I bet that a bunch of borrowers kinda sorta understood it, but figured that they'd just refinance when the payment first rises. With plummeting home prices, many of those will cry "foul!". Mix this in with the ones whol truly didn't understand the product and you've got a messy stew.
Please consider the risks of Option ARM mortgages. They let you stay in the home for 5 years at a substantial discount, stay anyway or cash in if your home has gone up, and stick us with the loss if it goes down. Please consider this risk as you evaluate the mortgage.
Gosh, I can't imagine why they're losing money, when they're taking such incisive action to address a major threat to their solvency!
Wachovia? Isn't that the bank that had internal email talking about how they knew they were helping telemarketing scammers pull money out of seniors' checking accounts? Isn't that the bank that could somehow magically offer half a point less than every other fnma dus lender on large multifamily loans?
Do they really think they're going to find borrowers here in June of 2008 buying a new home or refinancing an existing loan with a neg am ARM who understand what they're doing?
Remember the whole wholesale business model is pretty much built on plausible ignorance of the wholesaler. It's like stated income: hoocoodanode we were being lied to? We trusted these borrowers and brokers.
As soon as Wachovia concedes that it cannot rely on brokers to make sure that any OA application sent in involves an informed borrower who understands the loan, then it has exposed the whole game.
You wait til Wachovia declines to make a loan to some borrower who clearly isn't comfortable with the whole concept of annual interest, let alone negative amortization, and then gets slapped with a discrimination suit for "redlining" uneducated borrowers. Why they would want to volunteer to go down that road is beyond me.
Since damned near everyone else in the industry has already decided that it's much easier and safer just to not originate this dog at all, you have to wonder what Wachovia thinks it knows that the rest of us don't.
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
What on earth is Wachovia hoping to get out of this? I can just see the wrap-up meeting after this "experiment." I'm sure it'll go something like this: "OK guys, the results are in. It turns out that no one really knew what they were getting into at all, and most brokers had no idea how to explain it to their clients in the first place. In fact, most borrowers thought they had a 5/1 ARM at 1% fixed when they got the loan, because that's what their broker told them. Maybe we shouldn't have given these brokers a 3.5% YSP on Neg-Ams. I've made a note-to-self to avoid this one next time, so we should be ok from now on. Problem solved."
Since Option Arms haven't been exploding yet, isn't this an admission that all the people who already have OA's didn't understand them?
Apparently Wachovia has looked at their books and realized that if all the people out there with OA's actually understood them, they wouldn't have them.
Lance - and people laughed at me when I said that mortgage losses would eventually cost the banks around 900 billion, and the amount of debt outstanding was just too much, and that somewhere around 1.5 T just wasn't going to be paid.
Tanta, mass-market OAs do allow everyone to defer the Day of Disaster, and looking at Wachovia's results tells me they are fighting for time. I think this is a CYA move that is ill-judged.
" . . . only professional salespeople with Professional Sales People Skills can work with customers at the point of sale, which is what justifies their big commissions. You can't let back-room weenies (like me) talk to the ----- prospects, because we lack "people skills."
Those of us who lack 'people skills' are just the people who need to be talking to these applicants.
We might have to beat them severely about the head, but eventually we'll get through to them.
...How can any wholesaler afford to have Highly Skilled People re-doing the work of other Highly Skilled People
I'm assuming that's a rhetorical question. The problem isn't with the highly skilled it's the overwhelming preponderous of the underskilled. The wholesale market grew at an enormous rate from 2000 to 2007. For example in January of 1999 the wholesale division at Countrywide originated less than $1Bill in vol (this is before the split of prime and subprime). By 2006 there were probably more than 30 lenders originating more than a $bill in a month in their wholesale channels (prime only). Massive growth, poor risk management and inadequate regulation has led to some really bad loans. There has always been a maddening amount of redundancy although some of this has been mitigated by improvements in technology. What's really changed is that marketshare wholesalers are fighting over is potentially toxic.
@BB, who said "will the real Paulson please stand up ..." -
The Paulson you were quoting is a different one, not Hank:
Paulson & Co. Head Says Credit Writedowns May Hit $1.3 Trillion
By Poppy Trowbridge and Tom Cahill
June 18 (Bloomberg) -- John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.
This exemplifies my biggest b**** about management i.e., thinking that identifying a problem is akin to solving it and/or being blind to the can of worms it opens.
As long as I have to pay the cost of their moronic decisions I'll give push back, but our shop is unionized, most don't have that card to play.
big oil numbers on a big oil day. What were they. Dunnoh but I think they are bad because the prez is talking over them. a convinient lie? Can't wait for more drilling of empty holes. It can be called the.
"How America got its groove back initiative"
Tanta, there are artfully crafted words in our English language that sometimes capture the essence of hours of intensive writing. . . . like the word "Duh"
"Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) said Tuesday [June 17] that he has known since 2003 that his mortgage with Countrywide Financial was designated a VIP account, but continued to deny allegations he received any discounts when he refinanced two loans.
If I'm a lawyer trying to get my client out of an Option ARM contract, isn't this program Exhibit A? "Your honor, Wachovia instituted a systematic corporate program at considerable expense because they feared consumers were being preyed on by brokers..."
