Risky mort­gages im­peril mar­ket; fi­nan­cial threat a chal­lenge to Fed

The Washington Times Weekly - - National - By Pa­trice Hill

The risk of a fi­nan­cial cri­sis is grow­ing as home prices con­tinue to fall and ques­tion­able mort­gages made in the past two years go into de­fault, fi­nance of­fi­cials warned on Dec. 11.

Banks and mort­gage bro­kers have been pass­ing along to un­wary in­vestors as much as $600 bil­lion a year in risky mort­gages they made through un­tested chan­nels in the junk-bond mar­ket. That raises the threat of a fi­nan­cial cri­sis be­yond the abil­ity of the Fed­eral Re­serve to rem­edy, said Lewis Ranieri, the Wall Street guru who is widely cred­ited with cre­at­ing the mul­ti­tril­lion-dol­lar mar­ket for mort­gage-backed se­cu­ri­ties in the 1980s and 1990s.

Bank reg­u­la­tors told the Na­tional Hous­ingFo­ru­minWash­ing­ton,D.C. that they have found ma­jor banks punt­ing to in­vestors ques­tion­able mort­gages they could not legally keep in their own loan port­fo­lios. Mr. Ranieri said bro­kers on Wall Street have raised the risks by repack­ag­ing the mort­gages in de­cep­tive and opaque ways so that the small in­vestors and for­eign­ers who buy them are un­able to un­der­stand the risks.

“No se­cu­ri­ties mar­ket can stand if we do not have true dis­clo­sure, and we do not have true dis­clo­sure” of the grow­ing risks of ex­otic mort­gages whose pay­ments can dou­ble overnight and force buy­ers into de­fault, said Mr. Ranieri. “This stuff doesn’t just get sold to [pro­fes­sional] money man­agers. It gets sold to the pub­lic and to for­eign in­vestors who don’t have a clue what to look for.”

Allen Si­nai, chief global econ­o­mist at De­ci­sion Eco­nomics; Richard A. Brown, chief econ­o­mist at the Fed­eral De­posit In­sur­ance Corp.; and sev­eral other economists and reg­u­la­tors at­tend­ing the fo­rum also em­pha­sized the sub­stan­tial risks to the econ­omy and fi­nan­cial mar­kets from the deep­en­ing re­ces­sion in the hous­ing mar­ket and pos­si­ble mort­gage-fi­nance cri­sis.

De­spite the grow­ing dan­gers, Rep.Bar­neyFrank,in­com­ingchair­man of the House Fi­nan­cial Ser­vices Com­mit­tee, in­di­cated he saw no rea­son for fed­eral leg­is­la­tion to bet­ter reg­u­late the mort­gage mar­kets to pre­vent a pos­si­ble fi­nan­cial melt­down.

He­said­hewel­comes­re­cent­large drops in home prices be­cause it makes hous­ing more af­ford­able for young peo­ple and mi­nor­ity buy­ers.

“Hous­ing­suf­fered­fromir­ra­tional ex­u­ber­ance” dur­ing the first part of the decade, though it fell short of bein­ga­full-blown­bub­ble,theMas­sachusetts Demo­crat said. “The end re­sult of a 10 per­cent drop in many parts of the coun­try will be a more ra­tio­nal hous­ing mar­ket. [. . . ] If a few spec­u­la­tors get burned, that’s just ic­ing on the cake.”

Mr. Frank noted that a few years ago, con­sumers were ex­pected to de­vote about 25 per­cent of their in­come to house pay­ments. To­day, how­ever, con­sumers ex­pect their homes to con­trib­ute 25 per­cent to their­in­come—through­cash-out­re­fi­nanc­ingsan­dothertech­niquesthat have­comein­tovogue,he­said.“Let’s get back to the nor­mal sit­u­a­tion.”

A top na­tional bank reg­u­la­tor said many banks are con­tin­u­ing to of­fer con­sumers loans they can­not af­ford when their teaser in­ter­est rates ex­pire and pay­ments rise to re­flect mar­ket con­di­tions. Some banks are sell­ing the ques­tion­able loans to in­vestors to avoid keep­ing them in their port­fo­lios, where they would be un­ac­cept­able to reg­u­la­tors, said Kathryn Dick, deputy comptroller at the Of­fice of the Comptroller of the Cur­rency.

Con­sum­er­sal­so­may­be­u­naware of the risks in­her­ent in th­ese ad­justable-pay­ment loans, she said, be­cause they are not get­ting full dis­clo­sure or are get­ting in­for­ma­tion too late to pre­vent them from clos­ing on the loans.

Mr. Ranieri said the riski­est loans were made in the past two years as banks and bro­kers strived to help con­sumers qual­ify for high-priced homes that were be­yond their reach. Loan in­no­va­tions and loose lend­ing stan­dards have con­tin­ued de­spite ef­forts by a group of five fed­eral bank­ing reg­u­la­tors to limit such loans, he said.

“We have a tremen­dously pow­er­ful mort­gage-backed se­cu­ri­ties mar­ket. This mar­ket is un­fet­tered in its en­thu­si­asm and unchecked by reg­u­la­tion,” Mr. Ranieri said. “The in­ter­a­gency task force can’t touch it. The cap­i­tal is com­ing from in­ter­na­tional mar­kets.”

Mr. Ranieri said that bro­kers are even by­pass­ing the tra­di­tional mar­ket for mort­gage-backed se­cu­ri­ties that he helped cre­ate. In­stead, they are bundling the riski­est mort­gages to­gether and of­fer­ing them as “col­lat­er­al­ized debt obli­ga­tions” on the cor­po­rate bond mar­ket. The of­fer­ing doc­u­ments of­ten do not ex­plain the se­ri­ous risks in­volved with the mort­gages in a de­clin­ing hous­ing mar­ket, he said.

One re­cent of­fer­ing failed to dis­close to in­vestors that the home­own­ers not only were faced with high ad­justable pay­ments that they might have dif­fi­culty pay­ing, but they had fi­nanced 100 per­cent of their pur­chase and had no eq­uity in their houses — some­thing that greatly in­creases their like­li­hood of de­fault.

Mr. Ranieri said the qual­ity of loans has fallen so much re­cently that his firm has stopped buy­ing whole mort­gages for repack­ag­ing into mort­gage-backed se­cu­ri­ties. He re­cently re­jected some mort­gage­sof­fered­tothe­firm.He­saidhe asked what the bro­ker would do with the loans, and was told they would be sold to in­vestors in the junk-bond mar­ket.

The only fed­eral reg­u­la­tor with ju­ris­dic­tion over the bur­geon­ing mar­ket for such se­cu­ri­ties is the Se­cu­ri­tiesandEx­changeCom­mis­sion, Mr.Ranieri­said.But­theSECseems to be largely un­aware of what’s goin­go­ninthe­mort­gage­mar­ket,he said.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.