM

steebo77 on February 5, 2013 at 12:43 PM

And there would not have been a mortgage industry… Securitization isn’t evil. Fraudulent securitization is.

steebo77 on February 5, 2013 at 12:46 PM

When a prospectus states the securities are not backed by the full faith and credit of the U.S. Government, gwelf is wrong.

As for spreads, before rampant fraud, the spreads started at 75 bps and went up from there.

steebo77 on February 5, 2013 at 12:51 PM

This is a counter intuitive statement. The lower underwriting standards of CRA paper would be reason for borrowers to migrate away from the higher cost subprime paper. Why would anyone go subprime if the government is giving away the same loan at a lower rate?

Subprime isn’t evil either. It is when it is priced close to prime because the quality is fraudulently represented as being close to prime, that it becomes evil.

The allure of subprime paper, from an investor’s perspective, is the higher yield. That is the reward for taking more risk. It has little to do with who and in what amounts prime paper is being purchased.

That is like saying penny stocks are popular because blue chips stocks are briskly selling. There is little correlation.

voiceofreason on February 5, 2013 at 1:19 PM

voiceofreason on February 5, 2013 at 12:41 PM

Umm – that is not true. There were calls on this problem very early in the decade – and even Bush’s WH eventually figured out what was going on – the feds were on the hook for F+F and all the paper they were buying. Did some originators and financiers get them to buy a sucker bet? Yep. In fact they continue to buy paper, albeit not nearly as bad as before. And in doing so they are making conventional loans almost impossible to find. The distortion and collapse of the private mortgage market is complete. If you are young and starting out you had better be FHA compliant – otherwise you will be lucky to find mortgage money anywhere.

Me – I’m old and established – and the banks can’t wait to offer me money – and sell it to F+F. ANd so those with tangible assets just get more, while the folks the dems allege to help get screwed.

Zomcon JEM on February 5, 2013 at 1:22 PM

gwelf, fannie and freddie paper didn’t have the implied guarantee of the Federal government until after the crisis began. Just look at any GSE based mutual fund prospectus. The securities were not backed by the full faith and credit of the US government. That only happened after the crisis started. And it shouldn’t have btw. That is not an out for the ratings agencies or investment banks.

voiceofreason on February 5, 2013 at 12:41 PM

If it were written into the prospectus, then it would have been an explicit guarantee. An implicit guarantee is one the markets believe exists, bur is unstated. The GSE’s implicit guarantee was the reason they were able to borrow at below market rates and have all their debt rated much higher than would a stand-alone private company with the same obligations.

The only MBS’s with an explicit government guarantee are Ginnie Mae’s.

RadClown on February 5, 2013 at 1:25 PM

voiceofreason on February 5, 2013 at 1:19 PM

Remember the heady days, when F+F was buying anything that walked? What would you expect. The GSEs would buy almost anything. They fueled the race to the bottom. Without them, none of this would have happened because the full faith and credit of the US would have only been exposed to the FHA starter market.

Not that difficult – privatize profit and make loss a public guarentee. I’m not sure how S&P misread any of this. Seems they were dead on correct and then didn’t start to hit the US ratings until the congress wouldn’t pass a budget to deal with their books.

Zomcon JEM on February 5, 2013 at 1:27 PM

Zomcon JEM on February 5, 2013 at 1:22 PM

I believe you’re confusing the pre crisis and post crisis mortgage industry.

RadClown on February 5, 2013 at 1:25 PM

I agree on both counts. I stand corrected on the former.

voiceofreason on February 5, 2013 at 1:29 PM

This all about REVENGE for downgrading the U.S. Credit rating, the 1st ever in U.S. history!

easyt65 on February 5, 2013 at 1:32 PM

northdallasthirty on February 5, 2013 at 1:14 PM

Excellent work! Fannie and Freddie always had the implied backing of the Federal government. Many pension funds would not have been able to invest in the Mortgage Backed Securities if they didn’t.