Hello, I'm from Wachovia and I'm going to explain the concept of Option Arms to you: the risks and the benefits. And oh, by the way, if for some unforeseen circumstance you need a workout here's our number. Or should we just start with that now?
I never wrote an OA because it was immediately apparent that even if some schlep did understand how it worked he still went for it. The opportunity to get a McMansion for $2000 a month was just to strong a pull for him to resist. Most borrowers, brokers and wholesalers adamantly refused to understand how they worked.
The very act of buying Golden West at exactly the wrong time is a perfect example of that refusal at the very highest levels of finance. If that example isnt enough, consider that as soon as it was revealed that 80% of OA borrowers were making minimum payments, the plug should have been pulled on the OA origination channel. For the safety of the bank for Christs sake! These arent uneducated day laborers struggling to get by in a complicated world, theyre the top of the financial shitpile.
Brokers refused to understand because that would cause some moral discomfort when they went to cash those checks. They would honestly get angry with people who tried to explain it. Danger Will Robinson! Danger!
The borrowers have been caught up in this new race to debt slavery. The American Dream of ownership of safe, comfortable shelter has been replaced consumerist activity for activitys sake. A basic understanding of how a mortgage or car lease works would seriously compromise this new ethos. These people havent just been brainwashed, theyve been battered. Yesterday I saw a billboard for Granite tops. I thought who the hell has a billboard for construction materials? Whatever happened to smokes and liquor and insurance?
Our local McMansion builder, Decimator of Prime Farmland Inc., set up his own Mortgage Broker shop and tied upgrades and incentives to its use. Going to an outside bank or broker would cost a buyer $50 60,000 worth of granite or hot tubs etc. The only product he had was Option Arms. Thats it.
The most alarming thing is that this trash is still being pushed to the public. I dont know what sort of financial firestorm it will take to bring back some sanity but Im pretty sure its going to hurt.
It will be interesting to see how the public reacts to mentions of bailouts for these people. Favorably because theyre clean and nice and what we aspire too? Or much more negatively than the subprimers because their fraud was much greater?
The rationale may be nothing more than the following:
Stepping so much into the underwriting process is very unusual and almost unprecedented,'' said consultant David Lykken of Mortgage Banking Solutions in Austin, Texas.My sense is that to appease the federal regulators they are saying we will do this extra kind of due diligence.''
Or corporate politics? There is probably a vocal contingent within Wachovia arguing to continue the option arms. Those opposed probably pushed this through to hamstring the "sales" folks.
Definitely an act of "Goodwill" on Wachovia's part. As in cya's $15 billion in Golden West Goodwill.
My guess is they are trying to steer the OA product to live loan prospects in order to generate revenue, else face the prospect of a significant asset impairment.
"Our local McMansion builder, Decimator of Prime Farmland Inc., set up his own Mortgage Broker shop and tied upgrades and incentives to its use. Going to an outside bank or broker would cost a buyer $50 60,000 worth of granite or hot tubs etc. The only product he had was Option Arms. Thats it."
Since I don't believe in Hell, and since this guy probably isn't capable of feeling guilt in any case, I hope his wife catches him in bed with his marketing director and takes him for every penny.
A cynic might say that the "people skill" in question was "lying like a rug." An optimist would say that it was implying that the loan wasn't insanely stupid without actually comitting fraud. But that would rely on more legal perspecacity in the sales force than I would be comfortable with.
Meh. People understood how the loans worked. They were just betting that their assets would rise and this was the biggest leverage instrument they could find. The problem isn't that people don't understand one type of loan. It's that they don't understand general economics and sound financial planning.
I don't think the borrower understood the risk. I don't know the exact % but a substantial proportion of these were sold or slated to be sold so I have to assume that the originator did.
Racer X, I'm not saying that people understood the economic risks of the system, but I don't believe that there was mass confusion about the terms of the loan. (This is an information-free belief that I'd be happy to update in the face of data.)
Don't Call It A Housing Slump
heres an ugly word that keeps appearing in articles about the housing market: slump. Housing slump catches up to Charlotte. Housing slump deepens in Charlotte area. Housing slump starts to hit stronger cities.
Defined, slump is a period of decline or deterioration; a mild recession in the economy as a whole or in a particular industry. For an athlete, a slump is a period during which he performs slowly, inefficiently or ineffectively. For the real estate market, the word is a misleading harbinger of gloom-and-doom that further erodes consumer confidence.
While its a highly descriptive word, Id like to challenge the journalists and headline writers who use it with something they can appreciate hard, honest facts. And Ill reiterate something I cant preach enough. Real estate is local, and Charlotte IS different than the rest of the country.
Maybe this. Maybe they are asking the new applicants if they understand the loan in order to estimate how many of the people who already have these loans understand them. Knowing that either helps you estimate your losses or your lawsuits.
I agree with the numerous posters who said it's best just to eliminate option arms going forward.
