The business press is paddling like mad to keep up its head above the swirling subprime tide, making creative and original work difficult.
James R. Hagerty of The Wall Street Journal keeps his head and helps readers out with an interesting piece that reveals exactly to whom financial “innovators” turn to when they get into trouble: the government, of course.
The piece, “Where Countrywide Chief is Finding a Life Preserver,” in last Monday’s Journal, finds that Countrywide Financial Corp. has drawn 37 percent (or $51 billion worth) of the loans on the books of the Federal Home Loan Bank in Atlanta.
This bailout comes with no small bit of irony. Folks, Countrywide is at the heart of the subprime crisis, both symbolically and in a material way. Its bad practices—boiler room tactics for borrowers, deceptive marks for investors and buyers of its trash— caused the problem.
And yet here is this government-chartered lender placing, ultimately, tax dollars at risk, where the market fears to tread:
Countrywide’s borrowings from the Atlanta bank are mostly secured by mortgages — an asset many investors are shunning as defaults soar. Some politicians for years have raised questions about risks taken by Fannie Mae and Freddie Mac, the government-sponsored mortgage investors. Stuart Plesser, an equity analyst at Standard & Poor’s in New York, said that politicians should similarly scrutinize the home loan banks. One vital question, he says, is “how good is the collateral?”
Nobody knows the answer to that question, and that’s the problem. But markets have a hunch that it’s “not good.”
Despite anxiety among investors about mortgages, the home loan banks have increased their own bond-market borrowings as others have turned to them in recent months for funding. The home loan bank system’s debt outstanding rose to $1.134 trillion as of Sept. 30, up 21% from nine months earlier. Although they operate independently, the 12 home loan banks are jointly liable for one another’s debts.
The political response came swiftly. Several hours after the Journal published Hagerty’s story, Senator Chuck Schumer urged regulators to stop “extending advances backed by predatory mortgages” and to examine the risk to the Federal Home Loan Bank system created by the Atlanta bank’s policies.
Aaron L. Task at TheStreet.com responded to Schumer’s response said it was one of “Five Dumbest Things on Wall Street This Week.”
Given that the Federal Home Loan Bank system was set up in 1932 for the very purpose of aiding failing banks and to support mortgage lending, and that Countrywide sure could use a helping hand, Schumer’s broadside evoked former Sen. (Alfonse) D’Amato, a Republican best remembered for his strange, occasionally offensive and often perplexing filibusters.
We think Task’s logic doesn’t hold water. The Federal Home Loan Bank wasn’t set up in 1932 to aid crooked failing banks. And of course the government should examine its own risk. Who does he think it is, Citigroup?
Oh, and don’t look now, but Countrywide isn’t even the biggest user of these Federal Home Loan Bank advances. That would be Citigroup.
Speaking of the government, Gretchen Morgenson last week drew an illuminating comparison between a nonprofit subprime lender and the Countrywides of the world. In the debate over who’s responsible for the housing crisis, the banks and their pals often trot out the argument that borrowers were either incompetent, negligent or flat-out criminal in obtaining loans for houses they couldn’t afford.
Morgenson puts the lie to that line by showing that NeighborWorks America, a government-created nonprofit that helps mostly subprime borrowers in poor urban neighborhoods, has a considerably better record than those Wall Street “innovators.” Its subprime customers perform only slightly worse than commercial players’ prime customers.
As of June 30, the most recent figures available, 3.34 percent of NeighborWorks’ borrowers were at least 30 days’ delinquent on their loans, only slightly higher than the 2.63 percent delinquency rate on prime loans recorded in that period by the Mortgage Bankers Association. Compared with subprime loans over all, the NeighborWorks loans really outperform. Its 3.34 percent delinquency rate is well below the 14.54 percent on subprime loans nationwide. Foreclosure figures show a similar pattern. The NeighborWorks loans that went into foreclosure during the second quarter of 2007 totaled 0.56 percent, while subprime loan foreclosures came in at 2.45 percent during that period. The foreclosure rate for NeighborWorks loans was a little over double the 0.25 percent rate for prime loans in the period.
Some of this effect has to do with the education component of the NeighborWorks program, but much of it is because the program provides fixed-rate loans, not the adjustable-rate (or more aptly, “exploding”) mortgages that comprised 90 percent of subprime loans made between 2004 and 2006, Morgenson says.