Tuesday, May 28, 2013

Sorry for the lengthy AEI broadside, but sometimes heft is required!


5-28 PM Update on the Corker (R-Tenn) bill.

Reportedly it took only a few hours this morning, when Hill folks got back from their Memorial Day holiday, for House GOP sources to send Senator Bob Corker (R-Tenn) a message that the House wasn't interested in working on any legislation which set up new federal housing responsibilities, no matter what fate Corker proposes for Fannie and Freddie. No comment on Corker's idea of nationalizing F&F's financial obligations and adding a bazillion dollars to the national debt.


Wallison to the World: FICO You!!
Maloni to Wallison: No, FICO You!!

Peter Wallison, he of GOP lineage, AEI paycheck, and co-author with Ed Pinto of a subprime mortgage theory shot down more then stunt men in a Sergio Leone western, decided last week to jump all over resident hero, David Fiderer, when Fiderer wrote in the American Banker—with copious detailed research—that the AEI, Wallison and Pinto theory of Fannie Mae buying voluminous amounts subprime mortgages in the 1990's was so much poppycock.

Fiderer's conclusions hardly were unique, since the same specific rejections were produced by the Federal Reserve, the President's Financial Inquiry Commission Commission and dozens of top columnists and media, but Wallison wrote to the American Banker anyway dumping on Fiderer's analysis.

I told Wallison he was substantively off base when he blasted Fiderer's work and pointed out how many times the AEI's arguments about Fannie buying tons of subprime in the 1990's have been publicly rebuked.

But those institutional refutations haven't stopped Ed and Peter, with their Al Queda like zealotry, they just keep repeating the same lies and hope the WSJ editors and other acolytes will provide air cover for them.

I asked Peter--when the AEI and its minions discuss F&F mortgage activities precipitating the 2008 financial meltdown-- why they never mention the causal effects of Wall Street creating and selling worldwide almost a trillion dollars in worthless subprime securities and synthetic CDOs. (Why is it hard for the conservatives to admit the big GOP campaign contributors made mistakes?)

Here's what Peter told me when I questioned his anti-Fiderer efforts.

Bill: You’re full of misinformation because you live in the left’s echo chamber. It’s time you guys stopped saying that Ed Pinto’s characterization of subprime loans as those under 660 FICO is silly, or a lie, or disproved, or some other nonsense. You can’t get away with that if you’re communicating with someone who is not your ideological bedfellow. The 660 dividing line was established by the bank regulators in 1999, and in their statement they said that it does not matter what other characteristics a mortgage has, it is subprime if the FICO score is less than 660. When you are ready to deal with facts rather than the wild statements you, Fiderer and others throw around we’ll have a real discussion.

Regards, Peter

Thank you,  Peter (and Ed, the AEI, and the WSJ editorial staff); once more I'll venture into the your Valley, but I will fear no Evil--in this instance—because my FICO truth makes me one of the toughest Mothers in the Valley.

Misrepresenting FICO

First, FICO scores are a credit measure created several years ago by the Fair Isaac Company, ergo the acronym FICO. They are not linear, so a 625 score is a lower and presumably a lot more damnign than a 660 score.

Contrary to Peter's emailed allegations to me, I doubt any major balance sheet lender anywhere relied exclusively on FICO scores, other than as one element of a lending decision. Fannie and Freddie both expressly stated that hey did not rely on FICO scores to make credit decisions.

Further in challenging Peter/AEI, while bank regulators might have cogitated on a FICO 660 being a threshold, none of them ever followed through to make that measurement an operative rule in the mortgage world, prohibiting loans to those with lesser scores.

Since no federal regulator ever promulgated such a binding regulation, I expect that millions of loans—which never defaulted and were deemed viable--ere made to people with credit scores below Peter's “thou shall not be below 660.”

Peter and Ed say they are correct, but the following evidence suggests how FICO scores were viewed in the everyday/real world of mortgage lending, as opposed to Peter's and Ed's ivory tower AEI ideal..

Here's what others in the credit and mortgage loan universe say about the AEI's 660 FICO score being the “God above, Devil below “ demarcation line between good and bad credit.

