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.

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Cap, Trade & Calculations

To repeat that which bears repeating ad infinitum, cap and trade is the single most ill advised piece of legislation quite likely ever in our nation's history. Cap and trade is not a "green" bill. It will do nothing to reduce global temperatures - though the sun has taken care of that for us these past seven years. Cap and trade is a massive regressive tax, it is an attack on business, and it is a vehicle for a massive power grab by the left side of our government.

Today, Robert Zubrin at Roll Call does some 'back of the envelope' calculations on the real costs of the cap and trade bill. It is a must read. As he notes, the cap and trade bill portends to be "a massive and highly regressive tax on the U.S. economy, and could potentially cause not only extensive business failures, unemployment and privation within our borders, but starvation among poorer populations elsewhere."

This from Mr. Zubrin:

. . . According to a report issued by the Environmental Protection Agency in April, by 2015 the price of carbon emission indulgences required by the bill for industries to operate could be expected to run between $13 and $17 per ton of CO2 emitted. . . . That said, let’s stipulate the $15/ton midrange of the EPA estimate, and see what it implies.

The United States emits about 9 billion tons of CO2 per year. Therefore, at a rate of $15/ton fee for emission indulgences, the bill would impose a tax of $135 billion per year on the nation. Divided by the U.S. population of 300 million, that works out to a cost of $450 per year levied on every American man, woman or child, or $1,800 for a family of four. While for wealthy individuals like Al Gore such an impost might represent a mere pittance, for working families struggling hard to make ends meet it would be a very significant burden.

But that is not even the worst part of it. As a result of the markup of carbon costs, a lot of those working families will be out of work and unable to pay their existing bills, let alone new ones. Consider: Burning one ton of coal produces about three tons of CO2. So a tax of $15 per ton of CO2 emitted is equivalent to a tax of $45/ton on coal. The price of Eastern anthracite coal runs in the neighborhood of $45/ton, so under the proposed system, such coal would be taxed at a rate of about 100 percent. The price of Western bituminous coal is currently about $12/ton. This coal would therefore be taxed at a rate of almost 400 percent. Coal provides half of America’s electricity, so such extraordinary imposts could easily double the electric bills paid by consumers and businesses across half the nation. In addition, many businesses, such as the metals and chemical industries, use a great deal of coal directly. By doubling or potentially even quadrupling the cost of their most basic feedstock, the cap-and-trade system’s indulgence fees could make many such businesses uncompetitive and ultimately throw millions of working men and women onto the unemployment lines.

A gallon of petroleum-derived liquid fuel produces about 20 pounds, or 1 percent of a ton, of CO2 when burned. But it takes about 1.5 gallons of oil to produce one gallon of refined liquid fuel. So a $15/ton tax on CO2 emissions will also cause an increase in the price of gasoline, diesel and jet fuel on the order of $0.22/gallon. This will not only hit consumers’ pockets, but increase transport costs throughout the economy, thereby disabling businesses and increasing unemployment levels still more. While harming the economy, such a gas tax will do nothing material toward the truly essential goal of decreasing America’s dependence on foreign oil. Indeed, the bill’s dramatic hikes in electricity costs will have the opposite effect, since only 3 percent of America’s electricity is derived from oil, and by forcefully increasing electric power costs, the bill will actually discourage adoption of electric means of transport, . . .

But all these bad aspects of the Waxman-Markey bill pale before its potential impact on the world’s food supply. America’s agricultural sector is one of the greatest success stories in human history. In 1930, hunger still stalked the entire globe. Not just in Africa, India and China, but even in Europe and America, the struggle to simply get enough food to live on still preoccupied billions of people. Since 1930, the world population has tripled. But instead of going hungrier, people nearly everywhere are now eating much better. This miracle is the work of American farmers, who have not only produced huge surpluses to feed the world, but used the income gained from such good work to pioneer ever more advanced techniques that have enabled farmers everywhere to grow more. . . . But this miracle depends upon the availability of cheap fertilizer and pesticides, which in turn require carbon-based process energy to produce. If you tax carbon, you tax fertilizer and pesticides. If you tax these things, you tax food, and by no small amount. A $15/ton CO2 tax would increase fertilizer production costs directly by about $60/ton, with the cap-and-trade bill’s increased transport costs inflating the burden still more. That’s enough to make many farmers use less fertilizer, and less fertilizer means less food.

