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Mr. Watt And Mr. Castro

When President Obama announced that he was naming Melvin L. Watt to run the Federal Housing Finance Agency (FHFA) and Julian Castro to become Secretary of Housing and Urban Development (HUD), I felt that both appointments were major mistakes. At this point in time, however, I think I may have been half wrong in my assessment of their abilities to handle these jobs.

At first, both Watt and Castro appeared severely out of their leagues. Watt was an undistinguished Congressman with a penchant for tilting to the left. There was genuine reason to believe that he would tow the Obama line when it came to government intervention in housing. And Castro was the mayor of San Antonio and one of the fastest rising Hispanic figures in the Democratic Party – indeed, some pundits are eyeballing him as a potential vice presidential candidate in 2016. Neither gentleman had any great experience in formulating housing policy, and it was easy to assume their appointments were strictly engineered for partisan purposes.

For his part, Watt appears to be something of a happy wild card. In an October 1 news article that ran on the Bloomberg wire, reporter Clea Benson noted that Watt has confounded those who were expecting quasi-socialist machinations from his FHFA office.

“Watt’s circumspect style and scant policy changes in his first nine months as director of the Federal Housing Finance Agency have drawn criticism from some of the same housing advocates who pushed President Barack Obama to appoint him,” Benson wrote. “The National Low Income Housing Coalition and other groups said they expected Watt, the most powerful housing official in America, to move quickly to help troubled borrowers and lower-income families shut out of the two-year housing recovery. Instead, he is maneuvering cautiously, asking for public feedback on many issues — and earning accolades from the mortgage industry.”

Benson also quoted Peter Dreier, a public policy professor at Occidental College in Los Angeles and a highly vocal advocating of enabling debt reductions for borrowers with Fannie Mae and Freddie Mac mortgages. “Mel Watt has been a huge disappointment,” Dreier complained. “No one I know in the housing community understands why he’s sitting on his hands.”

To his credit, Watt appears to making a serious effort to understand the complexity of his duties before he attempts to make any significant changes to federal housing policy. In view of my earlier assertions that he was the wrong man for the job, I humbly acknowledge that my consideration of him was incorrect.

On the other hand, Castro’s leadership at HUD appears to be placing much more focus on the “urban development” element of HUD rather than on the “housing” side of the equation. His first major speech on housing took place on September 16 before the Bipartisan Policy Center’s annual housing summit, but Castro used his time on the podium to place a surplus amount of attention on Internet-related considerations. For example, consider this upcoming quasi-clueless happening that his office is producing.

“HUD is planning an event with the White House we call a ‘codeathon,’” he stated. “We’re bringing together data experts and programmers to take our information about communities and develop new digital tools that empower others. One of our hopes is that lenders will use these tools to see the whole picture when working with potential homebuyers. Let’s say they can easily determine a family wants to buy in an area where transportation costs are low. Lenders may consider these savings as they make their decisions about the quality of the loan – and that can help get credit moving.”

Oh, that’s all it takes to “help get credit moving”? Uh huh. Later in the speech, Castro enthusiastically called for a federal crusade to improve Internet usage.

“Over the next two-and-a-half years, I’m going to place a special focus on expanding broadband access,” he said. “Access to knowledge and information is as vital to a thriving community as access to jobs, good schools and safe streets … President Obama has challenged the nation to connect 99% of American’s students to broadband and wireless in their schools and libraries by 2018.  As HUD Secretary, I’d like to ensure that this access follows them home.”

While Castro’s speech offered vague acknowledgement of issues relating to affordable housing (or the lack thereof), his Internet mania clearly drove his address. Perhaps Castro should spend some time at FHFA headquarters, where Watt can offer him some guidance on the importance of not rushing into a new job in a silly-willy manner. Until I start hearing some serious talk from Castro about how HUD can add muscle to the housing market, I remain unconvinced that his HUD ascension was a good idea.

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It’s About Time

I gleefully reported in late January that FHA has opened the door to the broader use of electronic signatures in the mortgage space. The time for lenders to adopt e-signatures is today. There is huge ROI to be gained.

Specifically, back in January the FHA Mortgagee Letter (ML) announced that FHA will accept electronic signatures conducted in accordance with the performance standards outlined in this ML on documents requiring signatures included in the case binder for mortgage insurance, servicing and loss mitigation documentation, FHA insurance claim documentation, and on HUD’s Real Estate Owned (REO) Sales Contract and related addenda unless otherwise prohibited by law.

