Its not being a home owner that creates the wealth for people who own homes. These people are naturally better with their money because they used to have to save 20% for a downpayment. If you could save for a downpayment in the old days you were just more responsible than renters. The 100% financing crowd not so much.
At least I wasn't the only person kind of gob smacked by the CDO non-sequiter. We had noooooooo idea that these evil CDOs were buying our paper...no sireee bob. I also like how he blames the gov't. I mean if you want them to bail you out you have to make them feel responsible in the first place, no?
He said so many ... oh man... there can easily be a 10-page critique of this letter. First fo all some of this letter can be used as evidence that he violated fiduciary duty by wanting to help homeowners before shareholders. Secondly he's making a fool out of himself in like 10 different sentences. The rating agency models are superior to IMB underwriting...uh huh...
Tanta, I love the "You must be kidding" category. Wanna go for coffee?
One large portfolio to be sold has a notional value of approximately $900 million in single-A-rated debt. The identity of the seller could not be determined, but offers for all or part of the lists are due Thursday.
Bids on the individual debt components likely will be sold for values equivalent to 5 cents to 20 cents on the dollar or less. "Sellers are saying, 'I don't care if we make money on this, I just want to finally reduce my exposures,'" one hedge fund trader told TheStreet.com.
"Automated risk-based models, on which the entire market relied, replaced portions of traditional underwriting and credit evaluation, and only in retrospect is it now clear that these models did not perform as predicted during a period of severe economic stress."
No-one could have figured that house prices at over 3 times the income was trouble for everyone. After all, that's the "secret" at the center of the mortgage industry. So why bother programming that into the risk model?
And where did the "severe economic stress" come from? Wasn't it mostly from the violation of the " price at three times income" rule?
In addition, to prevent consumers from making the wrong mortgage choice in the future, Indymac has decided to adopt as our policy that borrowers without $50,000 in demonstrated liquid assets or $250,000 in demonstrated net worth are not eligible for the following products(2):
1. ARM loans with initial fixed terms of less than five years.
2. Loans with negative amortization or prepayment penalties.
3. Limited documentation loans.
In other words, we'll now only make risky loans to people we're pretty sure don't need these types of loans.
Good to see that the banking world is returning to the way they used to lend money.
You can't read something like this without wondering about this guys ego (which, if reputation holds true, is something like Napoleon). In what should be a mea culpa we get an attempted white-wash of the company's truly inadequate risk-management and quality control procedures. Indymac made bad loans because they had buyers for them. That's end of the story. If they want to stay in business they have to originate loans with the intent of holding them. Can they do that? That's the question Perry needs to answer.
I'm interested in the conditions set forth at the very end of the blog. The standards they set forth (basically common sense) won't be worth anything unless all of the other lenders agree to the same standards. Otherwise, someone who doesn't meet their standards for an ARM would just go to another broker, who'll be more than happy to set them up with what they want (option ARM, etc.).
They bought because they believed if they didn't act, they'd be priced out of the house market forever.
Bad judgment results in either their indentured servitude (just like old-time Americans), or their being priced out of the housing market for a long enough time to make many into those who have been price out of the market forever.
As to the lenders, the devil take the lot of 'em. We've yet to see more than a single handful of lenders who didn't gorge on this mischaracterization of security.
Six of the nation's largest home mortgage lenders are announcing a plan Tuesday for a 30-day freeze on foreclosures for prime and subprime borrowers who are more than three months behind on their payments, according to news reports. The plan, dubbed Project Lifeline, is intended to give borrowers more time to work out loan modifications from banks...
Great! Throw us a lifeline 'coz the 2-ton cement block is pulling us down.
We had noooooooo idea that these evil CDOs were buying our paper...no sireee bob.
Okay, so, like, we knew that your pension fund was, like, totally buying the super seniors. Okay? But, like, we totally had no idea where those mezzanine tranches were going, you know? We just went to bed every night, and in the morning the elves had come and taken those subs off somewhere. How were we s'posed to know where they went? Huh?
These people are approved by the SEC to issue securities. And they claim to have no idea where they go once they're issued.
thanks for posting this. As these debt portfolios are sold for pennies on the dollar, you will start to hear from two invisible elephants in the room: defined benefit pension plans and life insurance companies.
They both own billions of this stuff in their portfolios. Where the DB plan sponsors are public companies, you will see big hits to earnings to make up the shortfalls, especially because the equity and hedge fund sides of their portfolios also have been creamed since October. We also will see some blow-ups later in 2008 of weaker U.S. life insurance companies, including some still rated A or better.
Buffett noted that the CDO exposure for these companies would not be covered, adding that "we can't figure it out" when asked about the extent of that exposure. He described the "natural course" of the CDO insurance as "disastrous."
"Add to this mix a housing market that has not had a single regional market decline in over 15 years and, in fact, had a huge boom in prices from 2003 to 2006..."
Gosh, you don't think that 'huge boom' was telling us something, do you?
Buffett offer = the ultimate vulture play. Notice he's only offering to buy $800 billion of municipal guarantees. There's a lot more than than that backed by monolines.
He wants to cherry-pick the best credits in a muni portfolio with a lot of skunks.
The newsletter states: "And it worked for many years; the homeownership rate . . .expanded from 64% to 69% from 1994 to 2006, allowing 4 million additional Americans the opportunity to have the American dream." No, the self-deluding mirage of homeownership.
"Lenders didn't see that things were going too far, partly because we were too close to it, but mostly because objective evidence of this credit risk did not show up in our delinquencies and financial performance until it was too late to prevent significant losses."