One of the problems is the independent loan agents. They are paid on commission and resell their loans to the big brokerage houses. There are many honest agents out there but there are the dishonest ones as well. The problem is these ARMs are a newer product. I dont think anyone really knew what could happen until it did. The brokers didnt know how severe a downturn could get since most of them are new (people tend to flock to hot job fields). Borrowers dont really understand how interest rates can move up and down and change their payments. Bottom line, everyone is partly to blame but it is more of a learning experience. Unfortunately, a very hard one for many people!
Wouldn't Wachovia's test on Option Arms be a good test to determine who gets to procreate?
i.e., if you pass Wachovia's test but get an OA anyway, then you shouldn't be allowed to reproduce, because it shows that while you're smart enough to know how, you're too stupid to understand its implications.
CBS5's Anna Werner in the Bay Area has been hitting Wachovia hard since she got hold of a World Savings sales training tape that actually shows 2 guys role playing. When the trainee refers to negative am loans, the trainer says, "We prefer to call them 'deferred interest loans'."
"AP writes:
Meh. People understood how the loans worked. They were just betting that their assets would rise and this was the biggest leverage instrument they could find."
But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. These were always "so you want to lose your house" loans. The only thing that is changing is that now banks/investors are also losing money.
You made my point. For the last 4 years in the DC burbs, all the new builders, Toll ,Hov, Lern, et al all did the same thing.
Use our on site lender: 1st phase was Bill with the abc lending group, then bill closed up shop, then starting Phase 2 use our lender the def group with William, then 2007 phase 3 (smaller lots less price) use our lender xyz, with Billy...
all the same guy at the helm... no way to get snagged, as the company shuts down afetr each phase and options were the prefered. Ask for a fixed or fixed VA...and they wont talk to you or change your mind by all the guarnteed upgrades you will lose...and the wife won't have that.
I don't know too many people who have the option-arm type loan, but it seems like a majority of people did have variable rate loans.
Given the spread between the 30-year fixed and the variable rate loans, it is pretty much the same psychological problem of being unable to foresee the future as anything other then a gradual continuaton of current trends.
tanta, you're the best! i've been ranting about these guys for over a year. all the info is available on edgar, has been for 2 years. you and bill are the best!
But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. Crazy thing is, there was a period in bubbly CA where prices were going up faster than the principal was on this neg am cr@p. Needless to say, the party broke up.
Jim A writes:
"But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. Crazy thing is, there was a period in bubbly CA where prices were going up faster than the principal was on this neg am cr@p. Needless to say, the party broke up."
Yes, but that is not the issue.
During the bubble, principle rises, price rises faster, and when reset happens, the "owner" can't afford the mortgage, loses his/her house, and bank gets paid. The only thing that has changed is that now the sale is going to be short, and the bank will lose money. The "owner" was always going to lose the house. That happens in pretty much every case where lottery winnings or inheritances from previously unknown wealthy relatives don't occur.
It seems like the broker function, like the sales function of many financial products, could be automated. You need sales people when you have a differentiated (non-commoditized) product. If your product is something like life insurance, money (mortgages, bank accounts), or gasoline, you don't need sales people. If I wanted to borrow money, I'd look up the going rate and pay it. What can a sales person do? They can't say "let me show you the specialized features of our money over theirs?"
It seems to me debt should be sold by a website with specific language and graphical explanations of what you are buying and how much you'll pay for it. That would eliminate the need to make sure sale people are walking the customer through the details.
They were still advertising them on television. At least a couple of months ago, maybe still.
I think people understand pick a payment. The borrowers.
It's the lenders that don't understand pick a payment, if they intend to be paid back.
I also love the idea that some people will want to pay extra.
The TV ads do it perfectly......you are a little short this month, then the min. Flush the next month, pay more. Freedom. What's not to like.
The woman had a nice dog who understood that life has its ups and downs, etc. The best idea since the dog.
Anyway, the only real surprise, or rather shock, is that anyone was still buying the loans.
By the way, i don't see a problem with vanilla adjustables for people that aren't on a tight budget or a stagnant salary. Or this, for that matter.
Anyway, it is the lenders -- where ever in the foodchain -- that are the idiots. I mean, its the lenders that are supposed to be the adults in this arrangement.
I disagree with the people here who think buyers understand OAs. IME most people really do not understand the most basic math. The think that if they move into a higher tax bracket they'll pay a higher rate on all of their income. They don't know a tax credit from a tax deduction. They can't remember how to calculate the mileage their car gets. They don't sign up for 401Ks with company matching, for God's sake.
It goes against the libertarian grain of a lot of people to protect mathophobes from themselves. But since the rest of us end up paying for "free markets" in finanical products, IMO it is for the best even if you don't have any compassion for them.
On RacerX's link to the Global Lending site, there's another link at the bottom of the chart to something called the "Statement of Subprime Lending" which most likely everybody here is already aware of, but I've never heard of this animal before, so I clicked it. http://www.wlg-online.com/content/PDFs/GEL/StatementSubprimeLending.pdf
It turned out to be this big long statement from June of 2007 from the FDIC, Fed Reserve Board of Gov's and a bunch of other agencies including consumer protection agencies listing a host of standards & practices rules/guidelines? for lenders & mortgage brokers to adhere to when selling subprimes & ARM's.
