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View Poll Results: Your opinion on Financial Reform
Wall Street needs/deserves a smack down (regulation to limit their activity) 26 92.86%
Everything is fine, Keep it status quo 1 3.57%
No optinion 1 3.57%
Voters: 28. You may not vote on this poll

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Old 04-22-2010, 11:25 AM   #21
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A couple of thoughts.

1) It's difficult to generalize. Some people took out loans where they knew they were in over their heads. Some people took out loans they thought they could afford, but couldn't. Do the majority of defaulting borrowers fall into one category or the other? I don't think their are any statistics on this because it is too subjective. But I have a hard time believing that a majority of people took out loans that they knew they couldn't afford. To what end?

2) Defaulting isn't without consequences. It's not true that people acted irresponsibly and didn't pay a price. Personal bankruptcy, home foreclosure, etc, isn't something anyone aspires too. Ever since we've outlawed debtors prison, the consequence for not paying debts is asset foreclosure and bankruptcy. That's pretty much whats happening now. I'm not sure what more anyone wants or expects.

3) Few homeowners have been "bailed out". According to Bloomberg only 66,000 mortgages have been permanently modified. One can certainly argue whether the government should help modify any loans, but it would be an overstatement to say that even a significant minority of borrowers have been "bailed out with tax payer dollars". The same can not be said for some of the lenders.

4) People who made, and enabled, bad loans have fared far better in many instances than those who took out bad loans. While the consequences of bankruptcy and foreclosure are pretty clear for the borrower, what were the consequences for the individual lender? Did they give back their commissions and bonuses that were paid out of those borrowed funds?
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Old 04-22-2010, 11:26 AM   #22
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There are major flaws in the US mortgage market. 1) Banks can't afford to keep most mortgages on their books because they can't hedge the interest rate risk 2) They can't hedge the interest rate risk due to the imbedded option the borrower has to refinance and the term of the mortgages are so long (often 30 years) 3) There is a built in incentive to borrow too much (tax deductibility of mortgage interest) The solution to not holding mortgages on their books involve repackaging them off to other investors. As you know this caused significant problems. Mortgage originators didn't have to worry about repayment. These are not problems in Canada because: 1) terms are usually less than 5 years (amortization usually starts at 25 years). 2)No refinance option without paying penalties that approximate the lower interest rate. 3)No deductibility of interest unless used to earn income. Cdn banks keep most of the mortgages they originate on their books. Do you think the American people would support a Canadian type solution? I doubt it.
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Old 04-22-2010, 11:38 AM   #23
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What is this

"No optinion"
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Old 04-22-2010, 11:49 AM   #24
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I don't think the pre-payment option has much to do with the crisis. FHA loans without a pre-payment penalty go back to at least the 1940s. Interest rate risk is hedged dynamically based on historic pre-payment patterns. It's not a perfect hedge, but I can't recall the last lender who blew up because they botched their interest rate hedge.
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Old 04-22-2010, 01:44 PM   #25
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Agree about the interest rate hedge (although the S&L crisis of the early 90's did). But this was the original reason banks started to sell their originated mortgages off. Wasn't credit risk as many of those mortgages were insured. Canadian banks generally keep their mortgages on their books and the hedging is pretty easy. Texas proud- I was trying to explain and propose changes to the US mortgage market which in my opinion would help prevent the kind of problems you have had in your financial markets. Keep in mind this was a real estate related problem that started it.
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Old 04-22-2010, 01:58 PM   #26
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Agree about the interest rate hedge (although the S&L crisis of the early 90's did). But this was the original reason banks started to sell their originated mortgages off. Wasn't credit risk as many of those mortgages were insured. Canadian banks generally keep their mortgages on their books and the hedging is pretty easy. Texas proud- I was trying to explain and propose changes to the US mortgage market which in my opinion would help prevent the kind of problems you have had in your financial markets. Keep in mind this was a real estate related problem that started it.
Go back and read my post... it was not directed at you... then read it again... slowly.... and you will see why I am asking
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Old 04-22-2010, 02:11 PM   #27
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I read it verrrrry slowly- still no idea what else you could be referring to. Help me out?
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Old 04-22-2010, 02:51 PM   #28
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Originally Posted by Danmar View Post
There are major flaws in the US mortgage market. 1) Banks can't afford to keep most mortgages on their books because they can't hedge the interest rate risk 2) They can't hedge the interest rate risk due to the imbedded option the borrower has to refinance and the term of the mortgages are so long (often 30 years)
I respectfully disagree. Assessing interest rate/inflation risk is one of the reasons these guys get paid the big bux. If this were not possible (or at least if a zillion folks didn't believe it were possible) then the treasury would never be able to sell 20 or 30 year bonds. Likewise, the refinancing option is also built into the price of the mortgage. These are some of the reasons that mortgage backed securities have historically paid higher interest rates than non-callable corporate bonds.
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Old 04-22-2010, 03:38 PM   #29
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One thing I will add, PMI failed the system... anyone with less than 20% down **SHOULD** have had PMI. This was to cover the banks risk.

