The deterioration of credit card and other revolving debt is going to be the transmitter for the global economy. What none of the decoupling proponents have reasonably explained is where the demand is supposed to come from.
After overproduction, you need to destroy some capital to be able to start again. It will come with inflation, or by shutting down factories, or by war and riots destroying cities, but it will come.
Five months to the day, since we were last at 1375 on sp500. And the day of the FED fireworks extravaganza... that did'nt seem to work out..
Will they defend again?
But does that mean a return to DIY methods? Hard to imagine that hiring, training, monitoring, paying and taking responsibility for all the outsourced and streamlined functions will be looked at favorably by investors.
"The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.
"Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.
"The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005."
Good thing guvmint hedonics keeps the adjusted price of everything but food and energy down or the headline number would be a shocker.
The Broker model IS broken.It required to provide insulation,deniability and mostly so that lenders could say "well there MAY be a problem,and if there is We are covered by our buyback provision with the Brokers,so WE have NO RISK"
ratefink, yes, it appears the broker model is cheaper, but when all the costs are added up, the broker model is actually more expensive (a point Tanta has been making for some time).
Marcus Aurelius, that was an interesting comment on house prices. Dimon thinks house prices must be worse than the reported numbers because delinquencies are rising so fast (and unemployment isn't too bad yet. Imagine what happens when house prices fall another 7% or more this year!
OT - I'm not sure over at Fortune they understand the term "retirement". Or, they are doing their part to change what the word means. Either way, this headline made me laugh and grimace.
It's a bad day for hedge fund again today too. Sample headlines:
"Real Estate Hedge Fund Restricts Redemptions" - Mercury Real Estate Advisors has restricted withdrawals from two of its hedge funds stricken by the credit crisis...
From Bloomberg - "Basis Yield Alpha Fund (Master)lost its first effort at having a bankruptcy judge in Manhattan recognize a court in the Cayman Islands as the principal court to liquidate the hedge fund..."
And from the UK (Money Marketing) -"Hedge funds defeated at today's Northern Rock EGM - Hedge funds, RAB Capital and SRM Global, have been defeated at today's Northern Rock EGM in Newcastle..."
It's been kind of quiet on the hedge fund front lately, maybe we are now going to see the fit hit the shan finally.
Yes, the "cheaper" part requires focusing on a short run time frame and ignoring the destructive consequences. My question is more, does anybody think that going back is an option? At this point the damage to these large banks is done, and nowhere near priced in. My feeling is that the damage is irreversible; any attempt (a la Countrywide) to go back to the way it used to be will be crushed by investors comparing the returns to the bubble. Wouldn't that mean that the big names are destined for some kind of BK, and new firms will have to sprout up to follow wiser business practices, in a presumably re-regulated environment? Between here and there would lie a sea change in attitudes, and probably a lot of dead air time for investors.
So remember, credit card was always kind of abnormally low , so part of what you're seeing we think is the catch up to getting back to a more normal...
People can no longer get their MEW on in order to pay off their credit cards, but I'm betting that they haven't cut back on their use of them.
This recession is going to be uglier than normal in part because people will not have the normal emergency sources of spending cash (home equity and credit cards). They've already burned through both of them.
I suppose CEOs are not hired for their linguistic abilities nor their ability to express themselves elegantly and accurately, so that must be why Dimon sounds so discombobulated in the first quote you cite. Or is he scared?
What I'm wondering is whether the proportion of falsely high income is higher in the broker model. By this I mean that applicants are more likely to lie (or be manipulated) by a broker than the bank directly. Perhaps because the broker is rewarded more by the volume of transactions and has more incentive to get the deal done?
In effect, the true DTI ratio for otherwise identical loans through brokers would be higher than those originated from the bank.
Jaime Dimon is a smart guy, and I think his analysis is spot on - the sad thing is, he runs the bank and he still can't get his own people to comply. The first law of big bureacracies...just like physics... what's in motion stays in motion.
Lots of people, including the boss, knew this was a bad idea, but the machine just kept on running. Like a Monty Python script:
Boss: "Don't buy this crap!"
Minion: "Right, boss, buy this crap."
Boss: "No you idiot, don't buy this crap."
Minion" "Right, buy this crap..."
Matthew:
I think all the factors you mention are present. Plus when you are sitting in a store-front broker's office and thinking about pumping up your income/assets, it's a lot easier than when you are sitting in an impressive bank building -- even if it is only a CSR desk in the lobby.
I don't see any slowdown. My calcs from the raw data say that in November inflation was 4.3% year over year and in December it is 4.5%. Rising, not falling.
Lots of people, including the boss, knew this was a bad idea, but the machine just kept on running. Like a Monty Python script:
I don't think why it happened is too difficult to detect. It was simply the "everybody is doing it" syndrome. You have to follow the crowd or be seen as a weirdo, and no CEO wants to appear to be a weirdo. Unless of course he is really courageous and sensible and self-authenticated, like I presume the CEO of USB that didn't get caught up in the nonsense. The typical education experience of most Americans is not to stand out as a "weirdo" and it affects people all the way up to the top too.