Likely I'm using terms wrong-- am not a lawyer & can't decipher if this "Statement" has any real binding and enforceable regulatory power, though it certainly sounds like it does. It's supposed to "assist state examiners in determining compliance" with its content, etc. Part of it deals with underwriting & part consumer protection-- listing specific standards that brokers/lenders "should" meet-- including full disclosure to the borrower of how ARM re-sets are calculated, pre-payment penalties,& other specific details that are supposed to be provided/explained to the consumer.
Is it possible that this Statement-thingy-- which it says was developed "to address emerging risks associated with certain subprime mortgages" and with 'particular concerns' about ARM's-- might be a reason why a Wachovia is bothering to call borrowers to make sure they understand how PickaPay works?
Could Wachovia's action possibly be prompted by the protocols in this Statement-- showing compliance to satisfy regulators?
I'm a complete financial naif, so I guess what I'm asking is-- does this Statement actually have any power, & 2-- is this whole mortgage mess gonna wind up like the tobacco company settlement-- where all of a sudden after ignoring it for years, the guvmint is suddenly shocked-shocked to find that many lenders/brokers have misled or underinformed their borrowers, & gee, maybe we should impose hefty fines on them??
The lenders are the only deep pockets to go after in this debacle.
"Part of it deals with underwriting & part consumer protection-- listing specific standards that brokers/lenders "should" meet-- including full disclosure to the borrower of how ARM re-sets are calculated, pre-payment penalties,& other specific details that are supposed to be provided/explained to the consumer."
Remember that "full disclosure" is met by giving the borrower a written document. I'd guess that less than 10% of borrowers bother to read what the nice broker has given them. Of those, let's assume 20% understand it - almost by definition, full disclosure of a neg-am loan is ubernerd territory. That puts us at 98% of borrowers either unwilling or unable to help themselves when it comes to this product.
Great post, Tanta. How can so many people who are supposed to be so smart continue to act so stupid. As you indicate, negative amortization was never meant for the mass market. Perhaps Wachovia should rename its product Pick-your-Poison.
I think "some investor guy" and zuzu's petals have unearthed the ulterior motives:
"The bank began contacting would-be borrowers to verify information and improve customer service."
Where "verify information" may be the key.
Information is power. They probably want to know exactly how many of these loans are going to eventually fail and which brokers (if any) they might be able to litigate against for selling them bad loans (i.e. here's a bunch of borrower's on tape saying they didn't know anything about this actually worked).
At the same time, they are certainly covering their asses against anybody that might want to litigate against them.
It will be interesting to see if any mortgage holders are savvy enough to record such conversations and produce them to the public.
Just saw an ad on TV for "Walk-over-yah's" "Pick a payment" loan. Are these people insane? Minimum payments, interest-only payments... do they realize that the Ponzi scheme of the Bubble is over? Argh!!
Consumer test to judge Option ARM suitability:
How much is 2+2?
Correct answer:
Whatever they want it to be.
I bet that a bunch of borrowers kinda sorta understood it, but figured that they'd just refinance when the payment first rises. With plummeting home prices, many of those will cry "foul!". Mix this in with the ones whol truly didn't understand the product and you've got a messy stew.
Dear customer:
Please consider the risks of Option ARM mortgages. They let you stay in the home for 5 years at a substantial discount, stay anyway or cash in if your home has gone up, and stick us with the loss if it goes down. Please consider this risk as you evaluate the mortgage.
Gosh, I can't imagine why they're losing money, when they're taking such incisive action to address a major threat to their solvency!
cya?
I want Wachovia to explain that damn pick a pay mortgage.
Wachovia? Isn't that the bank that had internal email talking about how they knew they were helping telemarketing scammers pull money out of seniors' checking accounts? Isn't that the bank that could somehow magically offer half a point less than every other fnma dus lender on large multifamily loans?
Wachovia Rep: "So do you understands the key features of the Pick-A-Payment loan product"
Customer: "So what you are saying is basically I am up shit creek without a paddle"
Wachovia Rep: "That is correct sir, thank you for banking with Wachovia"
"Funny, isn't it, that six or seven years ago we already knew that?"
Correction: Funny, isn't it, that sixty or seventy years ago we already knew that?
I have PEOPLE SKILLZ! Can't you understand that? What the hell is wrong with you people?!?!
cya?
More like expose YA to a serious bite.
Do they really think they're going to find borrowers here in June of 2008 buying a new home or refinancing an existing loan with a neg am ARM who understand what they're doing?
Remember the whole wholesale business model is pretty much built on plausible ignorance of the wholesaler. It's like stated income: hoocoodanode we were being lied to? We trusted these borrowers and brokers.
As soon as Wachovia concedes that it cannot rely on brokers to make sure that any OA application sent in involves an informed borrower who understands the loan, then it has exposed the whole game.
You wait til Wachovia declines to make a loan to some borrower who clearly isn't comfortable with the whole concept of annual interest, let alone negative amortization, and then gets slapped with a discrimination suit for "redlining" uneducated borrowers. Why they would want to volunteer to go down that road is beyond me.
