Another example of "no-one could have anticipated" disease....
No one anticipated a day when potentially hundreds of thousands of residential mortgage loans would be modified, said Alison Utermohlen, an official of the Mortgage Bankers Association who has led the effort to get the accounting rules relaxed.
Oh, I am more than willing to believe that when Cuomo subpoenaed the Street firms and then subpoenaed the due diligence firms, he ended up with a set of reports that don't match. That is, the due diligence firms duly reported that there were errors/omissions/unreported exceptions/generalized horror present in the loan file, but when someone got around to writing a prospectus, there was no disclosure of the fact that a bunch of people with real expertise had looked at some of these loans and had to sit down quickly.
So that is a failure to disclose something that is unarguably material. My point is simply that what they did disclose should have scared the hell out of investors, and it clearly did not, so working ourselves up over "exceptions" at this point in the game seems a bit beside the point.
The only useful thing I think can come out of this is for the SEC to basically require "Due Diligence Findings" as an explicit subhead in the prospectuses. There really should be language that explains what due diligence is, and that makes it clear that a third party with no interest in the transaction looked at this stuff and presented the following findings.
However, unless you want to create a situation in which we do 0% due dilly instead of 5%, because we don't want to risk getting back something ugly that we have to include in the prospectus, then there will also have to be rules about acceptable diligence levels. I should think something on the order of: "The due diligence sampling in this pool was x%. That is [more/less] than the average for well-performing pools of loans. Investors should understand that this increases the risk that the loans will underperform" or verbiage to that effect.
Tanta,
Substitute meatpacking for bundled mortgages and you realize you've rewritten Upton Sinclair's great american novel? And you wrote it better. I suggest for a title: "Barbarians at the Table, The Jungle Revisited."
I keep coming back to [paraphrased] Buffet:
never invest in something you don't understand.
In the end, we may have seen a sea-change in finance. The products have gotten so complex that nobody can understand them.
people don't know what they have, how much it is worth, who owes them (or who they owe).
I can just imagine the months it would take to sort out if CFC would have gone BK as example.
I'll bet you there are still casualties from New Century that don't know they're insolvent yet.
one of the biggest companies that doesn't have a clue that they're in trouble is Goldman IMO.
Yeah, they're hedged my ass... until they find that their counterparties are all insolvent.
It just seems that going forward finance will be different. Wall Street has really screwed just about EVERYBODY. I would guess that it will take some time to rebuild the trust?
then again, who wouldv'e thought we'd be here with Real Esate again so soon after the S&L scandal.
Is there any analysis of how many of these no doc loans were to "flip this house" types who got caught when the market turned?
Yes, there is. It's beginning to trickle out. And it is going to take a while yet for anyone to quantify the actual costs of all that. We're still waiting for enough final REO liquidations of all this stuff to run the "fully loaded" numbers.
The problem we have right now is that the failed flippers are cratering neighborhoods, which are causing chain-reaction defaults among people who probably weren't no doc. It will take some time to wrap our heads around reliable numbers of the "chain" costs. It'll be more than 18 bps, of course.
Would Due Diligence firms have been able to uncover instances where mortgage originators were clearly accepting inflated incomes in order to justify loans?
Buffet:
never invest in something you don't understand
Let's see, you are investing in a mortgage (asset) backed security. These have been around for investors for generations. You are buying from long established Wall Street firms that are regulated. They in turn have done due diligence employing respected outside firms to review the packages presented by leaders in the mortgage industry. MBS is easy, people pay their mortgage. For a very small percentage who do not the asset has almost always covered the costs of recovery. Respected ratings firms have thus given these instruments their highest grade.
See? The investment is easy to understand has a long history of excellent performance and is highly respected by independent opinion. These POS would have appeared to be perfect candidates for a safe, easy to understand investment.
Thanks for the clarification on the flippers. I realize the flippers have been wrecking neighborhoods all along. In DC there were lots of stories about condo flippers reselling pre-construction.
It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby.
and that makes it clear that a third party with no interest in the transaction looked at this stuff and presented the following findings
They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen. For some reason I keep seeing this basic conflict between "who is paying me" and "what results they would prefer to see me produce" (no matter how independent they pretend to be).
There needs to be a better firewall. I don't know the how, just the need.
In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance.
Also, whether the proposed deal will be structured where the debt assumed by bac will actually become an obligation of bac or be held in a separate entity, ie countrywide. This thought would be to potentially protect the parent further from the further deterioration in the portfolio.
In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance.
Also, whether the proposed deal will be structured where the debt assumed by bac will actually become an obligation of bac or be held in a separate entity, ie countrywide. This thought would be to potentially protect the parent further from the further deterioration in the portfolio.
Would Due Diligence firms have been able to uncover instances where mortgage originators were clearly accepting inflated incomes in order to justify loans?
Well, that's actually the problem that all this is bringing to the surface. As it happens, you can find a lot of fraud in due diligence for $350/pop. (That's a fair expenditure of time and energy and certainly implies that the reviewer has some expertise.)
But the "stated income" part was the rule, not the exception. If you pay me to examine whether your loans met your published underwriting guidelines, and your published underwriting guidelines say you don't have to verify income, then I don't flag a loan as a "failure" because you didn't verify income.
All of us who have done loan-level analysis have seen the "janitor making $6000 a month" ones, and have reported that as potential fraud. But unless your contract is to do actual further detective work to prove or disprove a theory here, all you do is report "implausible income" and the owner of the loans has to decide whether to dig deeper or not. Obviously, a bunch of them decided not to.
That's what's got the due diligence firms pissed off. Their reputations are under fire, because it's looking like they didn't notice this shit. Well, I'm sure they did notice it, and the fact that they're cooperating with Cuomo tells me that they don't plan to be the bagholder here.
FYI: Anybody can check off the "owner occupied" box on the damned application. Just about any due diligence process will involve looking at the property you currently reside in, comparing it to the one you claim you're moving to, look at where you claim you're employed and so on, and tick off the "potential occupancy misrep" box on the due diligence report. They ignored that, too.
I just want to tell anyone who doubts Tanta's accuracy and fairness that she is completely, totally and absolutely pegging the reality with what she has written here.
But Tanta, you're talking about revoking the "no actual convictions that weren't reversed on appeal" policy.
Never. Gonna. Happen.
Remember, the guiding rule of the street is "The house made money, the broker made money, two outta three ain't bad."
They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen.
That's a good point, but remember that most of this due diligence doesn't happen at "securitization."
It happens at the point where you are bidding on whole loans to fill pools that you can then securitize down the road.
Sure, overall the same conflicts are there. But the Street firms were the ones who owned 100% of the risk between the day you buy whole loan inventory and the day investors buy bonds. The due diligence should have been considered self-protection there.
Now, we know it didn't because they just never believed that the music would stop and they'd have a shelf full of shit that they couldn't securitize and couldn't force back to the originator (even though they've clearly tried that). I think of most of the "repurchase" put-backs as after-the-fact attention to the due diligence findings.
The ones who are really bathing up to their chins are the ones who bought their own originator. It used to be, Merrill bought junk from First Franklin, but then Merrill could put it back to First Franklin. Well, you buy the originator, you can't exactly make yourself repurchase your own loans. Ooops.
Actually there is a school of thought that believes that due diligence firms have an interest in finding as many problems as possible, since it justifies their existence and those $350 charges. If you give too many loans a pass, people will decide that you are an unnecessary expense. The RAs were in a different situation, since everybody's got to get a rating.
My point is simply that what they did disclose should have scared the hell out of investors, and it clearly did not, so working ourselves up over "exceptions" at this point in the game seems a bit beside the point.
if i remember correctly (i haven't had much coffee yet), when Fitch decided to open up some loan files they concluded that about 75% of the underperformance of recent vintages was due to disclosed high risk attributes, with the rest due to the frightening things they discovered in the files.
Which bring us back to the points you made yesterday abou the purchase of Countrywide. When you take the Countrywide out of Countrywide you return to the loan standards of yesteryear and Countrywide becomes just another face in the crowd. In that case, did you really expand your presence in the mortgage industry by purchasing them, or did you buy last week's fresh tomatoes?
I'm not in the mortgage industry, but one buddy works HR in wholesale at one of the big lenders struggling right now. Another is an architect in DC doing "gentrification". They are honest people, but after reading CR and Tanta for the last couple of months, I am just appalled at the level of corruption. I was so naive. Thanks for opening my eyes.
"It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby."
These speculators were largely respoonsible for the equity PUMP in the first place. The truth is - It's hard to justify bailing ANYONE in RE out - period. Everyone who took a loan they can't hope to repay is irresponsible. The only responsible thing to do is allow assets to deflate to natural levels, as supported by incomes. Any other response is basically extending the charade.
This stuff did not start in 2005. Or 2004. Or 2003 either.
What I want to know is if they were just ignoring everything bad to make commissions, why did the originators bother to make all the borrowers' (in each and every transaction) lives a living hell?
I can't remember a closing where the borrowers were treated competently and with respect. All, whether rich or poor, high or low ltv ratios, prime or sub, had their papers lost repeatedly, had last minute requests for more papers of all types, and were generally driven crazy by the origators. Including a wealthy couple whose brother in law was manager of the Wells Fargo office where they were applying. And whose ltv ratio was something like 60%, who made well into the 6 figures and whose FICO score was impecable.
I think they actually believed their own lies, as to the not so good guys.
But as to the couple described above: why the torment?
However, the business about being in a conference room where people are scribbling unreadable doodles on those pricey flipcharts to people we flew in from the branches, all in aid of discussing why we can't afford 30% due diligence, is certainly real. That doesn't mean it's not a joke somewhere, but there you go . . .
OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet.
It's hard to justify bailing ANYONE in RE out - period.
Mabye so, but now you get into why people needed to suck equity from their homes to begin with. "Affordable housing" is such a nasty Great Society term. No one wants affordable housing near them for fear of depressing their property values. The upward spiral in housing prices (even before this boom) forces two incomes to survive. Equity becomes a source of income and, well, you know the rest.
Just where the heck do you expect me to live? When the teachers, cops, and firemen have to live 50 miles from your gated community to survive, how is that sustainable? When your lawn care workers and waiters at your favorite martini bar can't afford to drive to work how is this work going to get done?
Homes CANNOT become investment vehicles like pets.com or tulips. The irrational pricing kills the innocent bystanders.
Because operational chaos like that is what you get in a thin-margin business.
Frankly, the subprime borrowers pay so much in fees and rates that we can afford to roll out the customer service carpet for them. (But we don't, because they won't walk.)
Your basic no-brainer 60% LTV perfect credit borrower is probably getting the best rate you offer and not paying much in junk fees. The only way to make enough money off that person to keep the sales force in Beemers is to fire the veterans, hire temps for what you can't just outsource to Closings R Us Title Company & Bait Shop, and write budgets that ignore the costs of re-work.
The sad fact in a refi boom, particularly, is that you're drowning in "no brainer" loans. About the only good news for "no brainer" borrowers in a credit crunch is that they'll be desperate for your business again, desperate enough to produce a set of correct closing docs the first time through and possibly even spell your name right.
However, I will say that there is a whole class of well-heeled borrowers for whom I have limited sympathy here. They knew perfectly well they could get better service down at the credit union, but they went to JoeBroker because shaving another .125 off the rate was soooo important. You do frequently get what you pay for.
And I have some experience with profoundly "entitled" borrowers who think their "impeccable" FICO means that they don't have to fill out the application completely. It can in fact transpire that some of these last-minute "problems" came up because Mr. Entitlement didn't bother to mention certain things up front. ("What do you mean I should have told you that the seller is my sister-in-law? What business is it of yours? I'm Mr. Entitlement with an 850 FICO!")
See, if the IBs were warned about fraud in the origination process and basically ignored the warning or cut back on due diligence, I don't see how they avoid significant liability. They have a duty to perform reasonable due diligence and to report the findings in the prospectus. Otherwise they will be held accountable.
This is a highly technical post tree, and I usually read these and scratch my head a lot because I am in no way involved in this industry. However, a couple of things struck me as ininane in this whole process.
The first is Rob Dawgs point:
"Let's see, you are investing in a mortgage (asset) backed security. These have been around for investors for generations. You are buying from long established Wall Street firms that are regulated. They in turn have done due diligence employing respected outside firms to review the packages presented by leaders in the mortgage industry. MBS is easy, people pay their mortgage. For a very small percentage who do not the asset has almost always covered the costs of recovery. Respected ratings firms have thus given these instruments their highest grade.
See? The investment is easy to understand has a long history of excellent performance and is highly respected by independent opinion. These POS would have appeared to be perfect candidates for a safe, easy to understand investment."
Fair enough. We all rely on some others expertise to guide our decisions, at some point. Don't think so, well then why did you buy the car you are driving? Are you an engineer or a mechanic?
Then we get to this:
"They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen"
Now Tanta refutes this with, among other things:
"Actually there is a school of thought that believes that due diligence firms have an interest in finding as many problems as possible, since it justifies their existence and those $350 charges."
However, it seems to me that, given all of this, the incentives are still screwed up. The buyer should be paying the expert to review this stuff, not the seller. I mean, when I buy a used car I don't accept the sellers mechanics word on the cars quality, i bring my own.
I know it increases transaction costs. And yes the Gov't has cartelized ratings agencies and put them on the sellers side. But really, if I go through the transaction cost of my own mechanic for a used car transaction, surely having the buyer bring his own analyst to review a multi million (billion) $ deal seems prudent. Perhaps I just don't understand "high" finance. (I suspect clean bong water also helps).
OT,but interesting.I was talking to a BK attorney the other day who had a lender challenging the dischargeability of a stated income loan due to fraud on th borrowers part.There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
So much deception at so many levels. BUt it does seem that the ultimte deception in terms of the securities themselves was using Bond or Bond Loke ratings on synthetic instruments. This, plus the search for something paying higher interest is likely what brought a lot of buyers to the table.
Perhaps the first disclusure should have been the synthetic nature of the instruments. Second should have been that the ratings were not set by any usual standards.
But clearly across the board, greed drove everything. Paying commissions to originate loans (invitation to disaster).
One other thing, if the investment huses were buying the loans at more than usual discount, that may negate the "we didn't know" argument.
It really does seem that one of the main purposes of the final investment instruments was to obscure the nature of the suurce.
Good luck finding any deep pockets; however maybe some of these folks may do some jail time.
Just to remind everyone again, I am talking about buyer-paid due dilly.
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
They were the buyer. Now, of course, we know that they thought of themselves as the seller, because they were buying only to turn around and create a security.
But honey, I've done due diligence for portfolio buyers like insurance companies who do not have the expertise to do their own file reviews. They often aren't any smarter than the Street: once you factor in another 17.5 bps, the deal "doesn't make sense" any longer. Institutional owners of this crap need to ask their own buy side some tough questions, too.
Tanta,
This this a thin margin business? That I do not understand at all. Sure any one individual transaction may look thin but that's like saying the Brooklyn Bridge is a bad buy because Tolls are only $5. Angelo was taking home $50m/yr in salary when Countrywide was a going concern and stockholders were seeing dividends and secretaries were earning $85k. Those are not thin margin business practices.
[still pouting that 'Barbarians' didn't make you laugh.]
Rob, "Barbarians" did make me laugh. It's just that I've never gotten over Ark Ship B. You set yourself quite a standard.
I did say margins were too thin to keep the salesforce in Beemers. I didn't say that one cannot make a fair profit in the home mortgage business while doing things right. But too many people seem to take issue with my idea of a "fair" profit.
How about in a tent camp in the local state park along with all the other carpenters/painters/etc who work 50 hours a week for under the table wages and still cannot afford rent unless they are willing to go 10 to an apartment like the Mexicans.
This is not a rant but the experience of a 42 year old close family member. The working class in this country has been exploited into ruin trying to compete with aliens - hence the passion for imigration reform.
Have a nice weekend and be glad you have a roof over your head.
Regarding people not knowing (yet) that they're insolvent:
My hairstylist and I spent a half hour speculating about people we know (clients, neighbors, distant relatives) and wondering if they really had enough money to buy those big new houses they recently got, those vacations they took last year... or if they got funny loans or borrowed too much money.
PS- just want to add, when that sort of speculation is the topic of a hairdresser-client session (usually it's just kids, job, and Britney), when people are openly doubting if the Loyf Stoyles of the Rich and Famous (or even just their neighbors) are not what they seem... RUH-ROH. The dream IS over.
Very good piece. But my question is - from a guy w/squat experience in the financial analysis fields - what constitutes reasonable experience for such analysis of loan portfolios? Would pressure on loan folks been easier to handle had there been greater experience/education levels?
My viewpoint would be a new claims adjuster getting pushed around by a plaintiff attorney vs a more experienced/trained adjuster telling the atty to go pound sand.
"Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported."
