Housing Doom Housing Bubble Blog

Exploring the fine line between a gain and a painful decline:

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Good luck trumped good planning on this one. A quirk in Canada’s rules for Commercial Paper meant that most of the weight of the crisis fell on companies, not the banks. This has given David Dodge, Canada’s soon-to-retire central banker, precious time to orchestrate an orderly unwinding of all these opaque deals. Britain, on the other hand, is having to deal with a massive all-at-once rollover of commercial paper this week. It’s like Dodge got to pull into the pits to have his car serviced, while BoE’s Mervyn King in London has to crawl out onto the bonnet to make adjustments while the car is zorching around the track at 200 kilometers per hour.

The Economist is looking across the pond with envy [1] at all this. In effect they are saying that this accidental quirk in Canada’s rules is how it should be in general. They also include a fascinating snippet. Dodge is evidently close enough to retirement he felt he could express his real opinions about off-balance-sheet deals.

"Like Mr King, Mr Dodge is fearful of moral hazard. Banks should suffer for their mistakes, he says, though not so much that the system becomes insolvent.

He acknowledged that the Bank of Canada may itself have played a role in stoking the excesses by not raising interest rates enough. ‘One can see in retrospect that we should have been driving those rates harder than we did, because in reality credit conditions were being eased by increased securitisation and movement of stuff off balance [sheet],’ he says. That is an admission that most officials would make only when they are safely in retirement. If the failure to tighten was an error, it was surely one committed by many other central banks besides Canada’s." [my emphasis]

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The following email from First Net Mortgage was forwarded to me.  The sender prefaced this with:

Alt-A is almost completely dead in Nevada.  What happens if this goes nationwide?

Nevada Unfair Lending Practice

Under Nevada law, effective Oct. 1, 2007, it is an unfair lending practice for any lender to knowingly or intentionally make a home loan, including low-document, no-document, and stated-document home loans unless the lender determines that the borrower has the ability to repay the home loan, using any commercially reasonable method.

In response to this legislation, Wells Fargo Wholesale Lending will implement the following for all Conventional and Government loans secured by property in Nevada, effective Oct. 1, 2007:

• Wells Fargo Wholesale Lending will not purchase any loan with borrower selected reduced documentation, e.g., Limited Doc/VOA, closed after Sept. 30, 2007.
• System selected reduced documentation loans, i.e. minimum documentation determined by Direct ExpressSM, Loan Prospector® or Desktop Underwriter® may be eligible for purchase but must be submitted to Wells Fargo for underwriting. However, the Wells Fargo underwriter must perform and the loan must pass a reasonability of income test.
• Income must be verified and the borrower qualified for FHA Streamline Refis and VA IRRRLs.
• Secondary Stated Income option of our Home OpportunitiesSM Program is not allowed.
• Wells Fargo’s Mortgage Express program is no longer offered.
• We will not allow offsite Mortgage Insurance contract underwriting. All Nevada property transactions must be submitted to Wells Fargo location for underwriting.

Clients doing business in Nevada should review pipelines to ensure loans to be delivered to Wells Fargo Wholesale Lending comply with the above requirements and time frames.

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