Since damned near everyone else in the industry has already decided that it's much easier and safer just to not originate this dog at all, you have to wonder what Wachovia thinks it knows that the rest of us don't.
I see law suits.
RBS issues global stock and credit crash alert - Telegraph
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.
A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.
Paulson & Co. Says Writedowns May Reach $1.3 Trillion
Paulson & Co. Says Writedowns May Reach $1.3 Trillion (Update4) - Bloomberg.com
Will the REAL Paulson please stand up!
I only bring this up because I know everyone here over the last 3 years or so has never seen ANY of this coming...
just giving us a heads up....
Nice that the banks give us a heads up, probably not true though since their foreigners'
Not presitgious banks like we have here...
What on earth is Wachovia hoping to get out of this? I can just see the wrap-up meeting after this "experiment." I'm sure it'll go something like this: "OK guys, the results are in. It turns out that no one really knew what they were getting into at all, and most brokers had no idea how to explain it to their clients in the first place. In fact, most borrowers thought they had a 5/1 ARM at 1% fixed when they got the loan, because that's what their broker told them. Maybe we shouldn't have given these brokers a 3.5% YSP on Neg-Ams. I've made a note-to-self to avoid this one next time, so we should be ok from now on. Problem solved."
Since Option Arms haven't been exploding yet, isn't this an admission that all the people who already have OA's didn't understand them?
Apparently Wachovia has looked at their books and realized that if all the people out there with OA's actually understood them, they wouldn't have them.
Pay-option treasuries and sub-prime government debt are next up on the easy credit menu.
The bad debt is just moving from one part of the economy to another.
WB has a bit of 'splainin to do to its shareholders as well.
"for cryin out loud, it's Contained..
the Worst is Over.."
said those with 9 figure payouts
Son of Zinger said...I bet that a bunch of borrowers kinda sorta understood it, but figured that they'd just refinance when the payment first rises.
'Figured'? Or were specifically told by their brokers, "But you can always refinance."?
pay option taxes=1099
Funny, isn't it, that six or seven years ago we already knew that?
Ace of Base - The Sign
YouTube - Ace of Base - The Sign
Can't they all just write "Friend of Angelo" across the re-fi application and get an affordable below market fixed?
Lance - and people laughed at me when I said that mortgage losses would eventually cost the banks around 900 billion, and the amount of debt outstanding was just too much, and that somewhere around 1.5 T just wasn't going to be paid.
Tanta, mass-market OAs do allow everyone to defer the Day of Disaster, and looking at Wachovia's results tells me they are fighting for time. I think this is a CYA move that is ill-judged.
" . . . only professional salespeople with Professional Sales People Skills can work with customers at the point of sale, which is what justifies their big commissions. You can't let back-room weenies (like me) talk to the ----- prospects, because we lack "people skills."
Those of us who lack 'people skills' are just the people who need to be talking to these applicants.
We might have to beat them severely about the head, but eventually we'll get through to them.
...How can any wholesaler afford to have Highly Skilled People re-doing the work of other Highly Skilled People
I'm assuming that's a rhetorical question. The problem isn't with the highly skilled it's the overwhelming preponderous of the underskilled. The wholesale market grew at an enormous rate from 2000 to 2007. For example in January of 1999 the wholesale division at Countrywide originated less than $1Bill in vol (this is before the split of prime and subprime). By 2006 there were probably more than 30 lenders originating more than a $bill in a month in their wholesale channels (prime only). Massive growth, poor risk management and inadequate regulation has led to some really bad loans. There has always been a maddening amount of redundancy although some of this has been mitigated by improvements in technology. What's really changed is that marketshare wholesalers are fighting over is potentially toxic.
@BB, who said "will the real Paulson please stand up ..." -
The Paulson you were quoting is a different one, not Hank:
Paulson & Co. Head Says Credit Writedowns May Hit $1.3 Trillion
By Poppy Trowbridge and Tom Cahill
June 18 (Bloomberg) -- John Paulson, founder of hedge fund Paulson & Co., said global writedowns and losses from the credit crisis may reach $1.3 trillion, exceeding the International Monetary Fund's $945 billion estimate.
Grading on a curve is both the greatest and dumbest idea ever.
Making avg. Joes competent for over fifty years!
This exemplifies my biggest b**** about management i.e., thinking that identifying a problem is akin to solving it and/or being blind to the can of worms it opens.
As long as I have to pay the cost of their moronic decisions I'll give push back, but our shop is unionized, most don't have that card to play.
...and did someone REALLY just post an Ace of Base youtube link?
More from Bob Janjuah on his crash call.
Bob Janjuah e-mail| Discussion| RBS| RBS.L| GB0007547838 | Royal Bank of Scotland Group (The) PLC - Interactive Investor
I think we should nationalise all private banks, and put FHA in charge. Then we wouldn`t have these kind of problems, Obama willing.
big oil numbers on a big oil day. What were they. Dunnoh but I think they are bad because the prez is talking over them. a convinient lie? Can't wait for more drilling of empty holes. It can be called the.
"How America got its groove back initiative"
thanks Jeremy
suecris, yup this paulson is more truthful.
