The next financial meltdown- and why Andrew Cuomo should be in prison [Reader Post]

There is one word that accompanies the news from this administration more than any other. “Unexpected.”

WASHINGTON (Reuters) – New claims for jobless benefits unexpectedly rose last week, hardening the view the central bank will pump more money into the economy in hopes of boosting growth and lowering unemployment.

As this country fights for oxygen to breathe, Obama’s big spending, bigger regulation government’s tentacles continue to pull Uncle Sam under the water.

Sitting in a boat on the water, armed with a bat, ready to bash Uncle Sam as he struggles for air is the next Democrat financial crisis.

Potential paperwork errors on some of the $1.34 trillion of securitized home mortgages may give investors an opening to challenge the legality of deals, threatening to unnerve financial markets, according to Joshua Rosner, managing director at Graham Fisher & Co.

Some loans to borrowers with poor credit before 2007 may not have been transferred to mortgage trusts in the manner required by their pooling and servicing agreements. That raises questions about the ownership of the loans and may allow investors to force lenders to buy back the securities, Rosner wrote yesterday in a note to clients.

And it’s a big one:

“If plaintiffs bring suit it could rock the market,” Rosner, 44, said in a telephone interview. “If courts allowed those suits to proceed it would well feel much like 2008,” when the bankruptcy of Lehman Brothers Holdings Inc. led to the biggest market collapse since the Great Depression, he said.

And it all goes back to the sub-prime mortgage feeding frenzy:

Wall Street firms stopped selling almost all so-called private-label mortgage-backed securities in 2007 after defaults began to surge on loans to borrowers with poor credit. MBS values plunged as foreclosures climbed. More than 90 percent of mortgages are now issued by government sponsored enterprises, such as Fannie Mae and Freddie Mac, or are insured by the federal government.

Daniel Inviglio describes the Doomsday Scenario

Why is this so bad? The investors who hold that MBS might be able to claim that the bonds they hold were not created properly, contracts were breached, and the bank that originated the mortgages needs to buy back the bonds. This, of course, would require many billions of dollars in capital in excess of that banks have lying around. And remember these aren’t pretty bonds. They are mostly toxic and full of losses. Those losses would then be passed on to the banks.

Rosner imagines this leading to a Lehman-type weekend, where the financial industry again nears collapse. That might be a little melodramatic, but it isn’t impossible. If these investors have the legal standing that Rosner thinks, they would be sort of crazy not to force banks to take back these bad deals. After all, it’s better for the investors that they force these losses back to the banks who wrote the mortgages.

No matter what happens, it’s going to hurt those of us who pay taxes. Badly. Again.

Wall St. was quick to assign fault:

“If you didn’t pay your mortgage, you shouldn’t be in your house. Period. People are getting upset about something that’s just procedural,” said Walter Todd, portfolio manager at Greenwood Capital Associates.

Of course, that’s right, but it goes nowhere near explaining how this became so malignant.

There are many contributors to the current dire financial condition of this country, but no one is more responsible than Andrew Cuomo.

As Secretary of HUD under Bill Clinton, Cuomo set this entire fiasco into motion. But first, Henry Cisneros.

Redistribution pervades Obama’s administration but it is not new.

The roots of the whole debacle are by this point fairly clear. Clinton’s first HUD secretary, Henry Cisneros, required that mortgages serving low to middle income and underserved groups (read subprime loans) comprise at least 42% of Fannie Mae and Freddie Mac’s business. Since Fannie and Freddie are the primary purchasers of mortgages for packaging on the secondary mortgage market, this created a vacuum of demand, and encouraged primary lenders to make these bad loans for which they knew they could find a ready buyer in Fannie and Freddie.

Cisneros was Clinton’s redistributionist enforcer:

HUD held a series of “standing up for communities” rallies, financed by taxpayers, which encouraged local officials and special interest groups to lobby against Republican budget cuts. One piece of propaganda distributed by HUD’s New York office warned that the budget cuts “would dramatically expand America’s underclass” and that “thousands of families, many with children, would end up homeless.” HUD also sponsored a National Tenants Organization convention in Puerto Rico to defend the department. But that event was so political that even a HUD translator refused to take part and walked out of the proceedings in protest. According to HUD’s inspector general, an NTO official responded that “he really didn’t care whether HUD translated or not because the point was to get rid of Newt Gingrich.”

When Cisneros left HUD, he was lauded for the increase in homeownership rates that occurred on his watch. Part of his apparently winning strategy, Cisneros noted, was HUD’s “ability to convince lenders, builders and real estate agents that there was money to be made in selling housing to low- and moderate-income individuals.” Part of this “convincing” involved HUD-initiated legal action against mortgage lenders who declined higher percentages of loans for minorities than whites. As a result of such political pressure, lenders begin lowering their lending standards, which was another contributing factor to the housing meltdown in the 2000s

A giant, shovel-ready welfare program. And as is so common in the real world, the Law of Unintended Consequences takes its pound of flesh:

A key weapon in the Cisneros arsenal was the Clinton administration’s changes to the Community Reinvestment Act. The CRA was passed in 1977 and updated in 1995 to pressure lenders into making more loans to moderate-income borrowers by allowing regulators to deny merger approvals for banks with low CRA ratings. Even complaints brought by activists, such as the leftist group ACORN, were now counted against a bank’s CRA rating. The result was that banks began issuing more loans to otherwise uncreditworthy borrowers while purchasing more CRA mortgage-backed securities. As housing finance expert Peter Wallison noted, “The most important fact associated with the CRA is the effort to reduce underwriting standards. … Once those standards were relaxed … they spread rapidly to the prime market and to subprime markets where loans were made by lenders other than insured banks.”