We didn't do anything about the potential losses, because we weren't sure that we were actually going to lose anything until we'd.... lost it.
If you wait for the probability of loss to reach 1 before acting, then that's going to happen. What was the plan? Going to re-load from an earlier saved game? Or did you expect the rest of us to keep you supplied with quarters while you try for the high score table?
There are two big safety nets that prop up the U.S. financial system: FDIC and PBGC.
You forgot the National Credit Union Administration (NCUA) that insures credit unions. Credit unions have been offering CD's at some of the highest rates and offering loans at some of the lowest rates. For example, I can get a 3.50% three year auto loan from my credit union.
Indymac and most home lenders were not "greedy and stupid".
Greedy? That speaks for itself. I suppose he could try to argue the stupid part but then they're holding the biggest bag right now so I don't think that arguement will go well.
In the interests of self protection management has started the revisionism has already. The MSM really isn't the right venue for this though, I would prefer to hear him tell his story from the witness stand in the court of the hanging judge.
...a recent Federal Reserve Bank study shows that homeowners on average have 46 times the personal wealth of renters....
Already out of date. And after prices have dropped 40% nationwide from bubble peak -- and 70-80% in the worst areas -- this average ratio will be much, much lower, and about a third of homeowners will have no wealth at all.
The commenters before me caught most of what I saw wrong as I read the post. Hell I am a layman, but I used to have a mortgage and borrow money. So I have a little knowledge about things like interest rates. I have used a spreadsheet. So I am fully qualified to comment on these matters despite my non-professional, non mortgage lender, non-economist status.
Anyway the evidence from the professionals in the business-some of them anyway-indicates that I have the chops to comment on this matter.
"the capital gains tax break on home sales encouraged speculation"
A tax break passed by Clinton AND enthusiastically endorsed by the Republican Congress. Of course, the point about Congress is omitted by the promoters of this nonsense that the housing boom is Clinton's fault.
So, ladies and gentlemen, here we have, straight from the Republican fringe talking points book, an item that made its way in a letter to shareholders from the CEO of a public corporation. What a surprise!
A CEO using this kind of rhetoric in lieu of business judgment deserve tar and feathers, followed by a parade in the public park, and the boot from the village.
"We were not greedy and stupid" huh?
I agree! How about moronic, smug and very very greedy?
...to prevent consumers from making the wrong mortgage choice in the future
Does that mean that they won't pay substantially more YSP to brokers on higher risk transactions? Will they still pay AEs higher bps on these same loans? I guess the high pressure sales tactics and targeted incentives have nothing to do with the borrowers choices.
I remain completely amazed at the shamelessness of these executives.
He's really claiming that unless the ratings firm told them so, he had no idea that not verifying ability to repay a mortgage could cause defaults?
You know what I'd love to see? I'd love to see the banking regulators go through and throw out every one of these executives who say they had no idea that making no/low doc loans was "risky" on the grounds that their own statements prove them unqualified to run a safe and sound institution. They should be banned from banking for life.
I'm quite serious. I genuinely believe that no banking executive willing to write or say this for public consumption should be allowed to remain in banking.
On the CDO thing, It's pretty damn remarkable that a CEO of a major lender is willing to say/claim that he doesn't know where a substantial portion of his funding comes from. It's this sort of thing that gets me defending the structured finance industry more than I should, sometimes. It's become an easy scapegoat for everyone else who made fundamental errors of judgement.
If bank CEO's like Perry can convince the SEC that there was no way they coodanode, they will keep all the executive bonuses they earned during the good times. If the SEC can prove they "should have known", the CEO's and CFO's will have to pay back their bonuses.
Perry didn't write that letter and it wasn't written for the shareholders. His lawyer and accountant wrote it and it's intended reader is the SEC and/or a judge.
Well, given that IndyMac has had several representatives at each of the last few years' American Securitisation Forum conferences, including their head of investor relations, I can't imagine they'll find it easy to convince the SEC. And you'd think their shareholders would be a bit concerned too.
"By way of example, Indymac (and many other major financial institutions) has for years used one of the major credit rating agencies' models to assess and price credit risk on home loans. This model estimates expected lifetime losses on a loan level basis, and we closely monitor these average estimated lifetime losses for all of our loan production (that can be evaluated) on an ongoing basis. This particular rating agency revised its model in November 2007 (from version 6.0 to 6.1). Applying version 6.0 to our Q4-06 production (the version in place at that time) indicated an average expected lifetime loss rate of 0.88%, which we felt was a reasonable level of expected losses at which we could properly and adequately price the loans. However, now applying the updated version 6.1 to this same Q4-06 pool of loans results in an average expected lifetime loss rate of 1.88%, a 114% increase in expected losses in one year. This clearly indicates the extent to which the systemic underestimation of credit risk took place in the mortgage markets. As we began to realize this, we tightened our guidelines throughout the last year, with the result that our average expected lifetime loss rate for Q4-07 declined to 0.45% based on version 6.1, a 76% reduction in credit risk as compared to Q4-06, boding well for the future credit quality and related credit provisions/costs of our new business model."
So they changed the spreadsheet at the rating agency and now everything is going to be ok? They are using the rating agency that caused them to get into trouble?
Ginger, No harm in trying I guess.
Most every company I've audited could be, what I call, Audited to Bonus. That is, if you look at what the drivers are for executive compensation, you'll know likely problem areas. If they're compensated on sales, not cash receipts, look for unreported bad debts.
The probability that any explanation of how you weren't really greedy or stupid ends up sounding both greedy and stupid approaches 1.0.