I think I'm getting my pea brain around it now. The originator had shit for sale. The IB did due dilly, then ignored it. IB then sliced and diced it and went to Moody et. al. and said rate it. Now the seller is paying for a rating. They got AAA, then shopped for a buyer, who relied on the raters rather than do their own due dilly.
My head hurts. But I'm close to understanding...I think.
Off on a slight tangent - recently there was an interesting case from Nashville, where UBS was told to suck it up by a judge who threw out allegations of fraud on a $1.5 billion buy-out of a retailer.
It goes to the caveat emptor point that Tanta is making, and may show how the judiciary is going to treat "sophisticated investors" as they come crying in to court.
Apart from that, the case is a neat showcase for many of the economic snarl-ups we're seeing:
http://tinyurl.com/28ruo8
Nashville Chancellor Ellen Hobbs Lyle dismissed Finish Line's claims that Genesco withheld key financial information that could have signaled worse-than-expected earnings after the deal closed in June.
Lyle said Indianapolis-based Finish Line and investment bank UBS AG were sophisticated enough to know what they were getting into with the $54.50-per-share purchase.
The buyout was conducted by "teams of lawyers, advisers and handlers being paid enormous sums to orchestrate the procedure for obtaining information" she wrote.
"This milieu is UBS' home territory," Lyle said.
"Genesco's decline in performance in 2007 is due to general economic conditions such as higher gasoline, heating oil and food prices, housing and mortgage issues, and increased consumer debt loads," she said.
what constitutes reasonable experience for such analysis of loan portfolios?
I really think the issue isn't so much experience; it's financial vulnerability.
There are a lot of folks out there working due diligence because they are underwriters with decades of experience who got laid off when we replaced them with AUS and a prayer. They used to have salaries and bennies; now they go from contract job to contract job, struggle with self-employed insurance premiums, and deal with raising a family while having a job that keeps you on the road all the time.
So some of them are just afraid to tell anyone to pound sand. Their lives are too vulnerable.
I got into some due diligence work because, frankly, I was tired of corporate life and for me, it's a fairly low-stress way to make a living. I actually have more expertise than is needed in a due diligence underwriter, but since I was happy billing what everyone else was billing--not trying to make the client pay for my "overqualifications"--it worked out fine. Few people are willing and able to be in that situation.
But the whole logic of contracting on a per-deal basis creates a sense in the due diligence firms that it just isn't their business to tell anybody to pound sand or not. You pay me to tell you what's in the pool. I tell you. You can act on that information or not. A contract due dilly firm isn't going to go mano-a-mano with your staff attorney to try to get you to act in your own best interest.
Now, if you want a consultant who will in fact go to the mat for you, I can do that (as can many other people). It costs a hell of a lot more than $350. But few companies these days are paying for real business experts to come in and do battle with their own senior employees and officers who are sucking up such handsome pay packages.
I just want to tell anyone who doubts Tanta's accuracy and fairness that she is completely, totally and absolutely pegging the reality with what she has written here.
MaxedOutMama | Homepage | 01.12.08 - 10:36 am | #
I doubt anyone questions this. Show of hands? Anyone? Anyone?
That's what I thought.
In short all these fools asked for what has happened, or rather virtually BEGGED for what has happened, so it is very very fitting that they suffer all the consequences, and more. When people make a positive effort to be stupid and silly, they need the punishment they richly deserve. No time for tears.
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
Right. because Wall Street's view (from what I've read here and elsewhere) was that no deal was worse than a bad deal (just so long as the deal's kept flowing and the quarterlies looked great).
"There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
Tom Stone | 01.12.08 - 11:12 am | #"
You mean the judge didn't buy the argument that "it's just business" applies to only one side of the trade?
I'm not on the side of the fraudster, but I'm tiring of the rationale that my pension fund is outta luck because it didn't realize the IBs were sharks in suits, while the bank is deserving of relief because buyers aren't expected to lie.
I doubt anyone questions this. Show of hands? Anyone? Anyone?
That's what I thought.
Don't ever let your healthy skepticism about what you read on the net lapse. Not even here.
I like to think that long-time readers of the site have a sense of my credibility, but not everyone has been reading for a long time. Actually, those new readers may not know how much expertise MaxedOutMama has. Click her link and read her website. Read mine. Read others. Evaluate your sources.
This is the internet. It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something.
OT and pointless, but:
Believe it or not the Brooklyn Bridge does not have a toll. The Battery Tunnel does ($4) . . . and so we end up with a mass of drivers going out of their way through the neighborhoods to get on the free bridge.
I did say margins were too thin to keep the salesforce in Beemers. I didn't say that one cannot make a fair profit in the home mortgage business while doing things right. But too many people seem to take issue with my idea of a "fair" profit.
$350 for credit worthiness due diligence? Too much.
$5,000 in YSP for Dealin' Doug, the (former used car salesman) loan officer? NO PROBLEM!!!
I'm not on the side of the fraudster, but I'm tiring of the rationale that my pension fund is outta luck because it didn't realize the IBs were sharks in suits, while the bank is deserving of relief because buyers aren't expected to lie.
Take that argument. Apply it to the Florida LGIP, to the IB's/CW's that sold them the paper that cratered, to the counties/entities that invested in the LGIP, and to the citizens that had (a portion of) their tax payments vaporize in this whole affair.
Who's the bad holder ? Eventually its the citizens... who are also likely to get nailed on the other end of the clue stick from the falling home prices and/or the collapsing home resale/equity market.
Every party in the above described debacle (other than perhaps the citizens) should have done due dilly. I'm suspecting that very few did.
OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet.
barely, you are absolutely right.
But just the job of rounding up and deporting even a fraction of illegals would consume vast public resources and expense. Many have U.S. citizen children who would fall into the social welfare net. As I keep saying, 90% of that cost is paid by state/local govts.
Every time I hear a Republican bozo say they would immediately deport all illegals who have committed crimes, I just laugh.
Yep, "immediately" after you appoint a public defender, charge them, set bail, provide custody when they can't meet bail, mount a prosecution, win a conviction and only then after they exhaust all appeals.
Do you know what all that would cost the public, mainly state/local govts?
You gotta be kidding me. California is letting hard criminals loose because they can't afford to keep them in jail.
"It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something."
Oh bloody hell. And I was just about to start marketing Super Colander Tin Foil Hats as a cure to all that ails you. Dang Gummit.
Ray, I wasn't so much commenting on the DD responsiblities of the parties (though your comment about the pension fund is spot on and duly noted), as I was on the duality involved in the banks exploiting naivete when it's profitable and then claiming it as a defense against loss.
Just to remind everyone again, I am talking about buyer-paid due dilly.
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
They were the buyer. Now, of course, we know that they thought of themselves as the seller, because they were buying only to turn around and create a security.
The street didn't think it would ever come back to haunt them - they weren't really the buyers... they were just the middlemen... so why pay for DD?
It was a mindset thing - btw in industrial settings, this is why the procurement arms of most large industrial firms is kept as far away from the sell side as physically possible... in the few instances where I've seen the two hunkered down together (say where global procurement in the same office complex - campus as global marketing)... things didn't go well at the operational level...
The older I get the more I'm convinced nothing ever really changes... technology comes and goes, industries change hands... but nothing really changes regarding how stuff gets done, the kinds of mistakes that get made, and the excuses & 'novel remedies' offered.
The older I get the more I'm convinced nothing ever really changes...
I guess it's one of those "evolutionary leaps" they talk about.
Many years ago, a former boss of mine was asked by some n00b why we didn't just do some easy cheap thing that would build volume. My boss--a great big gentle bear of a man--said, "Because you don't shit in your own nest."
Millions of years of survival as a species, and we gave up that one.
"It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby."
Ahhh...but the flippers were the cause of equity."
And hence made housing unaffordable for anyone with a middle class wage. We have housing prices going up and up while wages stagnate. We're told by our President to "go shopping" to keep the economy humming. Guess what -the home equity line is tapped out and the credit card delinquencies are going up. So the flippers merely extended the boom by providing cheap $$$ to the middle class guy getting squeezed by outsourcing, medical insurance premiums and job insecurity. It's A Wonderful Life!
So now, I stop spending and you all lose your 401K, IRA, and pensions (conveniently invested in mortgage backed securities - oops). Have you looked at your mutual funds lately?
Speculation in housing is bad, very bad for all around.
Dryfly,
It is the velocity of mistakes that is biting us in our own ass now.
Maybe it is time to start a Triple Assured Never Tranched Asset Bank. TANTA-B will lend face to face to people who don't need the money and keep the paper documents in the basement, the note in the vault, and the money in the community. If you bring your kid in when you drop off the payment we'll give him a little plastic piggie bank.
A blast from the past.
Equity Funding Corporation of America was a Los Angeles-based U.S. financial conglomerate that marketed a package of mutual funds and life insurance to private individuals in the 1960s and 70s. It collapsed in scandal in 1973 after ex-employee Ronald Secrist and securities analyst Ray Dirks blew the whistle on massive accounting fraud, including a computer system dedicated exclusively to creating and maintaining fictitious insurance policies. Investigation found that from 1964 onward, as many as 100 company employees had engaged in organized deception of investors, auditors, reinsurers and regulatory authorities.
Tanta | Homepage | 01.12.08 - 12:15 pm | # This is the internet. It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something.
Ellen,
Dinner with a group of friends, we were having a very similar conversation wondering whose "success" was real vs. appearance. Maybe it's a new parlor game because that thinking appears to be catching on. I put a quart of oil in my little old truck yesterday. I pointed at the poor old thing, and asked for high mileage oil. Guy who ran the station, first words out of his mouth, "You own it and it's paid for, right?" Interesting to think he sits there day in and day out watching the Beemers and Audis come and go, calculating who has savings and who is just putting on a show.
"I have confidence in our due-diligence teams that we made the right assessment of the downside," Mr. Lewis said.
Just wondering what level of confidence Mr. Lewis had in those crack due diligence teams that scoured the data room before BAC plunked down $2 bn in August?
My hazy prediction is that BAC will eventually back out based on the Material Adverse Change clause, and there will be lawsuits in all directions.
Statistically speaking and depending on the size of the pool, a 10% due diligence level should be adequate in determining the level of quality. The problem is that the loan program guidelines were constructed in a was as to make due diligence much more difficult.
This sociological study of yours has connections to a couple of other important areas.
People become acclimatized to indebtedness. If I were to tell people that I have never borrowed money for a car, many would faint. That is how accustomed we have become.
Similarly, people will become comfortable with walking away from houses. Just like it is now normal to carry credit card debt, people will consider it normal to leave the bank holding the house. This important phenomenon has been discussed a bit here on CR, but I am confident that the main stream has not internalized the havoc this will wreak.
We live in a society of unspoken codes of ethics that provide a great deal more support than commonly credited. If a behavior becomes considered "normal", there is very little preventing it from occurring on a mass scale.
It is like the "broken window" principle: Broken windows, rather than intact ones, encourage vandalism. The presence of graffiti encourages it and makes it spread like a virus. Jingle mail will beget ever more jingle mail.
"In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance."
At this point in the banker stupidity cycle, you have to believe BAC is going to insist on a number of reset/escape provisions. My prediction is that BAC gets the servicing and the FHLB gets the portfolio.
Any candidate refusing to backstop the GSEs has my vote.
I think the application of quartz is an appropriate solution to all problems. Investing in quartz is recommended as a smart financial play for these troubled times. Quartz crystals in your shoes, however, is extremely uncomfortable and only warranted in desperate cases.
With RMBS now valued at pennies on the dollar, one wonders how long it will be before bondholders start forcing after-the-fact diligence on the pools they've invested in. Sponsors made reps into those pools that were backed by a repurchase obligation for loans that don't meet them. Among the standards were: "No fraud was involved in the origination of any Loan;" and "Each Loan was underwritten in accordance with the Underwriting Guidelines of [someone]." Also common was "The Mortgaged Property securing each Loan is the primary residence of the Borrower."
A breach triggers a repurchase at par. The difference between par and what can be recovered in foreclosure pays for a lot of diligence. If I were a major Sponsor of subprime securitizations filled with third-party origination, I'd be losing sleep over how much put-back liability is out there.
To me its a more fundamental underwriting issue.
So if a 100% No-Ratio investor loan goes bad it's the underwriter's fault? I agree that were a lot of lenders without adequate quality control and risk management procedures in place. I don't think it takes an overwhelming level of due diligence to determine this. I think the IBs knew what they were buying it's just that some hedged their bets better than others.
dryfly said: "The older I get the more I'm convinced nothing ever really changes... technology comes and goes, industries change hands... but nothing really changes regarding how stuff gets done, the kinds of mistakes that get made, and the excuses & 'novel remedies' offered."
"I'd be losing sleep over how much put-back liability is out there."
You would think with a 7+% delinquency rate and rising, put-backs would be enough to bury any originator using the new(soon to be old)-age lending practices. Can one of the resident mortgage experts comment on this?
Tom Stone's post was interesting in this regard -
OT,but interesting.I was talking to a BK attorney the other day who had a lender challenging the dischargeability of a stated income loan due to fraud on th borrowers part.There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
Tom Stone | 01.12.08 - 11:12 am | #
barely said: "OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet."
Where I live, we're getting a lot of legal immigrants coming from low-wage countries and getting good-paying jobs here.
Par for the course for the typical uber-bear viewpoint: Only looking at one part of the picture, the part that supports their narrow-minded, parochial, often xenophobic and jingoistic point of view.
But, I'm already starting to play past this. Just for the sake of argument, what if after all this the U.S. economy doesn't fall into recession? And what about when the real recession comes along: Will people think, "Back in 2007, it was a lot worse than this and there wasn't a recession, I won't be fooled twice"?
And how much would subscribers pay for an accurate recession call?
SDTFS, I laughed too when I wrote that, thinking, "Gee, this is a lot like a frog assuring people that the alligator has a big mouth full of teeth" - but I wrote it anyway.
People (even on this blog) do try to claim that Tanta isn't telling the truth, and accuse her and CR of being in some AntiAmerican SuperShortSelling
Communist Conspiracy. You have to realize that this entire thing came about because an entire INDUSTRY dismissed exactly what Tanta has written on this blog, and that these were insiders, and usually highly paid insiders. Also experts. As the losses accumulate into the hundreds of billions, they now wish to hear from Tanta even less than when the profits were in the hundreds of millions.
So, believe it or not, there are a lot of people who have a vested interest in claiming that Tanta is misrepresenting matters.
Paul - I was in the industry in a frog-like way, and I have to tell you that there were an awful lot of frogs and toads trying to point out that this was insane. The naysayers (who included appraisers and mortgage brokers as well as banker types) got short shrift.
I don't believe that those who pushed this will ever feel shame. Those who were talking about the wonderful job they were doing aren't capable of feeling shame. It's Tanta, who had no part in it, who is brokenhearted.
"Cuomo also subpoenaed Fannie Mae and Freddie Mac, the two largest sources of U.S. home loan financing, for information on whether loans they purchased were based on tainted property valuations as part of ``widespread'' industry collusion. "
Now that we're nearing the s#it-pot end of central banking's infinite credit-making process that enabled the temporary mortgage-morphing cash-out machine that enriched flippers, brokers and IB's, it's surreal to recall my experience in 1979 when Citi divested Advance Mortgage (then the nation's #2 MB behind Lomas Nettleton).
It took a dozen Peat Marwick Mitchell (now KPMG) auditors six months in combination with another dozen Ivy League MBA's to create two foot lockers full of work papers that scrutinized and documented every obscure condition and potential off balance sheet liability (FASB 5 was all the rage then) prior to Advance being bought by the IB that resold the components: orig ops, servicing, and the commercial RE and installment (mobile home) portfolios.
Granted, the footlockers full of papers were the outcome of not having PC's' we used HP calculators to produce NPV's, etc.
Still, we've come a long way since people understoon subsequent event risk, eh?
Just for the record, I'm absolutely convinced of Tanta's honesty and integrity (as well as intellect), and would aggressively and with malicious glee defend her from any posters who said otherwise.
Statistically speaking and depending on the size of the pool, a 10% due diligence level should be adequate in determining the level of quality. The problem is that the loan program guidelines were constructed in a was as to make due diligence much more difficult.
My view is if you can't figure out a prime pool with 10% sampling you need to go back to selling Avon or whatever it was you were trained to do.
But Alt-A or subprime? I call that the "Raisinets" versus the "Bridge Mix" problem. I'd be handed pools to look at that had AUS-reduced docs, SIVAs, SISAs, No Ratios, and NINAs. 15% NOO. IOs and non-IOs. 3/1s, 5/1s, and some 2/28s. One-third DU, one-third CLUES, one-third Barbie's My First Laptop(tm). Some retail, some wholesale, some correspondent. A few looked like they might have been originated by aliens from a distant galaxy.
Trying to get respectable results with a mere 30% sampling on that.
