On The Money with Peter Hebert

October 27, 2009

The SAFE Act, the Home Valuation Code of Conduct, Denials, and Absurdities

Filed under: Legislation and Regulation — Peter Hebert @ 4:09 PM

There are a few lessons that can be learned from what happened after the secondary market collapsed in July 2007 and from the Housing and Economic Recovery Act of July 2008, which was the nation’s first address to the subprime meltdown and foreclosure crisis.  One year of non-stop blame shifting and unashamed levels of denial within the financial sector served to misinform the media and elected officials and in turn the general public. This indirect contempt towards the American household and investors in financial sector stocks did not change any of the facts. Wall Street and the too big to fail banks accepted no responsibility from predatory financial engineering to predatory securitization. Capitol Hill, as a result of a skewed and mean-spirited understanding of issues blamed borrowers and mortgage brokers as evidenced by the Housing and Economic Recovery Act.

 Prior to the Housing and Economic Recovery Act, those absurd denials from the financial sector were addressed by the embarrassments of regulatory risk and marketplace risk. Regulators issued an interagency guidance to curb lender enthusiasm for short–term ARMs, prepayment penalties, and Option ARMs. Some predatory products came off of the shelf. And, that regulatory guidance halted stated income and no income loans to curb mortgage fraud, which more often than not had been directed by lenders and real estate agents … not borrowers. But, that guidance did not end the excesses within the financial sector or end customer abuses given that it was issued in September 2006, because it did not cover many lending institutions. Moreover, while it was indeed appropriate, it was far too late. In July 2007, the secondary market stopped buying mortgaged backed securities, because too many loans did not perform and it had become increasingly obvious that continued reckless underwriting  permitted blatant fraud and downright predatory behavior to become ingrained within the lending industry. The actions of the free market addressed what the regulators had failed in doing, which was their job to protect financial institutions and customers. This painful marketplace correction resulted in the Act paving the way to bailout Fannie Mae and Freddie Mac. After the $700 billion Wall Street bailout through the Emergency Economic Stabilization Act of October 2008, the Federal Reserve became the secondary market, which really was not the role per its initial purpose. Foreigners stopped buying America’s mortgage backed securities. They are not dumb. Can you blame them? Everyone at home was told “toxic assets” were behind the problems within the financial sector. And, the too many embedded journalists failed to unravel the mechanics of mortgage fraud and predatory lending in order to cut through the rhetorical nonsense that only served as more disinformation to befuddle the American public and treat taxpayers like idiots.

 Because nationally-chartered banks and Wall Street firms controlled the narrative with the media and Capitol Hill, the Housing and Economic Recovery Act did not hold themselves accountable. Why should they? The financial sector led the charge to draft the long-winded legislation. It held accountable their strategic partners – mortgage brokers and the state-regulated financial institutions. Within the Housing and Economic Recovery Act is the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The SAFE Act requires all loan originators to register with the Nationwide Mortgage Licensing System, which is a good idea. But, the SAFE Act also requires 20 hours of Continuing Education Credit, an exam, and a 75 percent score needed to pass that exam. The SAFE Act is a good idea. But, only licensed mortgage brokers and loan officers with state-chartered financial institutions are required to comply with the training, testing, and passing requirements. Loan officers at the nationally chartered firms were exempted, which is a bad idea. This was just legislative hypocrisy. I can tell you from first hand experience that loan officers at the federally chartered firms are no different from all others. Ask any wholesale account representative after he or she is under sodium pentothal and the truth will come out. Yes, coaching and guiding on the art of structuring the deal did take place. So did other subtle lending abuses. They cared little for small matters like history, which gave way to a host of consumer-oriented legislation starting in the 1960s, a small issue even though such ignorance is why reverse redlining was rampant as alleged in several class action law suits against Wells Fargo, one of the nation’s leading nationally chartered banks. Moreover, the Housing and Economic Recovery Act mistakenly rested on the premise that borrower-directed fraud was widespread. The fact, however, is just the opposite. Industry insiders have an asymmetrical knowledge and power relationship with the general public. Lender-directed fraud was widespread, because it is almost always an inside job. That fraud came from the nationally chartered banks. Their abysmal financial situation is evidence of both a lack of due diligence, a lack of adequate internal controls, and executive incompetence. The magnitude of this type of negligence and incompetence, however, does not justify blame shifting or denial. Consider the appraisal problems at Washington Mutual.

