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Grant Case
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I’m going to address both Chris Whalen articles. Let’s start first with the ZeroHedge article. In the concluding paragraph it has the following: "To really appreciate “too big to fail,” you must first and foremost understand that it is a political concept that springs from a sense of liberal privilege and entitlement. Conservatives generally oppose TBTF and advocate market based outcomes for banks, large and small." I would argue with vigorously that TBTF and outcroppings such as TARP came from insiders and powerplayers then from a liberal vs. conservative view. While Mr. Whalen was a proponent of allowing bond holders to take haircuts - I remember watching him on CNBC discussing Washington Mutual, it was the bastion of those who held power on both sides that brought TARP and codified TBTF. Many on the far left and far right wanted to see the process play out but it was those that stood the most to lose - those in the higher echelons of both parties that won the day. So let's drop the argument that TBTF was somehow a liberal policy. Mr. Whalen mentions Geither in the article saving Citigroup, but it was Henry Paulson, the Treasury secretary under a Republican president was its main architect to codify where we stand today. There is plenty of blame to go around in both parties, but it’s all concentrated in the power bases. Now to the HousingWire article's thesis – I tried to break it down into the following elements: Non-bank institutions in the mortgage industry (servicers) will have issues with earnings because: * 1. “The cause of the subprime crisis was securities fraud – not the violation of consumer rights” and regulators are not focusing on this point. * 2. Because regulators are focusing on consumers they do not see servicers first approach is to keep customers in their home and because of this they are getting mis-characterized. This creates more regulation, oversight, and overall ill will towards servicers. * 3. If servicers do everything right, it still may not be possible to satisfy the doctrinaire liberals that populate the CFPB and state regulatory agencies The result is which: * 4. Banks will not transfer loans to "high touch" servicers * 5. Banks will not lend to lower scoring (700 and below) FICO scores because the regulatory environment is such that they cannot get an exit through a foreclosure. * 6. Secondary market prices for non-performing loans in states like MA, CT, NY and NJ are typically among the lowest in the nation because of the regulatory regimes in these states. * 7. Profits for non-servicers will be continued to be challenged due to regulatory complexity Let’s take these one-at-a-time: 1. Agree. Securities fraud + greed + poor underwriting brought about the subprime crisis not the violation of consumer rights. However, unless we are talking about the Fed, OCC, or NCUA; the CFPB and state regulators role and responsibilities align either completely or more in line with constituents not to broader principles such as Safety and Soundness. In that sense, a NY regulator has less regard for what occurred so much as who it hurt and how they can stop it from occurring again. 2. Agree. However, I think the point Adam made was that when the paper was written and released 2008 – 2010 that particular approach was not being followed by all servicers at that time. Unfortunately, there may be some great servicers out there but due to the reckless and illegal actions of others the entire industry gets hit. As you may remember, it didn’t matter in 2008 if you had a “fortress” balance sheet in banking; every bank got whacked in the stock market and thus the same thing happened here. The actions of bad actors colored the entire industry from a regulatory standpoint and thus brought this regulation. 3. Again I will skip the political comment and jump to my point. It is not the role of the regulator to ensure that servicers can stay in business. It’s the role of the regulator to ensure that all actors are playing fairly. The industry had bad actors and thus everyone received new regulatory rules. If servicers cannot satisfy those requirements then perhaps they need to charge more of their bank customers or change their business model. 4. I’ll flip the question on this. Why as a regulator would I want an entity that is not the bank servicing these loans? The ZeroHedge article talked about “liberal” despising “small town business ethic”. I would say if indeed regulators are trying to keep banks servicing loans it would have more in line with small town or community lending then the outsourced, dis-intermediated version prevalent in large banks today. While a servicer may have the ability to help work out the loan more easily. I can make the argument that it’s better that banks own the entire process; in much the same way that community banks do, a process that Mr. Whalen has discussed favorably. 5. This argument holds only about 2 cups out of a 5 gallon bucket of water. The reason banks are not lending down below 720 has to do with an entire recalibration of risk models across the industry, higher down payments, the entire secondary market drying up, asset price instability, and NOT whether or not you can foreclose on someone in 180 vs. 390 days. Banks got hit hard by both losses and increased regulatory capital requirements neither of which was impacted greatly by the speed of a foreclosure so I dismiss this argument almost completely. 6. Agreed. I cannot find anything to dispute this particular fact. However, unless I am concerned from a standpoint of safety and soundness as a regulator why should I care whether a bank can get top dollar from a foreclosed home when they should not have made the loan in the first place? You can make the argument that lower secondary market home prices are not good for the rest of the neighborhood and community and that would be a fair argument. My rebuttal would be that slower speeds to sell may be helping ensure that market supply is restricted and thus buoys price. 7. Again, it’s not the role of any regulator to support an ancillary, bank support business (loan servicing) business model. It’s the role of the CPFB and state regulators to focus on the health of the consumer while it’s the role of the Fed, OCC, and NUCA to focus on the health of the financial institutions. No entity’s charter says anything about ensuring the servicer business is viable. We can say unequivocally that securities fraud was indeed a part of the sub-prime crisis, but consumers were impacted by bad actors within the mortgage servicing industry during that time as well. Due to this, those regulators that are focused on consumer interests more intently chose to exercise their regulatory powers and thus ALL servicers face new regulation. Whether or not the servicing industry can survive those changes can only be addressed by servicers and their clients.
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Mar 30, 2014