December 7, 2020|GSEs, Mortgage Industry, Repurchases
Mortgage junkies beware
Back in the COVID panic of March 2020, the mortgage industry was rocked by capital market gyrations causing massive losses to many mortgage bankers. The Federal Reserve stepped in and flooded the market with liquidity and they haven’t turned the faucet off yet. Still, through a combination of surprisingly strong demand for housing during the pandemic along with record low interest rates produced by the Fed’s action, 2020 quickly turned from a total disaster into mortgage lenders’ best year ever.
Thanks to the Fed’s action, the mortgage industry is giddy today with record profits. But every time I see the headlines and news about eye-popping mortgage profitability and companies going public in the best year ever (see e.g., this one), I remember that Liz Warren is still in the Senate, Joe Biden[1] supports higher taxes, and the fate of Fannie and Freddie remains totally uncertain and subject to further legislative and administrative action. Some of you may remember my Musings back in April where I called the mortgage industry addicted “junkies” as relates to the GSE’s support of the mortgage lending through lower rates and liquidity. The reference to addiction is the topic below, another word for the federal support of the mortgage industry is a “subsidy”.
So, we have historic profits this year in an industry subsidized by the federal government. Can you see the problem here for 2021? For example, do you remember the “windfall profits tax”? MBA’s federal lobbyists better be on their toes next year looking out for ways in which the new administration and Congressional allies are going to get back some of that subsidy (perhaps by taxing your profits directly). Consider too, who is going to pay the bills for the forbearance losses which loom on the horizon? Do you think your “federally-backed” GSE partners are going to go soft on repurchase claims if there is a contractual argument to put it back to those mortgage bankers who rolled in profits in 2020? Mortgage bankers would be wise to skip the private jets and courtside seats[2]and put a bunch of those fat profits away for a rainy day because it may come a lot sooner than you think.
The Social Dilemma
Speaking of addiction, if you haven’t yet seen The Social Dilemma on Netflix, do it now (or as soon as you finish this blog post). I was truly changed by what I saw and so many things began to make sense, but at the same time it scared the heck out me. The bottom line is that social media and its algorithms have turned all of us into cocaine monkeys with our smartphones, communications and information consumption. These algorithms are warping our ability to make rational sense of the events in our lives because it amplifies and capitalizes on the emotional reward structures in our brains. Social media advertisers pay for your eyeballs, so the algorithms, notifications and functions are designed to keep you scrolling.
You may not believe this because you think you are not capable of being manipulated in that way. Make no mistake, however, unless you are a Vulcan, silicon valley’s “robots” are pulling your strings and making you forget logic and reason in favor of emotional hits of dopamine. You are just as much a manipulated addict as the cocaine monkeys when it comes to these psychological triggers and you are fed information in ways you are unable to resist pulling you deeper and deeper into narrative “rabbit holes” where your brain seeks those emotional rewards and is unable to recognize truth or reason properly. While I know this logically and I am trying to appeal to your intellect to understand this, I too am a cocaine monkey getting manipulated.
Was the election stolen?
Yes, this psychobabble stuff is affecting people deeply and is bad for society. For example, some people continue to assert the Russians hacked the 2016 election even after the Mueller Report[3]. Similarly, reason “left the building” when public health officials around the country all signed a letter this summer saying the racial protest marches were more important than social distancing for the pandemic.[4] Beliefs driven by emotional reactions amplified by social media rabbit holes (like Twitter and Facebook) and partisan news sources can be emotionally compelling but also override facts and reason.
Most recently, on the other side of the political spectrum, I have been having a raging debate with some close friends about election fraud issues. No amount of personal credibility or fact checking by honest and trustworthy sources will convince them otherwise. My friends are smart and passionate and truly believe the things they are hearing in their echo chamber.[5]The conversation begins something like this. “Don’t you want to at least hear these claims of election fraud? Don’t you care about election fairness?”
