Change can be slow as molasses…

Fed Chairman Ben Bernanke spoke yesterday at the Federal Reserve Bank of Chicago‘s 43rd Annual Conference on Bank Structure and Competition in Chicago yesterday. There is a certain irony (well, to me, anyway) in that this was given a speech given at a conference on banking industry structure when the mortgage problem is based on a fundamental structure problem with the banking system. Structure is the key word here. Take a look at our other blog Soapbox for articles that contain the use of the word structure as it relates to the appraisal and lending industries.

Basically Bernanke does not want to regulate subprime, or be very selective on what is being regulated.

Bernanke concludes (excerpted from his speach):

Credit market innovations have expanded opportunities for many households. Markets can overshoot, but, ultimately, market forces also work to rein in excesses. For some, the self-correcting pullback may seem too late and too severe. But I believe that, in the long run, markets are better than regulators at allocating credit.

We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers. At the same time, we must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers. Together with other regulators and the Congress, our success in balancing these objectives will have significant implications for the financial well-being, access to credit, and opportunities for homeownership of many of our fellow citizens.

There seems to be a disconnect here. Bernanke is saying markets take care of themselves and we shouldn’t do too much, only in specific instances, because it might hurt those people it is intended to help. And I can’t seem to find the logic as to why he thinks the subprime mortgage problem won’t spill into the prime mortgage market.

From the Washington Post:

we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” according to the text of his remarks. While some subprime lenders have closed or entered bankruptcy proceedings, the problems in that market are not hurting banks or thrift institutions, he said.

Holden Lewis of Bankrate, who writes a must-read blog gets analytical and even goes all rhetorical on us to make his point.

He didn’t explain why he doesn’t expect the subprime debacle to spill over into prime mortgages or the overall economy, although he did acknowledge that the slowdown in home sales can be traced partly to the tightening of subprime credit. He contradicts himself there.

…So it would be better for our society if the homeownership rate were lower. Is that an unreasonable conclusion?…isn’t it safe to say that those neighborhoods would have been more stable had the houses been owned by landlords who had an incentive to maintain the dwellings to make them rentable?

Les Christie at CNN/Money writes:

But, according to Bernanke, the kinds of innovations in credit markets represented by exotic subprime loan products have had a positive effect, opening up home-buying opportunities for millions of Americans.

Bernanke wants regulators to be careful not to overreact and address specifics only. Aren’t these the same regulators who were there when underwriting quality deteriorated and subprime exploded?

Subprime lending has its place so its clear that its in no one’s interest to choke it off. However, I believe that the problems in subprime lending are not unique to subprime lending and are prevalent throughout the mortgage lending industry as it relates to collateral. These include:

  • Massive documentation that borrowers are unable to understand.
  • Appraisal pressure so prevalent and part of the lending culture that no one sees it as a problem.
  • “Don’t ask, don’t tell” position taken by lenders to their wholesale mortgage broker partners.
  • Commission-based lending system – high production with no real accountability from sales person.
  • Inflated appraisals understate risk to investors.


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3 Responses to “Molasses Primer: The Subtext on Subprime”

  1. mapgirl says:

    You know, I’m a college graduate and I used to read contracts as part of my job. And I have to admit that the loan documentation, of which I read every word, was overwhelming and confusing. I thought I was pretty savvy with my loan products, but what killed me is that later on, I actually didn’t know what I got. I had the Truth In Lending form sheet, but I didn’t know that I could convert my variable rate 2nd trust to a fixed rate at any time. Had I known that a year sooner, I would have a 2nd trust for a full percentage point less.

    There is something screwy about this process and the best thing I can tell people is if you can’t handle a $200-400 jump in your total mortgage payment, then rethink buying, because even if it’s not your interest rate jumping, it could be the escrow payment.

  2. skep-tic says:

    and yet you signed it anyway

  3. Keith Jeppson says:

    Thanks for the collection snipets on the address. Yes, the system is broken. In my opinion to much of a seperation between conforming and subprime. But, I really fear federal regulation. Can you imagine the whole system falling under HUD?