Vince on February 5, 2013 at 1:38 PM

Zomcon JEM on February 5, 2013 at 1:27 PM

Yes agency paper became very lax in the years prior to the meltdown. It wasn’t always that way. What allowed it to be that way was representing this lax paper the same as the paper that was underwritten to original standards. That is where the fraud was, among other places, in securitization. Where was that disclosed to investors? Why was that paper still considered as safe as the agency paper of old? It is up to the investment banks and ratings agencies to fully disclose this. They didn’t and the paper, this and that of lower quality, proliferated around the world.

Let me clarify some points. I don’t believe the GSE’s should be in existence to today. I don’t believe the too big to fails should be in existence today and much of our current economic woe is directly related to the continued existence. Bush, though he didn’t try hard enough, did try to reign in abuses to the cries of the likes of Maxine Waters and Barney Frank. The only purpose my comments are meant to serve is to dispel the myth that the meltdown was primarily due to CRA and and he GSE’s. It wasn’t. It couldn’t have happened without fraudulent securitization and the rubber stamp AAA ratings.

voiceofreason on February 5, 2013 at 1:41 PM

I don’t believe that the DOJ and the Obama administration believe they can win this. It’s all about legacy building and winning elections. Screw the people.

Vince on February 5, 2013 at 1:43 PM

If this is about revenge for a ratings downgrade, then they are playing with fire.
This is probably an effort to prevent a downgrade.

Vince on February 5, 2013 at 1:46 PM

And there would not have been a mortgage industry… Securitization isn’t evil. Fraudulent securitization is.

Never said it was.

When a prospectus states the securities are not backed by the full faith and credit of the U.S. Government, gwelf is wrong.

I think you’re misinterpreting what is meant by “implicit” and “explicit.”

As for spreads, before rampant fraud, the spreads started at 75 bps and went up from there.

Rampant fraud led to elevated Agency spreads? So you’re saying FNMA and FHLMC committed fraud?

This is a counter intuitive statement. The lower underwriting standards of CRA paper would be reason for borrowers to migrate away from the higher cost subprime paper. Why would anyone go subprime if the government is giving away the same loan at a lower rate?

There was a whole nexus of pressures pushing private lenders away from traditional, conforming loans. I only cited a few.

Subprime isn’t evil either. It is when it is priced close to prime because the quality is fraudulently represented as being close to prime, that it becomes evil.

I never said subprime was evil. I was merely pointing out that the market grew out of control only after the GSEs got heavily into the prime market and pushed lenders out of the more traditional space.

The allure of subprime paper, from an investor’s perspective, is the higher yield. That is the reward for taking more risk. It has little to do with who and in what amounts prime paper is being purchased.

I understand the relationship between perceived risk and expected return. What I’m saying is massive government purchases distort the market, pushing yields artificially low on higher-quality securities, forcing buyers to “chase yield” in riskier investment, which in turn carry artificially low yields because of the artificially high demand created by the original government intervention.

That is like saying penny stocks are popular because blue chips stocks are briskly selling. There is little correlation.

voiceofreason on February 5, 2013 at 1:19 PM

No it’s not. The feds and local governments aren’t investing in blue chips, or any stocks for that matter.

steebo77 on February 5, 2013 at 2:15 PM

Let me clarify some points. I don’t believe the GSE’s should be in existence to today. I don’t believe the too big to fails should be in existence today and much of our current economic woe is directly related to the continued existence. Bush, though he didn’t try hard enough, did try to reign in abuses to the cries of the likes of Maxine Waters and Barney Frank. The only purpose my comments are meant to serve is to dispel the myth that the meltdown was primarily due to CRA and and he GSE’s. It wasn’t. It couldn’t have happened without fraudulent securitization and the rubber stamp AAA ratings.

voiceofreason on February 5, 2013 at 1:41 PM

It seems we’re in agreement about the broad contours, but differ as to primary causes and secondary, contributing factors. I do agree that the CRA itself wasn’t primarily responsible, but was emblematic of the larger, primary cause: government distortions of the marketplace. To be sure, fraud played a role, but was more significant in the latter years of the bubble, and was in many ways a response to increased government intervention.

steebo77 on February 5, 2013 at 2:18 PM

No it’s not. The feds and local governments aren’t investing in blue chips, or any stocks for that matter.

steebo77 on February 5, 2013 at 2:15 PM

With a few notable exceptions (e.g., auto bailouts, TARP, some pension funds).

steebo77 on February 5, 2013 at 2:19 PM

Bottom line is this:

The government got increasingly involved in the mortgage game, cannibalizing much of the prime space. This, in addition to things like the CRA and other government pressure to make lower-quality loans, pushed private lenders/investors into the subprime, etc., space. Classic example of crowding out. Securitization of these lower-quality loans pretty much followed the example previously set by the GSEs. Securitization was nothing new.

steebo77 on February 5, 2013 at 12:51 PM

I’ve been in the mortgage industry for 35 years. During the 8 years of (Democrat) Bill Clinton’s pResidency, the percentage of subprime mortgages nearly tripled.