Let’s dig a little deeper. I know that you want to know what documents is FHA talking about in this letter. FHA goes on to say:

FHA will accept electronic signatures on the documents referenced below (collectively referred to as “Authorized Documents”), provided that the mortgagee complies with standards outlined in this ML.

>> Mortgage Insurance Endorsement Documents: Electronic signatures will be accepted on all documents requiring signatures included in the case binder for mortgage insurance except the Note. As of December 31, 2014, FHA will accept electronic signatures on the Note for forward mortgages only. FHA will not accept electronic signatures on HECM notes.

>> Servicing and Loss Mitigation Documentation: Electronic signatures will be accepted on any documents associated with servicing or loss mitigation services for FHA-insured mortgages.

>> FHA Insurance Claim Documentation: Electronic signatures will be accepted on any documents associated with the filing of a claim for FHA insurance benefits, including the Form HUD-27011, “Single Family Application for Insurance Benefits.”

>> HUD Real Estate Owned Documents: Electronic signatures will be accepted on the HUD REO Sales Contract and related addenda.

Great, FHA is onboard. So, what’s next? The closing process of course. We know that the FHFA is hard at work trying to develop the Common Securitization Platform (CSP). If there was a standard way to compile and submit e-mortgages to any investor, surely the industry will adopt. Well, maybe not, but if the investor mandates it, it’ll happen, and something tells me that it is not going to be built just so early adopters can use it, it’s being built so everyone uses it.

In this issue my good friend Jeff Lebowitz argues that the government should not build this platform because it has a bad track record of successfully deploying technology. I agree, but I would also note that lenders have an equally bad track record when it comes to deploying technology. The bottom line, as I see it, is that this platform is something that the industry needs. It’s long overdue. So, regardless of who builds it, to the coming CSP, I say: It’s about time.

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It’s Just A Flesh Wound?

Fans of the classic movie “Monty Python and the Holy Grail” may recall the character of the violently clueless Black Knight, whose sword duel with King Arthur resulted in having both of his arms and legs cut off by the monarch. But despite being chopped apart, the Black Knight stubbornly overlooked his physical predicament and persisted in his fight. “It’s just a flesh wound,” he insisted when King Arthur pointed to his bleeding injuries, later claiming, “I’m invincible!”

Well, the spirit of the Black Knight seems to be alive and well in this country, especially in view of very recent economic data. Despite a seemingly endless skein of numbers that affirms a metastasizing crisis, there are still too many Black Knight-inspired economists, elected officials and self-appointed opinion makers that insist everything is fine.

For example, let’s consider last week’s numbers from the Commerce Department that found a 16% drop in housing starts during January. This “flesh wound” is being quickly explained away by many housing industry observers as a meteorological fluke – after all, much of the country has experienced an abnormal amount of snowy weather since the year began.

But Dr. Anthony Sanders, distinguished professor of real estate finance in the School of Management at Fairfax, Va.-based George Mason University, observed that one cannot just wave away those numbers by blaming Mother Nature. “While it is stylish to blame the awful weather,” he wrote in his always-insightful blog Confounded Interest, “that doesn’t explain why starts are still below any level prior to January 2008.”

Also from last week was data from the Federal Reserve Bank of New York that found consumer debt rose by the most in more than six years during the final quarter of 2013. Household debt hit the $11.52 trillion mark during the fourth quarter of last year, up $180 billion from a year earlier.

In a Bloomberg News interview, Tim Duy, a former U.S. Treasury economist and a professor at the University of Oregon in Eugene, saw a silver lining in that dark cloud. “Signs that consumers are starting to re-leverage again and take on more debt is consistent with the idea that we’re turning a corner on the recovery,” he said.

Yes, we are turning a corner – and going in the wrong direction. Dr. Sanders, in his Confounded Interest blog, has noted that mortgage application purchases are at 1994 levels and real median household income is at 1995 levels. There is a difference between “turning a corner” and going back 20 years in time.

There is also the question of employment opportunities in this country – or, more accurately, the lack thereof. The federal unemployment rate has become thoroughly detached from the greater problem of long-term unemployment and under-employment. No less a figure than Federal Reserve Chairwoman Janet Yellen has gone on record to say that, “we shouldn’t focus only on the unemployment rate.”