Using "standard" sampling methods to handle these New Paradigm Bridge Mix pools was right up there with pricing them based on the performance of old Private Banking IOs.
Basically, there was just too much fraud. I know of no sampling technique that allows me to slap a "fraud level rating" onto the whole pool. I don't know anyone else who does, either (although some claim to).
Here is a wildly off topic summary of SF bay area real estate:
Is the credit crisis affecting Santa Clara County (south SFBA) real estate?
Following are excerpts from local (& honest) realtor(s) at 404 Not Found
September 2007: "September 2007 has few transaction than any month since we start keeping detailed records in September 1998 except for a couple of Decmebers and Januarys."
October 2007: "October 2007 has few transaction than any October since we start keeping detailed records in September 1998. There was a slight improvement in the volume of transactions from September 2007, which was the worst month not only since 1998 but back to 1984 when the MLS first started publishing statistics."
November 2007: "November 2007 had the fewest completed sales (closings) of any month not only since 1998, but appears that this record low volume goes back to 1984 when the MLS first started publishing statistics."
December 2007: "December 2007 had only 488 completed sales (closings) in SCC. That is the fewest of any month not only since 1998; but all the way back to 1984, when the MLS first started publishing statistics. Lower than September 2001, when the nation was stunned with 9/11. December 2007 is only 60% or less of any previous December, back to 1998 when we started gathering data."
By the way, currently in southern San Jose area of Santa Clara county, there are 2842 properties for sale, and 51 pending transactions. Is that normal???
Regarding the occasional rants posted on this site, certainly mine, I would just say it might be a result of stunned frustration. No offense is meant.
I would consider my wife and I educated professionals, but until recently completely ignorant of finance. We didn't even know there was a boom going on. Working too hard. We finally started earning higher incomes, paying down student loan debt, etc. and started thinking about the American Dream homeownership thing. It was depressing to learn what our "real" incomes could afford.
I was curious and soon ended up here.
There is often talk about the dumb consumer of financial services not doing due diligence, but as a member of a different profession, I would say that we feel people pay for our help because they TRUST we are filling their knowledge gap. A profession usually has a professional code of ethics not to use your knowledge to actively screw people. Clearly, many in the financial industry don't feel this way. Mozillo shouldn't be getting a big golden parachute, he should be slinking away in shame, and ruined. But as it is, he has $100s of millions and we don't (well most of us anyway). Who's really the winner here. We can say shame shame tsk tsk, but our market-based society defines winners with a dollar tag and the lessons seem to be effectively transmitted to the next generation.
I think when this is all out and the consequences fully appreciated, many in the financial industry are going to be quite dismayed at the general destruction of trust. Trust a used car salesman with my retirement? No way!
Oh yes, and that whole privatise social security is going to be a dead issue for a LONG time.
I am still wrapping my head around the magnitude of this debacle.
Privatize social security. Can you imagine - someone surely would have invested this money in Super senior AAA+ mortgage backed securities. Wow - dodged a bullet there didn't we.
Fortune article via CNN/Money on the surprising tax benefits to BOA on the CFC deal (the losses of CFC could save them $1/2 Billion a year).
Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually.
Why is it good to lose $270 million so that you don't spend $100 million in taxes? Why don't you just lose no money (by not buying CFC) and pay the taxes? The way the press has phrased, this, it still looks like a net $170 million loss.
So Sebastian, with all that faith you place in the Wright B suggesting no recession in 08, would you care to make a gentleman's wager... say the price of a subscription to CR? I would say 10000 NEW shares but they don't add up to enough any more.
if Countrywide has already incurred losses, but not recognized them for tax purposes, those paper losses could then surface after the acquisition for a tax benefit.
Those losses are presumably already included in the purchase price. Presumably, also, the tax benefit of those losses is also already included in the purchase price, but the market for failing subprime lenders is hardly a liquid one.
In any event, $100-$200M of tax benefit is a flesh wound compared to the mass battlefield casualties all around.
"I think when this is all out and the consequences fully appreciated, many in the financial industry are going to be quite dismayed at the general destruction of trust"
Seriously, are you old enough to remember Enron, WCOM, or the whole NASD collapse where analysts and brokers/fund managers were actively screwing their clients for financial gain? If you trust anyone in the financial industry with your earned money in any form you get what you deserve.
So now that we will no longer do any of these loans, how do we now get these houses into stronger hands?
We either start wages seriously higher, or we allow the crash to keep gathering speed. The fed seems to be turning the blind eye to inflation, but the crash keeps gathering speed. These tensions keep building up with no relief.
Perversely, lending criteria is going to need to be eased, rather than increased as the crash continues.
For instance, here in Phoenix, the number of houses on the market keeps growing, and waves of foreclosures are beginning to pile up. But now the mortgage paper for investment is starting to require full doc and 30% down for rates that are still higher than FHA by at least 100 basis points, and in most cases 150-200 basis points.
With this kind of pricing for loans, the market is going to have move down much further than the 20% so far. I think we could easily see at least 40% off the 2005/2006 peak, and even more drops in unpopular areas of 60%.
If this happens, the acceleration to the downside will totally freeze up national lending to the local market.
Zillowed Away will be the next credit contraction mechanism.
Tanta should enjoy the thought of lenders actually having to perform due diligence, but ultimately now we have to get these properties back into private ownership, and unfortunately either with really cheap financing or much lower prices. The government gets to take their pick.
It's always interesting to go back and see where it all broke down and who is to blame and how to punish people. It doesn't do much good going forward.
However it does set the stage for an orgy of litigation. Anyone that thinks they are walking away and someone else is the bag holder might think again.
I'm not sure there will be individual loan 'putbacks' but the IB's that think they sold and are off the hook are going to be dealing with blowback for a long time.
After attempting to look at C's level 3 assets last night, I ran across a throw away item at the end of their 10Q. Namely a couple of billion reserve for Enron, Worldcom, and IPO laddering lawsuits. Now these are pretty much done, but are still hanging around in regulatory disclosures.
A major motivation for Cuomo fishing around is looking for someone deep pockets that can be made to pay. This is actually more of a risk in my opinion then most of C's level 3's. The so called unknown unknown.
"Fortune article via CNN/Money on the surprising tax benefits to BOA on the CFC deal (the losses of CFC could save them $1/2 Billion a year).
Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually."
Articles like this indicate how little sense the cfc deal makes on its publicly announced merits. Some financial writer is trying to find some/any hidden rationale that makes it work. The writer also doesn't understand that $100 million rounds to zero in this deal.
I think that a lot of lending will go private, when it is possible. For example, a lady who lost her husband and father-in-law, inherited a house free and clear, that she would like to get rid of. Normally she'd hire an agent and sell it. Now, this didn't even cross her mind. Her neighbor across the street, who would like to get rid of some property, is doing a lease option with her, more or less contingent on the sale of those properties in the next year. What I think will actually happen, is he will not be able to sell his properties by next year and she will sell to him and take back a mtg, at a nice, high rate. No banks involved.
Other than the sale of free and clear property, I think, where there is no HELOC, but a first mtg with an ok rate and terms, I think the seller will sell and the Buyer will take back a 2nd mtg. Yes, I know that this violates the due-on-sale clause. But I think the lenders have more on their plate right now than to go after someone who has done this and the mtg is still current. By the time the lenders catch up with this issue, years will pass, the mtges will be paid down some more, and the Buyer can refinance. I've seen these unauthorized assumptions happen 2 or 3 times, and the lender never catches on, altho I warn the buyers that they can be foreclosed on for doing this. They are willing to take the risk.
After some time, people will figure out how to buy and sell without institutional help, and they will be the better for it too.
Prices will have to come down tremendously before this kind of activity is feasible, however.
So now that we will no longer do any of these loans, how do we now get these houses into stronger hands?
We either start wages seriously higher, or we allow the crash to keep gathering speed. The fed seems to be turning the blind eye to inflation, but the crash keeps gathering speed. These tensions keep building up with no relief.
Higher wages, particularly for those on the lower end of the ladder, are probably the first piece of the puzzle.
How to go about it without massive inflation will be tricky. Stronger unions and fewer workers(deporting illegals)? Less pay at the top?
Perversely, lending criteria is going to need to be eased, rather than increased as the crash continues.
Unlikely, I think. If anything I think we're going to see the banks look to increase the seven year limit on credit reports.
For instance, here in Phoenix, the number of houses on the market keeps growing, and waves of foreclosures are beginning to pile up. But now the mortgage paper for investment is starting to require full doc and 30% down for rates that are still higher than FHA by at least 100 basis points, and in most cases 150-200 basis points.
With this kind of pricing for loans, the market is going to have move down much further than the 20% so far. I think we could easily see at least 40% off the 2005/2006 peak, and even more drops in unpopular areas of 60%.
I'm guessing 50% off in the Valley proper, with outlying areas being completely off the map. I don't think anyone is going to live in Maricopa or Queen Creek at anything other than cratered pricing. There is too much supply in the central areas. While I wouldn't want to live in a Tempe condo conversion or tower, I'd take it in a heartbeat over commuting for an hour from QC.
Demand is going to be further shrunk by people moving in with each other: kids back to the parents, boyfriends and girlfriends, coworkers with each other.
The 20%+ down payment is going to be mandatory as well. Maybe the government should create some sort of 401K style program for people to save up for it. Maybe limit it to just I-Bonds and for the first time home buyers to limit speculation.
Yeah, but what's interesting to me is how many conversations I've been able to have with people who finally feel free to speak about their doubts about how much the neighbor is really making.
Not EVERYBODY is in debt... just the loud, flashy people are. There are plenty of people out there who don't have 10 credit cards and who don't buy a new car every 2 years. They just haven't been very vocal. Embarrassed? I don't know, but I sense a great deal of schadenfreude out there.
I think the idea that jingle-mail will become socially acceptable is talked up a lot here on CR, but maybe it's just become acceptable among the nouveau riche (or the "indebted riche" as my hairdresser probably would put it)... which does not include everyone in America.
Embarrassed? I don't know, but I sense a great deal of schadenfreude out there.
I'm not so sure if its schadenfreude or more like the class distinctions (white, blue, etc) have been ripped to shreds vertically. People who used to do 9-5 factory jobs have watched many of those sent overseas. If you want to get this economy back to a sensible footing, you need to have a widespread basic industrial base. Automation is fine, just make sure that there are people there watching the machines and pushing the buttons (as necessary) and bringing home decent paychecks. Giving some bean counter the power that says "5-cents cheaper per widget means we send it to the pacific rim" is just plain wrong. WalMart (and certain other retailers of similar ilk) encouraged this situation. I was stunned to look thru the frozen foods section at a low end grocery store and find that frozen fish is now being sent over from China. Once all the shoes fall and we get back to reality, perhaps we will be poorer, but wiser. I just hope its not too late.
I was stunned to look thru the frozen foods section at a low end grocery store and find that frozen fish is now being sent over from China. Once all the shoes fall and we get back to reality, perhaps we will be poorer, but wiser. I just hope its not too late.
RayOnTheFarm | 01.12.08 - 5:42 pm | #
After reading the NY Times series on pollution in China I would not buy any fish from China.
I know the industrial revolution was dirty but China is really doing a number on themselves.
Whenever we have discussions about how curbing pollution is going to kill the economy they need to interview parents of kids with cancer in polluted areas. I am from southeast Texas which has higher cancer rates than the national average. The son of a friend of the family died at 19 years of cancer (of course no way to know what really caused it, just another stat). It bankrupted the family and they had insurance.
We really like free markets in this country. An honest discussion of free markets would allow for the honest discussion of externalities. But, that would cut into profits, now wouldn't it?
I feel like I am being crushed by these so called free markets. I want to scream "hey, I am a human being, not a provider, not a consumer, not just a fungible thing!"
I think we should have a serious discussion about how much we want our lives dictated by a process that is concerned with maximizing profit and is subject to serious rigging.
I've learned enough. And as someone with a great FICO and big downpayments and positive cash flow who has been treated like crap by banks on several deals I have only one thing to say.
BRING ON THE JINGLE MAIL
You people thought you could treat quality customers like crap because they were "low margin". Well, guess what bitches, low margin is all you got now. And if you are low margin in this debt economy, you probably worked for it. So, looks like you'll be nicer to me in the future.
I may go try to get a loan some time soon just to have some fun.
You know, we can talk about lax lending all day (and the details are fascinating), but everyone knew what they were doing. It's like the damned dot-com bubble; anyone with a brain knew that the "new economy" was a farce.
Wall Street pushed toxic MBS & CDOs just like they did tech IPOs. There was never a question when the party would end, just how much money could be made before then.
There's a lot of good comments in this thread about the void in the American soul that commits fraud.
But IMHO, an equal void, in this mortgage situation and in business in general is fraud's passive cousin, denial.
For every person who actively engaged in mortgage fraud, there were two or three who saw it happening with their own eyes yet denied it was meaningful, or harmful, or systematic, or even real.
Denial runs deep in our culture, and it's perpetuated by the MSM. On this blog, there is not much denial and that's one thing that makes it a good prognosticator.
rich, "Denial runs deep in our culture, and it's perpetuated by the MSM"
Until just a month or 2 ago dubya and paulson were boldly describing our economy as "Strong" & "Robust". Now it's "Material weakness". Nothing at all changed in the last month or 2. It's just getting tougher to openly deny with a straight face. The charade is over. Now it's a matter of how officals intend to deal with it. I'm certain if they meddle we get Japan -- circa 2008-2018,
Until the people who are upside down on their mortgage finally start to realize that it is better for them (financially speaking) to stop paying their mortgage and pocket those payments until the foreclosure and eviction takes effect, we ain't seen nothing yet.
That will be the final leg down. When the masses tell the banks "here take your house back, give me some years to fix my credit and then I'll buy it back. Much much much lower of course".
And for those who say that their credit will be ruined for a long long time, I laugh. Are you kidding? This episode will go down in history as the big "credit cruch". People will be more easily forgiven for a foreclosure today than ever in the history of credit. It isn't that hard to rebuild credit. What you need though is time. And while you rebuild credit, time will be taking property values lower and lower.
It's a no brainer. Get out of a financial death trap. Save money while doing so. Continue saving money as you rent and cut expenses. Buy another house at a much cheaper price. It's a 3 to 5 year plan.
People are already catching on, but not yet in the masses as they will. The lower the prices go the more that will join the plan. It's gonna get UGLY!!!!
Rich,speaking out cost me one job,and a lot of commission money.Many people were unwilling to pay that price and went along to get along.I prefer the choice I made and would make the same choice again.I am pigheaded and learned a long time ago that you could pay too high a price for money or approval.Oh,and I don't like jail,I do volunteer work in the jails and it REALLY NICE to walk out again.
So let's fix this problem for good. Eliminate the tax deduction for mortgage interest. This is a perverse incentive to loot the equity in one's own home. What have we heard for years - pay off those high interest credit cards with a home equity line of credit.
The stupid banks loaned money at low rates against "equity" not realizing it could all go "poof". They had no clue they were making unsecured loans at low rates. That was there mistake - but honestly, why should they care - they don't own the loan anymore. Those tasked with doing due diligence could care less if the borrower could pay.
While we're at it, let's just ban home equity loans all together. If an owner wants to pull cash out of the house, make them sell it.
Eliminate the tax deduction for mortgage interest.
Here in California, 6% interest on a $417K mortgage is ~$23K, and given the 37% top marginal rate most people pay that's over $700/mo in extra buying power.
All things being equal, removing the various tax deductions would knock the $417K pricepoint down to $290K (both have $2250/mo in carrying costs).
The reality of the situation is that "pride of ownership" was a concept that made sense to buyers of securities. And a whole bunch of other rubes, dupes, scoundrels, and pigs. New Century might as well have called them "Ownership Society Loans" and made it a product rather than an exception. Probably they were working on that very thing (with a lot of $350 flip charts) when BK interrupted the meetings.
What a fine post, Tanta.
The Ownership Society turns out really to have been the Lose-Your-Shirt Society. Maybe it will yet be the Crash-The-Economy Society.
But you couldn't tell that to Americans, fed by cable TV, mesmerized by so many cheap prophets. To lots of ears, home ATMs speak louder than words.
I'm reminded of Gunter Grass' Tin Drum, where Oskar speaks of Germans falling under the spell of Nazism: "An entire credulous nation believed, there's faith for you, in Santa Claus. But Santa Claus was really the gasman."
Now it is our turn, up to our necks in catastrophic debt and a failed war of aggression, to recognize credulity in ourselves. We should build a monument in DC, just down from the Vietnam memorial. Call it the Ownership Society. I propose a leaning, wobbly McMansion facade, held up in the back by statues of Greenspan, the Tan Man, and the heads of Merrill, BS, et al, cavorting like so many Scrooge McDucks on piles of loot.
