I had an email exchange in 2005/2006 with a member of the NY FED, because of my digust with the lack of oversight and the excessively low rates. Among many other things.
What was my answer back - "this boom was built on fundamentals, you have no idea what you are talking about..." This was an email exchange with my name and business contacts over a three day period. I think these guys are truly surprised by this mess. They had no idea what was really going on with these mortgages until a few months ago.
Based on "the uncertainty of sales," Ruby Tuesday said it may become in violation of its debt covenants over the next year.
"We are not currently in default but, because of accounting rules, we have reclassified much of our long-term debt as current," the company said in a statement. "We will be working with our lenders to obtain a modification of covenants for future periods and expect a favorable outcome."
"South Beach, Fla. -- The Commercial Mortgage Securities Association held its annual Investors Conference this week in South Beach, Fla., at a particularly precarious moment. Credit markets remain locked up, which has turned the previous deluge of CMBS issuance into a drizzle. As a result, there are deeply dampened expectations for CMBS issuance for 2008. Meanwhile, talk of which--if any--commercial real estate sector might go the way of the residential market clearly had some attendees worried.
The mood was in stark contrast to one year ago. The CMBS industry closed 2006 with $297.8 billion in CMBS issuance ($202.6 billion in the U.S.) and $39.8 billion in CDO issuance, according to Commercial Mortgage Alert. Expectations were that CMBS issuance in 2007 would approach $363 billion, including $245 billion in the U.S. (a figure calculated by averaging the predictions of 14 analysts and experts)."
No mention of developers who helped inflate prices by over building the number of large homes, deliberately ignoring smaller more affordable units. The developers over built with the help of local banks and politicians who sat back and did too little too rein in the drunken consumption.
crispy&cole, it's hard to believe they really were that clueless. The problems have seemed obvious for several years. I remember when I first heard about DAPs - and I thought uh, isn't that a scam? And then liar loans, etc. ... wow, that seems like ages ago.
But you should see the email exchange I had with Chris Thornberg (UCLA then) back in '05. He was arguing prices would go flat - but not down. I very much disagreed. So even some of the bears were not bearish enough - maybe not even me!
I already weighed in on this. Perhaps my take is a bit harsh on the lenders but here is what i said:
Poole's list of five key mistakes:
Borrowers took on mortgages they could not afford.
Real mistake: Lenders did not vet borrowers.
Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.
Real mistake: Lenders did not vet borrowers.
Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."
Real mistake: Lenders did not lend responsibly.
Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell.
Real mistake: Lenders eschewed oversight.
Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.
Real mistake: Lenders did not reveal material information pertaining to these securities.
Poole is trying too hard to spread the blame. I blame the lenders.
The problem with this "mistake" is that many of these borrowers acted rationally. They put little or no money down and basically obtained free put and call options on a house (with only their credit rating at risk).
I see the call options bit, but could you explain the put options bit? Was there a way for the borrowers to make lots of money if their home prices plummeted?
I suspect that, when studies are done with cooler reflection, the causes of the swing in house prices will be seen as less a consequence of monetary policy and more a result of the emotions of excessive optimism followed by fear experienced every so often in the marketplace through the ages.
That's like saying "the problem is that people are people".
We know that. And we know that speculative manias are a recurrent problem throughout history. Jeremy Grantham claimed according to his research that, in effect, whenever a bubble could form a bubble did form. Presumably human nature is such that people will form bubbles whenever they can.
I suspect this is something Greenspan knew, and if he didn't, it's something he should have known.
I think the Fed should probably have acted to suppress the formation of bubbles, but I also wouldn't object so much if their attitude had been "let people have their bubble and learn from the consequences". Where I really fault the Fed is for repeatedly denying the existence of bubbles (even when Greenspan reportedly told private acquaintances he thought there was one) and then attempting to cure the hangover with more bubbles.
It seems to me given our knowledge of history, psychology, and economics, the Fed acted in such a way to almost guarantee the worst possible outcome.
Remember, Greenspan was warned of this by Robert Shiller in 1996. He can't say he didn't know any better.
anonymous, with the put, the homeowner just mails the keys to the bank. Say they bought for $400K, and the price falls to $250K, they don't lose $150K - they just exercise their put option and mail in the keys.
BTW, I hope everyone enjoys the Jazz concert at the bottom of the posts: "Bennie and the Fed". That guy is very good.
Poole dismisses greed to easily, people were shortsighted because they focussed on immediate opportunities to profit, most admit to realizing that the party could not last but felt driven to get as much as possible while the getting was good. While I don't hold investors blameless, I think it is a bit much to expect that the average investor was in much of position to second-guess the ratings agencies on very opaque and complex instruments. If AAA doesn't really mean low risk, and if you have to check in to the securities yourself, what is the point of ratings?
Finally I don't think that people so much misunderstood their 2/28's but believed them to be short term loans that would allow them to refinance into prime loans after "proving" themselves and repairing credit for two years. The lenders/brokers believed this too and no intended for the those adjusted rates to be meaningful, which takes us back to greed and short-sightedness especially when prepayment penalties were thrown in. I think it was sort of planned obsolencse for mortgages meant to keep the refi fee gravy train running on.
If the PHeD couldn't understand the fragmented oversite problem or lack of, how did they expect some borrower with a high school education to understand a 2" pile of loan documents. DUH.
My view is that the run-up of home prices has been driven by the fundamentals, says Dick Peach, an economist with the Federal Reserve Bank of New York. He figures well have a soft landing.
Two and four seem to be pretty solid. Three is a laugh, VPs don't become MDs by safeguarding the firms reputation. They get there by making boku bucks. Heck, it's not like Ibakers have that great of a reputation even in the best of times. Five kind of pisses me off. Even though investors should do their own homework on products, that AAA rating is supposed to mean something. Maybe not the ultimate word in the quality of the security, but ever since Friday became 'the day we see how many bonds go from AAA to junk without passing through the space in between' day (kind of a quantum teleportation financial effect) that rating has become worthless.
anonymous, with the put, the homeowner just mails the keys to the bank. Say they bought for $400K, and the price falls to $250K, they don't lose $150K - they just exercise their put option and mail in the keys.
CR,
Well.. really, it's more like buying a call and selling a put on the house... The no money down version would mean that the money made from the put went into purchasing the call. AND there were no margin requirements!
They technically owe the money if the price drops.. but.. you can't make them pay.
CR said: "...The problem with this "mistake" is that many of these borrowers acted rationally. They put little or no money down and basically obtained free put and call options on a house (with only their credit rating at risk). Was this really a mistake for these borrowers?..."