Tanta, there are artfully crafted words in our English language that sometimes capture the essence of hours of intensive writing. . . . like the word "Duh"
Good work!
Actually, the quiz is really easy:
Q: After my explanation, do you still want this product?
A. Yes [this indicates that they do not, in fact, understand neg-am]
B. Hell No. [the correct answer]
me agree that "Duh" is the long, short and correct of it.
From Roll Call:
Dodd Knew He Was Countrywide VIP Since 2003
"Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) said Tuesday [June 17] that he has known since 2003 that his mortgage with Countrywide Financial was designated a VIP account, but continued to deny allegations he received any discounts when he refinanced two loans.
[emphasis mine]
If I'm a lawyer trying to get my client out of an Option ARM contract, isn't this program Exhibit A? "Your honor, Wachovia instituted a systematic corporate program at considerable expense because they feared consumers were being preyed on by brokers..."
Hello, I'm from Wachovia and I'm going to explain the concept of Option Arms to you: the risks and the benefits. And oh, by the way, if for some unforeseen circumstance you need a workout here's our number. Or should we just start with that now?
I never wrote an OA because it was immediately apparent that even if some schlep did understand how it worked he still went for it. The opportunity to get a McMansion for $2000 a month was just to strong a pull for him to resist. Most borrowers, brokers and wholesalers adamantly refused to understand how they worked.
The very act of buying Golden West at exactly the wrong time is a perfect example of that refusal at the very highest levels of finance. If that example isnt enough, consider that as soon as it was revealed that 80% of OA borrowers were making minimum payments, the plug should have been pulled on the OA origination channel. For the safety of the bank for Christs sake! These arent uneducated day laborers struggling to get by in a complicated world, theyre the top of the financial shitpile.
Brokers refused to understand because that would cause some moral discomfort when they went to cash those checks. They would honestly get angry with people who tried to explain it. Danger Will Robinson! Danger!
The borrowers have been caught up in this new race to debt slavery. The American Dream of ownership of safe, comfortable shelter has been replaced consumerist activity for activitys sake. A basic understanding of how a mortgage or car lease works would seriously compromise this new ethos. These people havent just been brainwashed, theyve been battered. Yesterday I saw a billboard for Granite tops. I thought who the hell has a billboard for construction materials? Whatever happened to smokes and liquor and insurance?
Our local McMansion builder, Decimator of Prime Farmland Inc., set up his own Mortgage Broker shop and tied upgrades and incentives to its use. Going to an outside bank or broker would cost a buyer $50 60,000 worth of granite or hot tubs etc. The only product he had was Option Arms. Thats it.
The most alarming thing is that this trash is still being pushed to the public. I dont know what sort of financial firestorm it will take to bring back some sanity but Im pretty sure its going to hurt.
It will be interesting to see how the public reacts to mentions of bailouts for these people. Favorably because theyre clean and nice and what we aspire too? Or much more negatively than the subprimers because their fraud was much greater?
The rationale may be nothing more than the following:
Stepping so much into the underwriting process is very unusual and almost unprecedented,'' said consultant David Lykken of Mortgage Banking Solutions in Austin, Texas.My sense is that to appease the federal regulators they are saying we will do this extra kind of due diligence.''
Or corporate politics? There is probably a vocal contingent within Wachovia arguing to continue the option arms. Those opposed probably pushed this through to hamstring the "sales" folks.
Definitely an act of "Goodwill" on Wachovia's part. As in cya's $15 billion in Golden West Goodwill.
My guess is they are trying to steer the OA product to live loan prospects in order to generate revenue, else face the prospect of a significant asset impairment.
And that's not a good thing.
'Cause it will hurt.
A lot.
"Our local McMansion builder, Decimator of Prime Farmland Inc., set up his own Mortgage Broker shop and tied upgrades and incentives to its use. Going to an outside bank or broker would cost a buyer $50 60,000 worth of granite or hot tubs etc. The only product he had was Option Arms. Thats it."
Since I don't believe in Hell, and since this guy probably isn't capable of feeling guilt in any case, I hope his wife catches him in bed with his marketing director and takes him for every penny.
A cynic might say that the "people skill" in question was "lying like a rug." An optimist would say that it was implying that the loan wasn't insanely stupid without actually comitting fraud. But that would rely on more legal perspecacity in the sales force than I would be comfortable with.
Meh. People understood how the loans worked. They were just betting that their assets would rise and this was the biggest leverage instrument they could find. The problem isn't that people don't understand one type of loan. It's that they don't understand general economics and sound financial planning.
...People understood how the loans worked
I don't think the borrower understood the risk. I don't know the exact % but a substantial proportion of these were sold or slated to be sold so I have to assume that the originator did.
Racer X, I'm not saying that people understood the economic risks of the system, but I don't believe that there was mass confusion about the terms of the loan. (This is an information-free belief that I'd be happy to update in the face of data.)
I think I just threw up a little:
Charlotte Between the Lines || The Truth About Charlotte's New Home Market
Don't Call It A Housing Slump
heres an ugly word that keeps appearing in articles about the housing market: slump. Housing slump catches up to Charlotte. Housing slump deepens in Charlotte area. Housing slump starts to hit stronger cities.
