The foreclosure crisis has brought to the forefront the issue of bringing about reform in the financial system. The particular points relate to ownership of hedge funds, private equity funds as well as proprietary trading.
By proprietary trading is meant placing the capital of the bank at risk by speculating with the same rather than responding to the needs of clients. These operations are aggressively engaged in by few jumbo commercial banks of America – may be about only four or five of these. 25 or about 30 banks may have significance across the globe.
These activities are laced with great risks. But this apart their operations are in direct contradiction with the interests of customers – strong conflicts that cannot be blinked at by creating artificial walls between different sections of the same institution.
Their activities are not dependent in any way on the ownership of commercial banks. Currently there are countless independent hedge and equity funds of various sizes that are perfect of running the new competitive markets. These entities are generally financed privately and are heavily reliant on the services of the commercial banks including the matter of brokerage.
Very few of these entities because of their size and financial source can really claim to be “too big” or “too interconnected” to fail. The reality is that during troubled times these drop out by themselves without leaving behind a trail of destruction on the market.
What is necessary is protecting the market from these outsiders. There are only a few investment banks and insurance companies whose failure would have a sizeable impact on the market – big enough to raise concerns. In these instances a proper supervising agency can limit both their capital as well as leverage. This is what President Obama had suggested.
Specifically the new regulatory authority would have the power to interfere in case those entities that are vital to the market find themselves on the edge of a precipice. The agency would then step in for the only purpose of seeing to a systematic liquidation or a merger. In such cases limited funds would be there to see to running of operations without a break while getting ready for the death of the entity.
The stockholders and the members of the management would not be given protection in the case of such an eventuality.
FHA has made use of one stone to hit three birds. It has waived anti-flipping rules while trying to give a flip to drooping sales.
The Federal Government is trying to help those buyers of homes who had made low down-payments, the investors who take over and refurbished foreclosed units as well as the communities weighed down with staggering number of vacant foreclosed homes with this move. This one far reaching change in the policy of the administration is expected to have tremendous impact on all three.
The long term anti-flipping rules of the FHA are going to be changed and become effective soon. There is the possibility that it will serve the purpose of a silver bullet. For many years FHA has always been strict and harsh about flipping – buying and selling properties for profit within 90 days of purchase. The ban had been imposed to stop nefarious operations that inflated the worth of houses beyond ground realities.
A buyer, say Mr. X would purchase a house for a cheap price in need of extensive repairs. X would then make cosmetic changes and within few days of purchase sell it off at a much higher price to Mr. Y. Y would also be part of the operations. A string of such sales and resales would shoot up property prices falsely.
The game would end with the locating of finding a gullible buyer who would apply from the FHA a low down payment loan. Inevitably that buyer would default and FHA would be left in the lurch clutching on to a foreclosed house and loss of funds from its insurance coffers.
During most the last decade the FHA had continued to be strict about its anti-flipping regulation. But now it is waiving it – at least for a year. David H. Stevens said that FHA would once more permit mortgage insurance for some purchases even if a deal had been entered upon within 90 days of the original acquisition.
Stevens explained that the purpose for this change is to expedite sales of refurbished units to first time nest builders as well as other buyers. In 2009 foreclosures had hit a record – 2.8 million postings. Many communities are tottering with extra REOs lying about unsold and often in derelict conditions.
The waiver of the 90 day stipulations would allow the entry of investors to make bids for the units, repair these and sell them to buyers who would now have easy access to FHA financing. The latter takes only 3.5% as down payments.
The foreclosure crisis has caused much exposure to the Federal Reserve pulling it into the political arena. Consequently its chairman Ben Bernanke is continuously in the limelight similar to a voting candidate on the campaign trail. He is holding television talks, news conferences and talking to ordinary Americans.
The conservative legislators have always looked upon the Federal Reserve as rather heavy handed. They are now demanding that its regulatory powers should be trimmed.
On the other hand the liberals are accusing the Federal Reserve for pampering to the big banks and doling out hefty bailouts without giving protection to the consumers from poisonous financial products. The Democrats are also complaining that the Federal Reserve has been too secretive about the emergency rescue efforts it undertook.
Consequently Bernanke together with the central bank is caught up in the middle of a cross-fire over the best way the financial regulatory system can be overhauled. Obama’s plans are sweeping. He wants to place the central bank in control for regulating risk in a systematic manner. By it the central bank would have the right to clamp down tough regulations over financial institutions that seemed to be outsized. Simultaneously the Federal Reserve would forfeit its present authority to regulate credit cards and mortgages.
Bernanke supports those parts of the plan that would give more power to the Federal Reserve but he is against any curtailment included in the plans of Obama. This has placed Bernanke in a tricky position – he might lose his most vital supporter – the president.
For decades the Federal Reserve has never been under such pressure. This is making Bernanke more adept at handling the political aspect his post is demanding. Despite Bernanke’s strong protests about 300 House legislators and 30 senators have given their support for auditing the central bank. Bernanke has warned that this would imperil the independence of the Federal Reserve.
A row over how to regulate the Fed is imminent. Bernanke has the support of powerful politicians – one being Obama. He has been nursing these connections ardently and he has been carefully planning which battles are worthy of attention.
On the one side the central bank is facing popular anger irrespective of party loyalties. Its power and secrecy is being challenged. On the other hand there is a brutal war on about who should supervise Wall Street’s big banks. All this is against the background of the Congress is endeavouring to bring about sweeping regulatory changes.
The real estate industry in the US is going through turbulent times. Foreclosures are commonplace and the value of homes has plunged across segments and regions. Take for instance, Solano County, where 60 per cent of homeowners are paying mortgages on homes whose values are much less now than what they bought them for.
Yet there is a group of [...] Continue Reading…
The foreclosure stained market of today is the result of happenings in the market six years previously.
It is time to analyze and find out if it happened because of one group of firms falling asleep while driving, because of lack of foresight, because of excessive greed or because of ignorance? Most probably the answer is a cocktail of [...] Continue Reading…
The US economy is on a tailspin what with unemployment at its peak. As people lose jobs thick and fast, even those with sound credit history are faltering on mortgage payments. Hence, foreclosures have become common.
Now the Federal government has come up with a program to stem foreclosures. As part of this program, loans of homeowners are being [...] Continue Reading…
It is now high time to change the attitude from negativism to positivism – foreclosures have to be to be stopped but to do so one has to create more jobs and opt for more innovations.
Without the invention of new stuff and services that would increase the productivity, health and happiness for the people in general America will never [...] Continue Reading…
The defeat at Massachusetts has chastened Obama and he admitted to having made mistakes and failed to address the problems of the Middle Class. He said that the Americans were left with a “feeling of remoteness and detachment” from his seat of power – Washington; Obama as disarmingly candid.
He said, “We were so busy just getting stuff done [...] Continue Reading…
Despite the sluggish recovery and ongoing foreclosures it has been a good and profitable year for Goldman Sachs.
But at its headquarters in New York the mood was on a low key and little noise was being made about the fat pay cheques.
2009 had been a year of record breaking profits but the bank declared that it had [...] Continue Reading…
Foreclosure problems are increasing on a building in Bronx that had been purchased during the bubbly days. In a large hall on the ground floor of a house (1520 Sedgwick Avenue) in West Bronx that hip-hop music had bloomed and spread across the world as an international culture. One generation afterwards once more the building is the focus of [...] Continue Reading…