My question is more, does anybody think that going back is an option?
You mean going back to the wholesaling model?
Ask yourself why wholesaling is (apparently) so cheap.
Because they're not your employees, and when rates are high and volume is down (a known form of the business cycle) you are not saddled with overcapacity (and brick & mortar in markets you just wanted to skim from, not settle down in). In this case the brokers are saddled with the overcapacity, and the wholesalers shed no tears over that.
So the main incentive for relying on brokered applications is that you can cut them loose in a heartbeat. Many brokers are dumber than a box of rocks, but this part they figure out fairly quickly. How much "loyalty" to your safety and soundess do you think brokers will have, even in the absence of an outright bubble? Those of you who just started following the mortgage scene in recent years may not realize that this problem is very old. In the past, it mostly just operated on a smaller scale.
I mean, I was once (back in the 90s) paid to manage a pipeline of broker locks. I have never seen such a wretched hive of scum and villiany. We forget about painful stuff like rate lock abuse because in the last few years Mr. Market bailed that out. So to me, thinking about "going back" to normal wholesaling (where there is some handle on fraud and credit quality and you're just taking it in the shorts on your locked pipeline hedges) just means going back to normal perverse incentives. There were plenty of players who were driven out of the wholesale business before this most recent boom even started, because once they "fully loaded" the cost of doing business with brokers, it didn't make any sense.
But how to exit this unworkable model? Go out and hire retail loan officers and processors in the middle of a bust? Buy retail ops? How, exactly, can you be a giant nationwide lender with a giant servicing portfolio that earns its keep and be "retail"? There's "technically" retail and then there's really retail. Just putting a bunch of brokers on your payroll doesn't make you a "retail" lender.
Naples (Florida) Area Board of Realtors (NABOR) reported that 9 houses in the $2+ mil category sold in Dec and there are 263 on the market. Just an insight into what Mr. Dimon was talking about. It's not just subprime.
Maybe CR or someone would do us the favor of listing banks and their exposure to toxic waste from the worst to the best (not all banks, just the major ones), so we can gauge how they stand. I gather Wells Fargo, Bank of America and Morgan are better off than Citigroup. What about Wachovia and a few of the others. United States Bank? And if he or she is inclined and able, throw in some foreign ones too: Deutsche, UBS, Credit Suisse, LLoyds, Barclays, etc.
That is more what I meant. Going "back" to how it was when things like risk management were done in house is not really going to happen with the present players, I don't believe; the companies who rode this beast don't have the time to develop the resources, and, in my opinion, they would change their payoffs for their investors to such an extent that they would get decimated by markets looking for higher returns (like they remembered from the bubble). My conclusion is that they are going down, and probably taking some banks with them. Out of the ashes, and presumably after the torch and pitchfork interlude where new regulations (or old ones) are instated, then some new companies will make responsible lending practical again, at lower valuations than recently.
Edwards has canned the "corporate greed" speak, but Dems keep racheting up tax hike rhetoric against rich, corporations and oil cos. Michigan results make it clear that it's about the economy stupid and that may lead to total Republican rout in Congress. Not what Wall Street wants.
Wall Street brought it on itself via its elegant, expensive stupidity. I think stupid people and institutions deserve to be punished or else we'd be forever up to our a**holes in stupidity.
If you're considering entrepreneurship in retirement, you're not alone -- 20% of the over-50 workforce is self-employed. Here's how to improve your chances for success.
Ah, why is that so? Perhaps because their jobs disapeared? So how did they fund the new biz? Equity? What they had in there 401k? How screwed are these people going to be in a recession?
The broker industry really should be eliminated, or regulated in such a way that we wouldn't recognize it any more.
It's a travesty that this has been allowed to happen.
I wonder if it would have really mattered much. The Fed kept pumping easy money into the economy and people went crazy. Some more fundamental regulatory agency went awry... something went wrong at a very basic economic and financial level. In that context I don't think regulation of the brokers would have mattered that much -- I suspect we would have found clever ways around the regulations or would have found some other destructive outlet.
Something more primal was at work here. We were one step away from giving loans to house pets.
And I think it was made worse because we assumed the Fed was doing our thinking for us, so we didn't need to be bothered with it.
Just for fun, 'cause Global growth will soften the US experience:
Real estate trade volume in major cities shrank drastically in the first week this year, according to statistics compiled by China Index Institute, a leading researcher in the real estate industry.
Shanghai ranked top by trade volume, with 3,430 apartments sold in the first week of 2008. Chongqing followed with 2,351, down 27 percent from the previous week. Beijing sold 1,500, down 27 percent and Wuhan sold 1,150, 24 percent lower. No other city sold over 1,000 houses.
Hangzhou experienced the biggest drop among major cities, with only 191 suites sold, down 63 percent. Nanjing, Tianjin and Shenzhen saw housing sales decrease by 53, 49 and 38 percent respectively.
Prices of commercial properties fluctuated dramatically among the major cities. The average price of houses sold in Hangzhou grew 15 percent over the previous week to 16,341 yuan ($2,254) per square meter. Houses in Shenzhen were sold at 16,027 yuan per square meter on average, down 3.96 percent, while Beijing's home prices grew 1.33 percent to 12,342 yuan per square meter.
