Tags: QRM | mortgage | bank | real estate

QRM Creates 3-3-3 — A Surefire Way to Bankruptcy Again

By    |   Wednesday, 17 December 2014 08:07 AM

The old adage "Those who ignore history are bound to repeat it" seems to be coming true all over again these days.

I was celebrating the holiday season with my good friends who work for a top bank. A merry time was had by all. As we got talking, soon enough the discussion turned to the financial markets and what I heard turned me cold.

"We are watching the signs of the property bubble building again," said one friend. Another alluded to a potential collapse once again. What stunned me was their matter-of-fact comments rather than their fear of a bad outcome.

I am talking about the new rules for Qualified Residential Mortgages (QRM) exemptions coming into play now. As if we have not learned any lessons from the 2008 collapse, we seem to be headed down the exact same path again.

Soon after the 2008 collapse, banks were forced to slow down and really tighten lending standards. This obviously shrunk their incomes and bonus checks. The drop in income bothered them so much that they formed a big organization called the Coalition for Sensible Housing Policy to push the noble goal of helping first-time homebuyers with a return to the good old days of easing credit. The lobbying efforts (and no doubt large political contributions) paid off. The 20 percent down payment requirement has disappeared and Fannie Mae and Freddie Mac will now guarantee some loans with down payments of as little as 3 percent.

The lobby snared in vested congressmen who they knew would support such shenanigans again. The three politicians most responsible for the new QRM rules are Sens. Johnny Isakson, R-Ga.; Kay Hagan, D-NC; and Mary Landrieu, D-La. Except for Isakson who is up for reelection in 2016, the other two senators have lost and will not even be back so they will not be around when blame is being apportioned.

But then why blame the politicians alone? The fix has been in since last year. On Aug. 28, 2013, in a joint press statement by six federal agencies, the first dismantling of the Dodd-Frank regulations began. Mind you, I am no fan of the horrible legislation called Dodd-Frank, which is supposed to regulate bankers from creating excesses that feed bubbles in the market.

In that press release, the six agencies jointly issued new rules around regulations of QRM-related mortgage securities. In simple English — When banks create securities relating to QRM-based mortgages, those securities would not be scrutinized in much detail and would not count toward the risk metrics. Basically they are mandating that those kinds of mortgage securities would be considered safe. This then allows banks to really ramp up and push mortgages since they will not be penalized for holding or trading risky assets.

So now I can see the new marketing campaign from banks pushing mortgages — Come on over for the 3-3-3 mortgage. 3 percent down, 3 percent interest rate and (you will be bankrupt in 3 months). Of course, I say this tongue in cheek, but I am sure without the last part, we will see a massive push of these new cheap mortgages not too long from now.

Once you see this, it is time to short the real estate sector. Not yet, but soon. There are some exchange-traded funds that can help you short the real estate sector and are designed to profit from falling stock prices of publicly traded companies involved in the real estate industry.

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The old adage "Those who ignore history are bound to repeat it" seems to be coming true all over again these days.
QRM, mortgage, bank, real estate
Wednesday, 17 December 2014 08:07 AM
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