Enter Andrew Cuomo, Clinton’s second HUD Secretary. Cuomo pushes GSE’s requirement of risky mortgages to 50%:

In 2000, Cuomo required a quantum leap in the number of affordable, low-to-moderate-income loans that the two mortgage banks—known collectively as Government Sponsored Enterprises—would have to buy. The GSEs don’t actually sell mortgages to borrowers. They buy them from banks and mortgage companies, allowing lenders to replenish their capital and make more loans. They also purchase mortgage-backed securities, which are pools of mortgages regularly acquired by the GSEs from investment firms. The government chartered these banks to pump money into the mortgage market and, while they did it, to make a strong enough profit to attract shareholders. That created a tug-of-war between their efforts to maximize shareholder value, which drove them toward high-end mortgages, and their congressionally mandated obligation to finance loans for those who needed help. The 1992 law required HUD’s secretary to make sure housing goals were being met and, every four years, set new goals for Fannie and Freddie.

Cuomo’s predecessor, Henry Cisneros, did that for the first time in December 1995, taking a cautious approach and moving the GSEs toward a requirement that 42 percent of their mortgages serve low- and moderate-income families. Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the “very-low-income.”

Cuomo knew how bad these loans were going to be, and he did all he could to make sure no one was going to know.

The HUD secretary is also required to produce voluminous rules that govern how the GSEs meet those goals, and the 187-page rules Cuomo issued opened the door to abuse.

The rules explicitly rejected the idea of imposing any new reporting requirements on the GSEs. In other words, HUD wanted Fannie and Freddie to buy risky loans, but the department didn’t want to hear just how risky they were.

HUD conceded in the rules that many consumer groups had urged it to insist that the GSEs provide “loan-level data” revealing how many of their loans contained high interest rates, prepayment penalties, or other requirements that presaged bad loans.

Cuomo made bad even worse:

But Cuomo wasn’t only stifling data that HUD could use to keep the GSEs out of trouble. He also went against his own recommendation—in a report issued jointly with the Treasury Department a few months earlier—that called for a prohibition against the GSEs purchasing loans “with high costs and/or predatory features.” Instead, Cuomo decided without explanation to adopt rules that prohibited nothing.

Profits from sub-prime mortgages are derived largely from Yield-Spread Premiums” or YSP’s. Up to 90% of sub-prime mortgages trigger them.

There are certainly those who believe that YSPs are at the heart of the crisis. Senator Chris Dodd, the chair of the banking committee, is trying to ban them, prodded by the fact that up to 90 percent of subprime mortgages quietly triggered these lucrative payments. When the Federal Reserve recently considered barring them and then backed off, a Times editorial charged that it had “balked on banning the practice whereby brokers maximize their commissions by signing up borrowers for the most expensive loan possible, even when the borrower qualifies for a cheaper.” The Illinois attorney general, Lisa Madigan, accused Countrywide of structuring their deals with brokers “in a manner that virtually guaranteed” that they were “more concerned with getting the highest YSP possible than getting their borrowers the best loan possible,” oblivious to “the possible fraud that this financial incentive would motivate.”

Cuomo tacitly endorsed them.

Cuomo hasn’t sued anybody over these outrageous payments to brokers—which are based on the “spread” between the high interest rate that brokers persuade unwary borrowers to accept and the par or going rate they would ordinarily have to pay. If Cuomo did sue, it might make for an awkward moment or two in court, since it was Cuomo who issued a rule in 1999 that dozens of federal courts have since found legalized the yield-spread premiums. He was the first HUD secretary to say they were “not illegal per se,” nullifying most of the 150 class-action lawsuits against them filed across the country.

All the “evil” bankers did was to take advantage of the infrastructure that Cuomo created. Then Democrats ran Fannie and Freddie as though the GSE’s were personal piggie banks. Barney Frank protected this fraud as though his life depended on it. Now he lies through his teeth about doing so.

Barney Frank in 2005: “Those of us on our committee in particular will continue to push for home ownership.”

Barney Frank in 2010: “I was very much in disagreement with this push into home ownership, and I think the Federal government should not be artificially doing that.”

Henry Cisneros see no government culpability in this mess:

“The real problem occurred not out of a governmental push, but out of a hijacking of the homeownership process by some unscrupulous interests.”

And what of Cisneros? Well, he joined the Board of Countrywide in 2001.

In 1998 Cuomo sued Accubanc for $2 billion because they were not making enough bad loans.

Every time liberals do something that they see as “fair” it screws the working people of this country and ends up as a disaster. Cuomo should doing time in Riker’s, serving as a sexual relief station for inmates. Instead, he’s going to be the next Governor of New York.

Sometimes life cannot be more ironic than it is.

DrJohn

DrJohn has been a health care professional for more than 30 years. In addition to clinical practice he has done extensive research and has published widely with over 70 original articles and abstracts in the peer-reviewed literature. DrJohn is well known in his field and has lectured on every continent except for Antarctica. He has been married to the same wonderful lady for over 30 years and has three kids- two sons, both of whom are attorneys and one daughter on her way into the field of education.

DrJohn was brought up with the concept that one can do well if one is prepared to work hard but nothing in life is guaranteed.

Except for liberals being foolish.