So PMI should be outlawed, because when we needed mortgage insurance the most, it didn't work.
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Old 04-22-2010, 04:37 PM   #30
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I don't want to sound like I am ranting (although I am), but many folks don't realize that our present goofy system of bond issuers paying the rating agencies is a fairly recent innovation.

This from
Agency Problems—and Their Solution — The American, A Magazine of Ideas
a website that I admit to knowing nothing about, but this Q&A sounded reasonable.
Quote:
Q. How do the rating agencies earn their living? Who pays them?
A. The original business model for the rating agencies, established when John Moody published the first publicly available ratings in 1909, was an “investor pays” model. Moody, and subsequently other rating agencies, sold thick “rating manuals” to bond investors. In the early 1970s the Big Three changed to an “issuer pays” business model, which means that an issuer of bonds pays fees to the rating agency that rates its bonds. This model continues today. The three smaller U.S. agencies, however, maintain an “investor pays” model.
Q. Why the change to the “issuer pays” business model?
A. There is no definitive answer. Here are some leading candidates: First, the early 1970s was the era when high-speed photocopying machines became commonplace, and the rating agencies may well have feared that widespread copying by bond investors of their ratings manuals would reduce their revenues. Next, the rating agencies may have belatedly realized that the issuers needed ratings in order to sell their bonds to regulated financial institutions, for the reasons mentioned above, therefore the issuers should be willing to pay for a rating (and photocopying wouldn’t interfere with fees charged to issuers). Finally, the unexpected bankruptcy of the Penn-Central Railroad rattled the bond markets and may have made bond issuers willing to pay credit rating agencies to vouch for their creditworthiness (although that bankruptcy should also have increased bond investors’ willingness to pay to discover who was more creditworthy).
Q. Doesn’t the “issuer pays” business model create a conflict of interest?
A. It certainly creates the potential for conflict of interest. If the credit rating agency is being paid by the bond issuer—and the bond issuer has the ability to “shop around” for another rating by a different rating agency—then the issuers may well have leverage with the rating agencies, and the latter may shade their ratings in favor of issuers in order to keep the engagement.
The rating agencies used to argue that they took special efforts to make sure that this potential didn’t become an actuality. They have now acknowledged that the problem is greater than they had earlier admitted and that additional steps, including greater transparency, are required to deal with the problem.
The rating agencies also argue that even an “investor pays” business model can involve some conflicts, since investors would prefer lower ratings (and thus higher yields) for newly issued bonds, as would anyone who has sold short any other security of the issuing entity. With respect to subsequent downgrades, investors who already own the bonds would disfavor them, while short sellers would welcome them. Nevertheless, the potential conflicts seem substantially less severe than for the “issuer pays” model.
Finally, the rating agencies point out that the “issuer pays” model has the advantage of rapid dissemination of ratings to the market, whereas an “investor pays” model would require some lag in general dissemination. But if the former ratings are less accurate than the latter would be, then the advantages of speedy dissemination are clearly muted.
Q. Was the “issuer pays” model even more of a potential problem in the rating of the mortgage-related securities?
A. Yes it was. Unlike the rating of a corporate bond or a government bond, where the existing structure of the entity that is to be rated is largely a given (although judgments about future prospects can clearly be more subjective), the underlying mortgage (and other) collateral and the payment structures of the mortgage-related securities were largely malleable. Thus the rating agencies worked closely with the packagers/issuers to determine collateral requirements and payment structures, which—at a minimum—heightened the appearance problems of the “issuer pays” model.
The SEC effectively granted monopolies to the big agencies, implicitly accepting their inherently conflicted business model.
Concept Release: Rating Agencies and the Use of Credit Ratings under the Federal Securities Laws; Release Nos. 33-8236; 34-47972; IC-26066; File No. S7-12-03
Quote:
Since 1975, the Commission has relied on credit ratings from market-recognized credible rating agencies for distinguishing among grades of creditworthiness in various regulations under the federal securities laws. These credit rating agencies, known as "nationally recognized statistical rating organizations," or "NRSROs," are recognized as such by Commission staff through the no-action letter process. There currently are four NRSROs3 — Moody's Investors Service, Inc.; Fitch, Inc.; Standard & Poor's, a division of The McGraw-Hill Companies, Inc.; and Dominion Bond Rating Service Limited ("DBRS").4 Although the Commission originated the use of the term "NRSRO" for a narrow purpose in its own regulations, ratings by NRSROs today are widely used as benchmarks in federal and state legislation, rules issued by financial and other regulators, foreign regulatory schemes, and private financial contracts.
in fact, these agencies seem to be protected from civil liabilities
The Harvard Law School Forum on Corporate Governance and Financial Regulation » SEC Amends Rules Related to Credit Rating Agencies
Quote:
[the] Securities Act Rule 436(g), which currently exempts NRSROs (but not other credit rating agencies) from liability as “experts” under Section 11 of that Act.

