Thursday, January 31, 2013

The Next Subprime Crisis - Obama's Consumer Financial Protection Bureau Strikes With A Vengeance

Obama's Consumer Financial Protection Bureau has issued new regulations requiring banks not merely to continue making 'subprime' loans that were at the heart of our 2008-09 economic meltdown, but the new regs require the banks to issue such loans at 'prime' rates. This from IBD:

The War On Banks . . .

New mortgage rules issued last week by the administration will have the effect of forcing lenders to approve prime loans to borrowers who would normally only qualify for subprime loans carrying higher interest rates and fees to cover the added risk of default.

Banks are already under renewed pressure from federal prosecutors and regulators to make home loans to low-income borrowers with blemished credit as part of the administration's stepped-up enforcement of anti-redlining laws [the Community Reinvestment Act - the law at the heart of our last economic meltdown].

Before the [2008] mortgage crisis, lenders were able to hedge losses by placing such homebuyers in higher-cost subprime mortgages — something the government at one point actually encouraged as part of a strategy to expand credit opportunities for lower-income minorities and close the racial "mortgage gap."

But under the new mortgage rules, loans with subprime features do not fall under the official government definition of "qualified mortgages," and therefore do not provide a "safe harbor" against lawsuits and other action. As a result, analysts warn lenders may end up having to "subsidize" riskier borrowers at the expense of other customers.

The Consumer Financial Protection Bureau, the Dodd-Frank Act-created agency that wrote the 800-page mortgage regulation, has decreed that the way to distinguish a prime loan from a subprime loan is by the interest rate charged, even though the main distinguishing feature of a subprime loan is a sub-660 credit score.

"Under its tortured definition of 'prime,' a borrower can have no down payment, a credit score of 580, and a debt (-to-income) ratio over 50%," as long as the borrower is charged a prime rate, said former Fannie Mae chief credit officer Edward Pinto. [emphasis added]

Mortgages carrying a prime rate, or one within 1.5 percentage points of the national average, will have the strongest level of legal protection, according to the regulator. Analysts say this rule effectively limits lenders' ability to price for risk. Lenders who charge rates above the 1.5-point threshold open themselves up to legal liability.

Starting in January 2014, when the new rules take effect, borrowers who default on nonqualifying home loans will have the power to "raise a foreclosure defense" against banks, according to Joseph Barloon, a lawyer for New York-based Skadden, Arps, Slate, Meagher & Flom. Pinto, now a fellow for the Washington-based American Enterprise Institute, agrees: "CFPB's definition will force a lender to either subsidize risky loans to get the presumption of affordability (for lower-income borrowers), or subject itself to a rebuttable presumption (by charging subprime rates), which will bring certain litigation from the tort bar at every attempt made to foreclose."

In addition, lenders who underwrite such nonqualifying loans could open themselves up to federal charges if recipients are minorities.

CFPB has the power to enforce "fair lending" laws, and is already coordinating lending-discrimination cases against banks with the Justice Department.

As part of recent consent decrees, Justice has ordered several bank defendants to approve prime-rate mortgages for African-Americans and Latinos who otherwise would not qualify for them.

For instance, First United Security Bank of Alabama must set up a "special financing program" for African-Americans. According to the 25-page federal order, the program must offer them interest rates and other terms "more advantageous to the applicant than it would normally provide" — even if the applicant "would ordinarily not qualify for (a discounted) rate for reasons including lack of required credit quality, income, or down payment."

As I wrote a few days ago:

The next great recession in the U.S. is going to look surprisingly like the last one. The exact same policies that led to the 2008 recession are being followed - and indeed, in many cases strengthened - by the Obama administration.

Admittedly, that was before I saw this new regulation. This makes things exponentially worse for banks than they were in the lead up to our economic meltdown in 2008. This is just horrendous. It is not a solution to cure actual racism. It is pure leftwing social engineering, that as we well know, carries with it an unconscionable price for all Americans. Obama, like the entire left, sees our economy as a cash cow to be milked at will and altered on a genetic level, all in the belief that the cash will never stop flowing. Consequences, even such obvious ones as from the subprime crisis of 2008, are simply ignored. It simply defies belief. Of course the other issue is that this is going unmentioned by conservatives in Congress. That too defies belief.

Update: To see that same attitude playing out at the municipal level, look to John Fund's recent article on how Detroit's political leadership is operating on pure fantasy and denial.

1 comment:

The Elephant's Child said...

Alan Reynolds said, late last year, "Barack Obama doesn't understand economics, and apparently he refuses to listen to anyone who does."I find it slightly comforting to keep that in mind, though I don't know why it is comforting.