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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.
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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
Between Prime and Non-Prime Mortgages
-
#EntityComment1Charles 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.)2America’s Community Banker[2]Six hundred twenty is the marker between prime and subprime.”3LISC (Local Initiatives Support Corporation)[3]“adverse credit (usually defined as credit (FICO) scores below 620).”4Associated Press[4]“620, considered the dividing line between good and bad credit.”5Money Magazine[5]“620 and above are considered good.”6CNN/Money[6]“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.”7CNN/Money[7]“Credit scores in the range of 620-650 indicate basically good credit.”8Business Week[8]“nearly 20% of the U.S. population has a credit score under 620, generally the cutoff for a prime-rate loan.”9LA 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.’”10St. 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.”11“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.
STILL
NOT CONVINCED and NEED A FEW MORE REFUTATIONS, TRY THESE:
§
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]
§ [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.
§ 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