Market watchers said real estate dealers began cutting prices in many cities last week as the most important Chinese holiday, Spring Festival, draws nearer. In Beijing for example, a major real estate developer cut prices by over 2,000 yuan per square meter, instead of using "implicit" discount methods like decoration or home appliance give-away. The developer alleged it was the first in the city to lower selling prices because it needed capital to finance its purchase of two lots of land
Tanta, you're right, IT'S ALL THE FAULT OF THE BROKERS!!!
Afterall, who sets the guidelines, the lock requirements, the QC, the dynamics of the wholesale channel? - OOPS, on second thought, brokers don't set any of that. Yes, they use and abuse the system, because the lenders allow it, some might say, encourage it.
How many times have I had a wholesale rep from the big bank lender tell me to make up assets and double income, "because we don't verify?" - too many times, that's how many.
I've never done an Option ARM and preferred No Ratio loans instead of lying about income on "stated income" loans. And yes, many times I shook my head in disbelief because I met all the lender's guidelines for an approval for a loan I'd never make with my own funds.
Yes, there are a lot of unqualified scum in the mortgage bsuiness who happen to be brokers...but I met just as many lender employees with that sanctimonious attitude that they were above it all, when in fact they were neck deep in loan fraud by pushing their AEs (wholesale reps) to bring in more business, no matter what.
Unfortunately there is no accountability in my business. And no incentive from lenders, for a broker to care about potential defaults or churning. I know an awful lot of brokers who do good, clean business on a very professional level and provide a worthwhile service to their clients. - As the wholesale channel shrinks, does anyone really believe that mortgage pricing will get more competitive with less players in the market?
Too often, I can offer a client a mortgage at Zero points, where the very same bank is offering it at 1 point on their retail side.
The problem isn't really brokers, per se. It's that no one was enforcing their own guidelines, which you've stated on numerous occasions in your posts. It's convenient to have a scapegoat to take cheap shots at, but I really expected a more balanced view from you.
How many times have I had a wholesale rep from the big bank lender tell me to make up assets and double income, "because we don't verify?" - too many times, that's how many.
Wholesale AEs are just broker brokers. Of course a lot of them are worthless. Welcome to the wholesale model.
As the wholesale channel shrinks, does anyone really believe that mortgage pricing will get more competitive with less players in the market?
THE POINT IS NOT TO KEEP UNDERPRICING THE RISK.
Of course mortgage financing is going to get more expensive (as are RE transactions). This is not an unacceptable outcome.
Your point seems to be that the wholesale model corrupts both the broker and the lender. You get no argument from me about that.
Plenty of blame to go around folks, plenty. Good brokers, bad brokers, sensible lenders, not so sensible ones, people who wanted a nice home to live in, people who flipped with impunity (well almost Casey.)
Barley - he is probably on TV somewhere. Perfect role model for today's society - fraudulently try to become rich, lose your shirt, never take responsibility, and then try to wriggle out of what you owe.
"Unfortunately there is no accountability in my business..."
drdebt
Oh yes there is! We're gonna see a LOT of 'accountability' in the biz this year. It's just not in the loss of business/promotion/freedom (jail), it's in the total fallout of this mess. This kind of 'accountability' however, crosses all lines and holds our culture/society accountable and it pays the consequences.
jpm just firmly went to the dark side: MSR valuation gains, private equity gains, L3 assets. their reports are now as loaded as the CFC crap. and that's before their nemesis, CDS counterparty risk really comes out and kills them. JPM is the inventor of CDS and the largest ctpty in the mkt. they will have to eventually break JPM and Chase up, imo.
Something more primal was at work here. We were one step away from giving loans to house pets.
This is America. I'm betting it happened at least once. And I won't be surprised if we find Fluffy owns seven owner occupied McMansions that were bought from Cleo the cat.
Tanta, I've been puzzled about how large banking organizations would unwind, but somehow hadn't considered a breakup/spinoff scenario. Probably the right medicine for the banker/broker model as well.
So thanks for the 'baby Bells' comment. That's a big job, to be sure, but sensible.
We are looking at Dimon's claim that, given the same set of guidelines and the same loan characteristics, brokered loans perform worse than retail loans. The claim is not that the retail loans under these guidelines are great. The claim is that controlling for other variables, if it's brokered, you can predict it to perform 3x worse.
What do I get in response? "But the banks wrote the guidelines!" Well, yes. They did. And when they follow the guidelines, they apparently get better loans than when the brokers do, by a factor of about three.
Of course I have never defended those guidelines. But there's something else going on here besides the published guidelines.
The broker system is not broke! The whole financial system is broke when every player along the chain participates in the biggest financial scam ever in the world.