 Washington Mutual, a nationally-regulated mortgage banker, had engaged in egregious bad conduct by brow-beating the appraisers at eAppraiseIT’s to appraise home at values beyond a property’s actual worth. Those fraudulent appraisals, directed by Washington Mutual, ended up posing a financial risk to borrowers, that institution, and the overall economy. (This was not borrower, broker, or state-regulated bank fraud. The fraud came from management at a nationally-regulated lender). The industry’s response was another well-intended though ill conceived and completely misguided regulation called the Home Valuation Code of Conduct. The Home Valuation Code of Conduct permitted lenders to extort payments from the public while everyone worked in the dark. (The banks may have well just said, hand over the money). Prior to the Home Valuation Code of Conduct, a courtesy opinion of value came at no charge from appraisers to loan officers to save time and to prevent ordering a needless appraisal if the value was not there. Moreover, the Home Valuation Code of Conduct penalized competence and rewarded inexperience through a “no appraiser left behind” logic that put all appraisers on an equal footing, which is completely contrary to the free market that rewards competence and excellence. Finally, the Home Valuation Code of Conduct permitted the too big to fail banks with national charters to financially exploit customers through higher costs and the affiliated business agreement by extracting fees for themselves regardless of whether or not they committed to do a loan. The predatory practices built into the Home Valuation Code of Conduct need to be repealed given that there will never be an American Household Abuse and Prevention Act. With collapsed home prices, why wouldn’t a national lender insist on the Home Valuation Code of Conduct? Who cares if a home is $100,000 under water so long as appraisal checks from anxious homeowners across the country hit the bottom line. The Home Valuation Code of Conduct was a consumer shakedown, plain and simple. I wish it was easy as saying that the sponsors of the Home Valuation Code of Conduct need to get booted hard and sent to the curb in 2010, but no can do.  The Home Valuation Code of Conduct was the brain child of “a joint agreement between Freddie Mac, the Federal Housing Finance Agency, and the New York State Attorney General,”[i] which is troubling evidence that the leaders in the industry and those tasked with safeguarding the consumer know not what they do. Or do they?

So, whose interests were the SAFE Act and the Home Valuation Code of Conduct looking towards? These came about as a result of and on behalf of the nationally-chartered banks. This was about government by the strongest of corporations for the strongest corporations. It is, after all, always easier to blame the victim rather than to hold accountable those responsible due to the ramifications of widespread prosecutions in upper management. That cannot happen, because they finance election campaigns. But, if that were to happen, the truth would become evident at home – the demise of the American republic is the result of an unashamed state of political corruption from which all other forms of corruption stem.

At the consumer level, there are some loan officers and real estate agents also living in a complete state of denial.* There is a percentage – the exception not the rule – that refuses to accept any responsibility for the failure in the marketplace, the foreclosure crisis, and the loss in home values. For those still in denial, “it just happened.” For them, this existential problem is rooted in pure mystery. How can they be expected to understand given that roughly one third of them do not even read a daily paper or a bi-weekly magazine.  Yet, the public looks to them as arm chair economists when seeking guidance. For others more comfortable with blame shifting, it was the borrower’s fault and it was the fault of Capitol Hill for misguided public policy that pushed too hard to increase homeownership. While we gained 3 percent in the homeownership rate, we may lose 15 percent through foreclosures. Troubling facts, however, argue against those in blissful ignorance, those in denial, and those who would rather blame everyone else instead of those who run the industry.

Peter Hebert
Author of Mortgaged and Armed (Coming 2010)
LinkedIn Profile

*NOTE: The observation of gross, calloused denial is evident in some of the Continuing Education Courses I teach for licensed real estate agents and loan officers. Those attitudes are reflected in a lack of reading and / or over exposure to one-sided media accounts that serve more as propaganda than as journalism.

