Just you wait Henry Higgins.
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"With almost $15 trillion in assets, "
The question is: what are the liabilities on that 15 trillion, and whom will be in trouble when the market value of those liabilities go south. Can you say too big to fail banks boys and girls? That's right.
You cannot compare the mortgage market of today vs. 2008, at least not as you're doing in this article.
Mortgages have far more stringent underwriting requirements, and the money in mortgages since call it 2008 hasn't been made in portfolioing the loans (everyone dumping those conventional mortgages on the GSE's as fast as they possibly can, have been for a decade now) it's in the origination fees.
As a result they have to pass muster, namely the requirements instituted by Fannie and Freddie because if they don't, they're stuck with the loans, and the warehouse lines these lenders are getting don't support doing much of that... they have to keep up the six month churn or they're out of business in the existing model.
Other loans, business and personal and of course the ever expanding student loan debt issues, sure... but if you look at the data reported by the BLS HELOC balances are the only things going down over the last half year, which strongly suggests mortgage market is OK cause that most certainly was not the case when they were all resetting in 2008-2010.
Reminds me of AGI the insurance company that wasn't an insurance company that had to be bailed out with big bucks because it was too big to fail.
How do we have lenders who aren't lenders who don't have to follow lending rules? Anything is legal if you can get away with it. The reason no one went to jail in 08 despite the terrible financial damage to average people worldwide, was what happened wasn't illegal.
Is there the political capitol and intelligence for another huge bailout? I imagine Trump would love to stick his finger in the eyes of all of those who wouldn't lend to him because he's the litigation and bankruptcy king. Of course, we'll all go down, but that's despite the point.
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Here We Go Again as Reagan once said. Every time Republicans take over D.C. the debt in this country skyrockets because they don't believe in proper regulation. Then a 1929 or 2008 hits, all the BDCs and other ridiculous loan companies run to Congress for bailouts, and us taxpayers get stuck with the bill. Here we go again...
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Here we go again murmurs an interior voice...especially
with choice quotes like this one:
While they don’t have a nationwide regulator that ensures safety and soundness like banks do, the non-banks say that they are monitored by a range of government entities, from the Consumer Financial Protection Bureau to state regulators.
If not mistaken, CFPB is the agency created by Dodd-Frank in '10 and now gutted by its prior "director" mulvaney in order to eliminate useless ideological constraints on the
"free market" (there are alternative ways to say that but these are unsuitable for NYT decency standards). So, to claim such non banks are monitored by
CFPB is to engage in rhetorical flights of fancy disconnected from any everyday sense of "monitored". To say
state regulators are up to the task is ... laughable?
Remember the roles played by AIG and Moody's?
The main issue with the shadow banking system is that
shadow bankers either borrow big time from real banks to support their operations, or, big time banks and/or investment companies, to which they are joined at the bottom line by the joys of leverage and the benefits of a "diversified portfolio", are going to buy the CLOs of the shadow banks either with their own money, or money from (likewise leveraged) investors.
This arrangement concentrates risk in subtle ways in the absence of transparency. And, as we all know, it's
easy to be opaque.
So, here we go again...probably or surely?
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Has no one actually seen "The Big Short "? Really? It is NOT FICTION! It's happening still, despite history!
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Here we go again.
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Not to worry, if these default then people lose money from their investments. Certainly there will be no collateral damage, the market is simply too smart for that. What could possibly go rwong?
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This is a phenomenal opportunity!!! Where can I buy Credit Default Swaps on these risky investments without buying the investment? History does repeat itself... and quickly!
What short memories people have-the 2008 meltdown was only eleven years ago.Surely people remember the pain of losing homes and the shock of losing investments in “safe” companies.If BCD’s have a hundred billion in loans their failure could be another huge economic disaster.The American taxpayers were assured that they would not have to rescue the banking system again.It appears that red warning flags are flying now!
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@JANET MICHAEL a) BDCs are not banks, and b) it is not clear that there is any government backstop on those organizations.
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I don't have a problem with CLOs or BDCs or whatever the financial flavor of the month might be -- so long we don't have institutionally significant insurance companies selling credit default swaps.
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If an entity is issuing loans or trading in CDO's they ARE banks. Whatever you call them, they must be subject to stress tests.
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And so it goes. Whack-a-mole in one sector of capitalism and risk pops up somewhere else. That this lending will precipitate another debt-recession is axiomatic. It will happen--usually after the first-movers have liquidated and hollowed out the various debt-packaging entities. In mob terms, it's a "bust-out."
Next time it happens (probably within the year after the presidential election, with a multi-bankrupt fellow at the helm) is would be nice to jail a few of the financial engineers.
Fat chance.
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It shouldn’t be expensive or difficult to borrow something that is being generated in parabolic quantities throughout the world. Banks are merely co-conspirators given privileged status by “reserves” basically provided by national treasuries. It is hardly surprising that non-banks want to play. MMT fails to point out the corrupt nature of handing government the cash pump.
Minsky ‘s moment approaching soon?
For the past several months I have been getting robo-calls offering me unsecured business loans. I suspect that these were being dumped into some sort of securitized vehicle and then sold to folks who do not understand the risks. How can I short these vehicles?
Here we go again. The Great Recession was triggered by falling housing prices affecting highly leveraged mortgages. The financial risk of those mortgages had been sliced, diced, and sold to many other institutions. Then a clever company called AIG allowed still other institutions to wager on the health of those loans. It was a financial house-of-cards.
This time, we have a wider variety of loans including mortgage and business loans. And they're being sold by shadow banks who are not part of the regulatory scheme set up following the crash. So the tipping point may not be housing; it could just be tough business conditions, slowing growth, trade policy, whatever. The house-of-cards has been rebuilt.