Let's start with the top
.Ownership Society
.1% FFR (prolonged)
.Anti-bankruptcy legislation
.Bank deregulations (decades in the making)
.Wall Street's greed-driven-leveraged derivatives wrapped and sold to every corner of the world
.Risk redistribution model to the least capables to understand it
.Rating agencies collaborate every step of the way with their stamp of certified-conflict-of-interest
.Banks race for record loan volume since they are no longer holding them
.Brokers, unregulated and the ultimate loop hole, go for broke on originating loans
.Appraisers, chasing the higher fee, jack up the valuation
.Realtors, the bottom of the chain feeders, push buyers to max out
.Fraudulent buyers, schemers, scammers flip houses for quick bucks
.Bernanke, expert in economic crises, fast-tracked over others to be the Fed's chief (very coincidental)
.Paulson, an insider presiding over the mortgage fraud proliferation, picked to be the Treasury chief (also very coincidental)
.Feds and Treasuries bail out, eroding the trusts and confidence of the prudent citizens
And this is just with the mortgage industry! What else are out there? No wonder there is a serious confidence crisis in the US financial system and economy.
i have a question about home prices falling to some "mean" they will get close to but not at what it takes to build that house today plus land etc. ????
It is three times worse in broker than it is in our own.
Where have I heard that before?
During the third quarter, the bank[Wells Fargo] eliminated its correspondent home loans channel in which the bank would purchase home equity loans originated by other lenders. While the correspondent channel represented about 7% of the total loans in its home equity portfolio, it also contributed to approximately 25% of the losses in the quarter, it said.
Those who poisoned the securitization stream will be shown the door...
Broker-originated loans are clearly worse than direct. But Dimon was very clear that bank-originated high-LTV and liar loans were also bad.
We made fun of Bernanke and others desperately implying that worse performance of subprime meant prime was going to be just fine. Let's not fall into the same trap here, focusing on brokers and forgetting that a huge amount of loans made with less than 20-30% down will go bad, including very big chunks of bank-originated loans.
My guess is that at the end of all this, the only loans that will merit a true top private-sector safety rating will be those that require 20-30% down, and verify intrusively that the buyer is supplying all of the downpayment.
Not too crispy, but he seems to be saying it's already worse than we thought it would be and likely to deteriorate further.
The deterioration of credit card and other revolving debt is going to be the transmitter for the global economy. What none of the decoupling proponents have reasonably explained is where the demand is supposed to come from.
After overproduction, you need to destroy some capital to be able to start again. It will come with inflation, or by shutting down factories, or by war and riots destroying cities, but it will come.
u bn brokerized.
Five months to the day, since we were last at 1375 on sp500. And the day of the FED fireworks extravaganza... that did'nt seem to work out..
Will they defend again?
"What I'm saying is I believe that home prices are worse than people think..."
Mark these words.
@sportsfan - I read that to mean that it's worse now than they expected it to be at its worst, but it's going to get even worse. I think.
Brian: 4,029
The broker model is broken.
But does that mean a return to DIY methods? Hard to imagine that hiring, training, monitoring, paying and taking responsibility for all the outsourced and streamlined functions will be looked at favorably by investors.
"The CPI report showed that the 4.1 percent increase in overall prices was the biggest since a 6.1 percent jump in prices in 1990.
"Energy costs rose by 17.4 percent this past year while food costs rose by 4.9 percent. Both were the biggest increases since 1990. Gasoline prices were up 29.6 percent, the biggest increase since they soared by 30.1 percent in 1999.
"The 2.4 percent rise in prices outside of food and energy was the smallest since a 2.2 percent rise in 2005."
Good thing guvmint hedonics keeps the adjusted price of everything but food and energy down or the headline number would be a shocker.
blogenfreude, yup. It's already worse than it 'should be' at this stage of the cycle, meaning that cliff diving is in season.
The Broker model IS broken.It required to provide insulation,deniability and mostly so that lenders could say "well there MAY be a problem,and if there is We are covered by our buyback provision with the Brokers,so WE have NO RISK"
"It is three times worse in broker than it is in our own."
Obviously, high LTV/Stated Income is bad, regardless of whether it's originated in-house or via broker. Do you think those stats are legit?
I wonder what % of those brokered loans have some element of common fraud in them (owner-occupany, inflating appraisals, etc.)
todd,yes I do.
Our bank stuff is not so hot.
Our bank high-LTV stuff is bad.
Our broker high-LTV stuff is three times worse than that.
Our high-LTV stuff that we originated through Toby Spangler is...
Wow.
ratefink, yes, it appears the broker model is cheaper, but when all the costs are added up, the broker model is actually more expensive (a point Tanta has been making for some time).
Marcus Aurelius, that was an interesting comment on house prices. Dimon thinks house prices must be worse than the reported numbers because delinquencies are rising so fast (and unemployment isn't too bad yet. Imagine what happens when house prices fall another 7% or more this year!
Best to all
A decision by the U.S. Supreme Court could make it more difficult for investors to sue over the collapse of the subprime mortgage market.
High Court Decision Could Protect Subprime Players - January 16, 2008 - The New York Sun
The broker industry really should be eliminated, or regulated in such a way that we wouldn't recognize it any more.
It's a travesty that this has been allowed to happen.