Does anyone actually hear words when these CEO's open their mouth? I read that passage and envisioned Charlie Brown's teacher: " wa waa wa wa waaaaa wa wah. Wah wah wah wah! " Who coodanode? Um, him.
Many in our industry do not think it should be a lender's responsibility to determine if a loan is suitable for a consumer. While it is not our legal responsibility, I believe that determining suitability should be a key part of our responsibilities and is also "good business". Suitability goes hand in glove with reducing our credit costs, as a loan that is not suitable for a consumer is much more likely to default. This also means that, going forward, we will not be as sensitive to what our competitors or Wall Street are doing in terms of the products we offer.
If this is the wild west of high finance then do not ask me the responsible tax payer to bail the mortgage lender out when things go wrong because they did not see the risk of what they are doing.I know I know you the mortgage lender were taking that risk so everyone that could fog a glass could get rich and have 46 times the wealth of a renter. Sorry things did not work out for you and now a bunch of people will be living in tenements paying a slumlord. But that is just the breaks I guess when you speculate on everyone's shelter.
It is also important to understand that the rapid rise in housing prices is one of the key culprits in this current housing and mortgage crisis
A rapid price rise not driven by market fundamentals is the definition of a bubble, not a culprit or cause.
The home spending binge of the past few years was due to easy credit and lax lending standards. It was the result of everyone getting carried away. But the only group charged with making sure that this doesn't happen is the regulators. The Fed should have shined a brighter light on the dark shadows of Mortgage Backed Securities.
Very few in the private sector or in government predicted that the bursting of the housing bubble would be so severe and would result in the current wave of delinquencies, foreclosures and credit losses and the eventual collapse of the non-GSE secondary market ... even for high credit quality, full-documentation, jumbo home loans.
My paraphrase is "we were too stooopid to know homeowners could not afford to keep making the monthly payments on loans 12X their stated income." (period inside quote to make bacon dreamz happy)
I want to clarify that when we started making these loans our risk model had not yet incorporated the discoveries by Prof Whocoodavenown published in his recent paper "Lending money to folks who can't pay back is a great way of losing money".
At the time we had to rely on the wisdom of the classical underwriting text "As long as we get cut out of it and we're not the bagholders, who cares ?!"
In any case our loss mitigation strategy in place is now the time proven "when the horses are long gone along the hay and everything else in it maybe we can close the barn" so I want to reassure that we are neither stupid nor greedy (*)
Yours sincerely,
fake Mike Perry
*the definition of stupid or greedy is all relative of course
"If bank CEO's like Perry can convince the SEC that there was no way they coodanode, they will keep all the executive bonuses they earned during the good times. If the SEC can prove they "should have known", the CEO's and CFO's will have to pay back their bonuses.
Perry didn't write that letter and it wasn't written for the shareholders. His lawyer and accountant wrote it and it's intended reader is the SEC and/or a judge."
Lama,
I think you hit it right on the head. Folks, this is what it is really about right now and for the next several years. It began with Enron, but that could be written off as an isolated example. Now we have proof that an entire industry (Banking and Finance) is funcitioning on a completely and utterly corrupt basis largely aimed at funneling outrageous bonuses to CEOs/CFOs who went to the right schools and are members of the right country clubs. The jig is up and they are realizing that the public at large will shortly begin to understand that they are being fleeced a group of elitists.
Good God, I really didn't want to believe that this was true and start to think like Jas Jain, but the more I look at it objectively, that is exactly what is going on here.
in fact, a recent Federal Reserve Bank study shows that homeowners on average have 46 times the personal wealth of renters.
Could that maybe be because Warren Buffett and Bill Gates own homes??
Partly, I would also want to know what year the data was from for the study, getting good data for such a project usually means it is a year or two old. Thus if the personal wealth was based on late 2005 data, then the homeowners would have been at peak housing prices. given that we have already seen about a trillion of housing wealth disapear so far, with much more to come, my bet is that the 46:1 ratio is now substantially lower. Also dont forget about the 31% of homeowners who are mortgage free, if their houses are worth an average of $200,000, that alone gives them a big leg up on renters. Also the data would have to be age adjusted, homeowners are on average much older than renters (i.e. lots of 20 somethings have not bought houses, nor had thime to build up other financial assets, but saddled with college loans. 25-29 year olds make up 4.54% of homeowners and 14.91% of renters according to 2005 census data.
Lenders didn't see that things were going too far, partly because we were too close to it, but mostly because objective evidence of this credit risk did not show up in our delinquencies and financial performance until it was too late to prevent significant losses.
No "objective evidence" my a___.
How long have lenders been lending money? How long have lenders known that a loan must bear a rational relationship to the borrower's income if the loan is to be repaid? Do you consider this historical data relevant?
Dirk, I wonder if they included the home value and left out the mortgage amount?
Donald Trump does this. In the late 80's he took his $3 billion in RE, less his $5 billion in loans and calculated his net worth at $3 billion.
"Very few in the private sector or in government predicted that the bursting of the housing bubble would be so severe and would result in the current wave of delinquencies, foreclosures and credit losses and the eventual collapse of the non-GSE secondary market..."
Not true. Actually, most people I know in the private sector predicted it. But we're small-time people in the Midwest and the reporters weren't asking us. Whocoodanode.
However, in retrospect, like many
innovations (e.g., the Internet,
railroads, etc.), innovative home
lending went too far.
It's those damned bloggers. If they weren't running around pointing things out we could get this sweeping under the rug and unloading our hand grenades as collateral on Uncle Sam done before the dead tree press printed anything.