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Please clarify. Quicken and others typically just initiate the loans. The actual loans are on the balance sheets of Fannie and Freddie and maybe FHA.
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@MikeS I saw nothing in this article to indicate these mortgages are being purchased by Fanny/Freddy/FHA. What is your source?
@wjs there is a very important distinction between a bank, a mortgage banker and mortgage broker. A bank puts their Capital at risk, a mortgage banker and broker does not. Mortgage bankers and brokers underwrite loans to Fannie, Freddie, FHA standards and these agencies buy the loans. I hate to sound like I'm defending Quicken loans, but since they are a mortgage banker I don't understand why they should have a reserve requirement? Quicken loans does not have deposit accounts so they don't have that Capital they are putting at risk. the reason they offer loans to lower credit scores is because FHA allows very low credit scores that most banks are not willing to participate in. The standards are set by FHA, Fannie, and Freddy. Mortgage bankers and brokers are simply willing to sell at the lower end of those standards where banks are not willing to. If there is blame to be had for risky mortgage lending to Fannie and Freddie the blame belongs with their underwriting standards.
The market has become so dependent on the Fed's manipulation, that in some sense how well it does has become unhinged from the real economy. Today, bad jobs reports means the market rallies, because a weak economy means the Fed will have to inject more liquidity. Tariffs mean the stock market goes up because a weak economy means the Fed will have no choice but to inject more liquidity. Federal investigations into big tech companies means the stock market goes up because a weaker economy is good for the stock market. Etc. And, conversely, when the Fed was attempting to raise interest rates, which traditionally is an indication of confidence in the broader economy, the stock market flattened and eventually began to keel over leading to the panic we saw in December. This only reversed course when the Fed caved and indicated to the market that it was going to cease tightening.
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@Matthew Girard I've been saying the same thing lately. The Trump administration has pumped so much cash into this overheated economy (through the tax cuts and strong-arming the Fed to keep rates low), that there's a mountain of cash chasing high-rate returns that are illusory. At the bottom of this latest institutional conspiracy must be an AIG-like entity insuring the top players with the knowledge that it's too big to fail and will therefore be bailed out by the Treasury when the house of cards collapses again. It worked last time (with no criminal or financial penalties), so why not do it all over again -- especially if the White House and Senate are keen to keep the economy artificially inflated for as long as possible.
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Banks are insured by the FDIC, so their high risks left the banks with profits and the taxpayers with losses.
I don't see the problem with mortgages from these non-bank lenders as long as they are not cheating borrowers. If I owe Loan Depot $100,000 on my mortgage, how am I hurt if Loan Depot goes bankrupt? I'm not depending on them for any money after the original loan.
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@Michael
You aren't hurt in the scenario you painted, but let's turn your question around. If your job is affected in a downturn and you can't make your over-extended mortgage payment, Loan Depot's ability to pay back its funders is compromised. Its collaterized borrowing is held, in part we'll say, by your neighbor. Now both of you are hit by the downdraft.
I think the point of the NYT piece is that we've traded one high wire act that failed for another that might.
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@Michael, "Banks" aren't insured by the FDIC -- DEPOSITORS (or rather, depostoris' accounts) are insured by the FDIC. That's completely different: FDIC insurance steps in after a bank is already dead, not to make the bank whole again, but to make its customers whole again.
You're right that if you owe Loan Depot money and Loan Depot goes bust, you're not the one with the problem. Not directly, anyway. But Loan Depot had sold your mortgage, and others like it, to third parties (you don't think that Loan Depot loaned you IT'S OWN money, do you?). These third parties are investors of various stripes, and they can be hurt badly. Not so much because Loan Depot went bankrupt per se, but because Loan Depot went bankrupt because it made too many bad loans -- loans that investors now hold. Ooops.
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@Michael
If Loan Depot gave you a mortgage and then held the debt on its balance sheet, then you would be right. You failing to repay would hurt Loan Depot and that's about it.
The issue, which the article just barely begins to note, is that Loan Depot can and does sell the mortgages they make to government-sponsored entities like Fannie and Freddie.
But that's the tip of the iceberg. The problem multiplies when taking into account how Fannie and Freddie generally work. Not mentioned in the article is that they take the debt they purchased from Loan Depot, slap on a guarantee fee that earns them a few extra basis points but puts them on the hook in the event the homeowner defaults, and resell that product to other investors further removed from the origination of the loans themselves (who then bundle/chop up those products and sell them again).
What you wind up with is a market in which there is a quasi-government entity with a history of being bailed out guaranteeing hundreds of billions (trillions?) in home loans about which neither the loan originators nor the end investors actually care if the debtor has the ability to repay, and if the debtor can't repay, they lose their home, which is usually their main source of wealth. Then investors bet billions on whether/when those products will default.
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Its all good. They are regulated by the Consumer Financial Protection Bureau, which has not been completely gutted and crippled by the Trump Admin at all
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@Dave
Is that sarcasm? :)
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So... will shadow banks be treated as "too big to fail" when the air comes out of this credit bubble too?
I certainly hope not. Their risk, their reward, their failure... let it settle naturally and if some shadow banking entities fail.. so be it. Failure is the only thing that will teach them to stay in their own lane and to not take excessive risks.
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@Chuck
BUT, are companies like Quicken holding on to the risks? Sounds like they are offloading the risks elsewhere, presumably to entities / investors that don’t have a good grasp of the risks. It seems like the originators of these loans have little risk and all the reward. I’m not sure who the investors are, or what makes them so willing to take on risks eerily similar to those that contributed so greatly to the economic collapse in 2008.
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