Defined, slump is a period of decline or deterioration; a mild recession in the economy as a whole or in a particular industry. For an athlete, a slump is a period during which he performs slowly, inefficiently or ineffectively. For the real estate market, the word is a misleading harbinger of gloom-and-doom that further erodes consumer confidence.
While its a highly descriptive word, Id like to challenge the journalists and headline writers who use it with something they can appreciate hard, honest facts. And Ill reiterate something I cant preach enough. Real estate is local, and Charlotte IS different than the rest of the country.
What are they thinking?
Maybe this. Maybe they are asking the new applicants if they understand the loan in order to estimate how many of the people who already have these loans understand them. Knowing that either helps you estimate your losses or your lawsuits.
I agree with the numerous posters who said it's best just to eliminate option arms going forward.
One of the problems is the independent loan agents. They are paid on commission and resell their loans to the big brokerage houses. There are many honest agents out there but there are the dishonest ones as well. The problem is these ARMs are a newer product. I dont think anyone really knew what could happen until it did. The brokers didnt know how severe a downturn could get since most of them are new (people tend to flock to hot job fields). Borrowers dont really understand how interest rates can move up and down and change their payments. Bottom line, everyone is partly to blame but it is more of a learning experience. Unfortunately, a very hard one for many people!
Wouldn't Wachovia's test on Option Arms be a good test to determine who gets to procreate?
i.e., if you pass Wachovia's test but get an OA anyway, then you shouldn't be allowed to reproduce, because it shows that while you're smart enough to know how, you're too stupid to understand its implications.
CBS5's Anna Werner in the Bay Area has been hitting Wachovia hard since she got hold of a World Savings sales training tape that actually shows 2 guys role playing. When the trainee refers to negative am loans, the trainer says, "We prefer to call them 'deferred interest loans'."
nuff' said
"AP writes:
Meh. People understood how the loans worked. They were just betting that their assets would rise and this was the biggest leverage instrument they could find."
But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. These were always "so you want to lose your house" loans. The only thing that is changing is that now banks/investors are also losing money.
BobDobbs,
You made my point. For the last 4 years in the DC burbs, all the new builders, Toll ,Hov, Lern, et al all did the same thing.
Use our on site lender: 1st phase was Bill with the abc lending group, then bill closed up shop, then starting Phase 2 use our lender the def group with William, then 2007 phase 3 (smaller lots less price) use our lender xyz, with Billy...
all the same guy at the helm... no way to get snagged, as the company shuts down afetr each phase and options were the prefered. Ask for a fixed or fixed VA...and they wont talk to you or change your mind by all the guarnteed upgrades you will lose...and the wife won't have that.
AP, check out this site by Global Equity Lending. They're a large mortgage lender/broker with a multi level marketing structure
Sorry. Page not found.
ScoProLaw writes:
...and did someone REALLY just post an Ace of Base youtube link?
ScoProLaw | 06.18.08 - 10:32 am | #
I am short Ace of Base.
I don't know too many people who have the option-arm type loan, but it seems like a majority of people did have variable rate loans.
Given the spread between the 30-year fixed and the variable rate loans, it is pretty much the same psychological problem of being unable to foresee the future as anything other then a gradual continuaton of current trends.
tanta, you're the best! i've been ranting about these guys for over a year. all the info is available on edgar, has been for 2 years. you and bill are the best!
But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. Crazy thing is, there was a period in bubbly CA where prices were going up faster than the principal was on this neg am cr@p. Needless to say, the party broke up.
Jim A writes:
"But even if assets did always rise, so would the debt, and (eventually) the monthly payment would rise. Crazy thing is, there was a period in bubbly CA where prices were going up faster than the principal was on this neg am cr@p. Needless to say, the party broke up."
Yes, but that is not the issue.
During the bubble, principle rises, price rises faster, and when reset happens, the "owner" can't afford the mortgage, loses his/her house, and bank gets paid. The only thing that has changed is that now the sale is going to be short, and the bank will lose money. The "owner" was always going to lose the house. That happens in pretty much every case where lottery winnings or inheritances from previously unknown wealthy relatives don't occur.
It seems like the broker function, like the sales function of many financial products, could be automated. You need sales people when you have a differentiated (non-commoditized) product. If your product is something like life insurance, money (mortgages, bank accounts), or gasoline, you don't need sales people. If I wanted to borrow money, I'd look up the going rate and pay it. What can a sales person do? They can't say "let me show you the specialized features of our money over theirs?"
It seems to me debt should be sold by a website with specific language and graphical explanations of what you are buying and how much you'll pay for it. That would eliminate the need to make sure sale people are walking the customer through the details.
They were still advertising them on television. At least a couple of months ago, maybe still.
I think people understand pick a payment. The borrowers.
It's the lenders that don't understand pick a payment, if they intend to be paid back.
I also love the idea that some people will want to pay extra.
The TV ads do it perfectly......you are a little short this month, then the min. Flush the next month, pay more. Freedom. What's not to like.
