Deregulation: Bad for Cheeseburgers, Bad for Financial Markets

Cheeseburger

Image Credit: Valerie Everett (CC BY-SA 2.0)

Yesterday in the House Financial Services Committee, a new bill was considered that would weaken a key piece of financial reform. Speaking in support of the bill, Rep. Steve Stivers (R-OH) argued that this new piece of regulation was important because of “delicious cheeseburgers.”

H.R. 4166, the “Expanding Proven Financing for American Employers Act,” would create new exemptions from the rules in Dodd-Frank that require the financiers packing up new securities to retain a stake in their new products – rules put there to ensure that they have skin in the game.

The bill would allow financial firms that package up a product known as a “collateralized loan obligation,” or CLO for short, to escape the requirement that they hold onto a piece of the CLOs risk – a requirement to hold 5% of the total risk of the CLO, to be exact.

The Ranking Member of the Committee, Rep. Maxine Waters (D-CA), made a number of points against H.R. 4166:

“I’m baffled by legislation such as this… the 2008 crisis was caused – in large part – by mortgage companies that originated loans to borrowers that had no ability to repay…To address this problematic “originate to distribute” model, Dodd-Frank included an important component known as risk retention, or “skin-in-the-game.”  In essence, Congress told loan originators and securitizers to “eat their own cooking” before selling off their investments to others… H.R. 4166, takes us in the wrong direction, essentially exempting most securitizations of corporate loans from risk retention.

 

…CLOs are often used to finance private equity takeovers of companies through “leveraged buyouts.” The industry advocated for the exemption contemplated in this bill when they wrote letters to the regulators during the comment period.

Regulators heard their arguments, and rejected their proposal.  In fact, regulators pointed out that the leveraged loan market may be getting overheated, and that “characteristics of the leveraged loan market pose potential systemic risks similar to those observed in the residential mortgage market.”  …Mr. Chairman, when our banking regulators tell us there may be a bubble, I think we ought to listen.”

In response to the Ranking Member, Rep. Stivers tried out an argument…about cheeseburgers:

“Wendy’s International, a delicious food company based in my district…they have $246 million of collateralized loan obligations. Without that, they would not be able to make the delicious cheeseburgers you rely on every day.”

What Rep. Stivers doesn’t mention is that the reason Wendy’s needs so much borrowing, and is apparently pushing for weaker rules –  and the reason they are already so leveraged that they wouldn’t qualify for the exemption for responsibly underwritten loans that regulators have already granted –  is that they are doing a massive stock buyback which cashes out their shareholders. Although the buyback benefits current shareholders, it comes at the expense of leveraging up the company massively and threatening the future of franchisees. In other words, this borrowing isn’t for hamburgers, it’s to make billionaire shareholder Nelson Peltz richer to the tune of hundreds of millions of dollars.

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Monitoring the Mortgage Agreement

In February of 2012, the five biggest mortgage servicers signed on to a legal settlement with 49 states and the federal government. The servicers committed themselves to doing more and better mortgage modifications and using principal reduction as a tool. They also agreed to abide by a set of new rules designed to better protect homeowners.

In recent months, New York has threatened to sue Bank of America and Wells Fargo, while the attorneys general of Illinois and Florida have voiced concern that servicers are still not consistently following the new rules. Now the National Housing Resource Center (NHRC) has released a report documenting evidence of widespread noncompliance. The NHRC based its report on feedback from 212 housing counselors working with clients across 28 states.  An earlier survey by the California Reinvestment Coalition of counselors in California alone found similar results.

Here are some of the NHRC report’s most striking findings:

  • Mortgage servicers frequently take far beyond the mandated maximum of thirty days to respond to completed loan modification applications. Citibank’s review process, according to one counselor, “takes an average of 8 months to more than a year.”
  • Servicers routinely lose important documents and demand they be sent in again. Unexplained delays by the bank mean that borrowers must repeatedly update time-sensitive documents. Counselors complained of inefficient collection procedures, with one commenting (about GMAC/Ally Bank) that “Not all documents are scanned together at intake and often times they are lost and no one knows where the client is in the process ….”
  • Dual tracking – the servicer practice of moving forward with a foreclosure while the homeowner is actively seeking a loan modification – is unfortunately alive and well. “62% of respondents said that the mortgage servicers continued to dual-track at least ‘sometimes.’”
  • Qualified SPOCs (Single Points of Contact) are few and far between. The national settlement mandates that a borrower have consistent access to someone who is familiar with his or her case. In fact, servicers don’t always provide such a contact, and when they do, the SPOC often fails to return phone calls or isn’t knowledgeable about the borrower’s case. Speaking of Bank of America, one counselor said: “The voicemail machine is the only answer you get and there is never a call back within those 48 hours as they stated on their voicemail.”
  • Borrowers who don’t speak English face an uphill battle. According to the report, “Nearly half [46%] of counselors said their LEP clients ‘never’ received translated foreclosure-related documents and 76% of respondents said their LEP clients were ‘never’ or only ‘sometimes’ able to speak to a servicer in their native language or through a translator provided by the servicer.” Those with hearing and other disabilities are often literally ignored. “Servicers will typically hang up when they are ‘picked’ up by a relay call center for deaf/hearing impaired.
  • 29% of respondents believed that people of color must jump through extra hoops when trying to modify their loans. “Banks seem to take more time in doing work-outs with our white borrowers,” one respondent said. White borrowers “are sometimes offered services never offered to others.
  • Servicers often refuse to negotiate loan modifications with widows and surviving children when the deceased is the only name on the mortgage.  The Catch-22 in some of these situations is the servicer’s insistence that the mortgage be current before the inheritor can take it over and seek an affordable modification.

— Mitchell Margolis

Complete report is available at http://www.hsgcenter.org/wp-content/uploads/2013/06/NMS_Findings.pdf