Real Time Economics Economics Blog
Economic insight and analysis from The Wall Street Journal.
February 8, 2008, 4:59 pm
Non-Borrowed Reserves: False Alarm
TAF enabled the Fed to lend a
predetermined amount of funds to
the banking system, ...
and against a wide range of
collateral rather than just
Treasurys and agency securities.
The TAF didnt add to the money
supply because for each dollar lent
through the TAF the Fed was careful
to liquidate a dollar of its
holdings of Treasury bills and
bonds to keep its overall balance
sheet unchanged.
Uh, yeah. Because that 'wide range of collateral' is just as secure as what it's being exchanged for.
We mortgaged the country already, right? A Treasury bill and bond is as secure as an advanced securitized innovative mortgage bungled [sic] financial instrument. Why not give the banks the bills and bonds and take their bungles in exchange as collateral?
Bismarck updated:
If you love sausage, the law, and financial instruments, never watch them being made.
Lama,
Having not read the study, hard for me to tell, but if so, the study would not be useful for anything but toilet paper. Thus I assume that it does take mortgage debt into consideration.
Honestly speaking? They are greedy, and they are not stupid.
2.5 years ago we were moving out of a major city, heading to a better school district and a more rural way of life (cows! goats! yay!). When house shopping I contacted our then-mortgage company (Chase) to prequalify for a loan, since we'd been happy with their service over the previous decade. When I gave current income and savings information to the Chase rep, and told him what we were planning to spend on the new house, he spent the next 20 minutes trying to convince me we needed to buy a bigger home. Kept going on and on about how we qualified for a loan more than twice the size of the one we wanted. Regardless of how many times I said no, he pursued this argument for quite awhile.
Our eventual loan for the home we bought didn't come from Chase (got a slightly better rate for our 30 year fixed from someone else). But the entire purchasing experience way back in 2005 was one of "you should buy more, you can do it". From real estate agents, from bankers, from everybody.
If we were a little less zealous about controlling our spending, how easy it would have been to be seduced into buying a McMansion?
So yes, I do believe the lenders were greedy. And I suppose, in a sense, stupid if they thought people would be able to continue to make payments that suck up most of their net income. But the way they went about selling those rapacious mortgage products was anything but stupid.
The house we bought in 2005 has probably lost a tiny bit of its original value, sure (we do not live in a "bubble region"). But we're sitting on a 30 year fixed we can make payments on, and will own the house far past the future recovery so I'm certain we won't lose money on it.
We (not just Americans, but at this point entire world markets) have to clean up this mess. Why isn't there jail time being discussed for these cretins?
But the only group charged with making sure that this doesn't happen is the regulators.
ie. the "State". It's called the "State" because, ideally, it's supposed to stick around and not be able to sweep stuff under the carpet or otherwise engage or allow unsustainable practices.
The greek root of "Government" is to steer or pilot. Government's job is to steer the economy's free actors.
I won't get into my usual political rant here but just leave it at that.
First, and I don't even know what to say to this kind of narrative....excuse me i have to go to the washroom.... beeerkkkkk!!!
Its not being a home owner that creates the wealth for people who own homes. These people are naturally better with their money because they used to have to save 20% for a downpayment. If you could save for a downpayment in the old days you were just more responsible than renters. The 100% financing crowd not so much.
At least I wasn't the only person kind of gob smacked by the CDO non-sequiter. We had noooooooo idea that these evil CDOs were buying our paper...no sireee bob. I also like how he blames the gov't. I mean if you want them to bail you out you have to make them feel responsible in the first place, no?
He said so many ... oh man... there can easily be a 10-page critique of this letter. First fo all some of this letter can be used as evidence that he violated fiduciary duty by wanting to help homeowners before shareholders. Secondly he's making a fool out of himself in like 10 different sentences. The rating agency models are superior to IMB underwriting...uh huh...
Tanta, I love the "You must be kidding" category. Wanna go for coffee?
Irresponsible lenders lending to irresponsible borrowers. Seems simple enough.
CR,
Take a look at this:
Debt Fire Sale Is Imminent | Financial Services | Financial Articles & Investing News | TheStreet.com
One large portfolio to be sold has a notional value of approximately $900 million in single-A-rated debt. The identity of the seller could not be determined, but offers for all or part of the lists are due Thursday.
Bids on the individual debt components likely will be sold for values equivalent to 5 cents to 20 cents on the dollar or less. "Sellers are saying, 'I don't care if we make money on this, I just want to finally reduce my exposures,'" one hedge fund trader told TheStreet.com.
"Why didn't mortgage lenders see that things were going too far?"
When you get all of the fees and bonuses up front, why worry about 2 years from now?
No-one could have predicted...
"Automated risk-based models, on which the entire market relied, replaced portions of traditional underwriting and credit evaluation, and only in retrospect is it now clear that these models did not perform as predicted during a period of severe economic stress."
No-one could have figured that house prices at over 3 times the income was trouble for everyone. After all, that's the "secret" at the center of the mortgage industry. So why bother programming that into the risk model?
And where did the "severe economic stress" come from? Wasn't it mostly from the violation of the " price at three times income" rule?
In addition, to prevent consumers from making the wrong mortgage choice in the future, Indymac has decided to adopt as our policy that borrowers without $50,000 in demonstrated liquid assets or $250,000 in demonstrated net worth are not eligible for the following products(2):
1. ARM loans with initial fixed terms of less than five years.
2. Loans with negative amortization or prepayment penalties.
3. Limited documentation loans.
In other words, we'll now only make risky loans to people we're pretty sure don't need these types of loans.
