Tag Archives: QM

“Skin In The Game”

BHHSNJ NJ301_H_Seal_cab_cmykby James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Berkshire Hathaway Home Services New Jersey Properties, Montclair Office

The Weasels of Wall Street have done it again.  That’s my stereotyping catch-all description of the financial industry, particularly, the banking industry.

You think that’s too broad?  That I’m tarring an entire industry with the same, heavy brush?  It reminds me of when Zero Mostel (in the original movie of “The Producers” – the non-musical one) is told he can’t shoot the actors in his show because “the actors are people.”  “Oh, yeah?” he barks, “D’ja ever eat with one?”

I think our friends in banking and money lending have, once again, attacked the buffet table of our patience.  They’re cutting into the line and scarfing up all the good stuff and the rest of us be damned.

Now that I’ve stretched that metaphor to its breaking point let me tell you what’s got me so amped up that I’m publishing 2 posts in the same month.

In December of 2013 I published a post called “Greed, Risk and the Pope”  (click on the title to read the post).  In that post I discussed the part of the Dodd–Frank Wall Street Reform and Consumer Protection Act which mandated that mortgage lenders retain some risk when they securitized and sold bundled mortgages.

After 4 years of wrangling the regulators who establish the details of this law announced, this week, that there would, essentially be no risk retention for mortgage lenders. Here’s a link to an article in The New York Times Business Section on October 23rd:


What happened?  As the article points out, and as my December 2013 post predicted, there was intense pressure on regulators from an odd coalition of interest groups to water down the effect of the law.  Banking associations, builders, consumer groups and, wait for it….The National Association of REALTORS brought enormous lobbying efforts to bear to avoid the lenders from retaining a mere 5% of risk.

The last 2 times there was no risk retention in mortgage lending a financial collapse followed.  One was in the 1920s, with a raft of real estate securitization, which ended with The Great Depression and one was the sub-prime frenzy that ended with the housing collapse of 2008 and The Great Recession.  I’m no economist but isn’t there a lesson to be learned here?  After the country recovered from The Depression (thanks, solely, in my opinion, to World War 2), the mortgage market operated basically the same way until September 11, 2001.  In those years, banks and lenders held mortgages until they were repaid and also held the risk of default.  This led to 60-70 years of peaceful mortgaging.  When the government oversight of the financial industry was loosened (nay, abandoned) in the aftermath of the fears brought on by 9/11 and the financial industry was told to police itself, the surge of securitization started again.

Now, with the watering down of this part of Dodd-Frank, the banks are free, once more, to not care if any loan they originate is paid back – in other words, profit without risking capital.

The astounding fact is the government colluded in this potentially catastrophic compromise.  The federal regulators bought the argument that credit would be severely restricted if there was risk retention.  This is the same fear-based chestnut that lenders trot out whenever anything threatens their ability to do whatever they want.  As The Times article points out, the only thing that will prevent another disaster brought on by securitization is the wisdom of the investors who buy the securities (in the form of bonds) to distinguish the good from the bad.  The last time around those investors showed no such wisdom.

Let’s not forget, also, that the government, in the form of Fannie and Freddie guarantees the vast majority of mortgage loans so if securitized loans go bad the taxpayer is on the hook.

It did not take long for all of us to forget what happened in 2008.  The desire for more lending has fueled this groundswell of opposition to risk retention.  The new conventional wisdom seems to be we need more lending and we will bow to the banks in order to get it.   This seems to be particularly true at the National Association of REALTORS.  I have taken my profession’s trade organization to task in the past for being on the wrong side of important issues.  I have also watched in amazement as we REALTORS have become the toadies of the mortgage lenders.  It appears we’re croaking the same tune again.

If you can’t get enough of my opinions, take heart.  I have another (non-real estate) blog called “The World At Large by Jim Stefanile – Thoughts On Everything Else”.

This month’s post is “A Fateful Universe?” where I discuss the idea that “everything happens for a reason.”  I hope you can visit:   http://jimstefanilesotherblog.wordpress.com/2014/10/28/a-fateful-universe/

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Greed, Risk and the Pope


by James Stefanile, ABR, GRI, SRES, QSC, gCertified, REALTOR/Salesperson, Prudential NJ Properties, Montclair, NJ

As if there wasn’t enough to dislike about the banking industry, they’ve done it again!

A major reform in the recent Dodd-Frank financial overhaul law (Dodd–Frank Wall Street Reform and Consumer Protection Act) was risk retention for the banks for mortgages they grant.  It’s called “skin in the game”.  For all but the safest loans, the originating financial institution  connected to the loan had to keep a stake in it if it was securitized and sold to investors. If such a loan went bad, then that original lender would suffer along with those who bought securities containing it.  Congress’ intention in passing this law was, clearly, to promote responsible lending and to compel mortgagors to stand behind the financial bets they make which have an overall impact on our economy.

Now it appears the banking industry and its coalition partners have brought enough pressure on the regulators of the Dodd-Frank law to all but ensure that will not be the case.

The law established 3 tiers of mortgage loans.  QRM or “qualified residential mortgages” are the highest and safest category and there is no risk retention for the original mortgagor.  The next lower tier is QM or “qualified mortgages” which are riskier loans and a there’s a third, bottom category which is even riskier.  For both of these bottom tiers the originating bank had to keep some “skin in the game” if those loans were bundled into securities.