The woman had a nice dog who understood that life has its ups and downs, etc. The best idea since the dog.
Anyway, the only real surprise, or rather shock, is that anyone was still buying the loans.
By the way, i don't see a problem with vanilla adjustables for people that aren't on a tight budget or a stagnant salary. Or this, for that matter.
Anyway, it is the lenders -- where ever in the foodchain -- that are the idiots. I mean, its the lenders that are supposed to be the adults in this arrangement.
Also, anyone buying a house that doesn't get the basic idea of a revolving charge card/min payment really shouldn't be making any mortgage decisions.
30 mins of Suze Orman is enough to get the picture regarding min payments on charge cards. This isn't that hard.
To think that Merrill was pitching a merger with Wachovia last fall as a 'last resort' -- yikes.
I wanna know who uses these big brains for wealth management.
Gawd, I love the smell of napalm and reading Tanta in the morning.
You go girl!!!
I disagree with the people here who think buyers understand OAs. IME most people really do not understand the most basic math. The think that if they move into a higher tax bracket they'll pay a higher rate on all of their income. They don't know a tax credit from a tax deduction. They can't remember how to calculate the mileage their car gets. They don't sign up for 401Ks with company matching, for God's sake.
It goes against the libertarian grain of a lot of people to protect mathophobes from themselves. But since the rest of us end up paying for "free markets" in finanical products, IMO it is for the best even if you don't have any compassion for them.
On RacerX's link to the Global Lending site, there's another link at the bottom of the chart to something called the "Statement of Subprime Lending" which most likely everybody here is already aware of, but I've never heard of this animal before, so I clicked it.
http://www.wlg-online.com/content/PDFs/GEL/StatementSubprimeLending.pdf
It turned out to be this big long statement from June of 2007 from the FDIC, Fed Reserve Board of Gov's and a bunch of other agencies including consumer protection agencies listing a host of standards & practices rules/guidelines? for lenders & mortgage brokers to adhere to when selling subprimes & ARM's.
Likely I'm using terms wrong-- am not a lawyer & can't decipher if this "Statement" has any real binding and enforceable regulatory power, though it certainly sounds like it does. It's supposed to "assist state examiners in determining compliance" with its content, etc. Part of it deals with underwriting & part consumer protection-- listing specific standards that brokers/lenders "should" meet-- including full disclosure to the borrower of how ARM re-sets are calculated, pre-payment penalties,& other specific details that are supposed to be provided/explained to the consumer.
Is it possible that this Statement-thingy-- which it says was developed "to address emerging risks associated with certain subprime mortgages" and with 'particular concerns' about ARM's-- might be a reason why a Wachovia is bothering to call borrowers to make sure they understand how PickaPay works?
Could Wachovia's action possibly be prompted by the protocols in this Statement-- showing compliance to satisfy regulators?
I'm a complete financial naif, so I guess what I'm asking is-- does this Statement actually have any power, & 2-- is this whole mortgage mess gonna wind up like the tobacco company settlement-- where all of a sudden after ignoring it for years, the guvmint is suddenly shocked-shocked to find that many lenders/brokers have misled or underinformed their borrowers, & gee, maybe we should impose hefty fines on them??
The lenders are the only deep pockets to go after in this debacle.
"Part of it deals with underwriting & part consumer protection-- listing specific standards that brokers/lenders "should" meet-- including full disclosure to the borrower of how ARM re-sets are calculated, pre-payment penalties,& other specific details that are supposed to be provided/explained to the consumer."
Remember that "full disclosure" is met by giving the borrower a written document. I'd guess that less than 10% of borrowers bother to read what the nice broker has given them. Of those, let's assume 20% understand it - almost by definition, full disclosure of a neg-am loan is ubernerd territory. That puts us at 98% of borrowers either unwilling or unable to help themselves when it comes to this product.
"Walk-over-yah" is stupid: this is just more of the same from them.
The answer will be to outlaw the option arm, much like WaMu just annnounced:
WaMu Commits Another Billion To Help Borrowers While Ditching Neg-Ams
Great post, Tanta. How can so many people who are supposed to be so smart continue to act so stupid. As you indicate, negative amortization was never meant for the mass market. Perhaps Wachovia should rename its product Pick-your-Poison.
How about Pick-Our-Poison?
I think "some investor guy" and zuzu's petals have unearthed the ulterior motives:
"The bank began contacting would-be borrowers to verify information and improve customer service."
Where "verify information" may be the key.
Information is power. They probably want to know exactly how many of these loans are going to eventually fail and which brokers (if any) they might be able to litigate against for selling them bad loans (i.e. here's a bunch of borrower's on tape saying they didn't know anything about this actually worked).
At the same time, they are certainly covering their asses against anybody that might want to litigate against them.
It will be interesting to see if any mortgage holders are savvy enough to record such conversations and produce them to the public.
zuzu's petals, thanks for the vocabulary: "naif"
Just saw an ad on TV for "Walk-over-yah's" "Pick a payment" loan. Are these people insane? Minimum payments, interest-only payments... do they realize that the Ponzi scheme of the Bubble is over? Argh!!
Nasty stuff, that.