To get a sense of what it would mean for farmers to abandon fertilizer, it is only necessary to go to the supermarket and compare the price of the “organic” produce, grown without chemical fertilizer, to the regular produce, which, while just as nutritious, typically costs less than half as much. . . .

In the 220 years of our republic, there may have been worse pieces of legislation enacted by Congress than the Waxman-Markey bill, but none readily comes to mind. The Senate needs to take a stand and stop this disastrous act from passing into law.

Read the entire article. (H/T Gateway Pundit)

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Update: See also this from Forbes, Waxman-Markey Flunks Math:

In the U.S., electricity is produced from . . .:

48.9% -- Coal
20% -- Natural Gas
19.3% -- Nuclear
1.6% -- Petroleum

Got that? A tick over 88% of U.S. electricity comes from three sources: coal, gas and nuclear. Petroleum brings the contribution of so-called "evil" energy--that is, energy that is carbon- or uranium-based--to almost 90%.

The remaining sources of U.S. electricity, the renewables, are, by comparison, tiny players:

7.1% -- Hydroelectric
2.4% -- Other Renewables
0.7% -- Other

Hydroelectric accounts for 70% of renewable energy in America. But, of course, hydro is mostly tapped out. Almost every dam that could be built has been built. Ironically enough, political opposition to building more dams comes from the same crowd of tree huggers who oppose coal, gas and uranium.

Do you see where I'm going?

The Waxman-Markey bill that passed the House on Friday by a 219-212 margin will punitively tax energy sources that contribute 90% of current U.S. electricity (or 71% if you want to leave out nuclear). The taxes will be used to subsidize the 10% renewable contributors (but really just 3% after you leave out hydro).

In other words, Waxman-Markey is betting the future of U.S. electricity production on sources that now contribute 3% . . .

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If passed, I have no doubt that cap and trade will ultimately be repealed, but not before doing untold damage to our economy that might take decades to repair. And the people who ultimately will pay the highest price for this epic boondoggle will be the poor and the lower middle class. The intelligentsia of the left speak of populism and concern for the poor, but the reality is that they value power above all, irrespective of who suffers as a result of their acts. Controlling carbon allows the left to expand their power into every aspect of our economy and our life. If you doubt Speaker Pelosi's honesty when she said that, to control carbon, the left had to examine "every aspect of our lives," then just look at what else is in the cap and trade bill. This from Doug Ross, discussing some of the ancillary provisions in the House Cap and Trade bill:

It creates hundreds of new bureaucracies that benefit Obama's contributors; for example, it creates a "Development Corporation for Renewable Power Borrowing Authority" that issues "Community Building Code Administration Grants" under a "Low Income Community Sustainable Development Capacity Grant Program". This scam serves two purposes: it rewards failed housing programs like those run by Presidential Adviser Valerie Jarrett; it also provides yet another spigot of funds -- in blocks of $1,000,000 -- for groups like ACORN.

• It creates and regulates every building code in the country and will purposefully overrule any "city, county, parish, city and county authority, or city and parish authority having local authority to enforce building codes and regulations and to collect fees for building permits."

• It reaches into every neighborhood by eradicating "any private covenant, contract provision, lease provision, homeowners' association rule or bylaw, or similar restriction" to force localities to accept "green technologies" whether it fits in the neighorhood or not.

• It touches every aspect of water and sewer systems by regulating every "residential water efficient product or service"; ensuring those offerings are rated and forcing state government, local or county government, tribal government, wastewater or sewerage utility, municipal water authority, energy utility, water utility, or nonprofit organization to comply. . . .

• It defines "energy-efficient mortgages" (with our favorite GSEs, Fannie Mae and Freddie Mac, so what could possibly go wrong?) that artificially boosts the income of the borrower based upon how much "green technology" is employed. In other words, the Democrats are socially engineering mortgage underwriting standards again, just as they did in the nineties, which will lead to yet another financial disaster. . . .

Read the entire post. God help us if the Senate now passes this utter abortion.