Entities Defining a 620 FICO Score as the Dividing Line
Between Prime and Non-Prime Mortgages

Charles Calomiris and Joseph Mason, American Enterprise Institute[1]
The market generally considers any borrower with a credit score above 620 as a prime candidate for a mortgage” (Calomiris is a Wallison colleague.)
America’s Community Banker[2]
Six hundred twenty is the marker between prime and subprime.”
LISC (Local Initiatives Support Corporation)[3]
adverse credit (usually defined as credit (FICO) scores below 620).”
Associated Press[4]
620, considered the dividing line between good and bad credit.”
Money Magazine[5]
620 and above are considered good.”
62 percent of consumers do not realize that a score of 620 or better means you can become eligible for getting the best possible mortgage rate.”
Credit scores in the range of 620-650 indicate basically good credit.”
Business Week[8]
nearly 20% of the U.S. population has a credit score under 620, generally the cutoff for a prime-rate loan.”
LA Times[9]
But a score of 620 doesn't mean you're going to qualify for the best rate, [Craig Watts, FICO spokesman] says. It means you ‘qualify for a standardized rate, or a prime rate.’”
St. Petersburg Times[10]
Each company using scores sets its own standards, with a score of 620 often used as a cutoff point. Fall below that and you are likely to be labeled a high risk.”
A borrower with an A grade typically has a credit score of at least 620.”

[1] http://www.aei.org/docLib/20021130_71252.pdf. Note that Charles Calomiris often joins Peter Wallison in critiquing the GSEs. (http://www.aei.org/scholar/9)

[2] The Almighty 620 Credit Score, Vanessa Bush, America’s Community Banker, Oct. 1998 at 24. America’s Community Banker was the official trade publication for the thrift industry.

Worth repeating: FICO scores are not linear, so a 625 score is way below AEI's 660 standard.


§ Peter Wallison himself: “There is no universally accepted definition of either subprime or Alt-A loans, except that neither of them is considered a prime loan. … The term ‘subprime,’ accordingly, generally refers to the financial capabilities of the borrower, while Alt-A loans generally refer to the quality of the loan terms.”[1] (To say that a loan is subprime if it is not prime is a bit tautological.)

§ Federal Reserve staff: “There is no generally-accepted definition of prime and subprime mortgages.”[2]
§ Federal Reserve staff: “A subprime mortgage is one made to a borrower with a poor credit history (erg., a FICO score below 620) and/or with a high leverage as measured by either the debt-to-income ratio or the loan-to-value ratio).”[3]
§ Federal Reserve Bank of St. Louis: “A precise characterization of subprime lending is elusive.”[4]
§ GAO: “There is no uniform definition across the lending industry for what characterizes a loan as subprime or Alt-A.” http://www.gao.gov/new.items/d0878r.pdf page 15.
§ Federal Reserve Board, in an official commentary, describes: “a somewhat loosely defined segment known as the Alt-A market, the precise boundaries of which are not clear.”[5]
§ Finally, as shown in the table in the Appendix to this section on page 7, many sources (including a colleague and frequent collaborator of PW at the AEI) regard a FICO score of 620 rather than 660 as the dividing line between prime and non-prime loans. In fact, a web site on credit scores shows considerable more support for 620 rather than 660 as the prime/non-prime boundary.[6]
§ [1] Cause and Effect: Government policies and the financial Crisis, Peter Wallison, at 5. Available at: http://www.aei.org/docLib/20081203_1123724NovFSOg.pdf.
§ [2] An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on U.S. Mortgage Rates and Mortgage Securitization, Diana Hancock, Andreas Lehnert, Wayne Passmore, and Shane Sherlund at http://www.frbatlanta.org/news/conferen/housing2005/hancock.pdf, at 10
§ [3] A Snapshot of Mortgage Conditions with an Emphasis on Subprime Mortgage Performance, Scott Frame, Atlanta Federal Reserve Bank, Andreas Lehnert, Federal Reserve Board, Ned Prescott, Richmond Federal Reserve Bank, August 27, 2008 at 2. Available at: http://federalreserveonline.org/pdf/MF_Knowledge_Snapshot-082708.pdf.
§ [4] What is Subprime lending, Rajdeep Sengupta and William Emmons at http://research.stlouisfed.org/publications/mt/20070601/cover.pdf
§ [5] Regulation Z Truth in Lending, Board of Governors of the Federal Reserve System. Final rule; official staff commentary, 73 Fed. Reg. 44,522-01, 44,533-01 at http://frwebgate.access.gpo.gov/cgi-bin/getpage.cgi?position=all&page=44533&dbname=2008_register.
§ [6] http://www.creditscoring.com/pages/bar.htm.