I would argue that these people did not act rationally. I acted rationally when I re-financed my 5/1 adjustable 40-year loan at 7 7/8% into a 30-year fixed-rate at 5.75%, even though ARMs could be had below 4% at the time. I recognized that long-term fixed mortgage rates below 6% were very favorable (for homeowners) and not available very often.
This same rational behavior also had a knock-on positive effect on my credit rating, allowing me to take the money saved on lower monthly mortgage payments and pay down other consumer debt (or pay cash for things I would otherwise have had to buy on credit).
So we're saying now it's "rational" to perfect a fraud, in collusion with brokers and loan officers, by overstating one's income in a loan application, and that investors had some way of readily ascertaining the monkeyshines that went on here?
CR, I wanted to thank you for the note you left at the bottom of the post, I needed the wry laugh I got out of it.
CR - "If we are relearning old lessons, perhaps we should remember that some oversight is good, and ideologues are dangerous to our economic health."
Ideologues indeed. For an era of relative calm and prosperity the last 10 to 20 years has seen more that it's share of ideologues on all fronts. I'm heartily sick of them personally.
Back on topic, Paul Krugman has a column on the ideologues that have run the Federal Reserve recently and Greenspan in particular.
Blindly Into the Bubble
By PAUL KRUGMAN
Published: December 21, 2007
"...
So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.
Fed shrugged as subprime crisis spread, was the headline on a New York Times report on the failure of regulators to regulate. This may have been a discreet dig at Mr. Greenspans history as a disciple of Ayn Rand, the high priestess of unfettered capitalism known for her novel Atlas Shrugged.
In a 1963 essay for Ms. Rands newsletter, Mr. Greenspan dismissed as a collectivist myth the idea that businessmen, left to their own devices, would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. On the contrary, he declared, it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.
Its no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspans world, predatory lending like attempts to sell consumers poison toys and tainted seafood just doesnt happen.
..."
There's another article on Greenspan's idealist's leanings from Bloomberg.
So the speculators who lied about their income and lied about their intent to occupy and took out mortgages to buy properties in an attempt to get rich for doing nothing... They bear none of the blame?
It is incredible that Poole mentions home price appreciation exactly once, and only as something that kept foreclosures low and thus "fooled" the ratings agency models. What actually happened here was quite simple and quite classic... Prices went up. Lots of people saw the prices going up. Then they lied/cheated/stole their way to make the most leveraged bets they could. (What do you call taking out a 2/28 interest-only ARM whose payment you can barely afford in the first place? I call it a leveraged bet on house prices.)
Similar bets were made by "homeowners" and investors and Wall Street banks; they are all responsible; and they are all going to pay. And any attempt to shift blame away from any of them -- including the borrowers -- pisses me off.
Unfortunately the tendency of most overseers (i.e. government) goes well beyond simple oversight towards outright control. Heard about the State of California proposing to control our thermostats?
So the speculators who lied about their income and lied about their intent to occupy and took out mortgages to buy properties in an attempt to get rich for doing nothing... They bear none of the blame?
Sure they do. Prove to me there are a lot of those. My guess - as Tanta posted a few months ago - most 'liar loans' were really just 'delusional debt'... they didn't really ask, I didn't tell really tell... and besides that income is sorta close to what I make... er could next year.
And the fricking broker says 'Ya baby!'...
This system - like all others always needed a 'trust but verify' module... the verify part was truncated.
Allowing a borrower to "qualify" with absolutely no proof of anything, except that someone is going to take possession of it, is about as sure a guarantee of fraud as we can get. This impacts every other reason and the resultant pyramid of fraud is predictable. Damn straight people are going to take advantage. Hell, I'll loan them your money all day long if I can get a cut and at the end of the day close up my mortgage shop. Will I put them into an unsuitable mortgage? Why not, it's your money.
Bank's reputation? Who cares? People figure the FDIC is the guarantor. Besides the banks have long complained about having to deal with their depositors, they found a way to lend investor's money with high grade off balance sheet companies.
With the giddy atmosphere of rising wealth of course appraisals will soar, and the next month the outlandish appraisal is right in line with the market, wheee!
Well, every currently unoccupied house with a mortgage is owned by one.
My guess - as Tanta posted a few months ago - most 'liar loans' were really just 'delusional debt'... they didn't really ask, I didn't tell really tell... and besides that income is sorta close to what I make... er could next year.
Great! And you are on the hook for precisely the amount you signed up for. And if you cannot pay it and the collateral is junk, then the lender is on the hook. It's a beautiful thing.
When someone says "I didn't understand the terms of my mortgage", my response is (a) "I don't believe you" and (b) "tough". Unless they can prove actual fraud, of course.
An awful lot of people participated in this Ponzi scheme, including borrowers, lenders, and investors. I am of the opinion that 99.999% of them knew exactly what they were doing. No sympathy. (Hopelessly wishful thinking: No bail-out.)
Ooops hit publish too soon.
Not everybody will be a party to fraud, but their expectations will be colored by it and they will join the game unknowingly.
And profession investors making these mistakes? How about someone who is in charge of the financial well-being of the country being surprised by this? Mr Poole, in retrospect, don't you think you should have been alarmed sooner?
Again-- the first time anyone of you heard of a NINJA loan, didn't your head spin?
No - not at all - you race to get those suckers out and 'placed' (in good locations)... if you don't and you have a successful model then you'll face a gajillion clones before you are even done rolling out... now if they had reversed the ratio (say had 100 stores and 500 franchisees) THEN you could make the case they were numskulls with the long term debt... in that case their franchisees should be the ones carrying the debt! (That's why you franchise).
And isn't a successful store supposed to break even, including leasehold improvements, in year 2?
Sure but that means the store supports the payments on the debt load not that the debt goes away over-night... if it were that easy we'd all work at or run restaurants... last I looked only half of us do....
Well, every currently unoccupied house with a mortgage is owned by one.
No - I personally know more than a few that are not.
For example my late father's house. And the house across the street where the owners built in N Minnesoat (very cheap) before they sold their old home.
And all the builder homes that didn't sell - those were specs but no fraud.
The more I think the more houses I personally know where NO misstatement of income was required.
But I hear the opposite anecdotals of rampant mortgage fraud from folks like you - I don't know any of those. Never seen one. I believe they are out there but are dwarfed by the numbers of idjiots who believed the 'ownership' myth... they were fools but not necessarily liars.
For the life of me I can't understand what this debate is about. Krugman an AC are right on the money: it was a dramatic failure of monetary policy (too loose) and regulatory responsibility (even looser) engendered by this administration's moronic conservative pathology. Borrowers, who had negative return on savings overinvested in what had been a sure thing for their memory spans. Brokers, Banks, and Investment Banks did exactly what they were incented to do: keep the throughput going. If countrywide didn't do it, Wamu would. I'll blame the investors and Credit agencies for stupidity and laziness, but with liquidity washing around the global system looking for yield and a place to invest, they were going to be served and investment in American Mortgages wasn't totally illogical. Of these players, the ratings agencies were perhaps the most culpable (they should have remembered their long term franchise value) and have been and will continue to be severely punished for it. The Greenspan Bush regime however bears ultimate and clear responsibility.