OT - I'm not sure over at Fortune they understand the term "retirement". Or, they are doing their part to change what the word means. Either way, this headline made me laugh and grimace.
The Best Jobs for Retirees
Ah, the "new retirement" is a lot like what I call working for a living.
It's a bad day for hedge fund again today too. Sample headlines:
"Real Estate Hedge Fund Restricts Redemptions" - Mercury Real Estate Advisors has restricted withdrawals from two of its hedge funds stricken by the credit crisis...
From Bloomberg - "Basis Yield Alpha Fund (Master)lost its first effort at having a bankruptcy judge in Manhattan recognize a court in the Cayman Islands as the principal court to liquidate the hedge fund..."
And from the UK (Money Marketing) -"Hedge funds defeated at today's Northern Rock EGM - Hedge funds, RAB Capital and SRM Global, have been defeated at today's Northern Rock EGM in Newcastle..."
It's been kind of quiet on the hedge fund front lately, maybe we are now going to see the fit hit the shan finally.
CR,
Yes, the "cheaper" part requires focusing on a short run time frame and ignoring the destructive consequences. My question is more, does anybody think that going back is an option? At this point the damage to these large banks is done, and nowhere near priced in. My feeling is that the damage is irreversible; any attempt (a la Countrywide) to go back to the way it used to be will be crushed by investors comparing the returns to the bubble. Wouldn't that mean that the big names are destined for some kind of BK, and new firms will have to sprout up to follow wiser business practices, in a presumably re-regulated environment? Between here and there would lie a sea change in attitudes, and probably a lot of dead air time for investors.
Conjure just said he hates tofu, then ran outside and ripped up the neighbor's dog with the bear fangs he grew last night.
So remember, credit card was always kind of abnormally low , so part of what you're seeing we think is the catch up to getting back to a more normal...
People can no longer get their MEW on in order to pay off their credit cards, but I'm betting that they haven't cut back on their use of them.
This recession is going to be uglier than normal in part because people will not have the normal emergency sources of spending cash (home equity and credit cards). They've already burned through both of them.
I suppose CEOs are not hired for their linguistic abilities nor their ability to express themselves elegantly and accurately, so that must be why Dimon sounds so discombobulated in the first quote you cite. Or is he scared?
Was that "Wow" as in:
mp,
Did Conjure seem to preference any certain parts of the dog?
Just askin.
What I'm wondering is whether the proportion of falsely high income is higher in the broker model. By this I mean that applicants are more likely to lie (or be manipulated) by a broker than the bank directly. Perhaps because the broker is rewarded more by the volume of transactions and has more incentive to get the deal done?
In effect, the true DTI ratio for otherwise identical loans through brokers would be higher than those originated from the bank.
Thoughts?
Jaime Dimon is a smart guy, and I think his analysis is spot on - the sad thing is, he runs the bank and he still can't get his own people to comply. The first law of big bureacracies...just like physics... what's in motion stays in motion.
Lots of people, including the boss, knew this was a bad idea, but the machine just kept on running. Like a Monty Python script:
Boss: "Don't buy this crap!"
Minion: "Right, boss, buy this crap."
Boss: "No you idiot, don't buy this crap."
Minion" "Right, buy this crap..."
Matthew:
I think all the factors you mention are present. Plus when you are sitting in a store-front broker's office and thinking about pumping up your income/assets, it's a lot easier than when you are sitting in an impressive bank building -- even if it is only a CSR desk in the lobby.
U.S. Consumer Prices Rose 0.3 Percent in December (Update3) - Bloomberg.com
I don't see any slowdown. My calcs from the raw data say that in November inflation was 4.3% year over year and in December it is 4.5%. Rising, not falling.
It's hard to imagine that they get paid for this. It's looks like everything is on schedule to me as the race to the bottom continues.
jo6pac
We iz in your pipeline...adversely selectin' you d00ds.
and that's barring a real recession [CEO Jamie Dimon, J.P. Morgan Chase, Jan 16, 2008]
In other words, I'm still a bit behind the curve...
Lots of people, including the boss, knew this was a bad idea, but the machine just kept on running. Like a Monty Python script:
I don't think why it happened is too difficult to detect. It was simply the "everybody is doing it" syndrome. You have to follow the crowd or be seen as a weirdo, and no CEO wants to appear to be a weirdo. Unless of course he is really courageous and sensible and self-authenticated, like I presume the CEO of USB that didn't get caught up in the nonsense. The typical education experience of most Americans is not to stand out as a "weirdo" and it affects people all the way up to the top too.
and that's barring a real recession [CEO Jamie Dimon, J.P. Morgan Chase, Jan 16, 2008]
Conjure Bag says, "Bar this."
Baltic dry sea freight index shows record drop
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Macklowe looking to sell the GM building to stave off implosion.
It's On! Harry Macklowe Selling GM Building! It Could Fetch Record, Worth '$4 B.-Plus' | The New York Observer
My question is more, does anybody think that going back is an option?
You mean going back to the wholesaling model?
Ask yourself why wholesaling is (apparently) so cheap.