HC- "I propose a leaning, wobbly McMansion facade, held up in the back by statues of Greenspan, the Tan Man, and the heads of Merrill, BS, et al, cavorting like so many Scrooge McDucks on piles of loot."
Conjure likes that image. He thinks it captures the moment.
Great post Tanta. My question for you or anyone else that can answer is how far in court will this go? It seems like New Century Financial started building their legal team shortly after their crash went down in early 2007. It seems like there a few sacrificial lamb companies like New Century and Countrywide that are the lightning bolt of the entire industry. What of NovaStar, American Home Mortgage, and on and on?
From what you point out, the due diligence was cost savings on Wall Street. I'm not sure why there isn't any cases going after the i-banks. Seems like they provided the dirt for the dogs to roll in.
The new shell game: the pea is liability, the shells are your bank, mortgage broker, securities due diligence person, 401k provider, government regulator, and so forth.
Keep watching the table as they move around. Ignore the fat man sneaking out the back of the tent ...
"I'd be handed pools to look at that had AUS-reduced docs, SIVAs, SISAs, No Ratios, and NINAs ... Trying to get respectable results with a mere 30% sampling on that."
Ah, but the task at hand was not calculating an accurate payback/probability curve. It was determining, with 95% confidence, whether a supposedly-AAA pool contained any toxic notes. That task can be accomplished with surprisingly sparse sampling and cursory review.
Nearly all of the current MBS implosions could have been predicted by pulling a dozen mortgage files, putting them in front of an accountant, and seeing if they pass the giggle test. "$750k for a house in Compton? Computer says the purchaser's Tercel was repoed last year? Heh, heh, heh."
As I commented on Econbrowser, just think what 0.5 basis points on a $500M would have paid for. $25k buys a lot of giggle test. The only problem is finding an accountant who can stand the airplane and hotel lifestyle.
Yet the managers of retirement funds and state gov't rainy day funds did not lift a finger. Nothing can protect people who want to buy the Brooklyn Bridge.
Thanks for posting the link to BB's speech. Each time I read it I notice a new inanity.
BB says, "there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation."
And then goes on to list one such measure:
"Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails."
The inanity: unlike in 2001, inflation is not low (in fact its high and accelerating), and the fundamentals of the economy are not "suddenly" deteriorating -- in fact you could say the economy's been taking its own sweet time to slide into recession.
Why bother to lay out two conditions for steep cuts if you then chuck them out the window the minute things get rough?
I hope the bond market continues to believe this emperor is clothed. The last thing this economy needs is a spike in long term interest rates.
Walker:
"Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually."
It works on the small scale too - individual tax payers can write off $3k/yr in investment losses. There are probably very good principles of risk management that underly setting up these kinds of arrangements. True conservatives, of course, would be strongly against this kind of subsidy - people should take their hopes, successes, and lumps straight up.
The thing that might make this rational from an economic viewpoint is that they're bidding on an event with a known outcome. These losses have already been booked. The buyers don't have to "take a $270M loss to make $100M". They're effectively bidding on the pack of failed loans, which they can use to offset future profits.
"It's one thing to ask policy holders to pay premiums based on claims, but it's another thing to increase them due to mismanagement of assets," he said."
"It's one thing to ask policy holders to pay premiums based on claims, but it's another thing to increase them due to mismanagement of assets," he said."
Paul your comment ( Paul | 01.12.08 - 3:40 pm | #) about how lucky we were in that social security was not privatized, is more right than many may know.
I suspect that many on the street and some in the gov had an inkling about where this mess was headed and they hoped social security accounts could be left holding at least some of the bag.
I feel like I am being crushed by these so called free markets. I want to scream "hey, I am a human being, not a provider, not a consumer, not just a fungible thing!"
I think we should have a serious discussion about how much we want our lives dictated by a process that is concerned with maximizing profit and is subject to serious rigging.
Red Pill | 01.12.08 - 6:06 pm | #
Debt created fiat currency demands continous expontential growth or you have ponzi like collapse. That is why the fed has to fight deflation at all costs. The treadmill has to always be on a greater speed. Maybe the current model is broken instead of the free market.It worked great in the 20th century but might not for the 21st.
The tax write-off: This is the same sort of shenanigans that a lot of high-income individuals did back in the '80s--set up some form of S-corp to generate paper paper losses to offset income. (The IRS didn't like that, as you can expect.)
Here, BoA doesn't even have to set up their own corporation--just use only lying around.
(And yeah, there must be some other reason why this whole deal is going down--I bet promised bail-outs in the future from the Fed. The tax stuff is just a little extra lagniappe.)
this is not to say that one can not have growth and progress and return on investment without wars and unsustainable econ policies....but many citizens and leaders have chosen short cuts.
Basically, there was just too much fraud. I know of no sampling technique that allows me to slap a "fraud level rating" onto the whole pool. I don't know anyone else who does, either (although some claim to).
Tanta
With certain probably unrealistic assumptions, I would be such a claimant. The main thing you need is the ability to determine whether an arbitrarily chosen suspect is fraudulent. If you have a complete list of the potential frauds, randomly pick a few hundred of them for the assumed determination. I'm too lazy to look up the relevant formulas, but your chance that the fraction of fraud in your sample is within .05 of the fraction of fraud in the whole pool is pretty good.
"yes...debt demands interest, and investment demands dividends and maybe even capital appreciation!
Ultimately an unsustainable system if confined to a small space, or one continent, or one planet."
It is intriguing that Islam forbids interest. I am not saying that is the cause for the current conflict. Forbiddng interest under Islam and the seventh day of rest under Judaism leaves me some small consolation that there truly might be a god. I don't know if we are smart enough to come up with those by ourselves.
Hope I don't get carted off to Guantanamo in violation of some Homeland security rule. The very words "Homeland security" scare the bejeesus out of me. What Orwelllian fascist nightmare pundit dreamed up those words.
It's interesting that the denial over national mortgage fraud was contemporaneous with the denial over the Iraq war.
Now, most Americans are waking up to mortgage fraud but con men like McCain keep trying to convince people that the Iraq war is good and successful. To perpetuate McCain's fraud, you need to be oblivious to the fact that our President and our military have probably shattered the Iraqi way of life for generations. You have to be blind and deaf to all the torture and suffering we have inflicted on Iraqi civilians, families and children -- innocents all.
If you want to see a great documentary on the subject, told by returning GIs, get "The Ground Truth."
Privatize social security. Can you imagine - someone surely would have invested this money in Super senior AAA+ mortgage backed securities. Wow - dodged a bullet there didn't we.
Paul | 01.12.08 - 3:40 pm | #
That is a very sobering comment and one that I hadn't thought of yet. Funny, isn't it, that none of the experts on CNBC or the Murdoch Street Journal have mentioned that? I wonder how the WSJ would have defended that if it had occured. Never mind, I don't want to know.
Unfortunately, many state, county, and city pension funds or other plans will discover they own it. The people lobbying to privatize and manage social security plans were the same ones selling those AAA+ pieces of crap too. Talk about foxes guarding the hen house.
The problem is nobody cares if a loan is fraudulent. Nobody. In theory there should be some consequences but come on. Nobody bothers to rob banks with guns anymore. Heck nobody seeks to confront other countries with guns anymore either. Alright sociopaths but cut me little slack here. We'd have little or no trade deficit with China if they actually paid for the technology transfers, illegal software and intellectual content they acquire through non-financial means. Okay enough global-pol. Finding 'fraud' is easy but like I said all anybody currently cares about isn't fraud but performance. As long as loans performed there was no problem. Right? The models didn't slap a "fraud level rating" onto the whole pool because that answer was irrelevant to the issue of performance. The only reason we are talking about fraud now is because some bag holders are under the idea that assigning blame will improve their specific performance.
Hope I don't get carted off to Guantanamo in violation of some Homeland security rule. The very words "Homeland security" scare the bejeesus out of me. What Orwelllian fascist nightmare pundit dreamed up those words.
tg | 01.12.08 - 11:21 pm | #
Yes, be careful what you say or write or you may find yourself on the waterboard or on the receiving end of a Giuliani nightstick.
Denzel,I believe it was a plumbers helper.Horrifying stuff,as is what our country is doing to "fight terrorism".And instead of doing what it is "supposed to do" it makes things worse.
The point about Social Security was that people wouldn't (or didn't) do it on their own. We're talking about the entire population here, just how above average is everybody? What do you do with those who lost it all? Let them starve? Heck, if you're willing to do that, let them starve in the first place.
And as far as Social Security not being a great investment- well, it is a quasi pyramid Ponzi thing, but I would note that so far everyone looks like they are getting back far more than they've contributed.
Billy Hill - the problem with sampling mortgage pools for fraud is that there is not an even distribution. You could of course argue that NINA loans are all fraudulent, but that makes due diligence a laugh.
You write If you have a complete list of the potential frauds, randomly pick a few hundred of them for the assumed determination.
Okay, but traditionally, the frauds are associated with particular brokers, appraisers, etc, and you don't have that data. So Tanta's 30% seems far more correct to me. Otherwise you have to do it iteratively with at least a 15% sample. A 10% sample would be 100 loans out of a thousand. Let's suppose that there are 6 brokers who have contributed an average of 20 loans a piece to the pool (120 or 12% of the pool), of which an average of 15 (90 or 9% of the pool) out of each broker's contribution are fraudulent.
Pulling a random sample of 100 is highly likely to pick up 7-9 of those loans, but those particular brokers are probably good enough to make it look plausible on its face. You may flag 2 or 3 of them, but that would give you a very false idea of the whole pool.
Unless you go back and then sample all the loans by the brokers, appraisers, etc in the pool who appeared suspicious, you are unlikely to find the true nature of the pool.
As long as each broker throws in some good ones, and makes the bad ones look plausible, a 10% sample is not viable.
Actually lately I have fooled around with using epidemiological statistical techniques for this type of modelling and sampling. open source epidemiologic stats.
As in disease, successful mortgage loand fraud spreads. It is associated with certain individuals, but those individuals are likely to pass the contagion along to their associates. And once they have reached a certain proportion, the general population of loans (think fraudulent appraisals contaminating the whole comp pool) are likely to become diseased.
Disease and this type of fraud has a clustered nature.
MOM: we're probably in basic agreement. I was assuming that, for anything in the pool, it would be feasible to determine whether or not it was fraudulent. In the real world, the bad guys can probably make this more difficult than the amount of resources the good guys are willing to invest in the examination process.
However, suppose a bad guy has 100 frauds, and the good guy is going to be randomly picking 2 of them. Does the bad guy have to do his conealment activities on all 100 frauds in advance, or can he wait and only go into action when he knows which 2 will be scrutinized?
No, you have to do it up front. But in fact people got expert at it. They used things like Salary.com to see what incomes would not bring up a red flag, and added stuff like those famous cleaning businesses bringing in 2-3k a month. Also the collusion with appraisers is very hard to pick up without appraisal reviews, and once you let enough of them get by, you contaminate the whole pool.
It really has to be done at point of origination to work very well.
MaxedOutMama: It's a pleasure to be the last person standing with you in this thread.
I think (hope) the practical situation is this: there are a bunch (several thousand) transactions which may or may not be fraudulent. Somebody has the motivation and resources to try to estimate how many actually are frauds.
The choice is between "standard" examinations of a large number (30%?) of transactions and a smaller number of costly, in-depth examinations.
My "ivory tower" point is that, if the in-depth investigation was certain to detect fraud if present, then 500 randomly chosen examinations give you a very good chance of estimating the fraction of frauds in the whole pool within 10% (e.g, if your sample finds 35% frauds, then the pool probably has between 25 and 45 percent).
Back in the real world, I don't know whether or by how much an "in-depth" examination increases the fraud detection probability compared to a "standard" one.
For added insight into the operations of fraudsters and how collusion once worked work back in the day of no doc, no income, no oversight and no appraisal reviews (paid by the lender putting up the money), just
Google Rachel Dollar
for her blog in current investigations and arrests as the FBI
makes a necessary but surely incomplete attempt to put the bad guys and girls in prison.
As MOM notes, it takes quite a few to tango consecutive fraudulent mortgage
activities in an overheated market.
And I will not be surprised when fraudsters also figure out how to scam the upside-dwon segment of the population, hey, they are already doing it.
The problem is that no one was prepared to do an "in-depth" examination. How can a pool full of stated income loans withstand that?
This stuff can be very hard to detect, and no, I don't think a 10% sample will get it.
I have not just a theoretical but a practical basis for my comments. The type of methodology you are describing is what is used in selecting a lot of regulatory examination samples, and believe me, they miss a lot of what they are supposed to be looking for. I am talking 2, 3 exams in a row that don't pick up rather obvious errors.
These things are just not spread through the universe evenly at all.
Third?
Just guessing here from the wondrous Haloscan response times.. Seventh!
I'll also hazard a guess. Cuomo doesn't read this blog.
Isn't this lawsuit essentially suing a liar because he lied during his explanation of the depth of his past lies? Splitting participles seems easier.
Retroactively first.
Data?
We don't need no steenkin' data!
Another example of "no-one could have anticipated" disease....
No one anticipated a day when potentially hundreds of thousands of residential mortgage loans would be modified, said Alison Utermohlen, an official of the Mortgage Bankers Association who has led the effort to get the accounting rules relaxed.
Tan man "todo" list:
Oh, I am more than willing to believe that when Cuomo subpoenaed the Street firms and then subpoenaed the due diligence firms, he ended up with a set of reports that don't match. That is, the due diligence firms duly reported that there were errors/omissions/unreported exceptions/generalized horror present in the loan file, but when someone got around to writing a prospectus, there was no disclosure of the fact that a bunch of people with real expertise had looked at some of these loans and had to sit down quickly.
So that is a failure to disclose something that is unarguably material. My point is simply that what they did disclose should have scared the hell out of investors, and it clearly did not, so working ourselves up over "exceptions" at this point in the game seems a bit beside the point.
The only useful thing I think can come out of this is for the SEC to basically require "Due Diligence Findings" as an explicit subhead in the prospectuses. There really should be language that explains what due diligence is, and that makes it clear that a third party with no interest in the transaction looked at this stuff and presented the following findings.
However, unless you want to create a situation in which we do 0% due dilly instead of 5%, because we don't want to risk getting back something ugly that we have to include in the prospectus, then there will also have to be rules about acceptable diligence levels. I should think something on the order of: "The due diligence sampling in this pool was x%. That is [more/less] than the average for well-performing pools of loans. Investors should understand that this increases the risk that the loans will underperform" or verbiage to that effect.
Is there any analysis of how many of these no doc loans were to "flip this house" types who got caught when the market turned?
You got it, c_s.
Tanta,
Substitute meatpacking for bundled mortgages and you realize you've rewritten Upton Sinclair's great american novel? And you wrote it better. I suggest for a title: "Barbarians at the Table, The Jungle Revisited."
I keep coming back to [paraphrased] Buffet:
never invest in something you don't understand.
In the end, we may have seen a sea-change in finance. The products have gotten so complex that nobody can understand them.
people don't know what they have, how much it is worth, who owes them (or who they owe).
I can just imagine the months it would take to sort out if CFC would have gone BK as example.
I'll bet you there are still casualties from New Century that don't know they're insolvent yet.
one of the biggest companies that doesn't have a clue that they're in trouble is Goldman IMO.
Yeah, they're hedged my ass... until they find that their counterparties are all insolvent.
It just seems that going forward finance will be different. Wall Street has really screwed just about EVERYBODY. I would guess that it will take some time to rebuild the trust?
then again, who wouldv'e thought we'd be here with Real Esate again so soon after the S&L scandal.
Is there any analysis of how many of these no doc loans were to "flip this house" types who got caught when the market turned?
Yes, there is. It's beginning to trickle out. And it is going to take a while yet for anyone to quantify the actual costs of all that. We're still waiting for enough final REO liquidations of all this stuff to run the "fully loaded" numbers.
The problem we have right now is that the failed flippers are cratering neighborhoods, which are causing chain-reaction defaults among people who probably weren't no doc. It will take some time to wrap our heads around reliable numbers of the "chain" costs. It'll be more than 18 bps, of course.
Calculated Risk: Fitch Opens Loan Files: Results Not Pretty
Is there any analysis of how many of these no doc loans were to "flip this house" types who got caught when the market turned?
sure, we just have to look at the loan documents since I'm sure all the flibbers checked "non-owner occupied".
ROFL.
Would Due Diligence firms have been able to uncover instances where mortgage originators were clearly accepting inflated incomes in order to justify loans?
Or other dishonesty like "owner occupied" vs. "non owner-occupied"?
ice piece thanks!
Buffet:
never invest in something you don't understand
Let's see, you are investing in a mortgage (asset) backed security. These have been around for investors for generations. You are buying from long established Wall Street firms that are regulated. They in turn have done due diligence employing respected outside firms to review the packages presented by leaders in the mortgage industry. MBS is easy, people pay their mortgage. For a very small percentage who do not the asset has almost always covered the costs of recovery. Respected ratings firms have thus given these instruments their highest grade.