But what is the response to this? Congress passed a budget bill in late December that allowed for emergency unemployment benefits to expire. President Obama signed that bill into law, and then chastised Congress for allowing these benefits to lapse. As of this writing, the emergency benefits remain terminated. The Wall Street Journal estimates that one in six men between the ages of 25 and 54 do not have jobs; unemployment rates among African-Americans and Hispanics are abnormally swollen, and job-related age discrimination complaints are also reaching new highs.

And don’t get me started on the student loan debt crisis and the deleterious effect it is having on the current economic situation, not to mention the near-future of homeownership rates. But you cannot just spoon out bowlfuls of comfort food to ease the pain: last month, the U.S. Department of Agriculture projected an increase of 2.5% to 3.5% in the all-food index of the Consumer Price Index for 2014, a 1.4% jump from last year. It is enough to make you sick – and thanks to Obamacare, there’s an excellent chance you will be paying a much higher premium as part of your road to good health.

As for the housing market’s alleged recovery, we have the problem of Mel Watt, the new head of the Federal Housing Finance Agency (FHFA), who is ready to tear apart the slow progress that has been made over the past five years.

“We’re hearing that FHFA may again try to reduce the 25 basis point servicing fee,” said Bill Cosgrove, chairman-elect of the Mortgage Bankers Association during the trade group’s National Mortgage Servicing Conference last week. “We’re not clear as to what they would reduce it to, which is even more cause for concern. This could have adverse impacts to certain business models, particularly those that rely on the fee to compensate for the ever-growing cost of compliance. Any considerations to change the fee structure must consider business impacts, new accounting rules, and actual costs of servicing under the new rules. In the wake of shrinking originations and tighter credit, this would be just one more thing that further restricts private capital.”

Still, there are those who insist that our national injuries are just a flesh wound. In his recent State of the Union address, President Obama proclaimed, “Our housing market is healing, our stock market is rebounding, and consumers, patients, and homeowners enjoy stronger protections than ever before.”

Ah, yes, never mind all of that silly data, our president insists. After all, it’s just a flesh wound, yes?

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2014: The Year The CFPB Loses Power?

If I could make one bold prediction for the coming year, it would be that the Consumer Financial Protection Bureau (CFPB) will begin 2014 at the height of its powers and wind up 12 months later facing the end of its viability as a regulatory force.

Why would I say such a thing? Because market and political forces are not aligned in the agency’s favor. If these forces set off a specific socioeconomic chain reaction, they will result in the CFPB at the end of next year in a very different place.

For starters, next month will see the official launch of the CFPB’s new rules governing home loan origination, most notoriously the qualified mortgage (QM) aspect. Very few people believe that these rules will spur a new wave in originations. Indeed, the major lenders in this space spent a good chunk of this year cutting down on their origination operations – and no one is rushing in to fill the void they are leaving.

These rules will have one positive impact: it will spur many lenders to aggressively pursue the non-QM market. But this sector will be pursued by default rather than design, and there is only a finite number of deep-pocketed consumers eager to seek out jumbo mortgages.

Complicating matters will be the trends that promise (or threaten, depending on your outlook) to reshape the housing market: rising interest rates, the dramatic decline in affordable housing, a stagnant economy, an employment picture that favors low-wage/part-time job creation, and the financial disruptions being created in the Obamacare debacle. And I hate to imagine what will happen if the Fed tries to wean the economy off its QE-Forever policy.

Then, there is a real wild card: Mel Watt at the Federal Housing Finance Agency (FHFA). It is no secret that Watt – or, to be honest, the Obama White House that will tell Watt how to behave – wants to reverse the FHFA’s positions on principal reduction. Whatever flaws Edward DeMarco had as the FHFA leader, he was on target in ignoring the political pandering that fueled calls for aggressive principal reduction. If Watt changes course on this action, this could easily create new convulsions in a housing market that is attempting to stabilize.

Furthermore, there is the question of Richard Cordray, the CFPB’s director and a former attorney general in Ohio. There has been plenty of buzz in Ohio that Cordray is considering a run for the governorship. Although most people in Ohio seem comfortable with the Republican incumbent, Gov. John Kasich, Cordray is reckless enough to try for this job. (Lest we forget, Cordray shamelessly ran the CFPB after being shoehorned into the job via a presidential recess appointment process that federal courts declared to be unconstitutional – it is a bit odd for a former attorney general to happily break the law in order to get a job.)