Peter, you've wrote that I live in a left wing echo chamber, but given how the AEI (you and Ed) and your propaganda are so heavily dependent, and precariously positioned, on this “above 660 is good, below 660 is bad” argument--with apologies to Matt Damon--how do you respond to all these echo chamber “disagreeing apples”?

Worse for you—again, despite your protestations--when your theory was measured against Fannie Mae business in the 1990's---very, very, very few of those loans you claimed were subprime failed, indeed, most succeeded at mind boggling levels, meaning no losses. Bye-bye theory.

Your “Aha moment” bit you in the behind, because throughout the 1990's and for the first three or four years into this new century, Fannie's loan loss rate was infinitesimal because they didn't enagge in what you and Ed insisted.

So, what practical good then is your 660 FICO versus 620 assault on Fannie and others?

You suggest it was designed to prove Fannie failed to separate the credit haves from the have nots, the good from the bad, the trustworthy from the dross, the those we want from those we don't want, but when applied to more than 15 years worth of Fannie business, it looks like it only would have kept from home ownership many responsible borrowers who met their Fannie financial obligations.

You can and have shrilly proclaimed that a 660 FICO is the mortgage market's good/bad tipping point. But where does that put you, Ed, and AEI, if most in the mortgage finance world used 620 for that standard?

Maloni, 5-28-2013


Robert Mae said...

You're both right.

You're right, literally.

But Pete isn't wrong just because you've failed to acknowledge him and his principles. If you did you would know that anyone lessor than the 1% is scum to Wallison, so those with <660 are hopelessly pathetic and certainly in no position for home ownership. Or even a credit card, per Pete.

Thank god Wallison is not unlike Corky in that wherever they lunch, others are elsewhere. In child-speak, they got cooties.

PS, How Nader has been received is a better post.

Bill Maloni said...

I had three blogs working this weekend: Corker bill; this was the second; and my Nader commentary is in the third, which I'll put out later this week.

Nice Nader letter, but I still dislike him and what he claims to be.

Robert Mae said...

I've read many of your posts since TWO ZERO ZERO SEVEN and am quite impressed. Dedication defined.

I'll also add that any FnF stakeholder not reading your opinions on the policy side of their bet is nuts.

Keep up the fight!

Bill Maloni said...

You are in the middle of a major real business with geometric growth potential. I am an old man clucking over something I can't directly influence. but I am having fun with it.

You 're the current era's version of a "wildcatter."

My first real job in Pittsburgh, the day after I graduated college, was with Gulf Oil, so I know all of that company's "black gold" legends.

buccaneer 1961 said...

I disagree with this article...deeper dd must be made as the billions of income f-mae/f-mac are bringing in...the housing market is now at 2003 levels and rising strong...

Bill Maloni said...

Buc--not sure with what you are disagreeing; will you elaborate?

Anonymous said...

I'm a massive fnf common holder.
Keep up the hard work Maloni.
Shot out to
Faber, CNBC
Berkowitz, Fairholme Capital
Ralph Nader.
We need to unite,
We need to be heard.
Cramer disappointed me

Bill Maloni said...

Cramer disappoints a lot of people and that's just on days with even numbers in them.

He's proof of one great talent and that is if you can float a thousand balloons, you always can point to one or two that are flying high.

Not joking, that's a real skill and talent.

Adam W said...

Bill- what do you think about the Isakson Bill filed on May 23 that would put the GSEs into "irrevocable receivership"?

Bill Maloni said...

I think he is misguided and misinformed.

I always liked him--when I lobbied--and thought he was a bright guy, as well as a former Realtor and therefore a "houser."

But some of his public statements are very off, so much so that I suggested that someone inform him or his staff and get him the facts because he'll embarrass himself before long.

Also, I doubt substantive action on F&F for years, although there will be plenty of hearings and noise (and action for investors as common and preferred get driven hither and yon by the rhetoric)

If the November 2016 elections puts one party in charge of the White House and both chambers of Congress then you might see some action, but too much division on the subject until that time.

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Robert Mae said...

Three zip, prepare to be disappointed.