Obama Second Term To Challenge Big Banks

It will be in the mid 40s for the second inauguration of Barack Obama, but  behind the secenes things will be a lot hotter.

One of the big themes of the next four years concerns banks, lending and clarity. In the past few weeks thousands of pages of new regulations have been published as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulations which will substantially alter the way we create mortgages and finance real estate.

For example, according to the Wall Street Journal, 61 percent of all subprime borrowers qualified for better financing in 2006. (See:Subprime Debacle Traps Even Very Credit-Worthy, December 3, 2007).

At the time loan officers could be paid on the basis of a yield spread premium (YSP) — the higher the cost of the mortgage the greater the compensation to the loan officer. Today YSPs are illegal which means there is no incentive to drive borrowers into higher-cost loans, toxic financing or unsuitable mortgages and as a result many foreclosures and short sales will be prevented.

Lenders can now charge whatever they want for mortgage financing, BUT if a loan has points and fees which total more than 3 percent of the loan amount then the financing cannot be considered a “qualified mortgage” — and if you’re a lender you only want to make QMs to avoid liability.

There’s no usury rate for mortgages under the new rules, BUT if the mortgage rate is more than 1.5 percent above the Average Prime Offer Rate it cannot be a qualified mortgage.

Mortgage lending has become a huge profit center under the new rules but what about other bank operations? How risky are derivatives trading and off-the-books entities?

We have to know these things. Why? To avoid another financial meltdown.

Banks, Books & Clarity

The whole idea of the bank bailouts, the justification for them, was to assure that the banking system was safe and secure. Recent reports of bank profits suggest that the bailouts were a success, but that’s only true if you don’t read the fine type.

For instance, what’s the “fair market” value of foreclosed loans and real estate at today’s prices? Do bank books reflect the full value of derivative liabilities? What is the real financial impact of variable-interest entities not carried on bank books or fully disclosed? Who will go to jail for rigging the LIBOR rate, wrongful foreclosures or selling sub-standard mortgages worth billions of dollars to Fannie Mae, Freddie Mac and the FHA.?

Ask yourself: If banks are in such great condition why do many have shares priced below book value? If bank regulation is so sure and effective why did the financial system need a bailout? Why must the Fed continue to buy mortgage-backed securities worth $40 billion a month? Is there no buyer from the private sector?

The next financial battle in Washington will be very simple: Investors and the public need to know the financial condition of our major banks — and right now we don’t. It’s time America had a full, fair and understandable accounting of the banks we bailed out, a sure way to bring real stability to the financial system.

Mr. Obama will never again face the electorate. He has no 2016 campaign to fund. Now, finally, is his chance to make a difference and one historic step would be to simply assure that the financial system is really in order.


Our thanks to the National Park Service and photographer David Barna for providing the image above from the 2008 presidential inauguration. The picture was taken from the Washington Monument looking toward the U.S, Capitol.

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