See? The investment is easy to understand has a long history of excellent performance and is highly respected by independent opinion. These POS would have appeared to be perfect candidates for a safe, easy to understand investment.
Thanks for the clarification on the flippers. I realize the flippers have been wrecking neighborhoods all along. In DC there were lots of stories about condo flippers reselling pre-construction.
It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby.
In DC there were lots of stories about condo flippers reselling pre-construction.
Florida circa 1926. Swampland traded dozens of times sight unseen.
and that makes it clear that a third party with no interest in the transaction looked at this stuff and presented the following findings
They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen. For some reason I keep seeing this basic conflict between "who is paying me" and "what results they would prefer to see me produce" (no matter how independent they pretend to be).
There needs to be a better firewall. I don't know the how, just the need.
In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance.
Also, whether the proposed deal will be structured where the debt assumed by bac will actually become an obligation of bac or be held in a separate entity, ie countrywide. This thought would be to potentially protect the parent further from the further deterioration in the portfolio.
This conference call is worth the listen-
Bank of America | Investor Relations | Event Details
In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance.
Also, whether the proposed deal will be structured where the debt assumed by bac will actually become an obligation of bac or be held in a separate entity, ie countrywide. This thought would be to potentially protect the parent further from the further deterioration in the portfolio.
This conference call is worth the listen-
Bank of America | Investor Relations | Event Details
Would Due Diligence firms have been able to uncover instances where mortgage originators were clearly accepting inflated incomes in order to justify loans?
Well, that's actually the problem that all this is bringing to the surface. As it happens, you can find a lot of fraud in due diligence for $350/pop. (That's a fair expenditure of time and energy and certainly implies that the reviewer has some expertise.)
But the "stated income" part was the rule, not the exception. If you pay me to examine whether your loans met your published underwriting guidelines, and your published underwriting guidelines say you don't have to verify income, then I don't flag a loan as a "failure" because you didn't verify income.
All of us who have done loan-level analysis have seen the "janitor making $6000 a month" ones, and have reported that as potential fraud. But unless your contract is to do actual further detective work to prove or disprove a theory here, all you do is report "implausible income" and the owner of the loans has to decide whether to dig deeper or not. Obviously, a bunch of them decided not to.
That's what's got the due diligence firms pissed off. Their reputations are under fire, because it's looking like they didn't notice this shit. Well, I'm sure they did notice it, and the fact that they're cooperating with Cuomo tells me that they don't plan to be the bagholder here.
FYI: Anybody can check off the "owner occupied" box on the damned application. Just about any due diligence process will involve looking at the property you currently reside in, comparing it to the one you claim you're moving to, look at where you claim you're employed and so on, and tick off the "potential occupancy misrep" box on the due diligence report. They ignored that, too.
I just want to tell anyone who doubts Tanta's accuracy and fairness that she is completely, totally and absolutely pegging the reality with what she has written here.
But Tanta, you're talking about revoking the "no actual convictions that weren't reversed on appeal" policy.
Never. Gonna. Happen.
Remember, the guiding rule of the street is "The house made money, the broker made money, two outta three ain't bad."
They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen.
That's a good point, but remember that most of this due diligence doesn't happen at "securitization."
It happens at the point where you are bidding on whole loans to fill pools that you can then securitize down the road.
Sure, overall the same conflicts are there. But the Street firms were the ones who owned 100% of the risk between the day you buy whole loan inventory and the day investors buy bonds. The due diligence should have been considered self-protection there.
Now, we know it didn't because they just never believed that the music would stop and they'd have a shelf full of shit that they couldn't securitize and couldn't force back to the originator (even though they've clearly tried that). I think of most of the "repurchase" put-backs as after-the-fact attention to the due diligence findings.
The ones who are really bathing up to their chins are the ones who bought their own originator. It used to be, Merrill bought junk from First Franklin, but then Merrill could put it back to First Franklin. Well, you buy the originator, you can't exactly make yourself repurchase your own loans. Ooops.
Actually there is a school of thought that believes that due diligence firms have an interest in finding as many problems as possible, since it justifies their existence and those $350 charges. If you give too many loans a pass, people will decide that you are an unnecessary expense. The RAs were in a different situation, since everybody's got to get a rating.
My point is simply that what they did disclose should have scared the hell out of investors, and it clearly did not, so working ourselves up over "exceptions" at this point in the game seems a bit beside the point.
if i remember correctly (i haven't had much coffee yet), when Fitch decided to open up some loan files they concluded that about 75% of the underperformance of recent vintages was due to disclosed high risk attributes, with the rest due to the frightening things they discovered in the files.
Which bring us back to the points you made yesterday abou the purchase of Countrywide. When you take the Countrywide out of Countrywide you return to the loan standards of yesteryear and Countrywide becomes just another face in the crowd. In that case, did you really expand your presence in the mortgage industry by purchasing them, or did you buy last week's fresh tomatoes?
I'm not in the mortgage industry, but one buddy works HR in wholesale at one of the big lenders struggling right now. Another is an architect in DC doing "gentrification". They are honest people, but after reading CR and Tanta for the last couple of months, I am just appalled at the level of corruption. I was so naive. Thanks for opening my eyes.
Rumours have the Countrywide Gulfstream being sold last week, CHEAP!
ERROR
New Century might as well have called them "Ownership Society Loans" and made it a product rather than an exception.
i can't tell if that's a joke or not.
"It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby."
These speculators were largely respoonsible for the equity PUMP in the first place. The truth is - It's hard to justify bailing ANYONE in RE out - period. Everyone who took a loan they can't hope to repay is irresponsible. The only responsible thing to do is allow assets to deflate to natural levels, as supported by incomes. Any other response is basically extending the charade.
This stuff did not start in 2005. Or 2004. Or 2003 either.
What I want to know is if they were just ignoring everything bad to make commissions, why did the originators bother to make all the borrowers' (in each and every transaction) lives a living hell?
I can't remember a closing where the borrowers were treated competently and with respect. All, whether rich or poor, high or low ltv ratios, prime or sub, had their papers lost repeatedly, had last minute requests for more papers of all types, and were generally driven crazy by the origators. Including a wealthy couple whose brother in law was manager of the Wells Fargo office where they were applying. And whose ltv ratio was something like 60%, who made well into the 6 figures and whose FICO score was impecable.
I think they actually believed their own lies, as to the not so good guys.
But as to the couple described above: why the torment?
i can't tell if that's a joke or not.
Don't think I'll be able to tell you.
However, the business about being in a conference room where people are scribbling unreadable doodles on those pricey flipcharts to people we flew in from the branches, all in aid of discussing why we can't afford 30% due diligence, is certainly real. That doesn't mean it's not a joke somewhere, but there you go . . .
Tanta - this is an excellent piece. If more people had scruples and good business practices, we wouldn't be in the pig stye as we are now.
Mortgage Pig stye, excuse me.
OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet.
It's hard to justify bailing ANYONE in RE out - period.
Mabye so, but now you get into why people needed to suck equity from their homes to begin with. "Affordable housing" is such a nasty Great Society term. No one wants affordable housing near them for fear of depressing their property values. The upward spiral in housing prices (even before this boom) forces two incomes to survive. Equity becomes a source of income and, well, you know the rest.
Just where the heck do you expect me to live? When the teachers, cops, and firemen have to live 50 miles from your gated community to survive, how is that sustainable? When your lawn care workers and waiters at your favorite martini bar can't afford to drive to work how is this work going to get done?
Homes CANNOT become investment vehicles like pets.com or tulips. The irrational pricing kills the innocent bystanders.
Sorry for the liberal rant.
why the torment?
Because operational chaos like that is what you get in a thin-margin business.
Frankly, the subprime borrowers pay so much in fees and rates that we can afford to roll out the customer service carpet for them. (But we don't, because they won't walk.)
Your basic no-brainer 60% LTV perfect credit borrower is probably getting the best rate you offer and not paying much in junk fees. The only way to make enough money off that person to keep the sales force in Beemers is to fire the veterans, hire temps for what you can't just outsource to Closings R Us Title Company & Bait Shop, and write budgets that ignore the costs of re-work.
The sad fact in a refi boom, particularly, is that you're drowning in "no brainer" loans. About the only good news for "no brainer" borrowers in a credit crunch is that they'll be desperate for your business again, desperate enough to produce a set of correct closing docs the first time through and possibly even spell your name right.
However, I will say that there is a whole class of well-heeled borrowers for whom I have limited sympathy here. They knew perfectly well they could get better service down at the credit union, but they went to JoeBroker because shaving another .125 off the rate was soooo important. You do frequently get what you pay for.
And I have some experience with profoundly "entitled" borrowers who think their "impeccable" FICO means that they don't have to fill out the application completely. It can in fact transpire that some of these last-minute "problems" came up because Mr. Entitlement didn't bother to mention certain things up front. ("What do you mean I should have told you that the seller is my sister-in-law? What business is it of yours? I'm Mr. Entitlement with an 850 FICO!")
Thank for the response, Tanta.
See, if the IBs were warned about fraud in the origination process and basically ignored the warning or cut back on due diligence, I don't see how they avoid significant liability. They have a duty to perform reasonable due diligence and to report the findings in the prospectus. Otherwise they will be held accountable.
This is a highly technical post tree, and I usually read these and scratch my head a lot because I am in no way involved in this industry. However, a couple of things struck me as ininane in this whole process.
The first is Rob Dawgs point:
"Let's see, you are investing in a mortgage (asset) backed security. These have been around for investors for generations. You are buying from long established Wall Street firms that are regulated. They in turn have done due diligence employing respected outside firms to review the packages presented by leaders in the mortgage industry. MBS is easy, people pay their mortgage. For a very small percentage who do not the asset has almost always covered the costs of recovery. Respected ratings firms have thus given these instruments their highest grade.
See? The investment is easy to understand has a long history of excellent performance and is highly respected by independent opinion. These POS would have appeared to be perfect candidates for a safe, easy to understand investment."
Fair enough. We all rely on some others expertise to guide our decisions, at some point. Don't think so, well then why did you buy the car you are driving? Are you an engineer or a mechanic?
Then we get to this:
"They may not have had any financial interest, but ( like our friends the Ratings Agencies ) they were being paid by the parties that wanted to see the deal happen"
Now Tanta refutes this with, among other things:
"Actually there is a school of thought that believes that due diligence firms have an interest in finding as many problems as possible, since it justifies their existence and those $350 charges."
However, it seems to me that, given all of this, the incentives are still screwed up. The buyer should be paying the expert to review this stuff, not the seller. I mean, when I buy a used car I don't accept the sellers mechanics word on the cars quality, i bring my own.
I know it increases transaction costs. And yes the Gov't has cartelized ratings agencies and put them on the sellers side. But really, if I go through the transaction cost of my own mechanic for a used car transaction, surely having the buyer bring his own analyst to review a multi million (billion) $ deal seems prudent. Perhaps I just don't understand "high" finance. (I suspect clean bong water also helps).
Cheers,
OT,but interesting.I was talking to a BK attorney the other day who had a lender challenging the dischargeability of a stated income loan due to fraud on th borrowers part.There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
So much deception at so many levels. BUt it does seem that the ultimte deception in terms of the securities themselves was using Bond or Bond Loke ratings on synthetic instruments. This, plus the search for something paying higher interest is likely what brought a lot of buyers to the table.
Perhaps the first disclusure should have been the synthetic nature of the instruments. Second should have been that the ratings were not set by any usual standards.
But clearly across the board, greed drove everything. Paying commissions to originate loans (invitation to disaster).
One other thing, if the investment huses were buying the loans at more than usual discount, that may negate the "we didn't know" argument.
It really does seem that one of the main purposes of the final investment instruments was to obscure the nature of the suurce.
Good luck finding any deep pockets; however maybe some of these folks may do some jail time.
Just to remind everyone again, I am talking about buyer-paid due dilly.
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
They were the buyer. Now, of course, we know that they thought of themselves as the seller, because they were buying only to turn around and create a security.
But honey, I've done due diligence for portfolio buyers like insurance companies who do not have the expertise to do their own file reviews. They often aren't any smarter than the Street: once you factor in another 17.5 bps, the deal "doesn't make sense" any longer. Institutional owners of this crap need to ask their own buy side some tough questions, too.
Tanta,
This this a thin margin business? That I do not understand at all. Sure any one individual transaction may look thin but that's like saying the Brooklyn Bridge is a bad buy because Tolls are only $5. Angelo was taking home $50m/yr in salary when Countrywide was a going concern and stockholders were seeing dividends and secretaries were earning $85k. Those are not thin margin business practices.
[still pouting that 'Barbarians' didn't make you laugh.]
Rob, "Barbarians" did make me laugh. It's just that I've never gotten over Ark Ship B. You set yourself quite a standard.
I did say margins were too thin to keep the salesforce in Beemers. I didn't say that one cannot make a fair profit in the home mortgage business while doing things right. But too many people seem to take issue with my idea of a "fair" profit.
"any one individual transaction may look thin"
That's what "thin margin" means.
Just where the heck do you expect me to live?
Paul | 01.12.08 - 11:04 am
How about in a tent camp in the local state park along with all the other carpenters/painters/etc who work 50 hours a week for under the table wages and still cannot afford rent unless they are willing to go 10 to an apartment like the Mexicans.
This is not a rant but the experience of a 42 year old close family member. The working class in this country has been exploited into ruin trying to compete with aliens - hence the passion for imigration reform.
Have a nice weekend and be glad you have a roof over your head.
Jim
Regarding people not knowing (yet) that they're insolvent:
My hairstylist and I spent a half hour speculating about people we know (clients, neighbors, distant relatives) and wondering if they really had enough money to buy those big new houses they recently got, those vacations they took last year... or if they got funny loans or borrowed too much money.
Not even their hairdresser knows for sure!!!
PS- just want to add, when that sort of speculation is the topic of a hairdresser-client session (usually it's just kids, job, and Britney), when people are openly doubting if the Loyf Stoyles of the Rich and Famous (or even just their neighbors) are not what they seem... RUH-ROH. The dream IS over.
Tanta:
Very good piece. But my question is - from a guy w/squat experience in the financial analysis fields - what constitutes reasonable experience for such analysis of loan portfolios? Would pressure on loan folks been easier to handle had there been greater experience/education levels?
My viewpoint would be a new claims adjuster getting pushed around by a plaintiff attorney vs a more experienced/trained adjuster telling the atty to go pound sand.
Thanks
Thanks Tanta,
"Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported."
I think I'm getting my pea brain around it now. The originator had shit for sale. The IB did due dilly, then ignored it. IB then sliced and diced it and went to Moody et. al. and said rate it. Now the seller is paying for a rating. They got AAA, then shopped for a buyer, who relied on the raters rather than do their own due dilly.
My head hurts. But I'm close to understanding...I think.
Cheers,
Off on a slight tangent - recently there was an interesting case from Nashville, where UBS was told to suck it up by a judge who threw out allegations of fraud on a $1.5 billion buy-out of a retailer.
It goes to the caveat emptor point that Tanta is making, and may show how the judiciary is going to treat "sophisticated investors" as they come crying in to court.
Apart from that, the case is a neat showcase for many of the economic snarl-ups we're seeing:
http://tinyurl.com/28ruo8
Nashville Chancellor Ellen Hobbs Lyle dismissed Finish Line's claims that Genesco withheld key financial information that could have signaled worse-than-expected earnings after the deal closed in June.
Lyle said Indianapolis-based Finish Line and investment bank UBS AG were sophisticated enough to know what they were getting into with the $54.50-per-share purchase.
The buyout was conducted by "teams of lawyers, advisers and handlers being paid enormous sums to orchestrate the procedure for obtaining information" she wrote.
"This milieu is UBS' home territory," Lyle said.
"Genesco's decline in performance in 2007 is due to general economic conditions such as higher gasoline, heating oil and food prices, housing and mortgage issues, and increased consumer debt loads," she said.
what constitutes reasonable experience for such analysis of loan portfolios?
I really think the issue isn't so much experience; it's financial vulnerability.
There are a lot of folks out there working due diligence because they are underwriters with decades of experience who got laid off when we replaced them with AUS and a prayer. They used to have salaries and bennies; now they go from contract job to contract job, struggle with self-employed insurance premiums, and deal with raising a family while having a job that keeps you on the road all the time.
So some of them are just afraid to tell anyone to pound sand. Their lives are too vulnerable.
I got into some due diligence work because, frankly, I was tired of corporate life and for me, it's a fairly low-stress way to make a living. I actually have more expertise than is needed in a due diligence underwriter, but since I was happy billing what everyone else was billing--not trying to make the client pay for my "overqualifications"--it worked out fine. Few people are willing and able to be in that situation.