Good to see that the banking world is returning to the way they used to lend money.
You can't read something like this without wondering about this guys ego (which, if reputation holds true, is something like Napoleon). In what should be a mea culpa we get an attempted white-wash of the company's truly inadequate risk-management and quality control procedures. Indymac made bad loans because they had buyers for them. That's end of the story. If they want to stay in business they have to originate loans with the intent of holding them. Can they do that? That's the question Perry needs to answer.
Nothing like a good Laugh to start the day out in Sunny North Cal.
Thanks Tanta
The race to the bottom continues
I'm interested in the conditions set forth at the very end of the blog. The standards they set forth (basically common sense) won't be worth anything unless all of the other lenders agree to the same standards. Otherwise, someone who doesn't meet their standards for an ARM would just go to another broker, who'll be more than happy to set them up with what they want (option ARM, etc.).
The irony for the buyers bites clean through...
They bought because they believed if they didn't act, they'd be priced out of the house market forever.
Bad judgment results in either their indentured servitude (just like old-time Americans), or their being priced out of the housing market for a long enough time to make many into those who have been price out of the market forever.
As to the lenders, the devil take the lot of 'em. We've yet to see more than a single handful of lenders who didn't gorge on this mischaracterization of security.
Could that maybe be because Warren Buffett and Bill Gates own homes??
This is obviously a CEO who: 1) has some serious stuff to get off his chest; and 2) can no longer afford the services of a professional PR counselor.
OT, but noteworthy from MarketWatch:
Six of the nation's largest home mortgage lenders are announcing a plan Tuesday for a 30-day freeze on foreclosures for prime and subprime borrowers who are more than three months behind on their payments, according to news reports. The plan, dubbed Project Lifeline, is intended to give borrowers more time to work out loan modifications from banks...
Great! Throw us a lifeline 'coz the 2-ton cement block is pulling us down.
We had noooooooo idea that these evil CDOs were buying our paper...no sireee bob.
Okay, so, like, we knew that your pension fund was, like, totally buying the super seniors. Okay? But, like, we totally had no idea where those mezzanine tranches were going, you know? We just went to bed every night, and in the morning the elves had come and taken those subs off somewhere. How were we s'posed to know where they went? Huh?
These people are approved by the SEC to issue securities. And they claim to have no idea where they go once they're issued.
In other words, we'll now only make risky loans to people we're pretty sure don't need these types of loans.
Good to see that the banking world is returning to the way they used to lend money.
Umbrellas only available for borrowing on sunny days.
However, in retrospect, like many innovations (e.g., the Internet, railroads, etc.), innovative home lending went too far.
Huh? He's comparing option ARMs to the World Wide Web? Oh, I see, he's comparing IndyMac to Pets.com.
I agree, just like their dot-com predecessors, the people running these lenders have drunk the Kool-Aid.
probert,
thanks for posting this. As these debt portfolios are sold for pennies on the dollar, you will start to hear from two invisible elephants in the room: defined benefit pension plans and life insurance companies.
They both own billions of this stuff in their portfolios. Where the DB plan sponsors are public companies, you will see big hits to earnings to make up the shortfalls, especially because the equity and hedge fund sides of their portfolios also have been creamed since October. We also will see some blow-ups later in 2008 of weaker U.S. life insurance companies, including some still rated A or better.
Guess everyone is still asleep, since there is no article yet about Buffett's offer to the monolines.
Buffet Bailout at Bloomberg
Buffett Bids for MBIA, Ambac Municipal Bond Contracts (Update8) - Bloomberg.com
Tanta, it's always nice to read one of your slash and burn pieces over morning coffee.
"Homeownership is the main way we Americans accumulate wealth"
Wow. And that wealth is how much, overall?
Oh Lord, help me be pure. But not yet.
This one on Buffett is interesting:
Warren Buffett To The Resuce! - Dealbreaker - A Wall Street Tabloid - Business News Headlines and Financial Gossip
Buffett noted that the CDO exposure for these companies would not be covered, adding that "we can't figure it out" when asked about the extent of that exposure. He described the "natural course" of the CDO insurance as "disastrous."
"Add to this mix a housing market that has not had a single regional market decline in over 15 years and, in fact, had a huge boom in prices from 2003 to 2006..."
Gosh, you don't think that 'huge boom' was telling us something, do you?
Buffett offer = the ultimate vulture play. Notice he's only offering to buy $800 billion of municipal guarantees. There's a lot more than than that backed by monolines.
He wants to cherry-pick the best credits in a muni portfolio with a lot of skunks.
The newsletter states: "And it worked for many years; the homeownership rate . . .expanded from 64% to 69% from 1994 to 2006, allowing 4 million additional Americans the opportunity to have the American dream." No, the self-deluding mirage of homeownership.
OK people, go talk about Buffett in the next thread up. And good riddance.
OT
There are two big safety nets that prop up the U.S. financial system: FDIC and PBGC.
PBGC guarantees defined benefit pension plans.
I believe by the end of this year, both could be in trouble.
It's hard to see who will pick up the tab for thousands of retired auto workers' pensions.
"Lenders didn't see that things were going too far, partly because we were too close to it, but mostly because objective evidence of this credit risk did not show up in our delinquencies and financial performance until it was too late to prevent significant losses."
We didn't do anything about the potential losses, because we weren't sure that we were actually going to lose anything until we'd.... lost it.