On the other subject, thanks bloggers. I just shorted 4 restaurant chains today and will short more tomorrow!
Perhaps someone will be kind enough to explain the precise statutory or regulatory authorization for the Fed to control mortgage brokers, who seem central to all these suspect transactions. And what rationalization can be offered to excuse the obliviousness of the state regulatory authorities, with respect to both brokers and outfits like New Century?
Please don't tell me Ruby Tuesday is having problems. If Countrywide goes BK, that's one thing. But the Shnapster simply must have access to their triple-prime burgers.
one thing is clear: the PEOPLE in the system operated rationally -- make as much money as possible while the getting was good. It was the system regulators and overseers that failed.
Rich, what "me" said; and you're being harsh. Back in the regrettable day, bankrolling moderately renowned chain restaurants seemed as solid a business proposition as any.
In honesty's sake, I've never been to Ruby Tuesday (did they pay royalties to The Stones?); but have too often dined in JAM-PACKED Red Lobsters and Outback Steakhouses. In a tough spot near the end of the last recession ('02) I waited tables at a Lone Star Steakhouse in Jersey where traffic approached a riot every Saturday night.
The cash-flow on these joints is tremendous in good times. Blowing $100 on dinner for mom, dad and the two varmints was no less a factor in the middle-class HELOC than any granite countertop or SUV, and somewhere a latter day Tom Wolfe or F. Scott is doubtless writing about it!
We can debate the impact of low policy interest rates, but a clear failure was the lack of oversight
low interest rates -- and the 2001-2003 tax cuts, let not forget those -- got the appreciation ball rolling nationally. Then the abandonment of sane lending practices provided the acceleration, until the ball hit the wall in 2006.
When the Fed told you the market was based on fundamentals, did you suggest that they Google "Median Income, Anytown USA"? Followed by "Median Home Price, Anytown, USA"?
When you look at restaurant economics, you see the peril of a Fed that slashes rates to stimulate growth in this environment.
Food and utility costs of restaurants are soaring.
But customers are dropping and spending less.
There's so much overcapacity and competition that chains can't raise prices to pass through costs.
Fed cuts will drive food and utility costs even higher, but it won't change overcapacity much. Over time, maybe they will bring more customers back, but over the short term...MORE PAIN.
Since Poole says he is addressing 'the current situation', I'd think he would look beyond 'lending' mistakes at the underlying cause of the situation, which was the Fed's mistake of holding rates too low too long. Another problem I have not seen addressed anywhere is our system of appraising properties based on comps. With that system, when a bubble begins the whole appraisal system goes right along with it, happy as a clam.
Even if the Fed believed there was a bubble, I think it is naive to think they would tell you this in an email when they are stating the opposite publicly.
The establishement`s most coveted rule is loyalty, mostly expressed as team player.
Perhaps someone will be kind enough to explain the precise statutory or regulatory authorization for the Fed to control mortgage brokers, who seem central to all these suspect transactions.
Nil, don't hang around these parts, do ya? For your inspection, a copy of the HOEPA regulation the Federal Reserve was responsible for, but ignored: http://www.dallasfed.org/ca/epersp/2002/02-02.pdf
Please don't tell me Ruby Tuesday is having problems. If Countrywide goes BK, that's one thing. But the Shnapster simply must have access to their triple-prime burgers.
Besides that, their salad bar alone is enough to keep dryfly 'regular' while out on the road... you really don't want to read the details.
"But I hear the opposite anecdotals of rampant mortgage fraud from folks like you - I don't know any of those. Never seen one. I believe they are out there but are dwarfed by the numbers of idjiots who believed the 'ownership' myth... they were fools but not necessarily liars."
Ever been to SoCal??? Orange County or San Diego???
Oh yes, there was fraud...and lots of it here in Clownifornia.....
One thing that is missing is the fact that there is shortage of available land in high demand Coastal areas like LA, SF, NY, FL etc. where the combination of wealthy people, and free money and loose lending standards (which may not have caused large bubbles elsewhere) caused them in these desireable areas. Without vacant land, either you pay high prices for tear-downs or you remodel in order to obtain a modern home, and flipping becomes uncontrolable.
These bubble areas and the frenzy involved then fueled bubbles elsewhere, like Bakersfield and Sacramanto, where vacant land was available and was initially cheaper than immediately outside high bubble areas where bubbles sprawled.
Thus, IMO, in order to prevent this from occurring, there needed to be an understanding of land development and, more importantly, that the FED's "one-size-fits-all" monetary policy for all areas does not work since it will blow large bubbles in desireable areas every time.
How the FED does not discuss this is beyond belief.
The O C and San Diego-land, I hate to say it, but isn't that a Republican neighborhood? Lots of middle-class people trying to stay even with the Joneses.
I don't know what you already know about this topic so if you are already cognizant of the following I apologize.
Residential appraisals are current snapshots of estimated value at a point in time; being based on comps
does mean appraised values ride along on the roller coaster. If the ratios of prices to rents or median prices to median income were the method and means used to define the maximum loan amount, the real property market would generally be on a very slow trend line. If people could pay more than median area (say, census tract area) price but it would have to be with their own money, not borrowed, this would quickly and painfully bring prices into line and a whole lot of businesses and incomes to a halt.
Fannie and Freddie have rules in place for vetting the 40% of mortgage originations they purchase; the other 60% of MBS buyers may not have such or as good of precautions and no doubt haven't in many cases done the due diligence they should have. Of course Fannie and Freddie stepped into the shit also so rules and guidelines aren't foolproof.
Regs and licenses for MB's came rather late in the recent game in most states. Most enforcement has been by the FBI for RICO fraud rather than by states acting for defrauded lenders, borrowers, etc.
My opinion is, as myself and others have noted before in this blog, that the commissioned sales people acting as loan officers did "get while the getting was good"
and many are now unemployed or changing jobs or just as likely are reinventing themselves as "reverse mortgage specialists" to help Grampa and Grandma out of their equity too.
There was and still is a pervasiveness in the mortgage business of making the deal work, get the commission check, and who cares if the appraisal got tweaked, the applicant's income got boosted or the
collateral is in an overbuilt area.
