Friday, November 18, 2011

A Simplified Explanation - And Novel Solution - to Preventing the Recurrence of the Credit Crisis

With all of the "Fixes" for the Credit Crisis still underway, most people still don't understood how the market failed to create safeguards for itself.  Fed Chairman Bernanke attributed the crisis to a market failure, but how can a market fail, unless there are undue influences?  The influence, ironically, was a flight to safety itself.  The mechanics of how unsafe investments were transformed into "safe investments" is now well understood, but it was the demand for safety, itself, that created the crisis.  The solution, it turns out, is the government guaranteeing as much cash as it can (by borrowing) regardless of whether it is willing to. 

Zoltan Pozsar, a visiting scholar at the IMF, shows that the shadow system was fueled by institutional investors looking for a safe place to park large amounts of cash. There weren't enough short-term Treasuries to fill demand, nor were there enough banks to store the money in amounts below the FDIC insurance limit. So the investors found their cash-storage facilities at one end of the shadow banking system's "risk-stripping" assembly line.

At the other end was the by now well-known process in which pools of questionable loans were repackaged into triple-A securities (what Pozsar calls "credit transformation"). Said securities were then placed into investment vehicles funded with short-term instruments like repos and asset-backed commercial paper ("maturity transformation"). And those instruments were then placed in money market funds one could write checks against ("liquidity transformation").

The resulting "privately guaranteed instruments" ended up being the government's problem when the crisis hit, Pozsar writes; the shadow banking system's short-term obligations "were guaranteed by insured banks and hence ultimately the sovereign (whether via central bank backstops or equity injections)." So why not just accommodate the demand for a safe haven by having the government write more of its own IOUs? Pozsar acknowledges the obvious objection - that this "would increase rollover risks and the variability of interest expenses for the US Treasury." But he submits that the "externality," or cost to society, would be less than risking another crisis.

Sourced by American Banker Newsletter

Tuesday, November 8, 2011

CFPB reveals larger prototype mortgage form for public scrutiny « HousingWire

CFPB reveals larger prototype mortgage form for public scrutiny « HousingWire

This is another form in sheep's clothing. The agency has attempted to consolidate 2 or 3 forms, but has done nothing to address the remaining 25. Again, the practice is still one of burying the details in reams of paper.

Monday, November 7, 2011

Renewal Season STARTS in Maryland 11/1/11

Renewal applications for mortgage lenders and mortgage loan originators are accepted beginning November 1, 2011.  The deadline is December 31, 2011. 

We get many questions about what needs to be taken when.  "I took the 20 hours last year - do I have to take it again?"  Maryland has put together a matrix explaining the requirements:

What Do I have to Take?
  • 3 hours of federal law and regulations;
  • 2 hours of ethics that shall include instruction on fraud, consumer protection, and fair lending issues;
  • 2 hours of training related to lending standards for the nontraditional mortgage product market; and
  • 1 hour of instruction on Maryland mortgage-related laws.
A "covered employee" means the manager of each corporate office and branch office licensed, or required to be licensed, by the Agency.  A covered employee does not include a manager of the licensee who has been an employee for less than six months before the expiration of date of the licensee's current license and has had no prior experience as a manager of any other licensee.  

I Did Not Know That

You MUST Resolve any outstanding personal income tax, business tax and/or unemployment insurance liabilities with the State of Maryland, BEFORE a renewal application can be accepted. Contact the following, if applicable:
Income Tax: 410-974-2432
Business Tax: 410-649-0633
Unemployment Insurance Tax: 410-767-2699

In addition, companies must:

Confirm that licensee is in good standing 
Continue to satisfy the minimum net worth requirements

Friday, November 4, 2011

If I gave you a FREE Tree, and it saved you money...

...Would you plant it? 

That's what Pepco is doing.  It's not rocket science - everyone knows it's cooler in the shade, yet we let our houses (with their black, heat absorbing roofs) sit complete exposed while we throw money at our utilities to cool our homes.  The best antidote to sun is shad, and the best way to get shade in the summer (and not in the winter when you want the sun to warm your home) is to strategically plant trees.

Utility companies across the country are becoming partners with the Arbor Day Foundation to help reduce energy use through strategic tree planting..

Energy-Saving Trees is a research-based tool intended to help homeowners and utility companies save energy and money by strategically planting trees. This really cool (no pun intended) tool sees how much shading your house will do to reduce your energy costs.  AND a tree sequesters carbon! Learn More.

Thursday, November 3, 2011

It's Continuing Ed Season - Let's See What Government Mandated Education has in Store for US!

Some welcome changes to the regulatory scheme have come out of the meltdown, but having the government mandate minimum hours and content have turned mortgage training into a commodity. Prior to the SAFE Act and the incumbent NMLS some states had much more rigorous requirements. Smaller, local course providers developed and delivered training in the same marketplace where the training was approved. It allowed for relevant and practical adult learning, where instructors developed relationships with the students and the employers and really understood the needs of the workplace. The NMLS underwritten current scheme put that model out of business.  

This thinking evolved not from debating the need for a system of licensing (which mostly existed), but realizing federal government involvement's negative impact.  A review of what has happened since the implementation of the NMLS makes a fine example of how the best intentions of regulation create unintended consequences that limit choice and adversely affect market operation.  

Only 85,000 MLOs are now targeted for CE.  Stands in stark contrast to the 375,000 to 600,000 that the agency originally anticipated.  (Source NMLS)
As an example, our company abandoned providing NMLS centered training programs.  We were only a niche player in PE/CE, nowhere near the scale of Financial Strategies, Training Pro, or even Loan Officer School.  We focused on providing vocational, skills-based training through a network of companies that used our product as a backbone for their internal programs.  The NMLS offering was an add-on.  Though we were small, we provided value and flexibility.  Those choices are now gone primarily as a consequence of the regulatory scheme:

1. The NMLS, erroneously believing that there was a shortage of training companies, literally invited hundreds of non-mortgage training firms into the mix; real estate schools, appraiser institutes, community colleges... anyone who was related to training in real estate, insurance, or any vocational training school. The result was a "fractionalization" of the business. 300 firms for 90,000 licensed loan officers. That's 300 potential students for each of us!
2. There is a definite "bureaucratic-governmental" subjectivity to the NMLS' content review. Many of the reviewers hired to approve the content come from real estate training. As a 28 year industry veteran, I was astonished to see the level of misunderstanding of products, underwriting, business practices and general viewpoints expressed in the review of course material. I would rather not provide material, than provide something I believe to be wrong.
3. The low baseline has created a standard for the lowest common denominator. I've just gone through my licensing renewal CE online, and if your view the current offerings is "groan and bear it", then we share an opinion.
4. Commodities don't have any value. It costs tens of thousands of dollars and a lot of time to develop a good, interactive course. A 1 hour online course can take as long as 120 hours to create. If the market says an 8 hour course sells for $129, then I have to sell several thousand just to break even, and with a diminished market and so many competitors, what is the point?

Standardization always seems to result in a lowering of standards. In this case, while the bar is set very low, the positive takeaway is that at least there is a bar. My reputation as a loan officer won't be negatively impacted by the behavior of some unethical loan officer at another company... Unless he or she works for a bank, of course.