But the whole logic of contracting on a per-deal basis creates a sense in the due diligence firms that it just isn't their business to tell anybody to pound sand or not. You pay me to tell you what's in the pool. I tell you. You can act on that information or not. A contract due dilly firm isn't going to go mano-a-mano with your staff attorney to try to get you to act in your own best interest.
Now, if you want a consultant who will in fact go to the mat for you, I can do that (as can many other people). It costs a hell of a lot more than $350. But few companies these days are paying for real business experts to come in and do battle with their own senior employees and officers who are sucking up such handsome pay packages.
I just want to tell anyone who doubts Tanta's accuracy and fairness that she is completely, totally and absolutely pegging the reality with what she has written here.
MaxedOutMama | Homepage | 01.12.08 - 10:36 am | #
I doubt anyone questions this. Show of hands? Anyone? Anyone?
That's what I thought.
But thanks for the corroboration.
In short all these fools asked for what has happened, or rather virtually BEGGED for what has happened, so it is very very fitting that they suffer all the consequences, and more. When people make a positive effort to be stupid and silly, they need the punishment they richly deserve. No time for tears.
do dilly:
Dairy Queen 1950's Dilly Bar Package Set D.Q. Bag and Branded Stick
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
Right. because Wall Street's view (from what I've read here and elsewhere) was that no deal was worse than a bad deal (just so long as the deal's kept flowing and the quarterlies looked great).
To quote a famous piece of software: Game Over Ma
"There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
Tom Stone | 01.12.08 - 11:12 am | #"
You mean the judge didn't buy the argument that "it's just business" applies to only one side of the trade?
I'm not on the side of the fraudster, but I'm tiring of the rationale that my pension fund is outta luck because it didn't realize the IBs were sharks in suits, while the bank is deserving of relief because buyers aren't expected to lie.
I doubt anyone questions this. Show of hands? Anyone? Anyone?
That's what I thought.
Don't ever let your healthy skepticism about what you read on the net lapse. Not even here.
I like to think that long-time readers of the site have a sense of my credibility, but not everyone has been reading for a long time. Actually, those new readers may not know how much expertise MaxedOutMama has. Click her link and read her website. Read mine. Read others. Evaluate your sources.
This is the internet. It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something.
Constant vigilance!
OT and pointless, but:
Believe it or not the Brooklyn Bridge does not have a toll. The Battery Tunnel does ($4) . . . and so we end up with a mass of drivers going out of their way through the neighborhoods to get on the free bridge.
We're working on getting that changed this year.
One more thing on the potential bac/cfc deal-
correspondent lending is about to get the wake up call of the decade, regardless of the outcome, my prediction is for mass layoffs and a dead channel.
OT but closer:
CFC's REO portfolio now up to $3.25B. Maybe BAC is planning to start a REIT
I did say margins were too thin to keep the salesforce in Beemers. I didn't say that one cannot make a fair profit in the home mortgage business while doing things right. But too many people seem to take issue with my idea of a "fair" profit.
$350 for credit worthiness due diligence? Too much.
$5,000 in YSP for Dealin' Doug, the (former used car salesman) loan officer? NO PROBLEM!!!
I'm not on the side of the fraudster, but I'm tiring of the rationale that my pension fund is outta luck because it didn't realize the IBs were sharks in suits, while the bank is deserving of relief because buyers aren't expected to lie.
Take that argument. Apply it to the Florida LGIP, to the IB's/CW's that sold them the paper that cratered, to the counties/entities that invested in the LGIP, and to the citizens that had (a portion of) their tax payments vaporize in this whole affair.
Who's the bad holder ? Eventually its the citizens... who are also likely to get nailed on the other end of the clue stick from the falling home prices and/or the collapsing home resale/equity market.
Every party in the above described debacle (other than perhaps the citizens) should have done due dilly. I'm suspecting that very few did.
the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes
The Tan Man put smokey quartz crystals in his shoes on Monday, and by Friday he was strapping on his golden parachute.
Don't believe me? You just read it on the internets, so it must be true . . .
OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet.
barely, you are absolutely right.
But just the job of rounding up and deporting even a fraction of illegals would consume vast public resources and expense. Many have U.S. citizen children who would fall into the social welfare net. As I keep saying, 90% of that cost is paid by state/local govts.
Every time I hear a Republican bozo say they would immediately deport all illegals who have committed crimes, I just laugh.
Yep, "immediately" after you appoint a public defender, charge them, set bail, provide custody when they can't meet bail, mount a prosecution, win a conviction and only then after they exhaust all appeals.
Do you know what all that would cost the public, mainly state/local govts?
You gotta be kidding me. California is letting hard criminals loose because they can't afford to keep them in jail.
"It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby."
Ahhh...but the flippers were the cause of equity.
Tanta,
"It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something."
Oh bloody hell. And I was just about to start marketing Super Colander Tin Foil Hats as a cure to all that ails you. Dang Gummit.
Cheers,
Ray, I wasn't so much commenting on the DD responsiblities of the parties (though your comment about the pension fund is spot on and duly noted), as I was on the duality involved in the banks exploiting naivete when it's profitable and then claiming it as a defense against loss.
"Lawyers, guns and money"? Nice label!
Just to remind everyone again, I am talking about buyer-paid due dilly.
Wall Street was the buyer. NEW was the seller. Wall Street didn't want to pay $350 a pop for independent due diligence. When they did, they ignored what the firms reported.
They were the buyer. Now, of course, we know that they thought of themselves as the seller, because they were buying only to turn around and create a security.
The street didn't think it would ever come back to haunt them - they weren't really the buyers... they were just the middlemen... so why pay for DD?
It was a mindset thing - btw in industrial settings, this is why the procurement arms of most large industrial firms is kept as far away from the sell side as physically possible... in the few instances where I've seen the two hunkered down together (say where global procurement in the same office complex - campus as global marketing)... things didn't go well at the operational level...
The older I get the more I'm convinced nothing ever really changes... technology comes and goes, industries change hands... but nothing really changes regarding how stuff gets done, the kinds of mistakes that get made, and the excuses & 'novel remedies' offered.
The older I get the more I'm convinced nothing ever really changes...
I guess it's one of those "evolutionary leaps" they talk about.
Many years ago, a former boss of mine was asked by some n00b why we didn't just do some easy cheap thing that would build volume. My boss--a great big gentle bear of a man--said, "Because you don't shit in your own nest."
Millions of years of survival as a species, and we gave up that one.
"It's hard to justify bailing out the real estate speculators even though they are destroying equity for those nearby."
Ahhh...but the flippers were the cause of equity."
And hence made housing unaffordable for anyone with a middle class wage. We have housing prices going up and up while wages stagnate. We're told by our President to "go shopping" to keep the economy humming. Guess what -the home equity line is tapped out and the credit card delinquencies are going up. So the flippers merely extended the boom by providing cheap $$$ to the middle class guy getting squeezed by outsourcing, medical insurance premiums and job insecurity. It's A Wonderful Life!
So now, I stop spending and you all lose your 401K, IRA, and pensions (conveniently invested in mortgage backed securities - oops). Have you looked at your mutual funds lately?
Speculation in housing is bad, very bad for all around.
Dryfly,
It is the velocity of mistakes that is biting us in our own ass now.
Maybe it is time to start a Triple Assured Never Tranched Asset Bank. TANTA-B will lend face to face to people who don't need the money and keep the paper documents in the basement, the note in the vault, and the money in the community. If you bring your kid in when you drop off the payment we'll give him a little plastic piggie bank.
Hey, wait a minute, didn't we once flesh out the specs for Retro Mortgage, Inc. in the comments?
If I could remember what topic we veered off of when we did that I'd go find that thread.
A blast from the past.
Equity Funding Corporation of America was a Los Angeles-based U.S. financial conglomerate that marketed a package of mutual funds and life insurance to private individuals in the 1960s and 70s. It collapsed in scandal in 1973 after ex-employee Ronald Secrist and securities analyst Ray Dirks blew the whistle on massive accounting fraud, including a computer system dedicated exclusively to creating and maintaining fictitious insurance policies. Investigation found that from 1964 onward, as many as 100 company employees had engaged in organized deception of investors, auditors, reinsurers and regulatory authorities.
More on Equity Funding.
Sorry, the page you requested could not be found
Forget the year and one would think this is current news.
Tanta | Homepage | 01.12.08 - 12:15 pm | #
This is the internet. It is full of people who will tell you that the whole problem is due to misaligned Chakras and can be fixed with putting quartz crystals in your shoes or something.
hey was that a dig at my Pluto in Capricorn story
More familiar with the DharmaChakra
It was educating to figure out the ,Chakra and quartz connection.
Love these detours.
regards
sbarrkum
Ellen,
Dinner with a group of friends, we were having a very similar conversation wondering whose "success" was real vs. appearance. Maybe it's a new parlor game because that thinking appears to be catching on. I put a quart of oil in my little old truck yesterday. I pointed at the poor old thing, and asked for high mileage oil. Guy who ran the station, first words out of his mouth, "You own it and it's paid for, right?" Interesting to think he sits there day in and day out watching the Beemers and Audis come and go, calculating who has savings and who is just putting on a show.
From the WSJ:
"I have confidence in our due-diligence teams that we made the right assessment of the downside," Mr. Lewis said.
Just wondering what level of confidence Mr. Lewis had in those crack due diligence teams that scoured the data room before BAC plunked down $2 bn in August?
My hazy prediction is that BAC will eventually back out based on the Material Adverse Change clause, and there will be lawsuits in all directions.
Statistically speaking and depending on the size of the pool, a 10% due diligence level should be adequate in determining the level of quality. The problem is that the loan program guidelines were constructed in a was as to make due diligence much more difficult.
FT Woods, Ellen
This sociological study of yours has connections to a couple of other important areas.
People become acclimatized to indebtedness. If I were to tell people that I have never borrowed money for a car, many would faint. That is how accustomed we have become.
Similarly, people will become comfortable with walking away from houses. Just like it is now normal to carry credit card debt, people will consider it normal to leave the bank holding the house. This important phenomenon has been discussed a bit here on CR, but I am confident that the main stream has not internalized the havoc this will wreak.
We live in a society of unspoken codes of ethics that provide a great deal more support than commonly credited. If a behavior becomes considered "normal", there is very little preventing it from occurring on a mass scale.
It is like the "broken window" principle: Broken windows, rather than intact ones, encourage vandalism. The presence of graffiti encourages it and makes it spread like a virus. Jingle mail will beget ever more jingle mail.
On so many levels this is a downward spiral.
"In regard to the proposed cfc/bac transaction, the coming S-4 should be interesting, particularly if there are reset provisions in the pricing of the deal based on loan portfolio performance."
At this point in the banker stupidity cycle, you have to believe BAC is going to insist on a number of reset/escape provisions. My prediction is that BAC gets the servicing and the FHLB gets the portfolio.
Any candidate refusing to backstop the GSEs has my vote.
I think the application of quartz is an appropriate solution to all problems. Investing in quartz is recommended as a smart financial play for these troubled times. Quartz crystals in your shoes, however, is extremely uncomfortable and only warranted in desperate cases.
With RMBS now valued at pennies on the dollar, one wonders how long it will be before bondholders start forcing after-the-fact diligence on the pools they've invested in. Sponsors made reps into those pools that were backed by a repurchase obligation for loans that don't meet them. Among the standards were: "No fraud was involved in the origination of any Loan;" and "Each Loan was underwritten in accordance with the Underwriting Guidelines of [someone]." Also common was "The Mortgaged Property securing each Loan is the primary residence of the Borrower."
A breach triggers a repurchase at par. The difference between par and what can be recovered in foreclosure pays for a lot of diligence. If I were a major Sponsor of subprime securitizations filled with third-party origination, I'd be losing sleep over how much put-back liability is out there.
To me its a more fundamental underwriting issue.
So if a 100% No-Ratio investor loan goes bad it's the underwriter's fault? I agree that were a lot of lenders without adequate quality control and risk management procedures in place. I don't think it takes an overwhelming level of due diligence to determine this. I think the IBs knew what they were buying it's just that some hedged their bets better than others.
dryfly said: "The older I get the more I'm convinced nothing ever really changes... technology comes and goes, industries change hands... but nothing really changes regarding how stuff gets done, the kinds of mistakes that get made, and the excuses & 'novel remedies' offered."
It's an article of faith for me.
S.
"I'd be losing sleep over how much put-back liability is out there."
You would think with a 7+% delinquency rate and rising, put-backs would be enough to bury any originator using the new(soon to be old)-age lending practices. Can one of the resident mortgage experts comment on this?
Tom Stone's post was interesting in this regard -
OT,but interesting.I was talking to a BK attorney the other day who had a lender challenging the dischargeability of a stated income loan due to fraud on th borrowers part.There was fraud.The Attorneys argument was that the lender made their decision to lend based on the Fico score and Appraisal only,that there had been NO underwriting and that therefore the Income stated by the borrower whether accurate or not was not material to the decision to make the loan.It flew.No recourse.
Tom Stone | 01.12.08 - 11:12 am | #
I'm wondering when all those CEO's like Mozillo, Prince, etc are going to apologize for screwing this up.
It'll never happen.
And to those of you in the industry:
Aren't you just a little bit embarrassed?
Allen-
watch the common, it'll tell you where we are going in short order.
barely said: "OT, for all you Sebastians - If we get true immigration reform and kick out illegals on top of all this economic/negative-growth horror, well, you ain't seen nothin' yet."
Where I live, we're getting a lot of legal immigrants coming from low-wage countries and getting good-paying jobs here.
Par for the course for the typical uber-bear viewpoint: Only looking at one part of the picture, the part that supports their narrow-minded, parochial, often xenophobic and jingoistic point of view.
But, I'm already starting to play past this. Just for the sake of argument, what if after all this the U.S. economy doesn't fall into recession? And what about when the real recession comes along: Will people think, "Back in 2007, it was a lot worse than this and there wasn't a recession, I won't be fooled twice"?
And how much would subscribers pay for an accurate recession call?
Sebastia
SDTFS, I laughed too when I wrote that, thinking, "Gee, this is a lot like a frog assuring people that the alligator has a big mouth full of teeth" - but I wrote it anyway.
People (even on this blog) do try to claim that Tanta isn't telling the truth, and accuse her and CR of being in some AntiAmerican SuperShortSelling
Communist Conspiracy. You have to realize that this entire thing came about because an entire INDUSTRY dismissed exactly what Tanta has written on this blog, and that these were insiders, and usually highly paid insiders. Also experts. As the losses accumulate into the hundreds of billions, they now wish to hear from Tanta even less than when the profits were in the hundreds of millions.
So, believe it or not, there are a lot of people who have a vested interest in claiming that Tanta is misrepresenting matters.
Paul - I was in the industry in a frog-like way, and I have to tell you that there were an awful lot of frogs and toads trying to point out that this was insane. The naysayers (who included appraisers and mortgage brokers as well as banker types) got short shrift.
I don't believe that those who pushed this will ever feel shame. Those who were talking about the wonderful job they were doing aren't capable of feeling shame. It's Tanta, who had no part in it, who is brokenhearted.
"Cuomo also subpoenaed Fannie Mae and Freddie Mac, the two largest sources of U.S. home loan financing, for information on whether loans they purchased were based on tainted property valuations as part of ``widespread'' industry collusion. "
N.Y., Connecticut Probe Wall Street Loan Disclosures (Update2) - Bloomberg.com
Now that we're nearing the s#it-pot end of central banking's infinite credit-making process that enabled the temporary mortgage-morphing cash-out machine that enriched flippers, brokers and IB's, it's surreal to recall my experience in 1979 when Citi divested Advance Mortgage (then the nation's #2 MB behind Lomas Nettleton).
It took a dozen Peat Marwick Mitchell (now KPMG) auditors six months in combination with another dozen Ivy League MBA's to create two foot lockers full of work papers that scrutinized and documented every obscure condition and potential off balance sheet liability (FASB 5 was all the rage then) prior to Advance being bought by the IB that resold the components: orig ops, servicing, and the commercial RE and installment (mobile home) portfolios.
Granted, the footlockers full of papers were the outcome of not having PC's' we used HP calculators to produce NPV's, etc.
Still, we've come a long way since people understoon subsequent event risk, eh?
Just for the record, I'm absolutely convinced of Tanta's honesty and integrity (as well as intellect), and would aggressively and with malicious glee defend her from any posters who said otherwise.
S.
Statistically speaking and depending on the size of the pool, a 10% due diligence level should be adequate in determining the level of quality. The problem is that the loan program guidelines were constructed in a was as to make due diligence much more difficult.
My view is if you can't figure out a prime pool with 10% sampling you need to go back to selling Avon or whatever it was you were trained to do.