Because the deal still has to work to get paid and that's been more important than ethics. You bet there were and still are licensed appraisers who enabled the brokers and thereby got plenty of repeat number hitting work. I don't like it any better than you do. Appraisers are licensed and regulated by law in all states, this does not mean the laws don't get ignored when there is money involved. Presently there 's a true oversupply of unethical appraisers out there, not implying that a small supply of unethical appraisers is OK.
Tanta has excellent discussions of this in her mortgage portion of this blog. You've no doubt seen these.
Other:
I think you can add to the gross income shrinkage list businesses that depend on: first run movie theatres, vanity license plates, high end retail goods including CD music and hardcover books, optional vacations involving coach class airline travel, expensive imported fruits and vegetables, vanity vehicles, tattoos and body art, micro brew beer at $14 a large pitcher, high end custom construction in most major metro areas
C Mack,
In my experience, appraisers generally work from online connections to a national network of listed 'comps' and feed back their local numbers into that system. I believe that appraisals ought to be tied more to replacement cost or construction value... any premium above that should not be advanced by a lender because it is speculative value. Let the lender cover the 'hard' value, let buyers speculate or pay 'location' premiums from other funds.
"While I don't hold investors blameless, I think it is a bit much to expect that the average investor was in much of position to second-guess the ratings agencies on very opaque and complex instruments. If AAA doesn't really mean low risk, and if you have to check in to the securities yourself, what is the point of ratings? "
Look, even if the ratings had held up better than they had (and if you don't expect mortgage backed bonds to be downgraded at all during a severe housing crash, you're smoking crack), investors still would have been stupid not to look beyond the rating. Mortgage backed securities have complex cashflows, multiple counterparties and multiple risk factors. If you can't deal with that, don't buy them. They're not Treasury bonds. Even if a particular bond could be "proven" to be as safe from default as a vanilla AAA bond, you'd still be exposed to mark to market fluctuations compared to other triple-A bonds based on a variety of micro and macro events. It's your responsibility as an investor to know what those are and keep track of them. It's what you're paid to do while you're looking after other people's money.
There's a lot of blame to go around in this fiasco, but careless investors don't get enough of it. There is plenty of disclosure on most of these products, but a large proportion of the investor base never read it. As I've said before, I've heard many stories of ABCP investors buying paper without knowing whether or not it had full liquidity support or buying SIV paper without realising that they were exposed to the market value of the underlying assets. These aren't obscure facts. They're pretty much the defining characteristics of the products, and they're certainly the thing you should be paying most attention to as an investor.
Except for cases where there was outright fraud or deception on the part of borrowers, lenders, arrangers or salesmen, I'd say investors have the largest responsibility of all. What, for example, is an investment fund managing money used for teachers' salaries doing investing in products its portfolio manager doesn't begin to understand, no matter what the rating?
i work with a regional MLS database and a county database of assessor's information for factual infor mostly. The model you mention is an appraisal mamanagement company
as a client/employee of the local appraiser and the fedback comps go into a automated valuation model database. Thus the appraiser working for low fees for the AMC cuts his/her own throat by feeding the AVM providing number crunched "values"
for homes on your block, say like Zillow and many other AVM's. Usually not accurate or up to date but might be close enough for a particular lender based on FICO and LTV.
Replacement cost approach is dubious for any home on a lot if home is more than five years or so old just because of physical depreciation.
The lender does have to decide whether to loan on depreciated dwelling cost plus lot value plus site improvements anyway as these are all bundled into the comparative estiamted value. Clearly we will see a requirement for larger down payments which accomplished most of what you suggest.
I'm not sure if Poole was joking or was serious when he suggested that the way to ameliorate the Social Security problem is for people to retire later.
In his words, "... people retire at 62 or 65 and go out and play golf..." See this video:
mms://media2.bloomberg.com/cache/vYZUJO7f3H78.asf
I sincerely hope that was just a joke because this is one of the guys who prints the cash with which grandma and grandpa go to the grocery store to buy their bread.
And there will come a day when we also will walk in grandma and grandpa's shoes...
It's all good, just look at all the smiles.
Issues | The White House
CR-
I had an email exchange in 2005/2006 with a member of the NY FED, because of my digust with the lack of oversight and the excessively low rates. Among many other things.
What was my answer back - "this boom was built on fundamentals, you have no idea what you are talking about..." This was an email exchange with my name and business contacts over a three day period. I think these guys are truly surprised by this mess. They had no idea what was really going on with these mortgages until a few months ago.
More of a recession thread post but what the hey - and ruh-roh -
UPDATE 1-Ruby Tuesday swings to loss, warns of default
[snip]
Based on "the uncertainty of sales," Ruby Tuesday said it may become in violation of its debt covenants over the next year.
"We are not currently in default but, because of accounting rules, we have reclassified much of our long-term debt as current," the company said in a statement. "We will be working with our lenders to obtain a modification of covenants for future periods and expect a favorable outcome."
[snip]
OT but interesting:
CMSA Conference Marked By More Uncertainty
"South Beach, Fla. -- The Commercial Mortgage Securities Association held its annual Investors Conference this week in South Beach, Fla., at a particularly precarious moment. Credit markets remain locked up, which has turned the previous deluge of CMBS issuance into a drizzle. As a result, there are deeply dampened expectations for CMBS issuance for 2008. Meanwhile, talk of which--if any--commercial real estate sector might go the way of the residential market clearly had some attendees worried.
The mood was in stark contrast to one year ago. The CMBS industry closed 2006 with $297.8 billion in CMBS issuance ($202.6 billion in the U.S.) and $39.8 billion in CDO issuance, according to Commercial Mortgage Alert. Expectations were that CMBS issuance in 2007 would approach $363 billion, including $245 billion in the U.S. (a figure calculated by averaging the predictions of 14 analysts and experts)."
Commercial Mortgage Securities Association, Investors Conference
..................
On a side note:
We just had another commercial office building project canceled on us....
The Feds are confussed. They want to sound as if they are in control but they are not. At least not yet.
No mention of developers who helped inflate prices by over building the number of large homes, deliberately ignoring smaller more affordable units. The developers over built with the help of local banks and politicians who sat back and did too little too rein in the drunken consumption.
I think it's common knowledge that Bill Poole is shameful and that HE KNOWS NOTHING!
First, Let's dicuss First things First. Whose First?
Oops, Nevermind
crispy&cole, it's hard to believe they really were that clueless. The problems have seemed obvious for several years. I remember when I first heard about DAPs - and I thought uh, isn't that a scam? And then liar loans, etc. ... wow, that seems like ages ago.
But you should see the email exchange I had with Chris Thornberg (UCLA then) back in '05. He was arguing prices would go flat - but not down. I very much disagreed. So even some of the bears were not bearish enough - maybe not even me!
Best Wishes.
Here, here, CR. I completely agree about where the biggest blame should fall -- on the lenders and regulators.
