A big gripe with consumer groups and regulators of our industry are the subjectivity and arbitrary nature of fee structures, which leaves the system open to discrimination and abuse. On June 12th, Portfolio.com outed Senators Dodd and Conrad for receiving “FOA” loans from Countrywide Financial. Following a vehement denial from Conrad in the Washington Post, one can’t help but feel like you just towel dried with a side of bacon.You may ask… FOA? Fallacious Option Arm? Oh no… nothing so pedestrian… FOA is the internal CWF designation for “Friends of Angelo.” According to Portfolio.com :
“the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value.For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.”
Battle lines are being drawn again on HR 6254 FHA Direct Endorsement Lender Participation Act. The proposed legislation sponsored by Representatives Gary Miller (R-CA), Brad Sherman (D-CA) and Joe Baca (D-CA) allows mortgage brokers and lenders to participate in the FHA single family mortgage insurance program through direct endorsement lenders. The Act allows for brokers and lenders that are currently in application with HUD for FHA approval to begin originating loans through a direct endorsement lender without completion of their audited financials.
Despite the side-stepping of Labor Secretary Elaine Chow and others in Washington, there are very few people in the real world that don’t recognize that the economy is sick. And we just can’t spin it away. Unfortunately, we can’t even rely on the accuracy of the numbers produced by the Bureau of Labor Statistics to create sound policy. At issue is the slow and steady erosion of the meaning of these numbers by changing the formula, while leaving the definition unchanged. The entire country cringed when Clinton tried to debate the definition of the word “is.” It is because at our core we have to believe in the truism… by definition right? However, what if you could turn that into naiveté not by adjusting the definition but by adjusting the formula? Most econometric models rely on the sanctity of specific numbers, like the CPI, for setting COLA, rates, etc… and finding the real numbers involves editing out that spin. (more…)
Kevin Phillip’s article in May’s issue of Harper’s (Numbers Racket: Why the economy is worse than we know) gives an excellent analysis of the underlying and less obvious factors that have led to our current economic situation:
“…the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.
The corruption has tainted the very measures that most shape public perception of the economy—the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances—inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits.”
Click here to read the article. While you can look to any media source for a complex discussion of how the mortgage originator was the cause of the meltdown, the Phillip’s article takes an interesting look at the critical statistics, like Consumer Price Index (CPI), unemployment and Gross Domestic Product (GDP), underlying our entire economy and how they have been systematically “adjusted” over the last 25 years. Seen in the harsh relief of the current crisis, the Harper’s article addresses a number of interesting economic conundrums and laws of unintended consequences that are involved in economic policy.
The Mortgage Law Blog, a web log (blog) providing information briefs about the mortgage banking and real estate finance industry, interviewed Titan Lenders Corp’s Ruth Lee about Titan, her career, herself and her experience as an MBA Future Leader.
“The Fed has to undertake substantial open-market operations to sop up the liquidity that would otherwise be generated by its various new lending facilities. The result? The Fed is buying far fewer short-dated Treasuries at auctions, which is no doubt leading to higher interest rates.”
“June 2 (Bloomberg) — As if a slowing economy, a falling dollar, faster inflation and a credit crunch weren’t enough headaches for U.S. Treasury Secretary Henry Paulson, he now has to worry that the Federal Reserve will undermine the return of the one-year bill.”
This is a great article discussing the effects that tinkering with the CPI and economic indicators in order to give a positive economic outlook have on markets over the long term:
“In 1983 the Bureau of Labor Statistics was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15 percent, thereby making the country’s economy look like a banana republic. Worse, since investors and bond traders have historically demanded a 2 percent real return after inflation, that would mean that bond and money market yields could climb as high as 17 percent.
The BLS solution was as simple as it was shocking: Exclude the cost of housing as a component in the CPI, and substitute a so-called “Owner Equivalent Rent” component based on what a homeowner might rent his house for.”
I will be exploring the changes to the CPI and how they have falsely depressed interest rates which helped lead to the crisis over the next several weeks. Stay tuned!
North Carolina has been on the cutting edge of progressive mortgage legislation for almost ten years. The results have been effective in reducing subprime legislation; however, the net benefit of these efforts is still up for debate. There are indications that North Carolina, while producing less subprime origination, has not been as successful in producing equal access to financing for poor and minority borrowers. Today, recent legislation is having the consequence, intended or otherwise, of putting the NC FHA broker out of business.