If you wait for the probability of loss to reach 1 before acting, then that's going to happen. What was the plan? Going to re-load from an earlier saved game? Or did you expect the rest of us to keep you supplied with quarters while you try for the high score table?
"We made too many wrong mistakes" -Yogi Berra
There are two big safety nets that prop up the U.S. financial system: FDIC and PBGC.
You forgot the National Credit Union Administration (NCUA) that insures credit unions. Credit unions have been offering CD's at some of the highest rates and offering loans at some of the lowest rates. For example, I can get a 3.50% three year auto loan from my credit union.
Rich
If anyone thinks the automakers are going to honor the pension plans, they are dreaming. Especially Dodge.
Michael Perry has taken the douchebag mantle from those wonderful folks at the
I-Banks.
"it's not our fault....wahhhhhhh"
Total Douchebag
MS
Indymac and most home lenders were not "greedy and stupid".
Greedy? That speaks for itself. I suppose he could try to argue the stupid part but then they're holding the biggest bag right now so I don't think that arguement will go well.
In the interests of self protection management has started the revisionism has already. The MSM really isn't the right venue for this though, I would prefer to hear him tell his story from the witness stand in the court of the hanging judge.
...a recent Federal Reserve Bank study shows that homeowners on average have 46 times the personal wealth of renters....
Already out of date. And after prices have dropped 40% nationwide from bubble peak -- and 70-80% in the worst areas -- this average ratio will be much, much lower, and about a third of homeowners will have no wealth at all.
The commenters before me caught most of what I saw wrong as I read the post. Hell I am a layman, but I used to have a mortgage and borrow money. So I have a little knowledge about things like interest rates. I have used a spreadsheet. So I am fully qualified to comment on these matters despite my non-professional, non mortgage lender, non-economist status.
Anyway the evidence from the professionals in the business-some of them anyway-indicates that I have the chops to comment on this matter.
The question is:
Did they know what they were or are doing?
If they did, there ought to be a law.
If they didn't, they were stupid.
Neither picture is pretty.
...Indymac ... has for years used one of the major credit rating agencies' models to assess and price credit risk on home loans. ...
I am speechless.
Abstract of Indy Mac letter: It wasn't our fault, everyone else was doing it, the devil made us do it, and hoocoodanode?
Guess he is trying to explain why they lost 509 million (6.43/share) last quarter. Give the man a top hat and a cane............
I am reminded of the Texas saying:
"Well bless his heart".
I'll have to save this piece in case any of my grandchildren ever ask, "Grandpa, what does self-parody mean?"
Robert's Rule of Blame:
If you have to proclaim that you were not greedy or stupid it no longer matter if you actually were greedy or stupid.
Can we have a 'Mike Perry' tag?
"the capital gains tax break on home sales encouraged speculation"
A tax break passed by Clinton AND enthusiastically endorsed by the Republican Congress. Of course, the point about Congress is omitted by the promoters of this nonsense that the housing boom is Clinton's fault.
So, ladies and gentlemen, here we have, straight from the Republican fringe talking points book, an item that made its way in a letter to shareholders from the CEO of a public corporation. What a surprise!
A CEO using this kind of rhetoric in lieu of business judgment deserve tar and feathers, followed by a parade in the public park, and the boot from the village.
"We were not greedy and stupid" huh?
I agree! How about moronic, smug and very very greedy?
Beyond justifying greed, the Letter is also about ignoring simple common sense: FICO score is wholly a backward look.
anyone have any info on those debt pools? Who is shopping them?
...to prevent consumers from making the wrong mortgage choice in the future
Does that mean that they won't pay substantially more YSP to brokers on higher risk transactions? Will they still pay AEs higher bps on these same loans? I guess the high pressure sales tactics and targeted incentives have nothing to do with the borrowers choices.
Robert's Rule of Blame:
If you have to proclaim that you were not greedy or stupid it no longer matter if you actually were greedy or stupid.
Tanta's Corollary to Robert's Rule of Blame:
The probability of any explanation of how you weren't really greedy or stupid ending up sounding greedy and stupid approaches 1.0.
I remain completely amazed at the shamelessness of these executives.
He's really claiming that unless the ratings firm told them so, he had no idea that not verifying ability to repay a mortgage could cause defaults?
You know what I'd love to see? I'd love to see the banking regulators go through and throw out every one of these executives who say they had no idea that making no/low doc loans was "risky" on the grounds that their own statements prove them unqualified to run a safe and sound institution. They should be banned from banking for life.
I'm quite serious. I genuinely believe that no banking executive willing to write or say this for public consumption should be allowed to remain in banking.
On the CDO thing, It's pretty damn remarkable that a CEO of a major lender is willing to say/claim that he doesn't know where a substantial portion of his funding comes from. It's this sort of thing that gets me defending the structured finance industry more than I should, sometimes. It's become an easy scapegoat for everyone else who made fundamental errors of judgement.
If bank CEO's like Perry can convince the SEC that there was no way they coodanode, they will keep all the executive bonuses they earned during the good times. If the SEC can prove they "should have known", the CEO's and CFO's will have to pay back their bonuses.
Perry didn't write that letter and it wasn't written for the shareholders. His lawyer and accountant wrote it and it's intended reader is the SEC and/or a judge.
I thought this was just another one of Mike Perry's elightening posts on the company blog
http://theimbreport.com/
Well, given that IndyMac has had several representatives at each of the last few years' American Securitisation Forum conferences, including their head of investor relations, I can't imagine they'll find it easy to convince the SEC. And you'd think their shareholders would be a bit concerned too.