I already weighed in on this. Perhaps my take is a bit harsh on the lenders but here is what i said:
Poole's list of five key mistakes:
Borrowers took on mortgages they could not afford.
Real mistake: Lenders did not vet borrowers.
Mortgage brokers put too many people in unsuitable mortgages. They knew, for instance, that adjustable-rate mortgages probably wouldn't be right for many borrowers if interest rates rose as the market expected.
Real mistake: Lenders did not vet borrowers.
Investment banks jeopardized their reputations by securitizing mortgages without doing due diligence on the underlying assets, many of which were based on "inadequate or spurious information."
Real mistake: Lenders did not lend responsibly.
Rating agencies put their stamp of approval on securitized mortgages without considering whether AAA ratings could be maintained if house prices fell.
Real mistake: Lenders eschewed oversight.
Investors scooped up those securities without doing adequate analysis first. "Investors too readily accepted the AAA ratings at face value," Poole said. "A reach for yield with inadequate attention to risk in another basic lesson that apparently cannot be relearned often enough.
Real mistake: Lenders did not reveal material information pertaining to these securities.
Poole is trying too hard to spread the blame. I blame the lenders.
The problem with this "mistake" is that many of these borrowers acted rationally. They put little or no money down and basically obtained free put and call options on a house (with only their credit rating at risk).
I see the call options bit, but could you explain the put options bit? Was there a way for the borrowers to make lots of money if their home prices plummeted?
I suspect that, when studies are done with cooler reflection, the causes of the swing in house prices will be seen as less a consequence of monetary policy and more a result of the emotions of excessive optimism followed by fear experienced every so often in the marketplace through the ages.
That's like saying "the problem is that people are people".
We know that. And we know that speculative manias are a recurrent problem throughout history. Jeremy Grantham claimed according to his research that, in effect, whenever a bubble could form a bubble did form. Presumably human nature is such that people will form bubbles whenever they can.
I suspect this is something Greenspan knew, and if he didn't, it's something he should have known.
I think the Fed should probably have acted to suppress the formation of bubbles, but I also wouldn't object so much if their attitude had been "let people have their bubble and learn from the consequences". Where I really fault the Fed is for repeatedly denying the existence of bubbles (even when Greenspan reportedly told private acquaintances he thought there was one) and then attempting to cure the hangover with more bubbles.
It seems to me given our knowledge of history, psychology, and economics, the Fed acted in such a way to almost guarantee the worst possible outcome.
Remember, Greenspan was warned of this by Robert Shiller in 1996. He can't say he didn't know any better.
anonymous, with the put, the homeowner just mails the keys to the bank. Say they bought for $400K, and the price falls to $250K, they don't lose $150K - they just exercise their put option and mail in the keys.
BTW, I hope everyone enjoys the Jazz concert at the bottom of the posts: "Bennie and the Fed". That guy is very good.
Best to all.
The real mistake is to allow blogs like calculatedrisk to spread the truth. If we Fed people were in China, we would never have allowed it to happen.
Poole dismisses greed to easily, people were shortsighted because they focussed on immediate opportunities to profit, most admit to realizing that the party could not last but felt driven to get as much as possible while the getting was good. While I don't hold investors blameless, I think it is a bit much to expect that the average investor was in much of position to second-guess the ratings agencies on very opaque and complex instruments. If AAA doesn't really mean low risk, and if you have to check in to the securities yourself, what is the point of ratings?
Finally I don't think that people so much misunderstood their 2/28's but believed them to be short term loans that would allow them to refinance into prime loans after "proving" themselves and repairing credit for two years. The lenders/brokers believed this too and no intended for the those adjusted rates to be meaningful, which takes us back to greed and short-sightedness especially when prepayment penalties were thrown in. I think it was sort of planned obsolencse for mortgages meant to keep the refi fee gravy train running on.
That is when Thornberg was at UCLA - they never let him out of the ivory towers and they checked his emails for "party line".
If the PHeD couldn't understand the fragmented oversite problem or lack of, how did they expect some borrower with a high school education to understand a 2" pile of loan documents. DUH.
My view is that the run-up of home prices has been driven by the fundamentals, says Dick Peach, an economist with the Federal Reserve Bank of New York. He figures well have a soft landing.
The Boom Is—Is Not!—Over: The Great Real Estate Debate - TIME
(different guy, but same response)
And the Fed is STILL not learning the old lessons as they are making the same mistakes Japan did following their housing boom.
Two and four seem to be pretty solid. Three is a laugh, VPs don't become MDs by safeguarding the firms reputation. They get there by making boku bucks. Heck, it's not like Ibakers have that great of a reputation even in the best of times. Five kind of pisses me off. Even though investors should do their own homework on products, that AAA rating is supposed to mean something. Maybe not the ultimate word in the quality of the security, but ever since Friday became 'the day we see how many bonds go from AAA to junk without passing through the space in between' day (kind of a quantum teleportation financial effect) that rating has become worthless.
anonymous, with the put, the homeowner just mails the keys to the bank. Say they bought for $400K, and the price falls to $250K, they don't lose $150K - they just exercise their put option and mail in the keys.
CR,
Well.. really, it's more like buying a call and selling a put on the house... The no money down version would mean that the money made from the put went into purchasing the call. AND there were no margin requirements!
They technically owe the money if the price drops.. but.. you can't make them pay.
...or can you? duhduhduhhh!
CR said: "...The problem with this "mistake" is that many of these borrowers acted rationally. They put little or no money down and basically obtained free put and call options on a house (with only their credit rating at risk). Was this really a mistake for these borrowers?..."
I would argue that these people did not act rationally. I acted rationally when I re-financed my 5/1 adjustable 40-year loan at 7 7/8% into a 30-year fixed-rate at 5.75%, even though ARMs could be had below 4% at the time. I recognized that long-term fixed mortgage rates below 6% were very favorable (for homeowners) and not available very often.
This same rational behavior also had a knock-on positive effect on my credit rating, allowing me to take the money saved on lower monthly mortgage payments and pay down other consumer debt (or pay cash for things I would otherwise have had to buy on credit).
Sebastia
energyecon,
Thanks for posting about Ruby Tuesday.
Ask yourself something. Why does a modest size restaurant chain with 700 stores and 100 franchises need to have over $500 million in long-term debt?
Don't you build one store at a time? And isn't a successful store supposed to break even, including leasehold improvements, in year 2?
Don't franchise sales bring in cash, not debt?
What is wrong with this picture?
Who would lend this much money to a friggin' 2nd=rate restaurant chain?
Oh, yeah. As of last quarter, Ruby Tuesday is running 700 company-owned stores with $8 million of cash on hand.