(Cartoon H/T - No Oil For Pacifists)

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Obama's Explosion of Regulation

Obama began his war on private enterprise in America. His first target was to rein in pay across the private sector. Then came credit card companies. Now its a massive attack on the entire financial industry of our nation. Two days ago, “A New Foundation: Rebuilding Financial Supervision and Regulation,” running 89 pages in length and instituting the most far reaching regulation of our financial industry since at least the New Deal. Washington Wire condensed the report to the following:

For the regulation of financial firms, the proposal:

- Creates Financial Services Oversight Council, which would coordinate activities among regulators, replacing the President’s Working Group.

- Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests.

- Says the Fed will have to “fundamentally adjust” its current supervision to more closely watch for systemic risks.

- Allows the Fed to collect reports from all U.S. financial firms that meet “certain minimum size thresholds.”

- Gives the Fed oversight over parent companies and all subsidiaries, including unregulated units and those based overseas.

- Says the Treasury will re-examine capital standards for banks and bank-holding companies.

- Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes.

- Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks.

- Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight.

- Kills the SEC program that supervised Wall Street investment banks.

- Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms.

- Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures.

- Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs.

- Beefs up oversight of insurance by creating an office within the Treasury to coordinate information and policy.

- Kicks off a process by which the Treasury and the Department of Housing and Urban Development will figure out the future of mortgage giants Fannie Mae, Freddie Mac and the federal home-loan banks, which could include winding them down, returning them to the private sector or refashioning them as public utilities.

For the regulation of financial markets, the proposal:

- Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges

- Toughens the regulatory regime, including more conservative capital requirements and tougher rules on counterparty credit exposure.

- Strengthens laws designed to protect “unsophisticated parties” from trading derivatives “inappropriately.”

- Gives the Fed more power over the infrastructure that governs these markets, such as payment and settlement systems.

- Harmonizes the powers and authority of the SEC and CFTC to avoid conflicting rules relating to the same products or time-wasting turf battles over who should regulate what.

- Tells the SEC and the CFTC to deliver a progress report by September.

- Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products.

- Directs regulators to “align” participants’ compensation with the long-term performance of underlying loans.

- Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets and recommends the SEC have clear authority to require reporting from issuers of asset-back securities.

- Urges the SEC to strengthen its regulation of credit-rating firms, including disclosing conflicts of interest, better differentiating between structured and unstructured debt and more clearly stating the risks of financial products.

- Tells regulators to reduce their reliance on credit-rating firms.

For regulations protecting consumers and investors, the proposal:

- Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.

- Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.

- Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.

- Creates an outside advisory panel to keep an eye on emerging industry practices.
Says the new agency should play “a leading role” in educating consumers about finance.

- Gives the new agency authority to ban or restrict mandatory arbitration clauses.

- Improves transparency of consumer products and services disclosures.

- Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.

- Proposes the government “do more” to promote these simple products.

- Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.

- Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.

- Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
- Promotes access to credit in line with community investment objectives.

- Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.

- Requires non-binding shareholder votes on executive compensation packages.

- Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.

- Urges exploration of ways to improve participation in 401(k) retirement plans

To give the government more tools to manage crises, the proposal:

- Creates a mechanism that allows the government to take over and unwind large, failing financial institutions.

- Creates a formal process for deciding when to invoke this power, which could be initiated by the Treasury, Fed, FDIC or SEC.

- Gives authority to make the final decision to the Treasury, with the backing of other regulators.

- Gives the Treasury the authority to decide how to fix such a failing firm, whether through a conservatorship, receivership or some other method.

- Taps the FDIC to act as conservator or receiver, except in the case of broker dealers or securities firms, in which case the SEC would take over.

- Amends the Fed’s emergency lending powers to require prior written approval by the Treasury Secretary.

In the international sphere, the proposal:

- Recommends international regulators strengthen their definition of regulatory capital to improve the quality, quantity, and international consistency of capital.

- Recommends that various international bodies implement the Group of 20 recommendations, including requiring banks to hold more capital in good times to protect against downturns.

- Urges that national authorities standardize oversight of credit derivatives and markets.

- Recommends national authorities improve cooperation on supervision of globally interconnected financial firms.

- Recommends regulators improve the way firms are unwound when they straddle borders.

- Recommends strengthening the Financial Stability Board.

- Urges other countries to follow the U.S. lead and: subject systemically significant companies to stricter oversight; expand regulation of hedge funds; review compensation practices; tighten rules governing credit-rating firms.

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