I do care deeply and want to hear about election fraud…, just not “claims of election fraud” at a press conference or some state legislative side show hearing. Free and fair elections are the foundation of our system of government. If our election was stolen or rigged on a vast scale it would be an unfathomable disaster for our nation. Election fraud of any kind is an affront to the election process and must be identified and rooted out in all instances. The place to do that, however, is in the judicial system.
The Constitutional right to Due Process[6]guaranties citizens the opportunity to be heard, but the place to be heard is in a court of law. Justice is provided after evidence is presented in court that is subject to procedural and evidentiary standards developed over hundreds of years of factfinding to arrive at truthfulness[7](such as relevance standards and not allowing hearsay). Witnesses (and parties) must be competent and are placed under oath (under penalty of perjury) and subject to cross examination. Unless you also say that our whole judicial system in the US is corrupt, the place to air these grievances and seek justice is in open court[8]. To assert claims of widespread election fraud outside of court, however, and then fail to provide any evidence of that fraud in the proper forum for addressing the claims, is a scandal in and of itself. The President, his lawyers and others promoting the narrative of the stolen election outside of the courtroom have run out of time and now, shamefully, they appear to be the fraud they claim to expose.
Artificial intelligence? Not here.
Some may argue there is no intelligence whatsoever in this blog, but there is certainly no artificial intelligence. Heck, I didn’t even know how to spell algorithm (thanks, spellcheck!). I will, however, accept any criticism if premised upon reason and not an appeal to emotion like, “Levy doesn’t know what he’s talking about because he tortures puppies”. If you are reading this blog, it’s doubtful a social media robot/algorithm made you do it, but you should not read a mortgage blog from a puppy torturer even if his thoughts on mortgage lending are solid. I do not, however, torture puppies.[9]When our emotions are being manipulated by our smartphones in ways we barely understand, it is time to realize that emotions (particularly empathy[10]), while important in many intimate human relations, are a really poor guide for decisioning in the broader sense.
[1]See below regarding election results.
[2] Pandemic permitting. I’m sorry, however, you had to cancel the lavish holiday parties already.
[3] I read the entire Mueller Report. No, the Russians (nor anyone else) did not steal the election from Hillary Clinton, but they did try to mess with us. The Mueller Report proved to me, however, that Trump and his team were simply incompetent in their dealings with Russia before the election and then, lucky for him, Trump was prevented from obstructing the investigation of Russian interference by his own legal counsel who ignored the President’s “crazy talk” as he told his secretary (word changed to avoid swearing) . Trump was extremely fortunate to have legal counsel capable of exercising that level of client control. If there is a crime of “Attempted Obstruction of Justice”, this would be the textbook example.
[4]Health officials should stick to statements about health that are scientifically supported. While it is generally good to support racial justice, that letter was shameful from a public health perspective. Even if there was a tremendous case to be made for supporting the protests from a social awareness perspective, in no way did that make the protests any different from a health perspective than any other gathering.
[5] There is a liberal echo chamber that is just as misguided as the one on the right on these issues. Of course, my own centrist beliefs are not an echo chamber, echo, echo….
[6]Feel free to blame this brilliant woman who taught my Constitutional Law class in law school if you do not like my Constitutional interpretations.
[7]Adversarial evidentiary procedures as conducted in the US Court system subject to judge and jury decisioning remain imperfect as a means of determining the “truth” in meeting out unbiased justice. To paraphrase Churchill, it’s the worst system ever invented, except for all others”. P.S. It’s popular to quote Churchill for a lot of things, but in a court of law, it might be proven that while Churchill gets credit for that line, it wasn’t really his.
[8]“Open” is an important word here. The system of justice must be public to be trusted to be fair. Remember, however, while freedom is an objective standard, “justice” is always in the eye of the beholder.
[9]Curious as to why I should feel the need to say that I don’t torture puppies just because I mentioned it as an example of how emotion will affect rational thought? Well, even though the idea of me torturing puppies is unfathomable, a certain percentage of you will still think I might be capable of such a heinous act just because I mentioned it.
[10] In future Musings I may go into further discussion about Yale psychology Professor Paul Bloom’s discussion of rational compassion vs. empathy.