Because they're not your employees, and when rates are high and volume is down (a known form of the business cycle) you are not saddled with overcapacity (and brick & mortar in markets you just wanted to skim from, not settle down in). In this case the brokers are saddled with the overcapacity, and the wholesalers shed no tears over that.
So the main incentive for relying on brokered applications is that you can cut them loose in a heartbeat. Many brokers are dumber than a box of rocks, but this part they figure out fairly quickly. How much "loyalty" to your safety and soundess do you think brokers will have, even in the absence of an outright bubble? Those of you who just started following the mortgage scene in recent years may not realize that this problem is very old. In the past, it mostly just operated on a smaller scale.
I mean, I was once (back in the 90s) paid to manage a pipeline of broker locks. I have never seen such a wretched hive of scum and villiany. We forget about painful stuff like rate lock abuse because in the last few years Mr. Market bailed that out. So to me, thinking about "going back" to normal wholesaling (where there is some handle on fraud and credit quality and you're just taking it in the shorts on your locked pipeline hedges) just means going back to normal perverse incentives. There were plenty of players who were driven out of the wholesale business before this most recent boom even started, because once they "fully loaded" the cost of doing business with brokers, it didn't make any sense.
But how to exit this unworkable model? Go out and hire retail loan officers and processors in the middle of a bust? Buy retail ops? How, exactly, can you be a giant nationwide lender with a giant servicing portfolio that earns its keep and be "retail"? There's "technically" retail and then there's really retail. Just putting a bunch of brokers on your payroll doesn't make you a "retail" lender.
Baby Bells.
Naples (Florida) Area Board of Realtors (NABOR) reported that 9 houses in the $2+ mil category sold in Dec and there are 263 on the market. Just an insight into what Mr. Dimon was talking about. It's not just subprime.
Maybe CR or someone would do us the favor of listing banks and their exposure to toxic waste from the worst to the best (not all banks, just the major ones), so we can gauge how they stand. I gather Wells Fargo, Bank of America and Morgan are better off than Citigroup. What about Wachovia and a few of the others. United States Bank? And if he or she is inclined and able, throw in some foreign ones too: Deutsche, UBS, Credit Suisse, LLoyds, Barclays, etc.
We iz in your pipeline...adversely selectin' you d00ds.
We iz in your competitor's portfolio finding FHASecure refinance "opportunities" to sell to you . . .
Tanta,
That is more what I meant. Going "back" to how it was when things like risk management were done in house is not really going to happen with the present players, I don't believe; the companies who rode this beast don't have the time to develop the resources, and, in my opinion, they would change their payoffs for their investors to such an extent that they would get decimated by markets looking for higher returns (like they remembered from the bubble). My conclusion is that they are going down, and probably taking some banks with them. Out of the ashes, and presumably after the torch and pitchfork interlude where new regulations (or old ones) are instated, then some new companies will make responsible lending practical again, at lower valuations than recently.
Forbes.com File Not Found
Forbes has it right and Bloomberg has it wrong. Inflation is up not down. The year over year figure is what counts.
mp,
Baltic dry sea index, appears more like another bubble popping to me.
Cheers,
Edwards has canned the "corporate greed" speak, but Dems keep racheting up tax hike rhetoric against rich, corporations and oil cos. Michigan results make it clear that it's about the economy stupid and that may lead to total Republican rout in Congress. Not what Wall Street wants.
Wall Street brought it on itself via its elegant, expensive stupidity. I think stupid people and institutions deserve to be punished or else we'd be forever up to our a**holes in stupidity.
Re: 12thpercentile link on retirement.
If you're considering entrepreneurship in retirement, you're not alone -- 20% of the over-50 workforce is self-employed. Here's how to improve your chances for success.
Ah, why is that so? Perhaps because their jobs disapeared? So how did they fund the new biz? Equity? What they had in there 401k? How screwed are these people going to be in a recession?
Lenders Rethink Home-Equity Loans - WSJ.com
I win with Zillowed Away©!!!
America and lending will never be the same again.
Time to start negotiating the discounts to payoffs;-}
Someday this war's gonna end...
Food and energy prices soaring. Jobs disappearing. Tilted into a recession already. Methinks the model is going to fail again.
Cheers,
Brian: 4,029
yes, i noticed that. oh well, at least Tanta doesn't have any points yet today, so there's still a chance we could gain on her...
The broker industry really should be eliminated, or regulated in such a way that we wouldn't recognize it any more.
It's a travesty that this has been allowed to happen.
I wonder if it would have really mattered much. The Fed kept pumping easy money into the economy and people went crazy. Some more fundamental regulatory agency went awry... something went wrong at a very basic economic and financial level. In that context I don't think regulation of the brokers would have mattered that much -- I suspect we would have found clever ways around the regulations or would have found some other destructive outlet.
Something more primal was at work here. We were one step away from giving loans to house pets.
And I think it was made worse because we assumed the Fed was doing our thinking for us, so we didn't need to be bothered with it.
ac, welcome to the "CEO Presidency"
Just for fun, 'cause Global growth will soften the US experience:
Real estate trade volume in major cities shrank drastically in the first week this year, according to statistics compiled by China Index Institute, a leading researcher in the real estate industry.
