There is no getting around the fact that the Administration’s plan to address the mortgage crisis at the core of our economic woes has been a failure. I am not going to get into blame, because, frankly, everyone involved from the President through the greedy and heartless mortgage service industry is to blame. Slice it any way you like and you find that it is intransigence, political calculation and an entitled sense of greed that has brought us to this pass.
This big bag of failure means that the problem has not been arrested and, in fact, it continues to be a danger to our fragile economic recovery. In fact there is a new shoe getting ready to drop, with the 5.3 billion in private-mortgage-insurance industry liability from the three largest mortgage insurers hanging out there with nowhere near enough capital to pay off the insurance policies if the homes are foreclosed on.
Mortgage insurance was an idea that was developed in the 1950’s. Basically it lets people with good credit but not enough down payment get into the housing market. The insurance policy pays the first 25% of the mortgage debt if the owners default. The cost of the policy is rolled into the monthly payments, averaging about .75% a year in the over all cost.
This made it much easier for young people who had not had time to save up a traditional 20% down payment on a house to enjoy the benefits of home ownership. I am willing to bet that everyone had this insurance on their first homes. It was a required part of getting a FHA or VA loan for a very long time and I believe is still required today.
Up until the banks got way too greedy the system worked. There were defaults but there were not too many. For the most part the standards for getting this kind of insurance were tight enough that the companies that sold it were not in too much risk. Then as banks started to finance not just the 80% of the loan that was normal, but 100% through a 80% first and 20% second mortgage, the pressure was on these insurers to lower their standards (Thanks a whole fucking lot Wall St. you managed to not only kill your standards but everyone else’ with your greed).
This led the three biggest companies MGIC, Radian, PMI, to reduce their standards and start offering mortgage insurance to customers that would not have qualified before and are now paying the price.
From the Yahoo article:
In fact, there’s a distinct possibility that the coming avalanche could more than wipe out the three companies’ shareholder equity, with no new sources of capital available. Such an occurrence would be game, set and match for the insurers. At the very least, the three monolines will face a day of reckoning with state regulators if their risk-to-capital ratios blast through the 25-to-1 ratio fail-safe point, possibly relegating them to run-off status, in which they’d be unable to write new business. PMI is now close to 25%, while MGIC and Radian are near 20%.
Think about that for a minute. These companies are approaching 25 times the amount of liability versus the amount of capital they have on hand. That is considered the “fail-safe” point. Where in the world can that kind of number be considered safe?
Already the fourth largest private mortgage insurer (PMI) is in that “run off” state where they are paying $.60 on the dollar of policies owed and issuing IOU’s for the rest. I would not place a lot of faith in anyone ever collecting that extra $.40 on the dollar.
These companies have tried to raise capital before. Last year they all sold a lot of stock and raised around 3 billion dollars in an attempt to have enough reserves to cover their losses but that money is pretty much gone now.
These companies are hanging on by a thread, and the outlook is not very good. With more and more homes going into default and foreclosure there are going to be more and more claims against their policies. After all Freddy Mac and Fanny May are budgeting that they will receive $30 billion in the coming years from mortgage insurance.
The PMI companies do have a ray of light, as slim as it is. They are working to rescissions on the banks that gave them fraudulent information for their insurance policies. While this might recoup some of the money, it is more likely to really expose the massive levels of fraud that the banking industry engaged in during and after the housing bubble, it probably won’t save these companies from their overexposure.
This is where it becomes a problem for all of the rest of use. You see there are a total of seven companies that do this kind of insurance in a large scale way. One is already in the process of being wiped out, and three more are at severe risk of it.
It would be tempting in, especially after seeing the major banks give the finger to the people of the United States after we saved their asses, to let these companies fail. I don’t think that people have a lot of sympathy for any group that was willing to lower its standards to make a buck and then begs for help. That is to be expected.
The problem is that if more than half of the PMI companies go down, it will make any recovery in the housing market that much harder. The issue is not with the product but with the way that it was used in recent history. Without PMI the number of people who will be able to qualify for a home loan will plummet.
Given our massive jobs deficit and the unlikely prospect that it will drastically improve in the near future, the numbers of people who can scrape together 20, 30 or even 40 thousand dollars in one place will be very small. This means that there will be more and more empty housing in neighborhoods, as the backlog of foreclosures is worked through.
It could be a very long time, maybe a generation before the housing market recovers. That means fewer jobs in construction and all the associated businesses that supply materials for homebuilding. Long term it could basically mean an end to new home construction and a big hit to the American dream of home ownership.
As an added cherry on top of this turd sundae, there are almost certainly default swaps betting that these companies will fail out there waiting to be collected on as the destruction of our home financing system continues apace. They probably are not on the level of the Bear Sterns contracts but bet your bottom dollar that someone is trying to make a dollar on the collapse of these companies.
This brings us back to where we started. There is enough blame to go around on the abject failure of regulation and enforcement at all levels of mortgage finance. But that is for the courts and the future to deal with. What is needed now is a real program that greatly reduces the amount of foreclosures in this country.
That plan is an obvious one, allow bankruptcy judges to reduce the principal on the mortgages so people can stay in their homes. The time when many of the mortgages that were in default were irresponsible people is long past. The people defaulting today are ones that were thrown out of work by the worst recession in 80 years. Most of them had good jobs and could afford the houses they lived in when they had a job, now they don’t have that job and are in dire straights.
The banks have resisted this at every turn, but I think that the American people are pretty much at the point of saying “Fuck the banks”, and that is what we should do. They have shown that they have no sense of shared responsibility, and as such deserve no consideration in fixing a problem that they caused and one that continues to do slow motion damage to our nation.
The floor is yours.