But Alt-A or subprime? I call that the "Raisinets" versus the "Bridge Mix" problem. I'd be handed pools to look at that had AUS-reduced docs, SIVAs, SISAs, No Ratios, and NINAs. 15% NOO. IOs and non-IOs. 3/1s, 5/1s, and some 2/28s. One-third DU, one-third CLUES, one-third Barbie's My First Laptop(tm). Some retail, some wholesale, some correspondent. A few looked like they might have been originated by aliens from a distant galaxy.
Trying to get respectable results with a mere 30% sampling on that.
Using "standard" sampling methods to handle these New Paradigm Bridge Mix pools was right up there with pricing them based on the performance of old Private Banking IOs.
Basically, there was just too much fraud. I know of no sampling technique that allows me to slap a "fraud level rating" onto the whole pool. I don't know anyone else who does, either (although some claim to).
Here is a wildly off topic summary of SF bay area real estate:
Is the credit crisis affecting Santa Clara County (south SFBA) real estate?
Following are excerpts from local (& honest) realtor(s) at 404 Not Found
September 2007: "September 2007 has few transaction than any month since we start keeping detailed records in September 1998 except for a couple of Decmebers and Januarys."
October 2007: "October 2007 has few transaction than any October since we start keeping detailed records in September 1998. There was a slight improvement in the volume of transactions from September 2007, which was the worst month not only since 1998 but back to 1984 when the MLS first started publishing statistics."
November 2007: "November 2007 had the fewest completed sales (closings) of any month not only since 1998, but appears that this record low volume goes back to 1984 when the MLS first started publishing statistics."
December 2007: "December 2007 had only 488 completed sales (closings) in SCC. That is the fewest of any month not only since 1998; but all the way back to 1984, when the MLS first started publishing statistics. Lower than September 2001, when the nation was stunned with 9/11. December 2007 is only 60% or less of any previous December, back to 1998 when we started gathering data."
By the way, currently in southern San Jose area of Santa Clara county, there are 2842 properties for sale, and 51 pending transactions. Is that normal???
Thanks for your attention!
So if a 100% No-Ratio investor loan goes bad it's the underwriter's fault?
No. It's the fault of whoever signed off on guidelines allowing 100% NR investor loans, and the bozo who priced it at less than 15% with six points.
The underwriters just did what the due diligence firms did: verify that as hard as it is to believe, this met the requirements.
If you love mortgages and loans, never watch either being made.
Apologies to Bismarck.
... - Yahoo! News Photos
these guys ate to much of the CFC waste
MaxedOutMama - Hey I work in Big Pharma, I see it too - don't rock the boat or suggest there might be risk.
Regarding the occasional rants posted on this site, certainly mine, I would just say it might be a result of stunned frustration. No offense is meant.
I would consider my wife and I educated professionals, but until recently completely ignorant of finance. We didn't even know there was a boom going on. Working too hard. We finally started earning higher incomes, paying down student loan debt, etc. and started thinking about the American Dream homeownership thing. It was depressing to learn what our "real" incomes could afford.
I was curious and soon ended up here.
There is often talk about the dumb consumer of financial services not doing due diligence, but as a member of a different profession, I would say that we feel people pay for our help because they TRUST we are filling their knowledge gap. A profession usually has a professional code of ethics not to use your knowledge to actively screw people. Clearly, many in the financial industry don't feel this way. Mozillo shouldn't be getting a big golden parachute, he should be slinking away in shame, and ruined. But as it is, he has $100s of millions and we don't (well most of us anyway). Who's really the winner here. We can say shame shame tsk tsk, but our market-based society defines winners with a dollar tag and the lessons seem to be effectively transmitted to the next generation.
I think when this is all out and the consequences fully appreciated, many in the financial industry are going to be quite dismayed at the general destruction of trust. Trust a used car salesman with my retirement? No way!
Oh yes, and that whole privatise social security is going to be a dead issue for a LONG time.
I am still wrapping my head around the magnitude of this debacle.
Privatize social security. Can you imagine - someone surely would have invested this money in Super senior AAA+ mortgage backed securities. Wow - dodged a bullet there didn't we.
Fortune article via CNN/Money on the surprising tax benefits to BOA on the CFC deal (the losses of CFC could save them $1/2 Billion a year).
Taxpayers to help foot BofA's $4.1 billion Countrywide bill - Jan. 11, 2008
Fortune article via CNN/Money on the surprising tax benefits to BOA on the CFC deal (the losses of CFC could save them $1/2 Billion a year).
Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually.
Why is it good to lose $270 million so that you don't spend $100 million in taxes? Why don't you just lose no money (by not buying CFC) and pay the taxes? The way the press has phrased, this, it still looks like a net $170 million loss.
So Sebastian, with all that faith you place in the Wright B suggesting no recession in 08, would you care to make a gentleman's wager... say the price of a subscription to CR? I would say 10000 NEW shares but they don't add up to enough any more.
I recently read this speech by BB:
https://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
The man live ina dream world in which injecting more and more money solve any possible economic problem.
He is not in touch with the real world.
Walker,
if Countrywide has already incurred losses, but not recognized them for tax purposes, those paper losses could then surface after the acquisition for a tax benefit.
Those losses are presumably already included in the purchase price. Presumably, also, the tax benefit of those losses is also already included in the purchase price, but the market for failing subprime lenders is hardly a liquid one.
In any event, $100-$200M of tax benefit is a flesh wound compared to the mass battlefield casualties all around.
"I think when this is all out and the consequences fully appreciated, many in the financial industry are going to be quite dismayed at the general destruction of trust"
Seriously, are you old enough to remember Enron, WCOM, or the whole NASD collapse where analysts and brokers/fund managers were actively screwing their clients for financial gain? If you trust anyone in the financial industry with your earned money in any form you get what you deserve.
So now that we will no longer do any of these loans, how do we now get these houses into stronger hands?
We either start wages seriously higher, or we allow the crash to keep gathering speed. The fed seems to be turning the blind eye to inflation, but the crash keeps gathering speed. These tensions keep building up with no relief.
Perversely, lending criteria is going to need to be eased, rather than increased as the crash continues.
For instance, here in Phoenix, the number of houses on the market keeps growing, and waves of foreclosures are beginning to pile up. But now the mortgage paper for investment is starting to require full doc and 30% down for rates that are still higher than FHA by at least 100 basis points, and in most cases 150-200 basis points.
With this kind of pricing for loans, the market is going to have move down much further than the 20% so far. I think we could easily see at least 40% off the 2005/2006 peak, and even more drops in unpopular areas of 60%.
If this happens, the acceleration to the downside will totally freeze up national lending to the local market.
Zillowed Away will be the next credit contraction mechanism.
Tanta should enjoy the thought of lenders actually having to perform due diligence, but ultimately now we have to get these properties back into private ownership, and unfortunately either with really cheap financing or much lower prices. The government gets to take their pick.
Someday this war's gonna end...
Tanta - "I know of no sampling technique that allows me to slap a "fraud level rating" onto the whole pool."
Beverage out nostrils... priceless.
OT....
It's always interesting to go back and see where it all broke down and who is to blame and how to punish people. It doesn't do much good going forward.
However it does set the stage for an orgy of litigation. Anyone that thinks they are walking away and someone else is the bag holder might think again.
I'm not sure there will be individual loan 'putbacks' but the IB's that think they sold and are off the hook are going to be dealing with blowback for a long time.
After attempting to look at C's level 3 assets last night, I ran across a throw away item at the end of their 10Q. Namely a couple of billion reserve for Enron, Worldcom, and IPO laddering lawsuits. Now these are pretty much done, but are still hanging around in regulatory disclosures.
A major motivation for Cuomo fishing around is looking for someone deep pockets that can be made to pay. This is actually more of a risk in my opinion then most of C's level 3's. The so called unknown unknown.
Mozzilo reminds me of Nacchio.
Joseph Nacchio - Wikipedia, the free encyclopedia
As far as sample size, the more defects, the lower the needed sample size, in theory.
I get the feeling that this wasn't a normal QC type of exercise.
"Fortune article via CNN/Money on the surprising tax benefits to BOA on the CFC deal (the losses of CFC could save them $1/2 Billion a year).
Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually."
Articles like this indicate how little sense the cfc deal makes on its publicly announced merits. Some financial writer is trying to find some/any hidden rationale that makes it work. The writer also doesn't understand that $100 million rounds to zero in this deal.
I think that a lot of lending will go private, when it is possible. For example, a lady who lost her husband and father-in-law, inherited a house free and clear, that she would like to get rid of. Normally she'd hire an agent and sell it. Now, this didn't even cross her mind. Her neighbor across the street, who would like to get rid of some property, is doing a lease option with her, more or less contingent on the sale of those properties in the next year. What I think will actually happen, is he will not be able to sell his properties by next year and she will sell to him and take back a mtg, at a nice, high rate. No banks involved.
Other than the sale of free and clear property, I think, where there is no HELOC, but a first mtg with an ok rate and terms, I think the seller will sell and the Buyer will take back a 2nd mtg. Yes, I know that this violates the due-on-sale clause. But I think the lenders have more on their plate right now than to go after someone who has done this and the mtg is still current. By the time the lenders catch up with this issue, years will pass, the mtges will be paid down some more, and the Buyer can refinance. I've seen these unauthorized assumptions happen 2 or 3 times, and the lender never catches on, altho I warn the buyers that they can be foreclosed on for doing this. They are willing to take the risk.
After some time, people will figure out how to buy and sell without institutional help, and they will be the better for it too.
Prices will have to come down tremendously before this kind of activity is feasible, however.
So now that we will no longer do any of these loans, how do we now get these houses into stronger hands?
We either start wages seriously higher, or we allow the crash to keep gathering speed. The fed seems to be turning the blind eye to inflation, but the crash keeps gathering speed. These tensions keep building up with no relief.
Higher wages, particularly for those on the lower end of the ladder, are probably the first piece of the puzzle.
How to go about it without massive inflation will be tricky. Stronger unions and fewer workers(deporting illegals)? Less pay at the top?
Perversely, lending criteria is going to need to be eased, rather than increased as the crash continues.
Unlikely, I think. If anything I think we're going to see the banks look to increase the seven year limit on credit reports.
For instance, here in Phoenix, the number of houses on the market keeps growing, and waves of foreclosures are beginning to pile up. But now the mortgage paper for investment is starting to require full doc and 30% down for rates that are still higher than FHA by at least 100 basis points, and in most cases 150-200 basis points.
With this kind of pricing for loans, the market is going to have move down much further than the 20% so far. I think we could easily see at least 40% off the 2005/2006 peak, and even more drops in unpopular areas of 60%.
I'm guessing 50% off in the Valley proper, with outlying areas being completely off the map. I don't think anyone is going to live in Maricopa or Queen Creek at anything other than cratered pricing. There is too much supply in the central areas. While I wouldn't want to live in a Tempe condo conversion or tower, I'd take it in a heartbeat over commuting for an hour from QC.
Demand is going to be further shrunk by people moving in with each other: kids back to the parents, boyfriends and girlfriends, coworkers with each other.
The 20%+ down payment is going to be mandatory as well. Maybe the government should create some sort of 401K style program for people to save up for it. Maybe limit it to just I-Bonds and for the first time home buyers to limit speculation.
"Allen-
watch the common, it'll tell you where we are going in short order.
risk capital | 01.12.08 - 2:36 pm | #"
Interesting comment. I'm assuming you mean that if BAC stock doesn't tank, then they have have some sort of deal with regulators or whatever?
On "normalcy":
Yeah, but what's interesting to me is how many conversations I've been able to have with people who finally feel free to speak about their doubts about how much the neighbor is really making.
Not EVERYBODY is in debt... just the loud, flashy people are. There are plenty of people out there who don't have 10 credit cards and who don't buy a new car every 2 years. They just haven't been very vocal. Embarrassed? I don't know, but I sense a great deal of schadenfreude out there.
I think the idea that jingle-mail will become socially acceptable is talked up a lot here on CR, but maybe it's just become acceptable among the nouveau riche (or the "indebted riche" as my hairdresser probably would put it)... which does not include everyone in America.
Embarrassed? I don't know, but I sense a great deal of schadenfreude out there.
I'm not so sure if its schadenfreude or more like the class distinctions (white, blue, etc) have been ripped to shreds vertically. People who used to do 9-5 factory jobs have watched many of those sent overseas. If you want to get this economy back to a sensible footing, you need to have a widespread basic industrial base. Automation is fine, just make sure that there are people there watching the machines and pushing the buttons (as necessary) and bringing home decent paychecks. Giving some bean counter the power that says "5-cents cheaper per widget means we send it to the pacific rim" is just plain wrong. WalMart (and certain other retailers of similar ilk) encouraged this situation. I was stunned to look thru the frozen foods section at a low end grocery store and find that frozen fish is now being sent over from China. Once all the shoes fall and we get back to reality, perhaps we will be poorer, but wiser. I just hope its not too late.
how much to police officer's in the hamptons' and palm beach make?
I was stunned to look thru the frozen foods section at a low end grocery store and find that frozen fish is now being sent over from China. Once all the shoes fall and we get back to reality, perhaps we will be poorer, but wiser. I just hope its not too late.
RayOnTheFarm | 01.12.08 - 5:42 pm | #
After reading the NY Times series on pollution in China I would not buy any fish from China.
I know the industrial revolution was dirty but China is really doing a number on themselves.
Whenever we have discussions about how curbing pollution is going to kill the economy they need to interview parents of kids with cancer in polluted areas. I am from southeast Texas which has higher cancer rates than the national average. The son of a friend of the family died at 19 years of cancer (of course no way to know what really caused it, just another stat). It bankrupted the family and they had insurance.
We really like free markets in this country. An honest discussion of free markets would allow for the honest discussion of externalities. But, that would cut into profits, now wouldn't it?
I feel like I am being crushed by these so called free markets. I want to scream "hey, I am a human being, not a provider, not a consumer, not just a fungible thing!"
I think we should have a serious discussion about how much we want our lives dictated by a process that is concerned with maximizing profit and is subject to serious rigging.
I've learned enough. And as someone with a great FICO and big downpayments and positive cash flow who has been treated like crap by banks on several deals I have only one thing to say.
BRING ON THE JINGLE MAIL
You people thought you could treat quality customers like crap because they were "low margin". Well, guess what bitches, low margin is all you got now. And if you are low margin in this debt economy, you probably worked for it. So, looks like you'll be nicer to me in the future.
I may go try to get a loan some time soon just to have some fun.
You know, we can talk about lax lending all day (and the details are fascinating), but everyone knew what they were doing. It's like the damned dot-com bubble; anyone with a brain knew that the "new economy" was a farce.
Wall Street pushed toxic MBS & CDOs just like they did tech IPOs. There was never a question when the party would end, just how much money could be made before then.
dryfly: but nothing really changes
Seb: It's an article of faith for me.
Me too, which is why it's 1929 all over again.
Homes CANNOT become investment vehicles like pets.com or tulips. The irrational pricing kills the innocent bystanders.
Sorry for the liberal rant.
I don't consider that a liberal rant, I consider it common sense. There's simply no upside to overpriced housing -- none.
OTOH, we're well on our way to seeing that there's a spectacular downside.
Correction: There was never a question that the party would end, just how much money could be made before then.
There's a lot of good comments in this thread about the void in the American soul that commits fraud.
But IMHO, an equal void, in this mortgage situation and in business in general is fraud's passive cousin, denial.
For every person who actively engaged in mortgage fraud, there were two or three who saw it happening with their own eyes yet denied it was meaningful, or harmful, or systematic, or even real.
Denial runs deep in our culture, and it's perpetuated by the MSM. On this blog, there is not much denial and that's one thing that makes it a good prognosticator.
rich, "Denial runs deep in our culture, and it's perpetuated by the MSM"
Until just a month or 2 ago dubya and paulson were boldly describing our economy as "Strong" & "Robust". Now it's "Material weakness". Nothing at all changed in the last month or 2. It's just getting tougher to openly deny with a straight face. The charade is over. Now it's a matter of how officals intend to deal with it. I'm certain if they meddle we get Japan -- circa 2008-2018,
Until the people who are upside down on their mortgage finally start to realize that it is better for them (financially speaking) to stop paying their mortgage and pocket those payments until the foreclosure and eviction takes effect, we ain't seen nothing yet.
That will be the final leg down. When the masses tell the banks "here take your house back, give me some years to fix my credit and then I'll buy it back. Much much much lower of course".
And for those who say that their credit will be ruined for a long long time, I laugh. Are you kidding? This episode will go down in history as the big "credit cruch". People will be more easily forgiven for a foreclosure today than ever in the history of credit. It isn't that hard to rebuild credit. What you need though is time. And while you rebuild credit, time will be taking property values lower and lower.
It's a no brainer. Get out of a financial death trap. Save money while doing so. Continue saving money as you rent and cut expenses. Buy another house at a much cheaper price. It's a 3 to 5 year plan.
People are already catching on, but not yet in the masses as they will. The lower the prices go the more that will join the plan. It's gonna get UGLY!!!!