If Cordray stayed on at the CFPB, he could plan to run in 2016 against Ohio’s Republican Sen. Rob Portman. However, he would also be stuck on what could be a political sinking ship. And being associated with the Obama administration for any extended period is hardly a sure-fire vote generator.

And, finally, there is the question of the state of the nation in 2014. If there is a continuation of our current situation – or, if things get worse – it would be a no-brainer to see the Republicans maintain control of the House of Representatives and win the Senate come Election Day. (People will forget the government shutdown idiocy earlier this year and blame the president and his apologists for an endlessly crummy economy.) This, of course, hinges on the GOP’s ability to field candidates that don’t make utter fools of themselves on the campaign trail via stupid talk on social issues – I suspect the party finally learned the lesson there.

If Republicans control both chambers of commerce by strong majorities, one can easily expect to see significant changes to the Dodd-Frank Act and the position of the CFPB in the federal system in the next Congress While a full repeal of Dodd-Frank is unlikely, major tinkering can be expected in 2015, including the ouster of the CFPB director in favor of a commission to govern the agency, more direct CFPB accountability to Congress, and changes in how the CFPB is funded. These changes will weaken the CFPB considerably, to the point that the agency will limp through 2015 as a shadow of its current state.

Of course, these are only my predictions. And I have been known, on occasion, to be a little off-base in predicting the near-future. But if anything, 2014 won’t be a boring year!

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Holiday Gifts For The Mortgage Industry

Jingle bell, jingle bell, jingle bell shlock – jingle bell tinsel, jingle bell crock. No, that’s not how the classic holiday song goes, is it? Well, sorry if I am bit distracted – I am doing my holiday shopping, and I have a list of gifts to give to the people that shaped (or disfigured, depending how you look at it) the mortgage world in 2013.

Let me share my holiday shopping list with you!

For the shareholders of JPMorgan Chase: A trip to a fish market. You know the old expression that the fish rots from the head down, yes? Well, how come shareholders for JPMorgan Chase aren’t complaining about that distinctive piscine aroma coming from Jamie Dimon’s office? Dimon has repeatedly avoided taking any responsibility for the problems, potholes and hefty fines that befell his. Contrary to Harry S. Truman’s belief system, the buck doesn’t stop at Dimon’s desk – although he continues to pocket plenty of bucks for his less-than-stellar stewardship. Maybe the shareholders will have a massive revival of their olfactory senses in 2014 and start rethinking some basic issues related to competent corporate leadership.

For Janet Yellen: A new GPS. Yellen has already broken new ground as the first woman picked to run the Fed, but she won’t be of much value if she continues to follow Ben Bernanke’s roadmap and steer the country further into the realm of QE-Forever. Going forward, the economy needs bold and intelligent strategies to address acute problems, ranging from the evaporation of interest rates to an employment environment that is creating a gross surplus of low-paying part-time jobs. Yellen needs to be her own woman and not Bernanke in a dress.

For Edward DeMarco: A framed copy of the U.S. Constitution. I hope that DeMarco can use his gift to point out where he got the idea that the acting director of the Federal Housing Finance Agency has the constitutional authority to unilaterally redesign the federal government’s housing set-up without bothering to inform Congress or the White House of his plans (let alone get their respective approvals). While DeMarco has done some commendable work in his four-plus years as an interim appointee, his astonishing usurpation of authority has thrown the federal system of checks-and-balances thoroughly out of whack.

For Mel Watt: A Blu-ray disc of “Pinocchio.” Meanwhile, at the other extreme, we have Obama stooge Mel Watt lined up as DeMarco’s replacement. With this gift, Watt can get the hint that a former puppet can lose his strings and become a fully independent person – or, he can sing along to “When You Wish Upon a Star” and add a lyric about hoping the Blue Fairy can restore the housing market’s stability with her magic wand.

For the 34% of Americans classified as obese: A serious fitness and diet regimen. Health-related spending has been cited by industry studies as a primary reason why many homeowners fall behind on their mortgage payments. A 2012 study by the Journal of Health Economics found that the annual medical spending for an obese person was $3,271, while a non-obese person only spent $512. With Obamacare being put into place, we can easily expect those sums to rise in 2014 and beyond. There is no evidence that Americans are getting slimmer, but the expanding national waistlines and the increased medical costs associated to them will do little to help solidify the housing market. Healthier homeowners will ultimately help to build a healthier mortgage marketplace.