Gotta be some relationship there…

Del Dolemonte on February 5, 2013 at 2:28 PM

Yes agency paper became very lax in the years prior to the meltdown. It wasn’t always that way. What allowed it to be that way was representing this lax paper the same as the paper that was underwritten to original standards. That is where the fraud was, among other places, in securitization. Where was that disclosed to investors? Why was that paper still considered as safe as the agency paper of old? It is up to the investment banks and ratings agencies to fully disclose this. They didn’t and the paper, this and that of lower quality, proliferated around the world.

voiceofreason on February 5, 2013 at 1:41 PM

LOL.

Because it, like the agency paper of old, carried the guarantee that it was backed by the full faith and credit of the US government.

I repeat myself. You are screaming at the banks and the ratings agencies for actually taking the US government at its word that it intended to stand behind its guarantees.

Now, going forward, please state for the record that any and all government guarantees, implicit or explicit, cannot be considered actual and real for investment purposes.

This is what the imbecile Barack Obama and his slumlord puppet master Valerie Jarrett forget: they are suing Standard and Poor’s for taking the US government at its word.

And if it is no longer legal to do that, then the financial infrastructure of this country will implode overnight.

northdallasthirty on February 5, 2013 at 4:00 PM

S&P ought to publically refuse to gave any rating to US stuff from now on, due to the unaceptable leagal threats made by the highest prosecuting officer in the land. That ought to fix the problem coming from lowering ratings honestly.

Don L on February 5, 2013 at 4:05 PM

Does Warren Buffet have an investment in Fitch or Moody’s by chance?

Just wondering.

PappyD61 on February 5, 2013 at 8:17 AM

We don’t have up-do-date numbers on holdings of the fat slob Buffett, but we do know that in the past couple of years he has held up to $72m of stock in Moody’s. We don’t know if he is currently invested in Moody’s.

More interesting though is the fact that the democratics’ favorite Nazi stooge, George Soros, has held up to around a billion dollars worth of stock in Moody’s. We don’t know if he is currently invested in Moody’s.

slickwillie2001 on February 5, 2013 at 4:09 PM

Voice –

I think I better understand your differntiation – I just don’t think it holds – were the GSE ramping up their activity as the crisis moved along – absolutely – and I am not sitting here screaming CRA. But it was a part of it – and when you see “NorthDallas…” very long and detailed response you will understand how I am not going to hold the CRA blameless nor the GSEs. The situation as it occurred could not have happened – and I repeat could absolutely not have happened if the CRA and the GSEs were not in existance. Essentially legitimate underwriting was scrapped for volume and the GSEs and their ownership quotas drove that fact. Were there some who lied to make a quick buck – sure. We always see this in a govt program that becomes way too big to administer and so becomes a target.

I appreciate your attempt to say some were just defrauding a scam at the end. But the conditions were set in place by the Feds and the GSEs and legislation driving their activities.

Zomcon JEM on February 5, 2013 at 5:36 PM

And yes – Obama as you state is doing this for show – its going nowhere.

Which makes you wonder, what shoe is getting ready to drop on the GSEs that is requiring this move in order to innoculate the WH from more of their irresponsible stewardship of this nation’s finances?

They are still essentially insolvant and we are still on the hook.

Zomcon JEM on February 5, 2013 at 5:38 PM

blink on February 5, 2013 at 5:10 PM

First of all chief I was both a lender and broker. Do you know how that impacts the way a company operates? Didn’t think so. And this is germane to the discussion how?

If CRA originations were ignored by half of the origination force which produced the majority of loans, then clearly CRA production could not have been a significant factor regarding the meltdown. And it wasn’t.