Probably about enough to meet one payroll.
Talk about consumers who are leveraged up the wazoo and living hand-to-mouth.
"Who would lend this much money to a friggin' 2nd=rate restaurant chain?"
Who would lend 10,000 TIMES that amount to people who are the equivelant of waiters at such restaurants?
So we're saying now it's "rational" to perfect a fraud, in collusion with brokers and loan officers, by overstating one's income in a loan application, and that investors had some way of readily ascertaining the monkeyshines that went on here?
In that last week we have Home Town Buffet and Ruby Tuesday in default on debt...who is next?
CR, I wanted to thank you for the note you left at the bottom of the post, I needed the wry laugh I got out of it.
CR - "If we are relearning old lessons, perhaps we should remember that some oversight is good, and ideologues are dangerous to our economic health."
Ideologues indeed. For an era of relative calm and prosperity the last 10 to 20 years has seen more that it's share of ideologues on all fronts. I'm heartily sick of them personally.
Back on topic, Paul Krugman has a column on the ideologues that have run the Federal Reserve recently and Greenspan in particular.
OP-ED COLUMNIST; Blindly Into the Bubble - NY Times
Blindly Into the Bubble
By PAUL KRUGMAN
Published: December 21, 2007
"...
So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.
Fed shrugged as subprime crisis spread, was the headline on a New York Times report on the failure of regulators to regulate. This may have been a discreet dig at Mr. Greenspans history as a disciple of Ayn Rand, the high priestess of unfettered capitalism known for her novel Atlas Shrugged.
In a 1963 essay for Ms. Rands newsletter, Mr. Greenspan dismissed as a collectivist myth the idea that businessmen, left to their own devices, would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. On the contrary, he declared, it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.
Its no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspans world, predatory lending like attempts to sell consumers poison toys and tainted seafood just doesnt happen.
..."
There's another article on Greenspan's idealist's leanings from Bloomberg.
Greenspan's '63 Essay Foretold Subprime Inaction: Jonathan Weil - Bloomberg.com
Rob Dawg --
I blame the lenders.
So the speculators who lied about their income and lied about their intent to occupy and took out mortgages to buy properties in an attempt to get rich for doing nothing... They bear none of the blame?
It is incredible that Poole mentions home price appreciation exactly once, and only as something that kept foreclosures low and thus "fooled" the ratings agency models. What actually happened here was quite simple and quite classic... Prices went up. Lots of people saw the prices going up. Then they lied/cheated/stole their way to make the most leveraged bets they could. (What do you call taking out a 2/28 interest-only ARM whose payment you can barely afford in the first place? I call it a leveraged bet on house prices.)
Similar bets were made by "homeowners" and investors and Wall Street banks; they are all responsible; and they are all going to pay. And any attempt to shift blame away from any of them -- including the borrowers -- pisses me off.
I agree, oversight is good.
Unfortunately the tendency of most overseers (i.e. government) goes well beyond simple oversight towards outright control. Heard about the State of California proposing to control our thermostats?
CR,
You are too much of a gentleman:)
Jas is right. There is something very dark at the heart of all this.
What gets me is how these "mistakes" are mirrored across the water.
A couple of months ago the UK Treasury Select Committee took evidence from the Governor of the BoE, concerning Northern Rock.
The key exchange:
SC: "Who was in charge?"
G: Pause..hesitation..then "What do you mean by "in charge"?"
We can debate the impact of low policy interest rates, but a clear failure was the lack of oversight.
Yup, with high rates it was hypothetical but with low rates it happened.
In looking over Ruby Tuesday's quarterlies, I see big problems for the whole restaurant chain industry.
Big increases in food costs.
Labor costs are rising, too.
Customers are dropping sequentially from quarter to quarter, with recent acceleration.
Rents and utilities are rising.
Bad industry. Lots of shorts.
So the speculators who lied about their income and lied about their intent to occupy and took out mortgages to buy properties in an attempt to get rich for doing nothing... They bear none of the blame?
Sure they do. Prove to me there are a lot of those. My guess - as Tanta posted a few months ago - most 'liar loans' were really just 'delusional debt'... they didn't really ask, I didn't tell really tell... and besides that income is sorta close to what I make... er could next year.
And the fricking broker says 'Ya baby!'...
This system - like all others always needed a 'trust but verify' module... the verify part was truncated.
"I think it's common knowledge that Bill Poole is shameful and that HE KNOWS NOTHING!"
Can we put this to music?
Happily, Poole lists no mistakes by the Fed.
New book coming out in mid 2008.
"Greenspan Shrugged"
There's your first mistake.
Mistake number one free money.
Allowing a borrower to "qualify" with absolutely no proof of anything, except that someone is going to take possession of it, is about as sure a guarantee of fraud as we can get. This impacts every other reason and the resultant pyramid of fraud is predictable. Damn straight people are going to take advantage. Hell, I'll loan them your money all day long if I can get a cut and at the end of the day close up my mortgage shop. Will I put them into an unsuitable mortgage? Why not, it's your money.
Bank's reputation? Who cares? People figure the FDIC is the guarantor. Besides the banks have long complained about having to deal with their depositors, they found a way to lend investor's money with high grade off balance sheet companies.
With the giddy atmosphere of rising wealth of course appraisals will soar, and the next month the outlandish appraisal is right in line with the market, wheee!
dryfly --
Prove to me there are a lot of those.
Well, every currently unoccupied house with a mortgage is owned by one.
My guess - as Tanta posted a few months ago - most 'liar loans' were really just 'delusional debt'... they didn't really ask, I didn't tell really tell... and besides that income is sorta close to what I make... er could next year.
Great! And you are on the hook for precisely the amount you signed up for. And if you cannot pay it and the collateral is junk, then the lender is on the hook. It's a beautiful thing.
When someone says "I didn't understand the terms of my mortgage", my response is (a) "I don't believe you" and (b) "tough". Unless they can prove actual fraud, of course.
An awful lot of people participated in this Ponzi scheme, including borrowers, lenders, and investors. I am of the opinion that 99.999% of them knew exactly what they were doing. No sympathy. (Hopelessly wishful thinking: No bail-out.)
Ooops hit publish too soon.
Not everybody will be a party to fraud, but their expectations will be colored by it and they will join the game unknowingly.
And profession investors making these mistakes? How about someone who is in charge of the financial well-being of the country being surprised by this? Mr Poole, in retrospect, don't you think you should have been alarmed sooner?
Again-- the first time anyone of you heard of a NINJA loan, didn't your head spin?
Don't you build one store at a time?