"By way of example, Indymac (and many other major financial institutions) has for years used one of the major credit rating agencies' models to assess and price credit risk on home loans. This model estimates expected lifetime losses on a loan level basis, and we closely monitor these average estimated lifetime losses for all of our loan production (that can be evaluated) on an ongoing basis. This particular rating agency revised its model in November 2007 (from version 6.0 to 6.1). Applying version 6.0 to our Q4-06 production (the version in place at that time) indicated an average expected lifetime loss rate of 0.88%, which we felt was a reasonable level of expected losses at which we could properly and adequately price the loans. However, now applying the updated version 6.1 to this same Q4-06 pool of loans results in an average expected lifetime loss rate of 1.88%, a 114% increase in expected losses in one year. This clearly indicates the extent to which the systemic underestimation of credit risk took place in the mortgage markets. As we began to realize this, we tightened our guidelines throughout the last year, with the result that our average expected lifetime loss rate for Q4-07 declined to 0.45% based on version 6.1, a 76% reduction in credit risk as compared to Q4-06, boding well for the future credit quality and related credit provisions/costs of our new business model."
So they changed the spreadsheet at the rating agency and now everything is going to be ok? They are using the rating agency that caused them to get into trouble?
Here is a model for Mr Perry. If I let a bunch of kids go in an arcade with $20 each they will all come out broke and covered in corn syrup.
MOM,
Exactly...these types of letters are their own undoing, at least reputation wise and perhaps legally...
Ginger, No harm in trying I guess.
Most every company I've audited could be, what I call, Audited to Bonus. That is, if you look at what the drivers are for executive compensation, you'll know likely problem areas. If they're compensated on sales, not cash receipts, look for unreported bad debts.
However, in retrospect, like many innovations (e.g., the Internet, railroads, etc.), innovative home lending went too far.
Yeah, if only those Internet people would have stopped innovating before they came up with BLOGS!
lama - if memory serves, Perry's big bonus came the day he was named CEO. I don't think he's made any bonuses of note since.
How exactly has the internet gone too far?
Tanta - A tighten of your work, post coffee..
Tanta's Corollary to Robert's Rule of Blame:
The probability that any explanation of how you weren't really greedy or stupid ends up sounding both greedy and stupid approaches 1.0.
Does anyone actually hear words when these CEO's open their mouth? I read that passage and envisioned Charlie Brown's teacher: " wa waa wa wa waaaaa wa wah. Wah wah wah wah! " Who coodanode? Um, him.
Many in our industry do not think it should be a lender's responsibility to determine if a loan is suitable for a consumer. While it is not our legal responsibility, I believe that determining suitability should be a key part of our responsibilities and is also "good business". Suitability goes hand in glove with reducing our credit costs, as a loan that is not suitable for a consumer is much more likely to default. This also means that, going forward, we will not be as sensitive to what our competitors or Wall Street are doing in terms of the products we offer.
If this is the wild west of high finance then do not ask me the responsible tax payer to bail the mortgage lender out when things go wrong because they did not see the risk of what they are doing.I know I know you the mortgage lender were taking that risk so everyone that could fog a glass could get rich and have 46 times the wealth of a renter. Sorry things did not work out for you and now a bunch of people will be living in tenements paying a slumlord. But that is just the breaks I guess when you speculate on everyone's shelter.
It is also important to understand that the rapid rise in housing prices is one of the key culprits in this current housing and mortgage crisis
A rapid price rise not driven by market fundamentals is the definition of a bubble, not a culprit or cause.
The home spending binge of the past few years was due to easy credit and lax lending standards. It was the result of everyone getting carried away. But the only group charged with making sure that this doesn't happen is the regulators. The Fed should have shined a brighter light on the dark shadows of Mortgage Backed Securities.
Very few in the private sector or in government predicted that the bursting of the housing bubble would be so severe and would result in the current wave of delinquencies, foreclosures and credit losses and the eventual collapse of the non-GSE secondary market ... even for high credit quality, full-documentation, jumbo home loans.
My paraphrase is "we were too stooopid to know homeowners could not afford to keep making the monthly payments on loans 12X their stated income." (period inside quote to make bacon dreamz happy)
There is much sarcasm and maligning here.
I want to clarify that when we started making these loans our risk model had not yet incorporated the discoveries by Prof Whocoodavenown published in his recent paper "Lending money to folks who can't pay back is a great way of losing money".
At the time we had to rely on the wisdom of the classical underwriting text "As long as we get cut out of it and we're not the bagholders, who cares ?!"
In any case our loss mitigation strategy in place is now the time proven "when the horses are long gone along the hay and everything else in it maybe we can close the barn" so I want to reassure that we are neither stupid nor greedy (*)
Yours sincerely,
fake Mike Perry
*the definition of stupid or greedy is all relative of course
"If bank CEO's like Perry can convince the SEC that there was no way they coodanode, they will keep all the executive bonuses they earned during the good times. If the SEC can prove they "should have known", the CEO's and CFO's will have to pay back their bonuses.
Perry didn't write that letter and it wasn't written for the shareholders. His lawyer and accountant wrote it and it's intended reader is the SEC and/or a judge."
Lama,
I think you hit it right on the head. Folks, this is what it is really about right now and for the next several years. It began with Enron, but that could be written off as an isolated example. Now we have proof that an entire industry (Banking and Finance) is funcitioning on a completely and utterly corrupt basis largely aimed at funneling outrageous bonuses to CEOs/CFOs who went to the right schools and are members of the right country clubs. The jig is up and they are realizing that the public at large will shortly begin to understand that they are being fleeced a group of elitists.