I’m a joke? Please clue me into this counter argument that I’m sure has nothing to do with my position that fraudulent securitization was the heart of the meltdown because your attempts at the discussion have been comical up to this point. Shrill, but none the less comical.

As for your erroneous statement that no one called those loans AAA, you have a shred of credibility in that no one called that particular loan AAA. Loans, plural, like that were called AAA when they were pooled, tranched and sprinkled with worthless insurance. All part of the fraud process that caused the meltdown.

Essentially legitimate underwriting was scrapped for volume
Zomcon JEM on February 5, 2013 at 5:36 PM

Right. But these loans could not have proliferated without securitization. Even with securitization, they could not have proliferated without fraudulently rating them AAA. The allure of the toxic paper was the higher yield without the risk. The risk wasn’t apparent due to fraud. It doesn’t matter what the GSE’s wanted in terms of volume. What drove the process was investor demand for higher yielding paper without the associated risk that higher yielding paper requires.

And to reiterate/clarify, prime delinquencies lagged subprime and alt A delinquencies. It was the delinquencies of the latter that triggered the meltdown not delinquencies on prime paper.

voiceofreason on February 5, 2013 at 6:54 PM

Even with securitization, they could not have proliferated without fraudulently rating them AAA.

How is it fraudulent to assign a rating of AAA to a loan you expect to be backed by the United States government, which are then… backed up by the United States government?

The Schaef on February 5, 2013 at 8:41 PM

The liberal flight from reality is complete. They create the CRA which says that if you don’t lend to borrowers you otherwise would rate as risky, because of the high frequency of defaults in the “redlined” areas, that they could veto your business reorganization, merger, and investment opportunities. Narrative: businesses are mean and nasty and ony care about money.

However, now they are arguing that they never needed those sanctions![1] Because those greedy, money-grubbing lenders jumped at the opportunity to “predatorally” lend to the people who could not afford a home because they could sell the bad debt by layering bad loans in an MBS that the government helped to create and popularize with the GSEs and the CRA. And the GSEs would drain the market of bad debt, to keep the plates spinning.

And businesses–greedy MFs they are…USED the structures and markets created by the government (Big Government Solutions!) to make money.

The big question is why did the CRA create the stick, if they never had to use it? Why go out of their way to act like mobsters and dictate what risks a lending institution needs to make, if they never needed it? Doesn’t it speak against the planning and efficiency of Big Government Solutions (BGS) that they would employ coercion as a first measure for something that they never needed to use?

Now, they are saying that the carrots are negligible. They didn’t need the stick AT ALL (the way their spinning it), but now they are saying that they didn’t really employ a carrot either.

That leaves a natural tendency for capitalizing entrepreneurs to move into the risky house loan business all by themselves. That really puts the efficiency of all that was done by BGS in regard to the CRA in question.

That’s right, 20 years of laws just to regulate how bankers make–and resell–bad loans. It’s the greedy finance companies that made and gobbled up the bad loans. The government just needed to stem the tide! /sarcasm[--if only it were that easy!]

Axeman on February 6, 2013 at 10:23 AM

- More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.

- Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.

AJB on February 5, 2013 at 10:38 AM

Thanks for broadcasting how you’ll act if the wheels come off the Affordable Tax-care Act.

Almost ALL of those $20,000/year Bronze family policies will be issued by private insurers. And those that can make money will have made ALL their money off of ObamaTaxCare system. (The greedy b-stards!)

So, it won’t be the fault of the Big Government Solutions, Inc. In fact, you’ll probably use the union methodology of finding anything less than a void of mistakes by management as examples of “mismanagement”.

If I apply heated vicegrips to your scrotum a vast majority of your body will still be pain-free!! That’s what makes that location effective. Bulk stats are useless if applied wrong.

Did you know that 100% of those paying the non-insured penalty will be private parties “choosing” to pay the penalty?! It’s not coerced because they’re not being responsible and paying for the $20K Bronze coverage for their family. They chose to save money, and the government let them! Greedy, irresponsible, pigs!

Big Government Solutions: If we can’t do it, we can find somebody to blame and make them pay!

Axeman on February 6, 2013 at 11:23 AM

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