Shanghai ranked top by trade volume, with 3,430 apartments sold in the first week of 2008. Chongqing followed with 2,351, down 27 percent from the previous week. Beijing sold 1,500, down 27 percent and Wuhan sold 1,150, 24 percent lower. No other city sold over 1,000 houses.
Hangzhou experienced the biggest drop among major cities, with only 191 suites sold, down 63 percent. Nanjing, Tianjin and Shenzhen saw housing sales decrease by 53, 49 and 38 percent respectively.
Prices of commercial properties fluctuated dramatically among the major cities. The average price of houses sold in Hangzhou grew 15 percent over the previous week to 16,341 yuan ($2,254) per square meter. Houses in Shenzhen were sold at 16,027 yuan per square meter on average, down 3.96 percent, while Beijing's home prices grew 1.33 percent to 12,342 yuan per square meter.
Market watchers said real estate dealers began cutting prices in many cities last week as the most important Chinese holiday, Spring Festival, draws nearer. In Beijing for example, a major real estate developer cut prices by over 2,000 yuan per square meter, instead of using "implicit" discount methods like decoration or home appliance give-away. The developer alleged it was the first in the city to lower selling prices because it needed capital to finance its purchase of two lots of land
Tanta, you're right, IT'S ALL THE FAULT OF THE BROKERS!!!
Afterall, who sets the guidelines, the lock requirements, the QC, the dynamics of the wholesale channel? - OOPS, on second thought, brokers don't set any of that. Yes, they use and abuse the system, because the lenders allow it, some might say, encourage it.
How many times have I had a wholesale rep from the big bank lender tell me to make up assets and double income, "because we don't verify?" - too many times, that's how many.
I've never done an Option ARM and preferred No Ratio loans instead of lying about income on "stated income" loans. And yes, many times I shook my head in disbelief because I met all the lender's guidelines for an approval for a loan I'd never make with my own funds.
Yes, there are a lot of unqualified scum in the mortgage bsuiness who happen to be brokers...but I met just as many lender employees with that sanctimonious attitude that they were above it all, when in fact they were neck deep in loan fraud by pushing their AEs (wholesale reps) to bring in more business, no matter what.
Unfortunately there is no accountability in my business. And no incentive from lenders, for a broker to care about potential defaults or churning. I know an awful lot of brokers who do good, clean business on a very professional level and provide a worthwhile service to their clients. - As the wholesale channel shrinks, does anyone really believe that mortgage pricing will get more competitive with less players in the market?
Too often, I can offer a client a mortgage at Zero points, where the very same bank is offering it at 1 point on their retail side.
The problem isn't really brokers, per se. It's that no one was enforcing their own guidelines, which you've stated on numerous occasions in your posts. It's convenient to have a scapegoat to take cheap shots at, but I really expected a more balanced view from you.
Inflation, schmiflation.
The Fed will cut 100 bps to help get this this party started (again).
What happens in core, stays in core.
No food or energy for a reason.
How many times have I had a wholesale rep from the big bank lender tell me to make up assets and double income, "because we don't verify?" - too many times, that's how many.
Wholesale AEs are just broker brokers. Of course a lot of them are worthless. Welcome to the wholesale model.
As the wholesale channel shrinks, does anyone really believe that mortgage pricing will get more competitive with less players in the market?
THE POINT IS NOT TO KEEP UNDERPRICING THE RISK.
Of course mortgage financing is going to get more expensive (as are RE transactions). This is not an unacceptable outcome.
Your point seems to be that the wholesale model corrupts both the broker and the lender. You get no argument from me about that.
OK,
What just happened in dollar land?
INO Equities Stocks Indexes - U.S $ INDEX (NYBOT:DX) Price Chart and Quote
Cheers,
without even looking at your chart Misean, CPI came in hot, rate cuts less likely, dollar rocketed up...am I right?
Well said Dr. Debt. My wife is a broker and I/we get tired of everyone blaming the broker for this mess.
When the system securitized and sold off these loans at 30x leverage how is that supposed to be the fault of the mortgage broker???
people have a hard time with comprehension these days....
MS
Plenty of blame to go around folks, plenty. Good brokers, bad brokers, sensible lenders, not so sensible ones, people who wanted a nice home to live in, people who flipped with impunity (well almost Casey.)
Today's lesson : usage of "fewer"
well said Dr Debt..
i thought T's Tone was a little harsh also.
Geoff,
I'd agree if it happened at about the time of the news. Just happened. Odd...
Cheers,
Question: What ever happened to that Casey guy?
giacutter,are you a Breatharian?
Barley - he is probably on TV somewhere. Perfect role model for today's society - fraudulently try to become rich, lose your shirt, never take responsibility, and then try to wriggle out of what you owe.
I don't think Tanta was overly harsh.
It's not like she does posts that go soft on the IBs and other parties to this mess. By and large, the brokers deserve a heap of criticism.