[i] “Home Valuation Code of Conduct, enhancing the independence of appraisers,” Freddie Mac, October 1, 2009; Online at http://www.freddiemac.com/singlefamily/home_valuation.html.

October 11, 2009

The G-20 Meetings: An Abysmal Failure in Public Relations

Filed under: Legislation and Regulation — Peter Hebert @ 5:43 AM

Making sense of the three G-20 meetings (Washington, London, and Pittsburgh) and the public blow back since the Panic of 2008 is not difficult. Finance ministers and central bankers have repeatedly met to produce a global New Deal as it relates to accounting, capital reserve requirements for financial firms, better regulation, and more. None of this should be seen as controversial or reason for concern. The 27 nations that are part of the G-20 committed $5 trillion as a stimulus to the global economy. It was needed and certainly unpopular, because the financial fiasco was of the banking sector’s making with the enabling of legislation at the expense of all tax payers in the developed world. The International Monetary Fund was empowered to become the global central bank. In reviewing many of the key documents, everything that the finance ministers have proposed makes sense on paper and as theory. What should cause Americans concern is a global basket of currencies as the new reserve currency since that will result in the loss of the dollar’s value, a decline in America’s strength, and a compromise of our sovereignty for many reasons. There are wide spread implications that have not been adequately addressed by the media or government.

What does not make sense about the G-20 meetings is the lack of adequate or meaningful public relations outreach to mitigate street riots here and abroad. These unelected finance ministers and central bankers have concealed themselves behind political leaders, who in turn have been shielded by riot police. In this regard, the G-20 meetings have been an abysmal public relations failure. These meetings reflect paranoia of the first order. The public has an in-built distrust for organized and concentrated power. And, key members of the financial sector appear to believe that it may never again be safe for them to walk on public streets.

The major disconnect between G-20 finance ministers and the general public is rooted in more than just a lack of regular and easy to understand communications. I believe that disconnect is rooted in the third leading cause for pivotal changes in history – stupidity. There are indeed many smart people at the helm of finance and economics. But, high IQs, abstract thinking abilities, and great academic backgrounds guarantee nothing. What is missing among the G-20 finance ministers is people skills and street smarts. At a minimum what has happened is right out of a psychological text book. It is the definition of group think, which is “a mode of decision making marked by deterioration of mental efficiency, reality testing, and moral judgment that results from group pressures.”

There appears to be four major short comings among the G-20 finance ministers as it relates to public dissent, fear, and anger. First, they are too self-absorbed and self-focused, which denies the validity of public comment. Second, they think they know everything when in fact no one knows everything even in their own areas of subject matter expertise. Third, they think they are all powerful and can do anything, when the results on the ground suggest that the public is not going along. And fourth, they think they have super human qualities of intelligence and ability by virtue of their status when everyone knows the story of The Emperor’s New Clothes. When these factors combine, we have something far worse than stupidity. It is called megalomania. This psychological delusion when projected outwards can become socio-pathic and destructive.

A social upheaval in one form or another and of unprecedented proportions is inevitable unless the G-20 finance ministers begin to engage in radical change in its communications and outreach. Consider the Kent State Massacre or the Waco Massacre and fast forward to the year 2012 as the U.S. dollar collapses as a result of the federal government’s unsustainable and unserviceable debt. The unprecedented stimulus measures this government has taken will destroy the value of the American dollar, and that will end in wide spread panic. Perhaps the most appropriate case study is the Weimar Republic, which ended in political extremism as the backlash to a political crisis unleashed by a fiscal crisis ended in monetary collapse. It is for these reasons, I believe, that so many here and abroad protested. I believe that the wisdom of crowds in the end, hopefully, will prevail.

Peter Hébert
Author of Mortgaged and Armed
Coming late-July 2010

Mortgaged and Armed – An insider’s guide to the financial system

Filed under: Legislation and Regulation — Peter Hebert @ 5:31 AM

Welcome. I will share some of my installements of my Mortgage Money Update (an email newsletter),  excerpts from my book Mortgage and Armed, and commentary on events from time to time.

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