People will be more easily forgiven for a foreclosure today than ever in the history of credit.
I wouldn't bank on that.
Rich,speaking out cost me one job,and a lot of commission money.Many people were unwilling to pay that price and went along to get along.I prefer the choice I made and would make the same choice again.I am pigheaded and learned a long time ago that you could pay too high a price for money or approval.Oh,and I don't like jail,I do volunteer work in the jails and it REALLY NICE to walk out again.
LA Times -- Countrywide employees are nervous:
Bracing for sales, job hits - Los Angeles Times
So let's fix this problem for good. Eliminate the tax deduction for mortgage interest. This is a perverse incentive to loot the equity in one's own home. What have we heard for years - pay off those high interest credit cards with a home equity line of credit.
The stupid banks loaned money at low rates against "equity" not realizing it could all go "poof". They had no clue they were making unsecured loans at low rates. That was there mistake - but honestly, why should they care - they don't own the loan anymore. Those tasked with doing due diligence could care less if the borrower could pay.
While we're at it, let's just ban home equity loans all together. If an owner wants to pull cash out of the house, make them sell it.
OT, but interesting that Haloscan is no longer showing an online user count.
tj & the bear
I think that haloscan may act as if it drank the bongwater when more than 300 people log in on a weekend....
Eliminate the tax deduction for mortgage interest.
Here in California, 6% interest on a $417K mortgage is ~$23K, and given the 37% top marginal rate most people pay that's over $700/mo in extra buying power.
All things being equal, removing the various tax deductions would knock the $417K pricepoint down to $290K (both have $2250/mo in carrying costs).
The reality of the situation is that "pride of ownership" was a concept that made sense to buyers of securities. And a whole bunch of other rubes, dupes, scoundrels, and pigs. New Century might as well have called them "Ownership Society Loans" and made it a product rather than an exception. Probably they were working on that very thing (with a lot of $350 flip charts) when BK interrupted the meetings.
What a fine post, Tanta.
The Ownership Society turns out really to have been the Lose-Your-Shirt Society. Maybe it will yet be the Crash-The-Economy Society.
But you couldn't tell that to Americans, fed by cable TV, mesmerized by so many cheap prophets. To lots of ears, home ATMs speak louder than words.
I'm reminded of Gunter Grass' Tin Drum, where Oskar speaks of Germans falling under the spell of Nazism: "An entire credulous nation believed, there's faith for you, in Santa Claus. But Santa Claus was really the gasman."
Now it is our turn, up to our necks in catastrophic debt and a failed war of aggression, to recognize credulity in ourselves. We should build a monument in DC, just down from the Vietnam memorial. Call it the Ownership Society. I propose a leaning, wobbly McMansion facade, held up in the back by statues of Greenspan, the Tan Man, and the heads of Merrill, BS, et al, cavorting like so many Scrooge McDucks on piles of loot.
HC,
I was with you on the memorial until you started running down Scrooge McDuck!
HC- "I propose a leaning, wobbly McMansion facade, held up in the back by statues of Greenspan, the Tan Man, and the heads of Merrill, BS, et al, cavorting like so many Scrooge McDucks on piles of loot."
Conjure likes that image. He thinks it captures the moment.
Great post Tanta. My question for you or anyone else that can answer is how far in court will this go? It seems like New Century Financial started building their legal team shortly after their crash went down in early 2007. It seems like there a few sacrificial lamb companies like New Century and Countrywide that are the lightning bolt of the entire industry. What of NovaStar, American Home Mortgage, and on and on?
From what you point out, the due diligence was cost savings on Wall Street. I'm not sure why there isn't any cases going after the i-banks. Seems like they provided the dirt for the dogs to roll in.
In Texas, you couldn't get a HELOC, unless it was for home improvement. I think this is still true.
Are Texans any better off than the rest of us, as far as being saddled in debt.
Laywerliz,
According to TxChick57 on HBB the rules for MEW were changed just in time for Texans to screw themselves, too.
p.s.: She's a lawyer (by education), too.
The new shell game: the pea is liability, the shells are your bank, mortgage broker, securities due diligence person, 401k provider, government regulator, and so forth.
Keep watching the table as they move around. Ignore the fat man sneaking out the back of the tent ...
"I'd be handed pools to look at that had AUS-reduced docs, SIVAs, SISAs, No Ratios, and NINAs ... Trying to get respectable results with a mere 30% sampling on that."
Ah, but the task at hand was not calculating an accurate payback/probability curve. It was determining, with 95% confidence, whether a supposedly-AAA pool contained any toxic notes. That task can be accomplished with surprisingly sparse sampling and cursory review.
Nearly all of the current MBS implosions could have been predicted by pulling a dozen mortgage files, putting them in front of an accountant, and seeing if they pass the giggle test. "$750k for a house in Compton? Computer says the purchaser's Tercel was repoed last year? Heh, heh, heh."
As I commented on Econbrowser, just think what 0.5 basis points on a $500M would have paid for. $25k buys a lot of giggle test. The only problem is finding an accountant who can stand the airplane and hotel lifestyle.
Yet the managers of retirement funds and state gov't rainy day funds did not lift a finger. Nothing can protect people who want to buy the Brooklyn Bridge.
Yal,
Thanks for posting the link to BB's speech. Each time I read it I notice a new inanity.
BB says, "there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation."
And then goes on to list one such measure:
"Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails."
The inanity: unlike in 2001, inflation is not low (in fact its high and accelerating), and the fundamentals of the economy are not "suddenly" deteriorating -- in fact you could say the economy's been taking its own sweet time to slide into recession.
Why bother to lay out two conditions for steep cuts if you then chuck them out the window the minute things get rough?
I hope the bond market continues to believe this emperor is clothed. The last thing this economy needs is a spike in long term interest rates.
Walker:
"Articles like that drive home just how little I understand the workings of tax law. The article says that they can deduct $270 million annually from CFC's losses to save $100 million in taxes annually."
It works on the small scale too - individual tax payers can write off $3k/yr in investment losses. There are probably very good principles of risk management that underly setting up these kinds of arrangements. True conservatives, of course, would be strongly against this kind of subsidy - people should take their hopes, successes, and lumps straight up.
The thing that might make this rational from an economic viewpoint is that they're bidding on an event with a known outcome. These losses have already been booked. The buyers don't have to "take a $270M loss to make $100M". They're effectively bidding on the pack of failed loans, which they can use to offset future profits.
I guess Eric already said this.
"It's one thing to ask policy holders to pay premiums based on claims, but it's another thing to increase them due to mismanagement of assets," he said."
Citizens at eye of storm over state investment pool -- South Florida Sun-Sentinel.com
"It's one thing to ask policy holders to pay premiums based on claims, but it's another thing to increase them due to mismanagement of assets," he said."
Citizens at eye of storm over state investment pool -- South Florida Sun-Sentinel.com
Paul your comment ( Paul | 01.12.08 - 3:40 pm | #) about how lucky we were in that social security was not privatized, is more right than many may know.
I suspect that many on the street and some in the gov had an inkling about where this mess was headed and they hoped social security accounts could be left holding at least some of the bag.
I feel like I am being crushed by these so called free markets. I want to scream "hey, I am a human being, not a provider, not a consumer, not just a fungible thing!"
I think we should have a serious discussion about how much we want our lives dictated by a process that is concerned with maximizing profit and is subject to serious rigging.
Red Pill | 01.12.08 - 6:06 pm | #
Debt created fiat currency demands continous expontential growth or you have ponzi like collapse. That is why the fed has to fight deflation at all costs. The treadmill has to always be on a greater speed. Maybe the current model is broken instead of the free market.It worked great in the 20th century but might not for the 21st.
The tax write-off: This is the same sort of shenanigans that a lot of high-income individuals did back in the '80s--set up some form of S-corp to generate paper paper losses to offset income. (The IRS didn't like that, as you can expect.)
Here, BoA doesn't even have to set up their own corporation--just use only lying around.
(And yeah, there must be some other reason why this whole deal is going down--I bet promised bail-outs in the future from the Fed. The tax stuff is just a little extra lagniappe.)
tg said, "Debt created fiat currency demands continuous exponential growth or you have ponzi like collapse"
yes...debt demands interest, and investment demands dividends and maybe even capital appreciation!
Ultimately an unsustainable system if confined to a small space, or one continent, or one planet.
one reason for wars of conquest and the acquisition of colonies. Iraq=oil
the alternative is something called sustainability
this is not to say that one can not have growth and progress and return on investment without wars and unsustainable econ policies....but many citizens and leaders have chosen short cuts.
Basically, there was just too much fraud. I know of no sampling technique that allows me to slap a "fraud level rating" onto the whole pool. I don't know anyone else who does, either (although some claim to).
Tanta
With certain probably unrealistic assumptions, I would be such a claimant. The main thing you need is the ability to determine whether an arbitrarily chosen suspect is fraudulent. If you have a complete list of the potential frauds, randomly pick a few hundred of them for the assumed determination. I'm too lazy to look up the relevant formulas, but your chance that the fraction of fraud in your sample is within .05 of the fraction of fraud in the whole pool is pretty good.
"yes...debt demands interest, and investment demands dividends and maybe even capital appreciation!
Ultimately an unsustainable system if confined to a small space, or one continent, or one planet."
It is intriguing that Islam forbids interest. I am not saying that is the cause for the current conflict. Forbiddng interest under Islam and the seventh day of rest under Judaism leaves me some small consolation that there truly might be a god. I don't know if we are smart enough to come up with those by ourselves.
Hope I don't get carted off to Guantanamo in violation of some Homeland security rule. The very words "Homeland security" scare the bejeesus out of me. What Orwelllian fascist nightmare pundit dreamed up those words.
It's interesting that the denial over national mortgage fraud was contemporaneous with the denial over the Iraq war.
Now, most Americans are waking up to mortgage fraud but con men like McCain keep trying to convince people that the Iraq war is good and successful. To perpetuate McCain's fraud, you need to be oblivious to the fact that our President and our military have probably shattered the Iraqi way of life for generations. You have to be blind and deaf to all the torture and suffering we have inflicted on Iraqi civilians, families and children -- innocents all.
If you want to see a great documentary on the subject, told by returning GIs, get "The Ground Truth."
Privatize social security. Can you imagine - someone surely would have invested this money in Super senior AAA+ mortgage backed securities. Wow - dodged a bullet there didn't we.
Paul | 01.12.08 - 3:40 pm | #
That is a very sobering comment and one that I hadn't thought of yet. Funny, isn't it, that none of the experts on CNBC or the Murdoch Street Journal have mentioned that? I wonder how the WSJ would have defended that if it had occured. Never mind, I don't want to know.
Unfortunately, many state, county, and city pension funds or other plans will discover they own it. The people lobbying to privatize and manage social security plans were the same ones selling those AAA+ pieces of crap too. Talk about foxes guarding the hen house.
The problem is nobody cares if a loan is fraudulent. Nobody. In theory there should be some consequences but come on. Nobody bothers to rob banks with guns anymore. Heck nobody seeks to confront other countries with guns anymore either. Alright sociopaths but cut me little slack here. We'd have little or no trade deficit with China if they actually paid for the technology transfers, illegal software and intellectual content they acquire through non-financial means. Okay enough global-pol. Finding 'fraud' is easy but like I said all anybody currently cares about isn't fraud but performance. As long as loans performed there was no problem. Right? The models didn't slap a "fraud level rating" onto the whole pool because that answer was irrelevant to the issue of performance. The only reason we are talking about fraud now is because some bag holders are under the idea that assigning blame will improve their specific performance.
Hope I don't get carted off to Guantanamo in violation of some Homeland security rule. The very words "Homeland security" scare the bejeesus out of me. What Orwelllian fascist nightmare pundit dreamed up those words.
tg | 01.12.08 - 11:21 pm | #
Yes, be careful what you say or write or you may find yourself on the waterboard or on the receiving end of a Giuliani nightstick.
"Yes, be careful what you say or write or you may find yourself...on the receiving end of a Giuliani nightstick."
The Giuliani nightstick may be a draw in November.
So there was fraud?
And it was barely being looked for?
And the security was that someone did a home improvement that no one needed or could pay for?
Going more in hock to showed the loan was
good?
Denzel,I believe it was a plumbers helper.Horrifying stuff,as is what our country is doing to "fight terrorism".And instead of doing what it is "supposed to do" it makes things worse.
The point about Social Security was that people wouldn't (or didn't) do it on their own. We're talking about the entire population here, just how above average is everybody? What do you do with those who lost it all? Let them starve? Heck, if you're willing to do that, let them starve in the first place.
And as far as Social Security not being a great investment- well, it is a quasi pyramid Ponzi thing, but I would note that so far everyone looks like they are getting back far more than they've contributed.
Billy Hill - the problem with sampling mortgage pools for fraud is that there is not an even distribution. You could of course argue that NINA loans are all fraudulent, but that makes due diligence a laugh.
You write If you have a complete list of the potential frauds, randomly pick a few hundred of them for the assumed determination.
Okay, but traditionally, the frauds are associated with particular brokers, appraisers, etc, and you don't have that data. So Tanta's 30% seems far more correct to me. Otherwise you have to do it iteratively with at least a 15% sample. A 10% sample would be 100 loans out of a thousand. Let's suppose that there are 6 brokers who have contributed an average of 20 loans a piece to the pool (120 or 12% of the pool), of which an average of 15 (90 or 9% of the pool) out of each broker's contribution are fraudulent.
Pulling a random sample of 100 is highly likely to pick up 7-9 of those loans, but those particular brokers are probably good enough to make it look plausible on its face. You may flag 2 or 3 of them, but that would give you a very false idea of the whole pool.
Unless you go back and then sample all the loans by the brokers, appraisers, etc in the pool who appeared suspicious, you are unlikely to find the true nature of the pool.
As long as each broker throws in some good ones, and makes the bad ones look plausible, a 10% sample is not viable.
Actually lately I have fooled around with using epidemiological statistical techniques for this type of modelling and sampling. open source epidemiologic stats.
As in disease, successful mortgage loand fraud spreads. It is associated with certain individuals, but those individuals are likely to pass the contagion along to their associates. And once they have reached a certain proportion, the general population of loans (think fraudulent appraisals contaminating the whole comp pool) are likely to become diseased.
Disease and this type of fraud has a clustered nature.
MOM: we're probably in basic agreement. I was assuming that, for anything in the pool, it would be feasible to determine whether or not it was fraudulent. In the real world, the bad guys can probably make this more difficult than the amount of resources the good guys are willing to invest in the examination process.
However, suppose a bad guy has 100 frauds, and the good guy is going to be randomly picking 2 of them. Does the bad guy have to do his conealment activities on all 100 frauds in advance, or can he wait and only go into action when he knows which 2 will be scrutinized?
No, you have to do it up front. But in fact people got expert at it. They used things like Salary.com to see what incomes would not bring up a red flag, and added stuff like those famous cleaning businesses bringing in 2-3k a month. Also the collusion with appraisers is very hard to pick up without appraisal reviews, and once you let enough of them get by, you contaminate the whole pool.
It really has to be done at point of origination to work very well.
MaxedOutMama: It's a pleasure to be the last person standing with you in this thread.
I think (hope) the practical situation is this: there are a bunch (several thousand) transactions which may or may not be fraudulent. Somebody has the motivation and resources to try to estimate how many actually are frauds.
The choice is between "standard" examinations of a large number (30%?) of transactions and a smaller number of costly, in-depth examinations.
My "ivory tower" point is that, if the in-depth investigation was certain to detect fraud if present, then 500 randomly chosen examinations give you a very good chance of estimating the fraction of frauds in the whole pool within 10% (e.g, if your sample finds 35% frauds, then the pool probably has between 25 and 45 percent).
Back in the real world, I don't know whether or by how much an "in-depth" examination increases the fraud detection probability compared to a "standard" one.
For added insight into the operations of fraudsters and how collusion once worked work back in the day of no doc, no income, no oversight and no appraisal reviews (paid by the lender putting up the money), just
Google Rachel Dollar
for her blog in current investigations and arrests as the FBI
makes a necessary but surely incomplete attempt to put the bad guys and girls in prison.
As MOM notes, it takes quite a few to tango consecutive fraudulent mortgage
activities in an overheated market.
And I will not be surprised when fraudsters also figure out how to scam the upside-dwon segment of the population, hey, they are already doing it.
The problem is that no one was prepared to do an "in-depth" examination. How can a pool full of stated income loans withstand that?
This stuff can be very hard to detect, and no, I don't think a 10% sample will get it.
I have not just a theoretical but a practical basis for my comments. The type of methodology you are describing is what is used in selecting a lot of regulatory examination samples, and believe me, they miss a lot of what they are supposed to be looking for. I am talking 2, 3 exams in a row that don't pick up rather obvious errors.
These things are just not spread through the universe evenly at all.