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Consumer Protector Caves to the Banks


Richard Cordray might be the most powerful man in America today, and you’ve probably never even heard of him.

As head of the new US Consumer Financial Protection Bureau (CFPB), Cordray can effectively set the clock back to 2005 and inflate another gigantic, economy-busting housing bubble without breaking a sweat. All he has to do is define the term “qualified mortgage” in a way that suits the big banks and–presto–$40 billion per month will start flowing into new mortgages. It’s that simple. Here’s the story from Bloomberg:

U.S. lenders may get strong protections from lawsuits over most government-backed mortgages under rules being weighed by the Consumer Financial Protection Bureau, according to two people briefed on the policy.

The so-called qualified mortgage regulations would give banks including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) safeguards against legal action arising from the underwriting process, according to the people who spoke on condition of anonymity because the discussions aren’t public.(“CFPB Mortgage Rule Said to Give Lenders More Protection”, Bloomberg)

So this is why the banks haven’t stepped up their mortgage originations yet, eh, even though the Fed said it will buy $40 billion in mortgage-backed securities (MBS) per month via its QE3 program? It’s because they want blanket legal immunity from lawsuits from homeowners who may have been foreclosured on unfairly.  But why is Cordray helping them? Why is he making it harder for the victims to sue the miscreants who booted them out of their homes? Isn’t his job to protect consumers? Instead, he’s doing the banks bidding. What gives?  Here’s more from Bloomberg:

The consumer bureau, which is crafting the rules as part of a broader overhaul of housing-finance oversight, revealed its plans in a meeting with other federal regulators yesterday, according to the people. About 80 percent of loans backed by Fannie Mae (FNMA), Freddie Mac or government insurers such as the Federal Housing Administration, would qualify for a legal safe harbor under the bureau’s plan, according to data from the Federal Housing Finance Agency.

So, it’s a done-deal, eh? They just need to dot a few “i’s” and cross a few “t’s” before making the big announcement. But just look at the details: “80 percent of loans …would qualify for a legal safe harbor under the bureau’s plan.” What a joke.  Fannie and Freddie already insure 90 percent of all new mortgages, so now they’re going to provide legal immunity on mortgages that they’re already insuring for free? That’s one helluva freebie for the banks, don’t you think? Why not just hand them the keys to Fort Knox right now and be done with it. The fact is, Cordray shouldn’t be making any concessions at all. The whole thing is ridiculous. More from Bloomberg:

Protections would cover loans issued at prime interest rates to borrowers whose total debt-to-income ratio doesn’t exceed 43 percent.

How long do you think you’d be able to keep your head above water if a 43% chunk of your paycheck vanished before you ever got your mitts on it? Not long, I’d wager. In fact, experts think that house payments should never exceed 33% of income. So what does that tell you? It tells you that Cordray has agreed to a deal that’s going to cost taxpayers a bundle to cover the rancid mortgages that the banks plan to make as soon as the ink dries. But that’s okay, right, because at least the banks will make a chunk of dough chopping this dreck into securitized morsels and selling it to the Fed at top-dollar. What a scam!

Think about it for a minute. If the Fed says it’s going to buy $40 billion in MBS per month, then the smart money is going to dredge up enough mortgage applicants to sign on the dotted line, right? Because you need mortgages to make mortgage-backed securities.  Well, guess what, the banks don’t care if these new candidates default or not. Why would they? As long as they can slip them in under the new definition, they’ll get their money anyway. They just want to make sure all their bases are covered so that when Joe Blow defaults  (because he was fitted into a mortgage that he clearly couldn’t afford to repay) he can’t sue them for sloppy underwriting. Now Mr. Blow will have to take it on the chin and find a cheap rental somewhere because Cordray sold him out to the banksters.

Thanks Rich.

And, there’s more to this story, too,  because the banks aren’t merely angling for carte blanche guarantees on their boomerang mortgages; they also want to make sure they don’t have to pony-up one red cent to backstop their garbage MBS. They think they should be able to create as much credit as they want without any risk to themselves or their shareholders. It is arrogance in the extreme. Here’s an excerpt from an op-ed in the Washington Post by economist Mark Zandi that explains what’s going on:

A second looming decision with big implications for mortgage credit involves something called the “qualified residential mortgage” rule. Although the name is similar, this is quite different from the qualified-mortgage definition, and is designed to curb bad lending by forcing lenders to hold a financial stake in their riskiest mortgages.

Under Dodd-Frank, a lender must hold 5 percent of any loan that isn’t a “qualified residential mortgage” (QRM) so that if it later goes sour, the lender loses something, too. This makes sense in principle, but like the qualified-mortgage rule, the devil is in the details. These are quite complicated, reflecting regulators’ fear that lenders will work hard to circumvent any rule. But complexity adds to costs, and as a result, non-QRM loans threaten to have meaningfully higher mortgage rates than QRM loans.(“Defining a ‘Qualified’ Mortgage”, Mark Zandi, Washington Post)

Right. It’s too complicated for you to understand, Mr. Taxpayer, so just go about your business and leave it to us, the experts. We’ll take care of everything.”

Give me a break, Zandi, anybody can get this stuff. The banks just don’t want to hold enough capital to back up their shitty MBS. That’s it, isn’t it? They want to be able to create more toxic MBS in their off-balance sheet boiler rooms but not keep enough money on hand to pay off investors when the ship goes under. It’s called “risk retention”, and it’s no different than requiring insurance companies to have sufficient reserves to pay off claims in the event that your house burns down. Here’s more from Zandi:

Since Dodd-Frank stipulates that loans made by the federal agencies are qualified residential mortgages by definition, how QRM is defined will help shape the federal role in the mortgage market. If the definition is too narrow, private lenders won’t be able to compete, given the higher interest rate they will need to charge to compensate for the extra risk. The government will thus continue to dominate mortgage lending in the near term. On the other hand, if Fannie Mae and Freddie Mac are privatized down the road, a narrow QRM definition could significantly shrink the government’s role in the mortgage market, potentially threatening the existence of the 30-year fixed rate mortgage loan.

Oh please. Forget about the government’s role in the housing market; it’s completely irrelevant. What we’re interested in is making sure that the banks have a few bucks in the vault to back up their crappy assets when their next zeppelin crashes. Is that too much to ask? The fact of the matter is that capitalism requires capital; that’s just how it works. You just can’t keep cranking out credit without sufficient collateral to back it up or even the smallest blip in the market will send the financial system barrel-rolling into oblivion.  Lenders need to have enough skin in the game to cover their potential losses and to prevent another meltdown that requires trillions in gov support to fill the black hole that they (the banks) created.

Can you see what’s going on here? Behind all the legal rigamarole, the banks are blackmailing the government.  They’re saying that they won’t step up their mortgage originations until they get everything they want. And what they want is a safe harbor (legal immunity) and no more “put-backs”. (mortgages that the banks have been forced to repurchase because they exhibited “substantive underwriting and documentation deficiencies”.) In other words,  they don’t want to get stuck with the bill next time they blow up the financial system. That means that the way Cordray defines “qualified mortgage” matters a great deal, because it will determine whether the banks ease lending standards, increase mortgage originations, boost credit to marginal applicants, and fulfill Bernanke’s dream of inflating another housing bubble. That’s what this is all about. The CFPB’s definition could have a profound impact on the direction of the economy, so there’s a lot at stake.

Unfortunately, it looks like Cordray has caved in on all counts, which means we could see a sudden surge in housing activity as the banks put the Fed’s  $40 billion per month subsidy to work and start lending like madmen again.

Doesn’t it seem like we keep making the same mistakes over and over again?

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

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