Federal Reserve and Banks

Mortgage modification has been in practice in the United States in some form or another for years. The process entails modification of the terms of a mortgage separate from contract and original terms agreed to by both borrower and lender. The United States government has provided Americans with various versions of loan modification to help borrowers make payments via reduction of interest rates or principal balances. However, several recent news articles state the efforts of the American government have been in vain. The negative effects of mortgage modification have led to increasingly risky lending and removal of annual stress test fines for smaller banks leading to some banks' lending to borrowers with poor credit scores.

A New York Times article by Matthew Goldstein opens the discussion with exploration of the recent activity of Lone Star and Caliber concerning the mortgage market and issuing mortgages to borrowers that have poor or troubling credit histories. The most interesting part of the article is the acquiring of legacy loans from banks and federal agencies. "Most of the subprime mortgages at Caliber are "legacy" loans, those issued before the housing bust, which Lone Star acquired from banks and federal agencies" (Goldstein, 2016). These loans originally in the hands of federal agencies demonstrates the government's decision to let other organizations or banks step in to handle mortgages and other kinds of loans. Here mortgage modification seems like a positive effect, but instead is a negative effect. The positive effect is people receive loans. The negative is these loans go to people with poor/troubling credit histories. Leading to potential instances of missed payments and increased debt problems for the bank. Lone star's actions stem from interesting background.

Founded by a billionaire investor in 1995 named John Grayken, Lone Star has brought to the market, mortgages that are backed by bonds. These loans, named Fresh Start Loans, require borrowers prove they can repay loans. The results led to some negative outcomes such as foreclosures and bankruptcies, however, Goldstein states the likelihood for the borrowers to repay loans is positive. Lone Star and Caliber aim to take a step towards borrowers with troubled credit histories instead of what Big Banks do. Big Banks choose wealthy borrowers with pristine credit histories that creates accommodation for only a few versus the many. While the long-term consequences of letting shaky credit, borrowers acquire mortgages is unknown, the fact that this scenario exists points to the trouble the United States government has had in maintaining a beneficial mortgage modification program. While the article showed little to no author bias, with relevant information, the article lacked statistical information on the outcomes of banks like these allowing troubled borrowers acquire loans. Small banks like Lone Star have gone to extreme measures to handle the recession. The next article deals with how the Federal Reserve aimed to help.

Regional banks and small banks have all had to face trouble when recession came or any downturn in the economy. The United States government, specifically the Federal Reserve has begun reviewing the stress-testing program last year to see what can be improved upon in these tests and what can be removed to enable an easier time for these kinds of banks. What they discovered is smaller banks feel they cannot live up to similar standards upheld by larger banks. "Some of the smaller banks subject to the tests told the Fed the exams had become "unduly burdensome," Mr. Tarullo said, because the firms felt they needed to meet the same standards as bigger banks" (Tracy & Ensign, 2016). What all this means is regional and smaller banks will not have to pass certain capital requirements in the qualitative sense. As seen earlier with Lone Star, banks have become willing to modify mortgages and lend to risky borrowers.

The actions of the Federal Reserve aim to make such actions not punishable leading to a negative effect in the long-term that is perceived as a positive effect in the short-term. The annual stress tests and their modification has thus created a potential environment for economic instability should other banks follow suit in the way Lone Star has. Because the American government is ensuring that smaller banks will not have to maintain a certain capital requirement as strictly as in the past making way for potentially risk lending, there will be no fall out should banks fail to collect enough capital. Mortgage modification has been a part of the United States history for decades and is taking on a new form through smaller and regional banks. What large banks will not due (lend to risky borrowers), smaller banks may.

Overall, the article was informative and provided enough quantitative information to remove any assumption of bias from the article. It provided the kind of background information needed to tie in the previous article and provides the means with which to understand the next article which involves the future or potential future of banks in American and governmental influence. The Washington Post article by Mui and Merle share the efforts of President-elect Donald Trump's treasury secretary candidate, Steven T. Mnuchin in running a bank that not only saw voices of dissent concerning possible discrimination, but also took over $900 million in federal bailout money to counteract the damage the bank (now known as Onewest) to its customers and in some lesser part, to the economy.

Central to the deal was a promise by federal regulators to cover a significant share of the bank's losses -- a guarantee that lasts through 2019. In addition, the bank -- later renamed Onewest -- has repeatedly faced criticism over its attempts to foreclose on homeowners who were in the process of modifying their loans, among other practices (Mui & Merle, 2016).

Should President-elect Donald Trump choose someone like Mnuchin? That is where the article aims to allow the reader to focus on and explore. The Federal Reserve and the U.S. government may be putting the American public in a worse situation than before according to Mui and Merle. With smaller banks getting the greenlight from the Federal Reserve to proceed into potentially risky behavior due to less fear of punitive measures, more banks may see mortgage modifications and risky lending as part of a means of gaining customers and making profits. That coupled with little fear of repercussions from the earlier actions of the Federal Reserve and there can be a recipe for trouble.

What needs to be reiterated and clarified is that the actions of regional and small banks like Lone Star may seem like a positive step towards allowing people to acquire home loans. However, the reality is, many people are not able to maintain such payments and could lead to a situation where banks have less and less capital to circulate. The author does a great job of providing that negative effect feel by presenting one side more than the other. The article is an opinionated article and continues by demonstrating this attitude through the resume of efforts made by Mnuchin. He invested in blockbuster movies. He also enabled the construction of Chicago's Trump International Hotel and Tower. The writers could be implying that the government may lean towards choosing people that have helped Trump and thus erase any potential candidacy based on skill. This leads to discussion of the overall tone of the article.