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Wednesday, June 18, 2008

Friends of Angelo and Dodd/Frank

First, I want to house clean some unintended misinformation that has been floating in the media. It has been reported that Chris Dodd received a VIP loan from subprime lender Countrywide. While Dodd has confirmed he received a VIP loan, it is highly unlikely it was a sub prime loan. Countrywide has multiple divisions and along with their sub prime division they also have a prime division. It is much more likely that Dodd received his VIP loan from their prime division.

Now then, I have held off on commenting on this developing fiasco because frankly, I haven't known what to make of it. (a first on anything related to mortgages) First, Dodd's explanation that while he knew it was a so called "VIP loan", he didn't know that meant a break in rate is ludicrous. What exactly did he think the VIP treatment was getting him? Frankly, if he didn't know what the VIP treatment was getting him he should have asked.

I believe that investigations must occur. There are several power players from each party that have been caught in the net of this scandal. Folks like former HUD Secretary Alphonso Jackson received these special VIP loans. It is simply unacceptable and downright dangerous for so many powerful people to receive special favor from entitites that they have oversight responsibility.

Dodd, for his part, is chairman of the Banking Committee. He is currently trying to bring legislation to the floor to significantly alter the landscape of the mortgage market. This piece of legislation is a terrible idea in my opinion. It is an estimated $300 billion dollar bailout. It not only bails out the borrowers but to some extent the lenders as well. More than that, it is the tax payer, and mostly the good borrowers, that are ultimately stuck with the bill.

What this bill will do is transfer about $300 billion of the most troubled mortgages from the portfolios of banks and onto the portfolio of FHA. FHA is a government entity and insures billions of loans. Thus, ultimately the tax payer is insuring these loans. In many cases, loan amounts will actually be lowered in order to make them affordable. In other words, borrowers that simply overbought will be bailed out with loan amounts that are smaller and more manageable. The government justifies this by saying that the borrowers will have to split the equity when they sell with FHA. Of course, this is pure nonsense because these borrowers currently have no equity to begin with. Half of $50,000 is still better than zero, and giving an irresponsible person new found equity is a moral hazard of the worst kind.

Banks will be able to unload billions of bad loans. Yes, many times they will have to accept lower loan amounts, but in fact, this is almost always a victory nonetheless. If they had to foreclose they would likely still receive less and that was only after months of legal wrangling. This bill is a bailout plain and simple.

Worse than that, it is a bailout for every entity that DOESN'T deserve it. Both irresponsible borrowers, that borrowed more than they could afford, and irresponsible lenders, that created irresponsible programs, will receive bailouts. This bill is a disaster in the making.

Fortunately, the revelation that Dodd received preferential treatment offers folks that want to see sensible solutions to the crisis an opportunity. Dodd's VIP loan creates the appearance of impropriety. While there is of course no direct evidence that he crafted this bill as a result of the cozy relationship he had with Countrywide, it is certainly a question that is unresolved.

There is absolutely no way he can be allowed to craft important and controversial legislation while these questions remain. First and foremost, all good folks must demand that this bill be tabled while an investigation occurs.

We are talking about a bill that will cost $300 billion. There is absolutely no way that it can be allowed to move forward while there are legitimate questions about the motives of its main sponsor. Only years later, the public is finally aware that George Soros had a deep hand in pushing campaign finance reform, and the f527's that the law created have played into his hands.

We potentially have a similar situation again only this time the public knows beforehand of a potential conflict. There is simply no way that the bill should be allowed to move forward until a proper investigation is made and the public must demand it.

2 comments:

Anonymous said...

You obviously have more info on the nuts and bolts of the pending legistlation than I. And I agree that everyone who rec'd a VIP loan from CW should have their loan files audited for compliance and compared to what was offered to other similar borrowers at the time those loans were originated. I heard that Dodd rec'd 4.5% fixed rates on both his primary and secondary residences. These rates both seems extraordinarily low for 30 year fixed rates, even if they were closed at momeent when rates reached their lowest point.

Where we diverge is on the 'bailout' plan. As a surviving mortgage broker on the front lines day in and day out, I can tell you that there is NO liquidity for anything over $417k in the market. The recent FHA increases to max loans is helping a great deal. We're eating up inventory..both REO and resales, as a good clip and this activity is firming up the low end of the market in terms of values. But the middle of the market is in ruins. As long as the new legisaltion adds liquidity to the Jumbo market, especially in areas that are NOT considered high cost areas (like AZ, for instance) I'm all for it.

mike volpe said...

If he received a 4.5% rate then he absolutely needs to be investigated because that is outrageously low and that rate is almost certainly a set up for a quid pro quo.

I am also a surviving broker on the front lines, and I agree that the market for anything over 417k is terrible, however raising the limits on FHA in order to create liquidity in those mortgage balances will solve one problem and create others. I don't know if it will create liquidity but even if it does, it will also create a whole new market for bad loans.

Whatever loosening in liquidity will occur, it will only be temporary because the new loans are also bad loans. These folks will go bad on their loans and it is only a question of when. Whatever liquidity is created is temporary until these folks fall behind again.