What exactly is it that we manufacture in this country? A Clerisy of pundits suggest that our manufacturing base has all but disappeared. Some may point to the fact that our manufacturing base in 1950, lead the GDP with a healthy thirty percent. Today manufacturing hovers around an anemic high single digit. On the contrary, I would suggest that manufacturing is stronger than ever. It is simply a matter of figuring out what other things are manufactured in this country.
Wall Street has shown the world that we are great at manufacturing risk and debt. The securitization of mortgage back securities and derivatives such as collateralized debt obligations makes the point loud and clear. Prior to the implosion of Wall Street, activities from financial services lead the GDP with over twenty percent. Let’s take a look at just how good we are at this kind of manufacturing.
1. Mortgage lenders that retained the first payment default risk went out of business immediately.
2. Risk was also displaced to investors that purchased MBS & CDO’s. A pending disaster.
3. Lenders, companies and organizations that pledged these securities as collateral faced major margin calls. Let’s call Uncle Sam.
4. Insurance companies that insured against defaults (credit default swaps) saw assets decimated. Only when Goldman Sachs admitted that they could lose billions, did Treasury Secretary Paulson, former CEO of Goldman Sachs, come to the rescue. It is nice to have a “relative “in high places.
5. Investment banks took huge positions based upon the fact credit rating agencies rated this paper AAA. Then it came out that the higher securities are rated, the more the credit agencies make. The ultimate greed machine.
6. Companies heavily invested in these securities had trouble issuing commercial paper as their liquid assets took a hit. The effects are felt up and down the economy.
As long as borrowers continue to default on their mortgages and as long as housing values continue their precipitous decline, these securities will continue to decline, wrecking havoc to anything it its path.
This country is also good at manufacturing laws that change industry procedure for the worse. A perfect example is what has happened in our industry, the reverse mortgage industry. As I have pointed out before, HUD really had a handle on the counseling issues. Over the years, there were 5 mortgagee letters that set forth the manner, requirements and protocol of counseling (mortgagee letters: 2000-10, 2004-25,2004- 48, 2007-08 and 2008-12). Then with one amendment to the Housing & Economic Recovery Act 2008 ,these years of hard work were thrown out the door.
Another example is the wholesale exclusion of the sale of annuities from reverse mortgage proceeds. The reason the law went too far is that annuities are sometimes appropriate. This exclusion misses the point. The point is to eliminate the undesirable people from this industry. I would further suggest that systems be put into place that would require levels of review that would have to be signed off by a broker dealer, review board, etc. And if it is determined that such an annuity sale did not meet the base requirements, expulsion from the reverse mortgage industry (if a member) would follow along with substantial monetary penalties. This is the kind of teeth that is needed. So if someone wants to use those reverse mortgage proceeds to purchase an unnecessary annuity, they and the company run a huge risk. Accountability must become the linchpin upon which protection flows. Currently, this is lacking in the mortgage and reverse mortgage industries.
The country is good at manufacturing figure pointing as a problem solving technique. Congress likes to say that the reason we have this mess is because mortgage brokers are bad. Well, people are starting to wake up that it is not the mortgage brokers. If a mortgage broker is considered bad because a sub prime loan was sold to an unaware borrower (using the most egregious example), then mortgage bankers are bad, FDIC banks are bad. Credit rating agencies are bad. The Federal Reserve is bad (They kept interest rates low to insure the continued appreciation of home values and fueled the expansion of these ninja loans. Congress is bad. They had their heads buried in the sand. The truth of the matter is the entire system needs to be reconfigured.
The Community Reinvestment Act forced banks to make loans into minority areas. If a bank did not meet their CRA requirements, they could not expand. This is the law of unintended consequence at work. Loans were made that could not be paid back. This gave banks the appetite for these loans. Fannie & Freddie, to hide from their accounting scandals (some say), agreed to buy Alt-a and subprime paper. “Homeownership for all, even if you can’t afford it”, became their battle cry. The red light had turned a perpetual green.
The credit rating agencies thought these Alt-a and subprime loans were top notch. They were given a AAA rating. Therefore, Wall Street felt confident when these loans were resold and repackaged. All stop signs were taken down.
The borrowers were thrilled . They saw their homes increase in value and refinancing from one loan into another was just a loan originator away. The realtors’ mantra, “Home prices never go down”, emboldened many borrowers. All speed bumps were removed.
Many seniors got sucked into these loans from originators at neighborhood banks. These originators saw the reverse mortgage as an evil thing. When the senior borrower spent the mortgage proceeds and had nothing left for the monthly payments, tell me who was the evil one? What loan originator was evil? The answer: The ones that worked for the FDIC banks. Our banking system forgot the one thing that could have saved them: That one earns the right to get a loan.
The day of deregulation is done. The industry-wide (all industries) trust accounts are empty. More than oil power, more than solar power, or wind power, or more than nuclear power, this country had better start manufacturing some common sense.
