Sketchy Financing for Apartments and Private Markets Seems Like Deja Vu

Sonoma     Ten years on from the Great Recession of 2008, you wonder what we learned from that crisis, and who really learned it.  I mean really learned it!

Here’s a couple of scary examples that I’ll share in the “misery loves company” vein:

In the “who’s on first, what’s on second” vein, get this.  The major money center banks JP Morgan Chase, Citigroup. Bank of America, Wells Fargo and six others reportedly met with representatives of the Federal Reserve to lobby against Congressional meddling and regulatory backtracking on the Volcker rules, arguing that they wanted to keep them and they had worked so why the mucking around.  When the foxes are saying that the chickens are interring with them, you know the world of finance – and government — is upside down.

That doesn’t scare you?  How about this?  A Wall Street Journal item on the back pages in the “Heard on the Street” column pointed out that banks have been increasing their loans and exposure in financing private equity and private credit lines for business “in indirect ways that are hard to track.”  Whoa, Nelly!  That’s not good.  Going farther, they note that “loans to nonbank financial companies have been the fastest-growing element in global cross-border lending for the past two years.”  There are some $6 trillion of such loans. Nonbank financial companies already define a black hole of largely invisible and virtually unregulated activities with folks like KKR Capital Markets and Jeffries Financial Group.  Add to that the fact that many of these loans are also offshore.  When you wake up screaming in the middle of the night, write those names down and worry about these problems until you pass out again and pretend along with lawmakers that this is “no problem.”

But of course, there’s not just meddling and shadow financing, there’s outright fraud like we saw from mortgage brokers last time around.  The biggest investigation of mortgage fraud since 2008 involving the FBI, the US attorney, and the Inspector General for the Federal Housing Financing Agency which is supposed to oversee Fannie Mae and Freddie Mac is looking at a potential heist in multifamily housing that was curiously exempted in the Dodd-Frank rules after 2008.  Essentially, Fannie and Freddie have been allowing almost a self-certification system by borrowers of their own balance sheets.  One outfit being investigated was claiming cashflow from rented apartments that Freddie didn’t inspect rigorously before guaranteeing the loan and getting away with it by putting radios in vacant apartments and other shenanigans to inflate the rental cashflow statistics.  Once they get the loan it can be “take the money and run time” because, get this, again hidden in a Wall Street Journal article, “Mortgages with full or partial interest-only repayment periods made up 75% of multifamily loans bought by Fannie Mae and Freddie Mac” in 2017.

So sure, this is complicated and way trickier than balancing our home checkbooks but with the Developer-in-Chief in Washington ignoring all of the fine print of government, especially among his developer tribe, if we’re not worried, it may be because we’re not paying enough attention.

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Banks and Their Buddies Learned Little to Nothing from the Great Recession

New Orleans     When we can muster up the attention span to read past the latest Mueller investigation activity and the Trump tantrums, we can see what Congress is doing to try to make life easier for the banks and gut Dodd-Frank requirements that force them to pay more attention in class rather than going the “greed is good” route.  It turns out that there is little relief in revisiting the lessons our old friends, the banks, have learned from their reckless behavior that led to the real estate bubble and the Great Recession only a long decade ago.

Of course, they certainly learned to be careful in dealing with the subprime lending market and its exorbitant and often predatory interest rates.  Wrong!  They only learned that they shouldn’t lend in their own names and through direct subsidiaries, but instead should supply nonbank middlemen with billions so that they can take the first fall when that bubble crashes.  The Wall Street Journal calculates that between 2010 and 2017, yes within 2 years of the meltdown and their repeated mea culpas to politicians and customers, they jumped in hard and collectively have made $345 billion in loans to such companies.  Many of these subprime loans are not in real estate, but in auto financing and similar areas that are even more unstable, if that’s possible.   Don’t for a minute think that this is just something the smaller fry are feeding on, because the big fish are goring on these loans.  Major bank loans to nonbank financial companies that loan money to subprime borrowers include Wells Fargo at $81.1 billion, Citigroup at $30.5 billion, Bank of America at $30.2 billion, JP Morgan Chase at $28.1 billion, Goldman Sachs at $22.2 billion and Morgan Stanley at $16.3 billion.

That’s not all that banks and their buddies haven’t learned.  On the wild right there are still pundits and posers who claim that loose credit standards, ACORN and the Community Reinvestment Act triggered the real estate meltdown and the recession, rather than their own activity.  Two researchers from the Urban Institute, which is the real estate industry and developers own think tank, in a working paper plainly state that the blame game is misplaced.

we … show that First-Time-Home-Buyers have similar loan performance as that of repeat buyers. This evidence indicates that the expansion of lending to include more marginal borrowers may not be the main cause of the financial crisis. Instead, the poor performance of the cash out refinances and refinances more generally, are more important contributing factors.

They put the shoe firmly on the foot of cash out refi’s that were popular for hordes of speculators and investors trying to take money out of properties as the bubble got bigger and then being caught short in their ability to pay as the market became overloaded and crashed.  In plain language speculators, big and small, with the help of bank’s emphasis on refinancing, were a much larger factor.

When banks won’t even admit to themselves what their role was in the crisis, how can they learn the lessons to avoid the next disaster?  Playing button-button on subprime loans and having their lobbyists dissemble in Congressional hallways about where the blame really lies are both signs of more meltdowns to come by the refusal to learn the lessons of the last one.

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