For the Progress in Lending readers: A deep hug of friendship and gratitude. Since joining this winning team in the spring, I have been overwhelmed by the extraordinary positive feedback by the Progress in Lending readers. I am also ecstatic to be part of Progress in Lending’s new publication Today’s Lending Insight – and this wonderful monthly could only have occurred thanks to the mega-strong support across the industry for the innovative work that our publisher Tony Garritano is doing.

I believe that I can speak for the entire Progress in Lending team in wishing you the very best for this holiday season and for the New Year. And remember, folks: Keep fighting the good fight, and fight to win!

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A Real GSE Reform Solution?

Huey Newton, the provocative co-founder of the Black Panther Party, once commented, “We have two evils to fight: capitalism and racism. We must destroy both racism and capitalism.” It seems that half of Newton’s wish has come true. Racism, while it is not officially tolerated, has not vanished completely and it is still a hardship faced by people of color. But Newton’s death wish for capitalism is another story.

In the past five years, Washington has sank hundreds of billions of dollars into propping up mega-corporations while burdening smaller institutions – the real backbone of the economy – with a crippling tax and regulatory regimen. As a result, the traditional definition of capitalism as the cornerstone of a healthy democracy has certainly been challenged to the fraying point.

Mercifully, there are those still among us that believe that capitalism is the solution and not the problem. A case in point: the Miami-based hedge fund Fairholme Capital, which audaciously offered to buy up the mortgage-backed securities insurance businesses of Fannie Mae and Freddie Mac in order to create the foundation of a secondary market consisting of two new state-regulated private insurance companies that will do the jobs of the government-sponsored enterprises (GSEs) without soaking the American taxpayers for operating expenses.

Of course, the Fairholme concept isn’t entirely altruistic – the company stands to earn a few bucks under this proposal. Fairholme, lest we forget, also has an axe to grind with Washington: in July, it sued the government to seek “just compensation” over changes to the bailout terms set for Fannie Mae and Freddie Mac, claiming that these changes lethally impacted shareholder value in the enterprises.

Fairholme’s managing member and chief investment officer, Bruce K. Berkowitz, made his pitch in an open letter to Edward DeMarco, who has been the “acting” director of the Federal Housing Finance Agency for more than four years. To date, DeMarco has not publicly responded to the Fairholme offer, but that is no surprise because this offer is radically different from his bureaucracy-driven strategy to realign the role of the GSEs – and, besides, the complexity of the plan is not something that you can absorb over a cup of coffee.

Berkowitz did not propose this idea to Congress or the White House. And why should he? After all, neither entity has done very much to speed to conclusion of the federal conservatorship of Fannie Mae and Freddie Mac. And, besides, DeMarco has already been reconfiguring the state of federal housing finance without bothering to consult with the Legislative or Executive Branches – score one for Berkowitz for speaking to the guy in charge.

I don’t pretend that this plan is flawless – I can’t believe the states will want to absorb a lot of the pressures borne by the federal government – but the Fairholme solution deserves praise if only because it offers evidence that some people in the private sector are tired of waiting around for government to do its job. Fannie Mae and Freddie Mac have been in federal conservatorship for more than five years, and at the current political pace it seems unlikely that their fate will be seriously discussed until after the 2014 elections.

Yes, there have been a number of GSE reform plans from trade groups and think-tanks, but they seem to be part of the Washington babble machine – a lot of talk and a lot of posing, but very little in the way of genuine results. By boldly forcing DeMarco to think outside of that proverbial box, Fairholme is providing a lesson that too many people in Washington have forgotten: it is the private sector that pumps the economy with ideas, initiatives and action.

With Thanksgiving coming up tomorrow, here is something we can all be thankful for: there are still passionate people in the private sector that are not willing to let Washington ruin the economy further. Cheers to Fairholme for reminding us about what really makes this country strong.

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Who Elected Edward DeMarco?

*Who Elected Edward DeMarco?*
**By Phil Hall**

new-PhilH***When I was a kid in school, I learned that the U.S. government consists of three branches – the Executive, the Legislative and the Judicial – that operated in a triangular configuration known as “the system of check and balances.” Somehow or other, that triangle has become a quadrangle, with a fourth entity that doesn’t pay much heed to the other three branches.

****The fourth branch is occupied by the Federal Housing Finance Agency (FHFA), which was created five years ago as the successor for the ultra-incompetent Office of Federal Housing Enterprise Oversight (OFHEO). But whereas OFHEO had endless problems being taken seriously, the FHFA is ignoring popular opinion and constitutional law by unilaterally reconfiguring the federal housing finance environment.

