I got into writing financial blogs three years ago for one reason. It was the mortgage insurance industry “PMI” that got me out in the open. I saw first hand what a terrible concept this was. I saw (in advance of the problem) that PMI was going to result in a mortgage explosion for the country. Of course it did.
I had a family member working at one of the big PMI firms. I argued with them regarding the insanity of what they were doing. Before the crisis the response was always the same, “We’re doing God’s work of getting people into their own homes. Plus we’re making a boatload in the process.”
In my opinion there is nothing more dangerous to our financial health than PMI. It should have been banned years ago. It is the ultimate derivate of credit risk. If it were not for PMI the disaster that hit us in 2007 would not have been anything close to as severe as it was.
Yes I want PMI banned. Yes I want the likes of AIG (United Guaranty) out of the business. But that will not happen. My fallback position is that it should be illegal to securitize ANY PMI loan. I want to have PMI backed loans rejected as eligible for purchase by Fannie and Freddie. If there must be PMI, keep it out of the risk of taxpayers. If private lenders want to make mistakes with this, let them. They will go out of business and we will be rid of them and their poor choices.
There is an excellent, must read article on this from the folks at Institutional Risk Analyst today. We can only hope that the “deciders” in D.C. read it. Link to IRA.
Credit Unions go for blood
Interesting article at the WSJ this morning re Credit Unions. It would appear that a law suit is about to get filed against the big banks (again). Five of the nation’s biggest credit unions had their balance sheets polluted with crap CDOs. Now they want their money back. From the article:
The National Credit Union Administration, or NCUA, has threatened to sue several investment banks unless they refund over $50 billion of mortgage-backed securities sold to the five institutions, called wholesale credit unions.
The names involved?
The NCUA is accusing Goldman Sachs Group Inc., Bank of America Corp.’s Merrill LynchCitigroup Inc unit, . and J.P. Morgan Chase & Co. of misrepresenting the risks of the bonds to wholesale credit unions.
Surprised? I’m not. Goldman Sachs has commented on the pending litigation:
Goldman said the NCUA “has stated that it intends to pursue…on behalf of certain credit unions for which it acts as conservator” claims that offering documents for certain securities Goldman sold “contained untrue statements of material facts and material omissions .”
Untrue statements of material facts?? Material omissions?? I’m shocked!
Watch this case as it evolves. This may set an interesting precedent. It could very well backfire on the US Treasury Department. Way back in the spring of 2008 our good friend Hank Paulson (and former T.Sec.) forced Fannie Mae to issue a $1 billion + Preferred Stock offering. Fannie of course went bust less than six months later. The offering document on this deal was littered with material omissions and misstatements of facts. But this deal was pushed out to the public by the Treasury Secretary. All the big banks (led by Merrill) sold this swill to the public.
If the NCAU wins its fight with the banks, the lawsuit against Treasury re the garbage Fannie pref is assured.