And MS, it's not polite to disparage your wife like that
"Unfortunately there is no accountability in my business..."
drdebt
Oh yes there is! We're gonna see a LOT of 'accountability' in the biz this year. It's just not in the loss of business/promotion/freedom (jail), it's in the total fallout of this mess. This kind of 'accountability' however, crosses all lines and holds our culture/society accountable and it pays the consequences.
Ultimately, there is ALWAYS accountability!
jpm just firmly went to the dark side: MSR valuation gains, private equity gains, L3 assets. their reports are now as loaded as the CFC crap. and that's before their nemesis, CDS counterparty risk really comes out and kills them. JPM is the inventor of CDS and the largest ctpty in the mkt. they will have to eventually break JPM and Chase up, imo.
Something more primal was at work here. We were one step away from giving loans to house pets.
This is America. I'm betting it happened at least once. And I won't be surprised if we find Fluffy owns seven owner occupied McMansions that were bought from Cleo the cat.
Tanta, I've been puzzled about how large banking organizations would unwind, but somehow hadn't considered a breakup/spinoff scenario. Probably the right medicine for the banker/broker model as well.
So thanks for the 'baby Bells' comment. That's a big job, to be sure, but sensible.
Macklowe looking to sell the GM building to stave off implosion.
maybe steve jobs will buy it, to protect his magical glass cube.
Casey Serin was on Dr. Phil - I think either yesterday or today.
i thought T's Tone was a little harsh also.
Don't look for an apology from me.
We are looking at Dimon's claim that, given the same set of guidelines and the same loan characteristics, brokered loans perform worse than retail loans. The claim is not that the retail loans under these guidelines are great. The claim is that controlling for other variables, if it's brokered, you can predict it to perform 3x worse.
What do I get in response? "But the banks wrote the guidelines!" Well, yes. They did. And when they follow the guidelines, they apparently get better loans than when the brokers do, by a factor of about three.
Of course I have never defended those guidelines. But there's something else going on here besides the published guidelines.
The broker system is not broke! The whole financial system is broke when every player along the chain participates in the biggest financial scam ever in the world.
Let's start with the top
.Ownership Society
.1% FFR (prolonged)
.Anti-bankruptcy legislation
.Bank deregulations (decades in the making)
.Wall Street's greed-driven-leveraged derivatives wrapped and sold to every corner of the world
.Risk redistribution model to the least capables to understand it
.Rating agencies collaborate every step of the way with their stamp of certified-conflict-of-interest
.Banks race for record loan volume since they are no longer holding them
.Brokers, unregulated and the ultimate loop hole, go for broke on originating loans
.Appraisers, chasing the higher fee, jack up the valuation
.Realtors, the bottom of the chain feeders, push buyers to max out
.Fraudulent buyers, schemers, scammers flip houses for quick bucks
.Bernanke, expert in economic crises, fast-tracked over others to be the Fed's chief (very coincidental)
.Paulson, an insider presiding over the mortgage fraud proliferation, picked to be the Treasury chief (also very coincidental)
.Feds and Treasuries bail out, eroding the trusts and confidence of the prudent citizens
And this is just with the mortgage industry! What else are out there? No wonder there is a serious confidence crisis in the US financial system and economy.
Don't look for an apology from me.
Tanta: 45,874
Brokers: 0
I wonder if Mr. Dimon can put a coherent sentence together..........
Of course, dancing around the real answer usually leaves one tongue-tied.
Broker says: 'Hey, don't look at me, I'm no role model.'
.
FT - Regulators should intervene in banker's pay (I've been saying this for 20 years)
FT.com / Columnists / Martin Wolf - Regulators should intervene in bankers’ pay
But there's something else going on here besides the published guidelines.
Yeah, but what? The million-dollar question.
i have a question about home prices falling to some "mean" they will get close to but not at what it takes to build that house today plus land etc. ????
another thought :if it becomes ok to do "jingle mail" you people are going to be in real deep sh@t.
i am joe six pack . house paid for car nice paided for kids accounted for and safe. mba 1988 thanks.
It is three times worse in broker than it is in our own.
Where have I heard that before?
During the third quarter, the bank[Wells Fargo] eliminated its correspondent home loans channel in which the bank would purchase home equity loans originated by other lenders. While the correspondent channel represented about 7% of the total loans in its home equity portfolio, it also contributed to approximately 25% of the losses in the quarter, it said.
Those who poisoned the securitization stream will be shown the door...
I'm crunching some numbers here, and, yes, it looks like roughly 98% of brokers are soulless crooks on the take. Give or take 1%.
Broker-originated loans are clearly worse than direct. But Dimon was very clear that bank-originated high-LTV and liar loans were also bad.
We made fun of Bernanke and others desperately implying that worse performance of subprime meant prime was going to be just fine. Let's not fall into the same trap here, focusing on brokers and forgetting that a huge amount of loans made with less than 20-30% down will go bad, including very big chunks of bank-originated loans.
My guess is that at the end of all this, the only loans that will merit a true top private-sector safety rating will be those that require 20-30% down, and verify intrusively that the buyer is supplying all of the downpayment.
I don't think regulation of the brokers would have mattered.
Tactical Flashlights
r c helicopter
video game