****Last week, the FHFA announced that it established Common Securitization Solutions (CSS) as a limited liability company in the state of Delaware. CSS is an FHFA idea to consolidate the functions that are being replicated by Fannie Mae and Freddie Mac.

****(You may remember Fannie Mae and Freddie Mac – they are the government-sponsored enterprises that went bust in 2008 and were placed in federal conservatorship. Five years later, they are still in federal conservatorship, with no end in sight for that dubious status.)

****According to the FHFA, CSS will have its own chairman and CEO. Most likely, those officers will follow the leads set by the Fannie and Freddie executives and enjoy higher salaries than President Obama’s take-home pay. The FHFA says that Fannie and Freddie will fund CSS – or, to be more specific, the American taxpayers that poured hundreds of billions of dollars into Fannie and Freddie since 2008 will fund CSS.

****And lest we fear that CSS will be contaminated by Washington politics, the FHFA has already signed a three-year lease for commercial office space in Bethesda, Md., and has retained an executive recruitment firm to locate the new company’s executive leadership. This is most interesting – the shutdown federal government had no money to pay death benefits to the families of military personnel killed in Afghanistan or to cover the salaries of the Park Police that prevented a deranged woman from driving onto the White House grounds, but there’s money for new office space and the hiring of corporate headhunters?

****Edward DeMarco, who has been the “acting” director of the FHFA since August 2009, issued a statement that insisted CSS “represents a significant milestone toward accomplishing the goal of building a new secondary mortgage market infrastructure.” Of course, DeMarco’s statement conveniently forgot to mention that this milestone is being achieved without consulting Congress or the White House, let alone getting their approval on this new endeavor.

****I have been involved in the financial services world for a quarter-century, and at no time have I ever witnessed such a blatant disruption as DeMarco’s casual restructuring of the federal housing system. At a time when federal workers are furloughed and agencies are either at half-staff or fully suspended, DeMarco’s FHFA is blithely spending taxpayer money on a project that was never approved by either the Congress or the White House.

****Whether CSS is a good idea or not is irrelevant – what is shocking is that this regulatory agency, run by an interim appointee who has long overstayed his duties, is now functioning as a de facto branch of the federal government. There is no precedent for such rogue behavior, nor should there be any tolerance for this misuse of regulatory authority.

****Of course, the Executive and Legislative branches are so busy throwing mud at each other that they are not making any effort to question the CSS situation; whether anyone will question the legality of the FHFA’s actions before the Judicial branch remains to be seen, but it is probably not likely.

****Nonetheless, the FHFA’s actions need to be held up to scrutiny. It is no secret that the federal government is dysfunctional, but this latest action by the FHFA clearly shows the situation is worse than previously imagined.

Should We Shut Down the FHA?

*Should We Shut Down the FHA?*
**By Phil Hall**

new-PhilH***Back in January, Rep. Jeb Hensarling, R-Texas, made a statement that few people took seriously. “The FHA is broke – bailout broke,” said Hensarling, who is chairman of the House Financial Services Committee. “The FHA’s dire financial condition and dominance of our housing finance system are a clear and present danger to every taxpayer who is now at great risk of having to fund yet another Washington bailout. Without serious reform, FHA may become the next Fannie Mae and Freddie Mac.”

****The source of Hensarling’s warning was a November 2012 actuarial report by the U.S. Department of Housing and Urban Development, which noted that the FHA’s single-family insurance fund had a negative economic value of $16.3 billion. However, the FHA and its apologists sneered at Hensarling’s warning, claiming that everything was copacetic.

****I think you know what happened next. Hensarling’s warning was quietly confirmed by the Obama Administration, which announced in April that the FHA was projecting a $943 million shortfall for fiscal year 2013, which ended on September 30. But that projection was absurdly off the mark: the FHA is now requiring a $1.7 billion bailout from the U.S. Department of the Treasury in order to stay afloat.

****But anyone who thinks that a mere $1.7 billion will be enough to put the FHA back on its feet is a fool. Edward Pinto, a former Fannie Mae executive and a senior fellow at the American Enterprise Institute, recently told Investors Business Daily that approximately 40% of the newer FHA-backed loans were in the subprime class and that delinquencies on FHA loans are at the 17% range. Pinto estimates the agency will need at least $25 billion to remain operational.