Good God, I really didn't want to believe that this was true and start to think like Jas Jain, but the more I look at it objectively, that is exactly what is going on here.
Could that maybe be because Warren Buffett and Bill Gates own homes??
Partly, I would also want to know what year the data was from for the study, getting good data for such a project usually means it is a year or two old. Thus if the personal wealth was based on late 2005 data, then the homeowners would have been at peak housing prices. given that we have already seen about a trillion of housing wealth disapear so far, with much more to come, my bet is that the 46:1 ratio is now substantially lower. Also dont forget about the 31% of homeowners who are mortgage free, if their houses are worth an average of $200,000, that alone gives them a big leg up on renters. Also the data would have to be age adjusted, homeowners are on average much older than renters (i.e. lots of 20 somethings have not bought houses, nor had thime to build up other financial assets, but saddled with college loans. 25-29 year olds make up 4.54% of homeowners and 14.91% of renters according to 2005 census data.
So the defense against being accused of being "greedy and stupid" is to maintain we were just stupid?
Lenders didn't see that things were going too far, partly because we were too close to it, but mostly because objective evidence of this credit risk did not show up in our delinquencies and financial performance until it was too late to prevent significant losses.
No "objective evidence" my a___.
How long have lenders been lending money? How long have lenders known that a loan must bear a rational relationship to the borrower's income if the loan is to be repaid? Do you consider this historical data relevant?
I would love to have this tool on the stand.
Dirk, I wonder if they included the home value and left out the mortgage amount?
Donald Trump does this. In the late 80's he took his $3 billion in RE, less his $5 billion in loans and calculated his net worth at $3 billion.
"However, in retrospect, like many innovations (e.g., the Internet, railroads, etc.), innovative home lending went too far."
You mean, all the way to California?
I really wish I could short IndyMac right now. Unfortunately, I get the "no shares available to short" every time I try.
"Very few in the private sector or in government predicted that the bursting of the housing bubble would be so severe and would result in the current wave of delinquencies, foreclosures and credit losses and the eventual collapse of the non-GSE secondary market..."
Not true. Actually, most people I know in the private sector predicted it. But we're small-time people in the Midwest and the reporters weren't asking us. Whocoodanode.
I am reminded of the Texas saying:
"Well bless his heart".
I am reminded of a completely different Texas saying:
"Did he need killin'?"
It's those damned bloggers. If they weren't running around pointing things out we could get this sweeping under the rug and unloading our hand grenades as collateral on Uncle Sam done before the dead tree press printed anything.
Real Time Economics Economics Blog
Economic insight and analysis from The Wall Street Journal.
February 8, 2008, 4:59 pm
Non-Borrowed Reserves: False Alarm
Uh, yeah. Because that 'wide range of collateral' is just as secure as what it's being exchanged for.
We mortgaged the country already, right? A Treasury bill and bond is as secure as an advanced securitized innovative mortgage bungled [sic] financial instrument. Why not give the banks the bills and bonds and take their bungles in exchange as collateral?
Bismarck updated:
If you love sausage, the law, and financial instruments, never watch them being made.
(runs, screaming, in circles...)
Lama,
Having not read the study, hard for me to tell, but if so, the study would not be useful for anything but toilet paper. Thus I assume that it does take mortgage debt into consideration.
Honestly speaking? They are greedy, and they are not stupid.
2.5 years ago we were moving out of a major city, heading to a better school district and a more rural way of life (cows! goats! yay!). When house shopping I contacted our then-mortgage company (Chase) to prequalify for a loan, since we'd been happy with their service over the previous decade. When I gave current income and savings information to the Chase rep, and told him what we were planning to spend on the new house, he spent the next 20 minutes trying to convince me we needed to buy a bigger home. Kept going on and on about how we qualified for a loan more than twice the size of the one we wanted. Regardless of how many times I said no, he pursued this argument for quite awhile.
Our eventual loan for the home we bought didn't come from Chase (got a slightly better rate for our 30 year fixed from someone else). But the entire purchasing experience way back in 2005 was one of "you should buy more, you can do it". From real estate agents, from bankers, from everybody.
If we were a little less zealous about controlling our spending, how easy it would have been to be seduced into buying a McMansion?
So yes, I do believe the lenders were greedy. And I suppose, in a sense, stupid if they thought people would be able to continue to make payments that suck up most of their net income. But the way they went about selling those rapacious mortgage products was anything but stupid.
The house we bought in 2005 has probably lost a tiny bit of its original value, sure (we do not live in a "bubble region"). But we're sitting on a 30 year fixed we can make payments on, and will own the house far past the future recovery so I'm certain we won't lose money on it.
We (not just Americans, but at this point entire world markets) have to clean up this mess. Why isn't there jail time being discussed for these cretins?
I'm a little late to the comment party on this one, but, um, the railroads went too far?
what?
But the only group charged with making sure that this doesn't happen is the regulators.
ie. the "State". It's called the "State" because, ideally, it's supposed to stick around and not be able to sweep stuff under the carpet or otherwise engage or allow unsustainable practices.
The greek root of "Government" is to steer or pilot. Government's job is to steer the economy's free actors.
I won't get into my usual political rant here but just leave it at that.
I've met drug dealers with higher ethical standards.
Railroads going too far - - see panic of 1873.
All home lenders, including Indymac, were a part of the problem, and, as Indymac's CEO, I take full responsibility for the mistakes that we made.
And lucky for him, saying you are taking full responsibility for something these days doesn't really mean anything. Such a martyr...