There Are Opinions, And There Are Facts

(Another installment in Buster's ongoing bullshit-correction service, providing accurate info to friends and associates who've been exposed to crapola.)
___________________________________________

At the old watering hole the other night, somehow the subject of the Consumer Financial Protection Bureau came up.  The CFPB was founded in 2010 to oversee banks, credit unions, and other financial entities, and is headed by Richard Cordray, former Ohio Attorney General and State Treasurer.

One friend mentioned he went to school with Cordray.  Another, who happens to be a real estate attorney, said the CFPB was detrimental to business, punished innocent companies for the poor decisions of individual consumers, and levied fines and penalties which did not benefit consumers but went directly into Cordray's pocket. (No CFPB fan, this guy!)

The CFPB exists for a good reason.  It was created as a response to the abuses in the financial and real estate markets "wherein geeks invented impenetrable securities in order to profit from the miseries of lower- and middle-class Americans who couldn't pay their bills.*"  The over-inflated real estate market and the worthless mortgage-backed investments tied to it were what caused the 2007-2009 financial crash and Great Recession.

At the heart of the mess were adjustable rate sub-prime mortgages -- home loans given to borrowers without the credit and/or income to qualify.  Yet the loans were made anyway.  Why?  Mortgage lenders assumed continual and rapid real estate appreciation.  You could lend hundreds of thousands of dollars to poor dumb schmucks and the never-ending increase in home values would protect your interests.  After the rate adjusted up and the schmucks defaulted, you'd just foreclose, sell the properties and still make money.  In the worst cases -- and they were numerous -- naive, unqualified borrowers, sometimes unemployed, were actually sought out.  Their income and other credit app info was falsified.  Appraisers were incentivized to over-value homes.  Clearly, this was in no way a case a of random individuals making "poor decisions." 

In the peak year of 2006, sub-prime mortgages were 24% of all mortgage originations and accounted for almost $700 billion in supposed value.  One year.

These sub-prime mortgages were packaged together by the thousands, sliced, diced and euphemized into "collateralized debt obligations", CDO's.  Moody's and S&P were persuaded to give AAA bond ratings to these pieces of junk, while Wall Street gave them nondescript names and gleefully peddled them to unsuspecting brokers, municipalities and pension funds across the country.  Some CDO's had a few good conventional mortgages mixed in, but many were entirely sub-prime.  Some CDO's were comprised of other CDO's.

It was all a Big Lie, a house of cards.  When real estate appreciation slowed and default rates sky-rocketed, it all collapsed and the truth came out:  "Looking for bad bonds inside a CDO was like fishing for crap in a Port-O-Let.*"  American families lost up to 40% of their assets -- tens of trillions of dollars gone in a flash.

So that's why the CFPB was created, and it's OK by me.  It was necessary, and likely always will be.  Corporate America, for the most part, has a low opinion of the agency, but they always dislike anything that upsets "business as usual."  Deal with it.

My friend the lawyer is a fine fellow and had nothing to do with the sub-prime abuses, nor did his employer.  But realtors were certainly complicit in the fraud, along with mortgage lenders and big Wall Street banks.  That is fact, not opinion.  (And I never met a realtor who truly gave shit about anything except loan approval.)  At this point, bitching about the CFPB seems a bit disengenuous.

He complained that CFPB rules are slowing down the home sale process and lengthening the average time between sale and closing.  "It's gone from 30 days to 45."  I find conflicting reports on this, but I'm sure he's correct for his company's experience.  OK.  Deal with it.  I think you'll bear up under the strain.  Fifteen days seems a small price to pay for more diligence, verification, transparency and consumer choice.  (e.g. CFPB scrutiny of MSA's, or marketing service agreements -- cozy kickback arrangements between realtors and lenders/title companies.)

As for the idea that CFPB penalties go only to the agency and not the affected consumers, well, that's just not so.  It's all relative, but the bulk of all CFPB fines go to consumers.  Small portions are indeed civil penalties paid to the CFPB.  A few examples:

Bank of America -- $727 million to consumers, $20 million penalty.
Citibank -- $700 million to consumers, $70 million penalty.
Ally -- $80 million to consumers, $18 million penalty.
Fifth Third -- $21 million to consumers, $500,000 penalty
Chase -- $50 million to consumers, $166 million penalty.  (Ooh!  Chase must have been a bad boy on that one!)

Free-market capitalism in its purest form lacks scruples and basic concern for the end user.  Caveat emptor.  The Consumer Financial Protection Bureau operates as a counterweight to discriminatory, deceptive and predatory practices.  It's a good thing.
_______________________________________

(* from The Big Short, by Michael Lewis, 2010, W.W. Norton Publishing)

For the genuine info-seeker, I highly recommend the The Big Short.  If you're nice, I might lend you my copy.  For others, try the major motion picture of the same name, opening in theaters everywhere on Dec. 11th.  That would kinda be cheating, but whatever.  Might be a good movie.