Risk Retention October 28, 2014

“Skin In The Game”

BHHSNJ NJ301_H_Seal_cab_cmykby James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

The Weasels of Wall Street have done it again.  That’s my stereotyping catch-all description of the financial industry, particularly, the banking industry.

You think that’s too broad?  That I’m tarring an entire industry with the same, heavy brush?  It reminds me of when Zero Mostel (in the original movie of “The Producers” – the non-musical one) is told he can’t shoot the actors in his show because “the actors are people.”  “Oh, yeah?” he barks, “D’ja ever eat with one?”

I think our friends in banking and money lending have, once again, attacked the buffet table of our patience.  They’re cutting into the line and scarfing up all the good stuff and the rest of us be damned.

Now that I’ve stretched that metaphor to its breaking point let me tell you what’s got me so amped up that I’m publishing 2 posts in the same month.

In December of 2013 I published a post called “Greed, Risk and the Pope”  (click on the title to read the post).  In that post I discussed the part of the Dodd–Frank Wall Street Reform and Consumer Protection Act which mandated that mortgage lenders retain some risk when they securitized and sold bundled mortgages.

After 4 years of wrangling the regulators who establish the details of this law announced, this week, that there would, essentially be no risk retention for mortgage lenders. Here’s a link to an article in The New York Times Business Section on October 23rd:


What happened?  As the article points out, and as my December 2013 post predicted, there was intense pressure on regulators from an odd coalition of interest groups to water down the effect of the law.  Banking associations, builders, consumer groups and, wait for it….The National Association of REALTORS brought enormous lobbying efforts to bear to avoid the lenders from retaining a mere 5% of risk.

The last 2 times there was no risk retention in mortgage lending a financial collapse followed.  One was in the 1920s, with a raft of real estate securitization, which ended with The Great Depression and one was the sub-prime frenzy that ended with the housing collapse of 2008 and The Great Recession.  I’m no economist but isn’t there a lesson to be learned here?  After the country recovered from The Depression (thanks, solely, in my opinion, to World War 2), the mortgage market operated basically the same way until September 11, 2001.  In those years, banks and lenders held mortgages until they were repaid and also held the risk of default.  This led to 60-70 years of peaceful mortgaging.  When the government oversight of the financial industry was loosened (nay, abandoned) in the aftermath of the fears brought on by 9/11 and the financial industry was told to police itself, the surge of securitization started again.

Now, with the watering down of this part of Dodd-Frank, the banks are free, once more, to not care if any loan they originate is paid back – in other words, profit without risking capital.

The astounding fact is the government colluded in this potentially catastrophic compromise.  The federal regulators bought the argument that credit would be severely restricted if there was risk retention.  This is the same fear-based chestnut that lenders trot out whenever anything threatens their ability to do whatever they want.  As The Times article points out, the only thing that will prevent another disaster brought on by securitization is the wisdom of the investors who buy the securities (in the form of bonds) to distinguish the good from the bad.  The last time around those investors showed no such wisdom.

Let’s not forget, also, that the government, in the form of Fannie and Freddie guarantees the vast majority of mortgage loans so if securitized loans go bad the taxpayer is on the hook.

It did not take long for all of us to forget what happened in 2008.  The desire for more lending has fueled this groundswell of opposition to risk retention.  The new conventional wisdom seems to be we need more lending and we will bow to the banks in order to get it.   This seems to be particularly true at the National Association of REALTORS.  I have taken my profession’s trade organization to task in the past for being on the wrong side of important issues.  I have also watched in amazement as we REALTORS have become the toadies of the mortgage lenders.  It appears we’re croaking the same tune again.

If you can’t get enough of my opinions, take heart.  I have another (non-real estate) blog called “The World At Large by Jim Stefanile – Thoughts On Everything Else”.

This month’s post is “A Fateful Universe?” where I discuss the idea that “everything happens for a reason.”  I hope you can visit:   http://jimstefanilesotherblog.wordpress.com/2014/10/28/a-fateful-universe/