There is a whole bunch out there about new SEC regulations, both proposed and recently enacted, but they seem pretty lily-levered to me. Instead of preventing bond issuers from paying for ratings, they simply required disclosure. Whoopde-effing-do.
op-cit:

Quote:
In brief, the amendments would require such issuers to describe in their registration statements:
...the identity of the person who paid for the credit rating, and whether the rating agency or its affiliates provided other services to the registrant or its affiliates over a specified period of time (as well as any related fees); and
any final ratings not used by a registrant, as well as whether any “preliminary ratings” were obtained from rating agencies in a practice known as “ratings shopping.”
So here we are. Bond issuers work hand-in-glove to get tranches AAA ratings in return for big fees, perfectly legal and nothing under the table you understand, but wink-wink-nudge-nudge.
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Old 04-22-2010, 05:12 PM   #31
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What is this

"No optinion"
Oops.
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Old 04-22-2010, 05:30 PM   #32
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I read it verrrrry slowly- still no idea what else you could be referring to. Help me out?

It is misspelled... so am asking what it is... I guess the joke was lost if others did not see it...
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Old 04-22-2010, 05:43 PM   #33
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OK I get it. I failed to go back to OP. Cheers.
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Old 04-22-2010, 05:50 PM   #34
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I respectfully disagree. Assessing interest rate/inflation risk is one of the reasons these guys get paid the big bux. If this were not possible (or at least if a zillion folks didn't believe it were possible) then the treasury would never be able to sell 20 or 30 year bonds. Likewise, the refinancing option is also built into the price of the mortgage. These are some of the reasons that mortgage backed securities have historically paid higher interest rates than non-callable corporate bonds.
You make good points but pricing a security is quite different then hedging one. The hedges and underlying can often diverge in price in unexpected ways. I once studied the financial statements of WAMU. I defy anyone to understand how their mortgage hedges worked. I doubt they did at least not very well.
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Old 04-22-2010, 06:14 PM   #35
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You make good points but pricing a security is quite different then hedging one. The hedges and underlying can often diverge in price in unexpected ways. I once studied the financial statements of WAMU. I defy anyone to understand how their mortgage hedges worked. I doubt they did at least not very well.
I suspect that you know much more than I about this, so I will tiptoe out of this conversation.
Well, maybe one last word...
I believe that WaMu very much wanted to obscure what they were doing. They didn't want anyone to understand those hedges. The reason? They were trying to conceal the fact that they were up to their ears in "liar loans", "sub-prime loans" and other creepy "creative financing". (This is from my admittedly faulty memory. Please correct me if I am wrong.)

Do plain-Jane 20% down, verified income, verified disposable income mortgages really required elaborate hedging?

Fill me in if my ignorance is showing.
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Old 04-22-2010, 07:51 PM   #36
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No problem. I agree with your basic conclusion and you may be right about them near the end. I met with several of their senior execs on a tangential issue in mid 2002. They seemed honest, sincere, and did try to explain the hedges to me. But I still didn't really understand it.
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Old 04-26-2010, 05:06 PM   #37
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Interesting poll.


ABC News Poll: Two-Thirds Back Financial Reform - ABC News
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Old 04-26-2010, 05:24 PM   #38
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So 63% support reform but only 43% think derivatives should be regulated (with 41% saying no). I don't get it.
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Old 04-26-2010, 05:30 PM   #39
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What I find stunning in this whole debate is the lack of actual debate. Here we have one of the most sweeping pieces of financial legislation since the 1930s. We have two bills printed in black and white (one House and one Senate) so there is no mystery about what they're trying to do. We have one party uniformly saying "No", but offering only the vaguest explanations of why. And no real explanation of how they would do things differently, or what they would change. Even on this forum, we have no real back and forth, and I'm guessing people here are somewhat more financially savvy than the average American. Heck, nearly the whole board was expert on health insurance earlier this year, but when it comes to finance . . . nary a peep. What gives?
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Old 04-26-2010, 05:43 PM   #40
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What I find stunning in this whole debate is the lack of actual debate. Here we have one of the most sweeping pieces of financial legislation since the 1930s. We have two bills printed in black and white (one House and one Senate) so there is no mystery about what they're trying to do. We have one party uniformly saying "No", but offering only the vaguest explanations of why. We have no real back and forth on this forum, where I'm guessing people are somewhat more financially savvy than the average American. Heck, nearly the whole board was expert on health insurance earlier this year, but when it comes to finance . . . nary a peep. What gives?
Your comment above takes a very clear political position, inviting a response from the other side which, if history repeats itself, will quickly degrade into personal attacks resulting in closing this thread. I am of the opinion the posters eager to "debate" matters here are simply seeking a way to espouse their political philosophy, thus antagonizing those who differ. In almost every case it ends as a hog calling contest.
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