Banks and a coalition of “consumer advocacy” groups and, guess who?, my beloved National Association of REALTORS reacted fiercely enough to Congress’ passage of these rules that the regulators who must establish the enforcement of the law all but surrendered to the pressure.  The re-proposed regulations lump QRM and QM loans together into one category with no risk retention.  “The result,” Representative Barney Frank (retired), a co-author of the law, wrote in a comment letter, “would be two categories, those that fall below standards and probably shouldn’t be made, and those that could be made and would not be subject to risk retention.”

My main introduction to these issues was Floyd Norris’ column in The New York Times on November 28, 2013.  Read the column at:


It’s easy to make loans if you don’t have to worry (or care) if they will be repaid.  That’s what a lack of risk retention is.  The banks collect fees from the borrower then sell the loan which is then securitized.  It was one of the major factors in the meltdown of 2008 and the ensuing foreclosure crisis and here we are giving the banks a free pass to do it all over again, despite the will of Congress.

Banks and their partners are, once again, promoting a fear based scenario where credit will be unavailable, low-income borrowers will be shut out and the housing recovery will be lost.  I’m afraid we REALTORS are coming down on the wrong side of the issue, as we have done in other issues in the past.  Read the National Association of REALTORS comment on the re-proposed rules at: http://www.realtor.org/news-releases/2013/10/realtors-to-regulators-aligning-qrm-with-qm-assures-safe-sound-mortgage-lending

Barney Frank

Barney Frank

The NAR postulates that combining QM and QRM rules will ensure sound lending practices.  I, for one, don’t know how you can come to that conclusion.  Giving in to the banks’ implied threats of a credit drought and the banks’ unwillingness to stand behind their underwriting will only set up a replay of the mess we are just emerging from.  Mr. Frank says, “I am not surprised [that] the overwhelming majority of commenters who are interested in building, selling or promoting the sale of housing to lower-income people support effectively abolishing risk retention. I should note that if all of these people were correct in their collective judgment, we would not have had the crisis that we had.”

It’s what I call “blind capitalism”, capitalism’s demented cousin, where the pursuit of the bottom line is the only endeavor, elbowing out all other considerations of ethics, fairness and morality.  I have seen this blindness up close as some people my industry, people who I had regarded well in the past,  have put the love of lucre above all common sense and sense of values.  Once again, I am chagrined that, once again, we REALTORS have been so short-sighted, as we have also been in the emerging Eminent Domain strategy (see the August and October 2013 posts in this blog).

Pope Francis

Pope Francis

I was reading the Roman Catholic Church’s Pope Francis’ most recent treatise, his APOSTOLIC EXHORTATION EVANGELII GAUDIUM (what? you mean you don’t follow papal bulls?).  It’s basically an exhortation to the faithful to promote Catholic evangelicalism. What really caught my eye, however, was in Chapter 2 where His Holiness warns of a culture of greed and exclusion and has grave doubts about the unfettered pursuit of wealth.  He says, “… some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.  This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”  He goes on to say, “… a globalization of indifference has developed” and “While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few.  This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation.  Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control.  A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.”

Wow! If that isn’t what the first few paragraphs of this post were about, then I don’t know what was.  The “unilateral” and “relentless” pursuit of profit above all other consideration.

You can read the Pope’s message below:


I’m not particularly religious and have never seen myself as committedly altruistic.  I will hope for the status of  “reclaimable sinner” by saying the Pope’s words touched me in a significant way.  This strikes at the heart of what kind of people we want to be, of what kind of society we want to live in.  Whether we are so blinded by greed that all other concerns are lost.

Rush Limbaugh

In response to the Pope’s message, radio talk show host and conservative mouthpiece Rush Limbaugh declared, “This is just pure Marxism coming out of the mouth of the Pope.”  On economics, he says, the Pope is “totally wrong, I mean dramatically, embarrassingly, puzzlingly wrong.”  Well, if Limbaugh doesn’t like it I think the Pope is really on to something and I say “Hooray for His Holiness!”  Anyone who can give Rush Limbaugh agita has got my vote.

As I write this we are in the midst of the end of year holiday shopping season, a time so consumed by spending and acquisition that we can’t escape the drumbeat of media exhortations to buy, buy, buy.  Many of us have long lists of expensive obligations to family and friends.  If your family and friends have such expectations – you need new family and friends.  I recently saw a young woman laden down with many shopping bags from a holiday buying binge and she looked as unhappy as any person I’ve ever seen.  We are hypnotized by our culture of consumerism and acquisition of wealth and its perversion of  “the pursuit of happiness”.  We so blinded by our conformity that we are not even aware of those who would lead us down the garden path of the “fairness of the unregulated marketplace”.

Emily Esfahani Smith

Emily Esfahani Smith

Jennifer L. Aaker

Jennifer L. Aaker

But, there is always hope, I suppose.  In the Sunday Review section of the November 30th New York Times, the essay “Millennial Searchers” by  Emily Esfahani Smith and Jennifer L. Aaker concludes that ” today’s young adults have been forced to rethink success so that it’s less about material prosperity and more about something else… rather than chasing the money, they appear to want a career that makes them happy,” and further, “Millennials appear to be more interested in living lives defined by meaning than by what some would call happiness.”  Read the essay at:

Maybe this, at last, will be the generation that wakes up from its Matrix-like slumber and demands accountability and fairness in the financial marketplace.  Let’s hope that generation’s REALTORS will also break free of their somnolent tethers and awaken as well.

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