****“The FHA is woefully insolvent,” Pinto said.

****My two-cent deposit in regard to the $1.7 billion bailout request: shut down the FHA completely. I am not suggesting that the closure should be temporary, with the goal of rectifying the problems at hand. I believe that the nation could do very well without this mismanaged mess of an agency.

****The FHA bailout offers yet another piece of evidence about the federal government’s failure to run the national housing finance system with any degree of competence. In the years prior to the 2008 crash, federal regulators utterly abdicated their monitoring responsibilities while elected officials of both parties pushed for unrealistic and unsustainable housing goals that were driven by political steam rather than economic intelligence. Since the 2008 crash, Washington has created a series of rules and regulations that punish the financial institutions that were not responsible for the crash while giving the too-big-to-fail monsters and their well-heeled executives the proverbial get-out-of-jail card that allows them to carry on with their reckless and stupid behavior.

****Even worse, the federal government has spent the past five years steering the housing finance system away from a free-market capitalist environment into a socialist set-up where Uncle Sam uses taxpayer money to cover the entire process, from homeowner education through the sale of mortgage-backed securities. Some idiots like to crow that everything is under control because Fannie Mae and Freddie Mac are making huge profits today. Well, yeah, that’s not difficult when you have no competition whatsoever! And the Federal Reserve’s policy of printing endless amounts of money keeps the madness in motion.

****Of course, we just can’t shut down the FHA overnight. As with the long-delayed question of reforming the government-sponsored enterprises, there will have to be a period of transition from the nanny state to the private-label market. There will be savvy financial institutions that will seek to absorb the FHA’s intelligent operations, while the reckless and risky aspects of the FHA’s outreach could fade away unless someone figures out a smart way to do that kind of business (and not with taxpayer money, too!).

****It will take time, but it will ultimately prove to be time well-spent. But the nation needs to get moving in that direction – too much time and money has already been wasted.

****Sadly, too many people will not admit that. Rep. Maxine Waters, D-Calif., defines the state of complete denial when she defends the viability of the FHA.

****“It’s important to note that FHA is far from bankrupt,” she said after the $1.7 billion bailout request became public. “[The FHA is] holding over $30 billion in reserves and [is] continuing to generate revenue.”

****Maxine, your reality check has bounced!

Top Of Mind Stuff

*Top of Mind Stuff*
**By Lew Sichelman**

LewS***Paul Muolo, my friend and former colleague at a publication that shall remain nameless, sure stirred up a hornet’s nest when he wrote late last moth that the Federal Housing Finance Agency is contemplating a big change – read that DROP – in Fannie Mae and Freddie Mac’s loan limits. He and others who quickly jumped on the bandwagon have pressed the FHFA about when the big announcement would be coming, and the agency responded that it would do so in due time. But what’s the big deal, here?

****Like clockwork, announcements about changes in the limits – currently $417,000 in most places but $625,500 in high cost markets  – have always come during Thanksgiving week, never before and rarely after. So hold your horses, guys. Unless somebody spills something to Wikileaks, it’s going to be a few more weeks before we know anything for certain.

***** * * *

****I have no issue whatsoever with the roughly $300 million settlement with JPMorgan Chase over force-placed insurance. After all, the big bank has been helping itself to a big share of the ungodly premiums insurers are slapping borrowers who, for one reason or another, don’t carry their own home owners’ policies.

****But I do wonder how much of all that will actually make its way back to the some 1.3 million people who were actually harmed by the practice of forcing borrowers to pay unjustified premiums and then taking a big share of the loot in kickbacks? My bet is, not much. My bet is, the attorneys are in for a big payday, not their clients.

****And if I’m right, isn’t that just as egregious as force-placed insurance? Maybe Shakespeare had it right when he wrote, “The first thing we do is kill all the lawyers.”

***** * * *

****With Halloween just around the corner, you are likely to run across articles or programs about haunted houses and how well they sell – or not. But they are all late to the party.

****I wrote my first piece about the topic in the late 1970s at the Washington Star. And two places I wrote about are still top-of-mind: One was a place in Bowie, Md., where two young men conspired to kill each other’s wives. After one was murdered, but before the other dastardly deed took place, the guys were apprehended.

****The house where the woman was killed was later sold to an investor, who rented it out. But what is still unnerving to this day has to do with the family that rented the place. The wife had the first name as the woman who was killed, and the daughter had the same name as the woman’s child.