No - not at all - you race to get those suckers out and 'placed' (in good locations)... if you don't and you have a successful model then you'll face a gajillion clones before you are even done rolling out... now if they had reversed the ratio (say had 100 stores and 500 franchisees) THEN you could make the case they were numskulls with the long term debt... in that case their franchisees should be the ones carrying the debt! (That's why you franchise).
And isn't a successful store supposed to break even, including leasehold improvements, in year 2?
Sure but that means the store supports the payments on the debt load not that the debt goes away over-night... if it were that easy we'd all work at or run restaurants... last I looked only half of us do....
Well, every currently unoccupied house with a mortgage is owned by one.
No - I personally know more than a few that are not.
For example my late father's house. And the house across the street where the owners built in N Minnesoat (very cheap) before they sold their old home.
And all the builder homes that didn't sell - those were specs but no fraud.
The more I think the more houses I personally know where NO misstatement of income was required.
But I hear the opposite anecdotals of rampant mortgage fraud from folks like you - I don't know any of those. Never seen one. I believe they are out there but are dwarfed by the numbers of idjiots who believed the 'ownership' myth... they were fools but not necessarily liars.
How much more compelling the collective warnings of Ruby Tuesdays, American Eagles, etc., than a thousand sunny CNBC economists!
For the life of me I can't understand what this debate is about. Krugman an AC are right on the money: it was a dramatic failure of monetary policy (too loose) and regulatory responsibility (even looser) engendered by this administration's moronic conservative pathology. Borrowers, who had negative return on savings overinvested in what had been a sure thing for their memory spans. Brokers, Banks, and Investment Banks did exactly what they were incented to do: keep the throughput going. If countrywide didn't do it, Wamu would. I'll blame the investors and Credit agencies for stupidity and laziness, but with liquidity washing around the global system looking for yield and a place to invest, they were going to be served and investment in American Mortgages wasn't totally illogical. Of these players, the ratings agencies were perhaps the most culpable (they should have remembered their long term franchise value) and have been and will continue to be severely punished for it. The Greenspan Bush regime however bears ultimate and clear responsibility.
On the other subject, thanks bloggers. I just shorted 4 restaurant chains today and will short more tomorrow!
Perhaps someone will be kind enough to explain the precise statutory or regulatory authorization for the Fed to control mortgage brokers, who seem central to all these suspect transactions. And what rationalization can be offered to excuse the obliviousness of the state regulatory authorities, with respect to both brokers and outfits like New Century?
Please don't tell me Ruby Tuesday is having problems. If Countrywide goes BK, that's one thing. But the Shnapster simply must have access to their triple-prime burgers.
qualifying buyers on the teaser rates -- not the taser rates -- was also contributory to the price run-up and current affordability mess.
one thing is clear: the PEOPLE in the system operated rationally -- make as much money as possible while the getting was good. It was the system regulators and overseers that failed.
Rich, what "me" said; and you're being harsh. Back in the regrettable day, bankrolling moderately renowned chain restaurants seemed as solid a business proposition as any.
In honesty's sake, I've never been to Ruby Tuesday (did they pay royalties to The Stones?); but have too often dined in JAM-PACKED Red Lobsters and Outback Steakhouses. In a tough spot near the end of the last recession ('02) I waited tables at a Lone Star Steakhouse in Jersey where traffic approached a riot every Saturday night.
The cash-flow on these joints is tremendous in good times. Blowing $100 on dinner for mom, dad and the two varmints was no less a factor in the middle-class HELOC than any granite countertop or SUV, and somewhere a latter day Tom Wolfe or F. Scott is doubtless writing about it!
Can we put this to music?
Which <a href="http://bigpicture.typepad.com/comments/2007/08/mashup-cramercr.html>remix would you like?
We can debate the impact of low policy interest rates, but a clear failure was the lack of oversight
low interest rates -- and the 2001-2003 tax cuts, let not forget those -- got the appreciation ball rolling nationally. Then the abandonment of sane lending practices provided the acceleration, until the ball hit the wall in 2006.
Underlying all is the idea that we can borrow our way to prosperity. But it is ok we are just borrowing from our future to overconsume now.
Crispy-
When the Fed told you the market was based on fundamentals, did you suggest that they Google "Median Income, Anytown USA"? Followed by "Median Home Price, Anytown, USA"?
Morton's (restaurant) and Gamestop (retail) warned today too.
When you look at restaurant economics, you see the peril of a Fed that slashes rates to stimulate growth in this environment.
Food and utility costs of restaurants are soaring.
But customers are dropping and spending less.
There's so much overcapacity and competition that chains can't raise prices to pass through costs.
Fed cuts will drive food and utility costs even higher, but it won't change overcapacity much. Over time, maybe they will bring more customers back, but over the short term...MORE PAIN.
rich, that post was very helpful. Tks.
Don't blame me... I rented!
Since Poole says he is addressing 'the current situation', I'd think he would look beyond 'lending' mistakes at the underlying cause of the situation, which was the Fed's mistake of holding rates too low too long. Another problem I have not seen addressed anywhere is our system of appraising properties based on comps. With that system, when a bubble begins the whole appraisal system goes right along with it, happy as a clam.
Goodbye Ruby Tuesday ....
Even if the Fed believed there was a bubble, I think it is naive to think they would tell you this in an email when they are stating the opposite publicly.
The establishement`s most coveted rule is loyalty, mostly expressed as team player.
Is" fragmented oversight" the new catch word for " LACK of oversight"?
Perhaps someone will be kind enough to explain the precise statutory or regulatory authorization for the Fed to control mortgage brokers, who seem central to all these suspect transactions.
Nil, don't hang around these parts, do ya? For your inspection, a copy of the HOEPA regulation the Federal Reserve was responsible for, but ignored: http://www.dallasfed.org/ca/epersp/2002/02-02.pdf
Please don't tell me Ruby Tuesday is having problems. If Countrywide goes BK, that's one thing. But the Shnapster simply must have access to their triple-prime burgers.
Besides that, their salad bar alone is enough to keep dryfly 'regular' while out on the road... you really don't want to read the details.
"But I hear the opposite anecdotals of rampant mortgage fraud from folks like you - I don't know any of those. Never seen one. I believe they are out there but are dwarfed by the numbers of idjiots who believed the 'ownership' myth... they were fools but not necessarily liars."
Ever been to SoCal??? Orange County or San Diego???
Oh yes, there was fraud...and lots of it here in Clownifornia.....
One thing that is missing is the fact that there is shortage of available land in high demand Coastal areas like LA, SF, NY, FL etc. where the combination of wealthy people, and free money and loose lending standards (which may not have caused large bubbles elsewhere) caused them in these desireable areas. Without vacant land, either you pay high prices for tear-downs or you remodel in order to obtain a modern home, and flipping becomes uncontrolable.
