April 17th, 2012 11:31 AM by Andrew Walter May
How to fix the financial crisis in 2012
By Andrew May, President of ADRMortgage.com, a 25 year veteran of the mortgage industry.
My wife and I sit down for coffee every Sunday before church. Sara recounts the ways that technology will flatten out the world and decrease the need for humans, and I review the latest NYTimes article on why the financial crisis is a huge money maker for the lucky few that get to determine the worlds financial fate. I then describe a couple easy fixes and we get the kids ready for church, and we’re off.
Well after 5 years of watching mistake after mistake be made with our country’s money I finally have had enough and am writing my top 5 ways to improve our country’s financial crisis (by way of background, I’ve worked at AIG, JPMorgan, Allstate, and owned my own businesses, along with an MBA from Duke). The first fix starts with Accountability. We no longer live in the idealistic capitalist country that we tell our kids about in history class. Our fore-fathers did create that country, but we clearly live in a socialist country now. We have socialized medicine, insurance, autos, credit unions, government sponsored enterprises, church run businesses, etc. Clearly we, the tax payer, own the banks off-balance sheet risks. While the publicly traded banks profess that they are owned by their shareholders – that only works for the profits. When there is a blow-up, the bank is thrown on the tax payer. We need to do what Britain did, rather than reward the CEO by telling that person that they are the only one that knows the risks of the bank we need to remove them from their corporate office. Accountability comes in many forms, and it’s not to reward the management with higher cash incentives, more stock options at lower strike prices, and more incestuous unaccountability.
Like Britain, we need to stop feeding the wealthy 1% and fire the board, fire the senior management, and absorb the bankrupt banks into healthy ones (unlike the Citi-flip where our government almost gave Wachovia to Citibank….when Citibank was on taxpayer life support, and still is). America needs accountability of its bankers.
The second thing America must do is have a diverse group of companies compete for mortgages and financial services. Having 4 sets of government operators (FHA, VA, USDA, GSEs) with essentially one government regulator to monitor these 4 mega-trillion dollar liability companies is a recipe for disaster. Diversify the risks. Expand the number of companies that can offer mortgage products. We’ve gone the other way, and eliminated competition. Over 60% of independent brokers were thrown out of business. The government can back the mortgage industry, it should not be the mortgage industry.
With this diverse group of companies, we must level the playing field. Banks hire 1099 loan officers (brokers have w2 loan officers), banks can compete in all 50 states (brokers have to obtain expensive licenses in all 50 states), banks can hire an 18 year olds and have them push bank mortgages (brokers have to pass state and national tests, take continuing ed, be insured/bonded, etc.). Banks also require their 1099 employees to come into work. Brokers have to purchase land lines for loan officers that are clearly 1099 in nature, but because banks wrote the laws the brokers have to provide office space and land lines (an interesting conundrum).
The third fix for America is to raise capital backing the mortgage industry. Capital is what makes an industry. Return on capital is what drives the industry. Right now the government is using the U.S. Taxpayer’s balance sheet and leveraging the risk beyond any normal corporate levels. Typical risk to capital ratios of banks are 10:1, insurance companies 25:1, government sponsored enterprises (150:1) and FHA/VA/USDA/State run Housing agencies – who knows? I’d guess 1,500 to 1 (risk:capital). There’s really no over-sight of the true risks associated with these entities. They just operate like social security in a pay-as-you-go mentality. If cash is short, they can just ramp up their volume to pay current losses and hopefully out-run their loss-curve. If they are wrong, then the U.S. Taxpayer shows up again. And if they are really wrong, we just raise sales taxes and property taxes on the people that are paying (of course, those 25% of Americans that went BK or into foreclosure don’t pay so much anymore).
The forth fix is to stop feeding the banks by allowing massive write-offs. Many of our banks have assets on their balance sheets that are worthless. They are allowed to keep them on their balance sheets at a higher value than reality. They also are allowed to count Tarp-money as capital. We need to write these losses off the banks balance sheets and not throw them off onto the tax payer again. That’s a backwards way of executive compensation for bad bank behavior and poor risk management. Rewarding the million-dollar a day CEOs by sticking it to the taxpayer.
The 5th method for securing a better future for housing is to implement a better set of underwriting standards. Let’s call it the Preferred Financial Underwriting Method. With the PFUM we will see housing prices stabalize, housing will be a place for investment again, and America will see GDP grow once more. The PFUM would enable the current crazy appraisal industry to resume as a normal capital market, rather than a “lower the home price and get paid anyway” model. In addition to creating a better appraisal industry (the current one everyone agrees is “Andrew Cuomo” broken) we would make the following underwriting changes:
- Eliminate the 3% tax on mortgages for investor properties up to 80% LTV;
- Eliminate the 1.75% tax on mortgages for investor properties up to 75% LTV;
- Offer a .5% tax on 90% LTV investor properties (currently 80% in the max LTV);
- Allow Americans to move again, by allowing rented properties to qualify as rentals. When an American moves to a better job, they are saddled by their old property and are allowed to count rental income (unless they get an “appraisal” and prove 30% equity in the old property);
- Allow anyone that has made 5 years of mortgage payments on time to refinance with no paperwork. The government takes all the risk now. Why not allow them to do that with a security that has borrowers that are reducing their payments (rate term refinances only) and have a strong payment history.
Yes, a lot of these criteria seem ridiculous, and they are. In fact, the majority of these underwriting standards target the so-called “rich”. If you want to purchase a home you can still do it with 100%+ loan-to-value loans and 620 credit scores. The above criteria are no-brainers and simply expand upon a government that doesn’t know risk management….but does think it knows social policy. And certainly understands how to enrich it’s senators and congressmen (although President Obama has stricten the insider trading loop-hole). These simple changes would turn America around. The only problem now is to get Barney Frank and Chris Dodd’s successors to do something without being over- paid to do it or without selling our country down the toilet like these two did.