****One of the other houses I discussed belonged to Bradford Bishop, the foreign service officer who bludgeoned his family to death with a sledgehammer. After he learned he was being passed over for a promotion, Bishop bought the aforementioned murder weapon, went home to his Bethesda house and hammered his wife, mother and three sleeping children. Bishop, who was trained as a spy and speaks several languages, is still a fugitive.

****Anyway, the buyer of that fateful place had no idea what had gone on there, and his realty agent saw no need to tell him. (Nowadays, the law requires the disclosure of such information). But shortly before closing, a neighbor told him of the murderous events, and he was able to renegotiate the price. Down, of course.

A High-Tech Debacle Waiting to Happen

*A High-Tech Debacle Waiting to Happen*
**By Phil Hall**

new-PhilH***Last November, the Consumer Financial Protection Bureau (CFPB) and the Federal Housing Finance Agency (FHFA) announced that they were joining forces to create something called the National Mortgage Database, which the agencies dubbed the first “comprehensive repository of detailed mortgage loan information.” Why does the federal government need a National Mortgage Database?

****Well, the CFPB and the FHFA claimed that when it came to tracking mortgage information, there was a “lack of comprehensive data available on a complete, national scale.” As a result, the new database would “support the agencies’ policymaking and research efforts and to help regulators better understand emerging mortgage and housing market trends.”

****Uh huh. Clearly, the agencies believe that all of the mortgage-related data that is being compiled by federal and state government agencies, trade associations and numerous private companies have no value whatsoever. And we’re not just talking about current data – the National Mortgage Database will track information as far back as 1998.

****When the CFPB and the FHFA made their announcement about the database last fall, there was relatively little worry regarding this endeavor. After all, what could be the problem in having the government monitoring homeowner data?

****Today, thanks to Edward Snowden, there is a different mindset on federal data collection procedures. The other week, Sen. Mike Crapo (R-Idaho) voiced his concern on this, focusing primarily on the CFPB’s activities.

****“There is without a doubt a trust deficit in government today, and we now have a federal agency that is using unchecked power to gather data on the spending habits of hundreds of millions of Americans,” Crapo said. “We do not know exactly what information is being collected or how it is being used; the agency has been evasive in its answers to questions from Congress. We do know that the data includes information from credit card accounts, bank accounts, mortgage transactions and student loan transactions.”

****Crapo, who is the ranking member of the Senate Banking, Housing and Urban Affairs Committee, added that the CFPB has ignored his requests for information on its data gathering operations. As a result, the senator is asking the Government Accountability Office (GAO) to look into this matter.

****Actually, Crapo might do better to review a May 2012 report that the GAO issued about the FHFA’s computer network problems. If anything, the report points to a potentially damaging security breach on the FHFA side of the operation.

****The GAO cited the FHFA for multiple problems connected to its information security program, which were charitably described as “vulnerabilities.”

****“FHFA did not ensure that appropriate password management controls were implemented on key systems we reviewed at both FHFA and an FHFA service provider,” said the GAO in its report. “In addition, FHFA did not enforce disabling of inactive user accounts on one of its systems. As a result, an increased risk exists that FHFA accounts could be compromised and used by unauthorized individuals to access sensitive information.”

****The GAO also commented on the shoddy nature of the FHFA’s authorization controls, noting that data “could be inappropriately modified, either inadvertently or deliberately.” Even worse, the GAO noted that the FHFA had a history of ignoring warnings about its IT flaws.

****“The underlying cause of the vulnerabilities we identified in fiscal year 2011 is that FHFA has not fully implemented our previous recommendations related to FHFA’s information security program,” the GAO stated. “For example, we have previously reported that FHFA did not always effectively monitor its systems. This lack of monitoring contributes, in part, to the new control issues we identified in our 2011 review. These new and continuing control issues increase the risk that (1) contractors or other users with privileged access could gain unauthorized access to or improperly use agency financial systems, applications and information, and (2) unauthorized system changes could be implemented. Until FHFA mitigates its control deficiencies by fully implementing an effective information security program, increased risk exists that its financial and support systems and the information they contain will be subject to unauthorized access, use, disclosure, disruption, modification or destruction.”

****Between the CFPB’s mania for power and the FHFA’s high-tech sloppiness, one can easily imagine the new depths of inane danger that will be plumbed with the National Mortgage Database. Needless to say, Big Brother is watching you – but not watching for cyber vandals.