These bubble areas and the frenzy involved then fueled bubbles elsewhere, like Bakersfield and Sacramanto, where vacant land was available and was initially cheaper than immediately outside high bubble areas where bubbles sprawled.
Thus, IMO, in order to prevent this from occurring, there needed to be an understanding of land development and, more importantly, that the FED's "one-size-fits-all" monetary policy for all areas does not work since it will blow large bubbles in desireable areas every time.
How the FED does not discuss this is beyond belief.
Not DH
The O C and San Diego-land, I hate to say it, but isn't that a Republican neighborhood? Lots of middle-class people trying to stay even with the Joneses.
rich | 01.09.08 - 6:58 pm | #
"Ask yourself something. Why does a modest size restaurant chain with 700 stores and 100 franchises need to have over $500 million in long-term debt?"
my guess:
ruby tuesdays borrows 500 million as a tax strategy and to provide cash to compensate their top people with salary, benefits, and options.
Also might be interesting to see who holds the paper...could be some back scratching going on...lots of ways to make a dime.
wally,
I don't know what you already know about this topic so if you are already cognizant of the following I apologize.
Residential appraisals are current snapshots of estimated value at a point in time; being based on comps
does mean appraised values ride along on the roller coaster. If the ratios of prices to rents or median prices to median income were the method and means used to define the maximum loan amount, the real property market would generally be on a very slow trend line. If people could pay more than median area (say, census tract area) price but it would have to be with their own money, not borrowed, this would quickly and painfully bring prices into line and a whole lot of businesses and incomes to a halt.
Fannie and Freddie have rules in place for vetting the 40% of mortgage originations they purchase; the other 60% of MBS buyers may not have such or as good of precautions and no doubt haven't in many cases done the due diligence they should have. Of course Fannie and Freddie stepped into the shit also so rules and guidelines aren't foolproof.
Regs and licenses for MB's came rather late in the recent game in most states. Most enforcement has been by the FBI for RICO fraud rather than by states acting for defrauded lenders, borrowers, etc.
My opinion is, as myself and others have noted before in this blog, that the commissioned sales people acting as loan officers did "get while the getting was good"
and many are now unemployed or changing jobs or just as likely are reinventing themselves as "reverse mortgage specialists" to help Grampa and Grandma out of their equity too.
There was and still is a pervasiveness in the mortgage business of making the deal work, get the commission check, and who cares if the appraisal got tweaked, the applicant's income got boosted or the
collateral is in an overbuilt area.
Because the deal still has to work to get paid and that's been more important than ethics. You bet there were and still are licensed appraisers who enabled the brokers and thereby got plenty of repeat number hitting work. I don't like it any better than you do. Appraisers are licensed and regulated by law in all states, this does not mean the laws don't get ignored when there is money involved. Presently there 's a true oversupply of unethical appraisers out there, not implying that a small supply of unethical appraisers is OK.
Tanta has excellent discussions of this in her mortgage portion of this blog. You've no doubt seen these.
Other:
I think you can add to the gross income shrinkage list businesses that depend on: first run movie theatres, vanity license plates, high end retail goods including CD music and hardcover books, optional vacations involving coach class airline travel, expensive imported fruits and vegetables, vanity vehicles, tattoos and body art, micro brew beer at $14 a large pitcher, high end custom construction in most major metro areas
Lack of space....
Downtown LA has been undergoing a major redevelopment. The current bail out joke now making the rounds is "luxury housing for the homeless."
C Mack,
In my experience, appraisers generally work from online connections to a national network of listed 'comps' and feed back their local numbers into that system. I believe that appraisals ought to be tied more to replacement cost or construction value... any premium above that should not be advanced by a lender because it is speculative value. Let the lender cover the 'hard' value, let buyers speculate or pay 'location' premiums from other funds.
"While I don't hold investors blameless, I think it is a bit much to expect that the average investor was in much of position to second-guess the ratings agencies on very opaque and complex instruments. If AAA doesn't really mean low risk, and if you have to check in to the securities yourself, what is the point of ratings? "
Look, even if the ratings had held up better than they had (and if you don't expect mortgage backed bonds to be downgraded at all during a severe housing crash, you're smoking crack), investors still would have been stupid not to look beyond the rating. Mortgage backed securities have complex cashflows, multiple counterparties and multiple risk factors. If you can't deal with that, don't buy them. They're not Treasury bonds. Even if a particular bond could be "proven" to be as safe from default as a vanilla AAA bond, you'd still be exposed to mark to market fluctuations compared to other triple-A bonds based on a variety of micro and macro events. It's your responsibility as an investor to know what those are and keep track of them. It's what you're paid to do while you're looking after other people's money.
There's a lot of blame to go around in this fiasco, but careless investors don't get enough of it. There is plenty of disclosure on most of these products, but a large proportion of the investor base never read it. As I've said before, I've heard many stories of ABCP investors buying paper without knowing whether or not it had full liquidity support or buying SIV paper without realising that they were exposed to the market value of the underlying assets. These aren't obscure facts. They're pretty much the defining characteristics of the products, and they're certainly the thing you should be paying most attention to as an investor.
Except for cases where there was outright fraud or deception on the part of borrowers, lenders, arrangers or salesmen, I'd say investors have the largest responsibility of all. What, for example, is an investment fund managing money used for teachers' salaries doing investing in products its portfolio manager doesn't begin to understand, no matter what the rating?
wally,
i work with a regional MLS database and a county database of assessor's information for factual infor mostly. The model you mention is an appraisal mamanagement company
as a client/employee of the local appraiser and the fedback comps go into a automated valuation model database. Thus the appraiser working for low fees for the AMC cuts his/her own throat by feeding the AVM providing number crunched "values"
for homes on your block, say like Zillow and many other AVM's. Usually not accurate or up to date but might be close enough for a particular lender based on FICO and LTV.
Replacement cost approach is dubious for any home on a lot if home is more than five years or so old just because of physical depreciation.
The lender does have to decide whether to loan on depreciated dwelling cost plus lot value plus site improvements anyway as these are all bundled into the comparative estiamted value. Clearly we will see a requirement for larger down payments which accomplished most of what you suggest.
Thanks,
C Mack
Regulation, regulation, regulation - please Mr. government save us from ourselves.
I'm not sure if Poole was joking or was serious when he suggested that the way to ameliorate the Social Security problem is for people to retire later.
In his words, "... people retire at 62 or 65 and go out and play golf..." See this video:
mms://media2.bloomberg.com/cache/vYZUJO7f3H78.asf
I sincerely hope that was just a joke because this is one of the guys who prints the cash with which grandma and grandpa go to the grocery store to buy their bread.
And there will come a day when we also will walk in grandma and grandpa's shoes...