Thursday, March 29, 2007

Lying For a Very Cushy Living

There are three significant sides to this story; those who will take the hit for bad loans, those who will lose everything they worked decades to build and those who got fat.

Subprime I just love the self-serving talk about the sub-prime mortgage market and the huge losses that are about to fall out of that debacle. For anyone who’s late to the party, sub-prime relates to the quality of the applicant, not the mortgage rate. Sub-prime, baby, as in
  • No credit history
  • No money in the bank for a cushion
  • No down payment
  • No bother to verify employment
  • No hope, no future, no way they’re going to repay
There are three significant sides to this story; those who will take the hit for bad loans, those who will lose everything they worked decades to build and those who got fat.
Lender In the first category, I have very little sympathy for anyone along the food-chain of the lenders. They took advantage of the housing bubble and a proliferation of mortgage packaging entities that were new to everyone and so complicated as to be beyond understanding.
Greenspan1842 The Setup: A ten-year housing bubble that made anything you stumbled into buying, automatically worth 10-20% more each and every year. Alan Greenspan, then chairman of the Federal Reserve Board let the whole thing slide like a river under his feet. Add to that a decline in long-term mortgage rates and you had the cautious as well as the ignorant re-negotiating their mortgages. Thus were provided to the sharks, unending schools of bait-fish and blood in the water.
The Sting: The ignorant were led to believe they could not only lower their monthly payment, but grab a substantial amount of cash for doing it. Just sign on the dotted line and we’ll deposit the cash next week.
DreamhomeThe Sting, Part II: Your equity in your present home is sufficient to buy that dream palace on the next street or in the next town at the same monthly payment you’re making now. Don’t wait to sell your present home—just sign on the dotted line and we’ll close on your dream home. This was (and is) the stuff of Shakespearean tragedy.

These were mortgages, the Fed would have you believe, that have made it possible for people with poor credit, scant savings and modest incomes to buy homes. Wrong! They have made it possible for people with poor credit, scant savings and modest incomes to lose their homes by fraudulent representations.
Hedgefund What the hell was going on? The confluence of lowered interest rates and rising home values (bubble, bubble) created yet another vehicle for a virtually unregulated hedge fund industry. These funds are called hedge funds either because they hedge against loss or because they periodically trim their investors —you be the judge. At any rate . . .
. . . it was kind of like a football game. The mortgage salesman took an application, cashed his fee and handed it off to the bank or savings and loan he worked (and I use that term loosely) for. The bank issued documents, based on the number 0, took their fHandoff ee and handed off to mortgage packagers, usually a Wall Street investment bank or derivative thereof. The investment bank, put a bunch of worthless mortgages together, salted the mix with a few honest deals, took their cut and neatly reversed field, letting fly a hail-mary pass of questionable documents down the sidelines to the waiting arms of any number of open receivers.
Openreceiver These are known in football as the go-long guys. They took the several cuts that go-long guys are privileged to take, marketed the newly devised instruments and were supposed to gallop them into the end-zone of increased real-estate values.
Unfortunately, they were blind-sided by an unexpectedly early end to the up-market, fumbled the ball and, when it was recovered, investors found all the air was gone. Flat ball. No one has a pump. Game over before the come-from-behind guys could come from behind.
Alan Greenspan mumbled about overheated real estate, but then Alan was a mumbler and he was close (some said long past due) to retirement. Alan saw the salesman pocketing a commission on any deal he could write, fraudulent or not. He knew the banks and S&Ls were no longer holding the paper they had signed off on. He intimately understood the packaging Wall Street was up to. His Fed acquiesced in allowing the hedge fund jockeys to write un-understandable investment documents. Exactly two years ago, I wrote of Greenspan
The man who helped Bill Clinton engineer the first federal surpluses in memory, almost overnight became the man who cheered as Bush gave it all away to the rich and bankrupted us as a nation.  The man who agreed as Clinton paid down the national debt only recently agreed with President Bush's plan to quadruple it.  The only thing recognizable in Alan is that the man who failed to see the dotcom bubble still fails to see the real estate bubble.   
Benbernanke And now, with Alan long gone, poor newly-minted Federal Reserve Chairman Ben Bernanke has to run out onto the field. In his striped-shirt, he's supposed to unpile the players, certify that the ball is truly flat, possibly call the foul and assess 20 yards for unnecessary roughness.
But against whom?
Surely not the mortgage salesmen, just brought up from used-car special-teams, they merely hiked the ball. The foul was called way down field. The banks and S&Ls? Where’s the foul? They found eager and willing buyers at a profit. The Wall Street packagers? "C’mon, ref, it was a brand new running play. Where does it say in the rules the ball has to have air in it and when did the air actually leave, before or after the hit?"
Don’t even look to question the hedge-fund guys, they’re up in the skyboxes, sipping chardonnay. Not to worry, stocks go up, they go down and money is made in both directions. Who’s to worry except a few hundred thousand poor losers? None of them sky box types.
And while we’re discussing these finer points, I came across this absolutely brilliant investment device. It’ll be a while before it feeds up to hedge-fund altitude, but get this:
Cardboardbox We find homeless people, give them $10,000 for their cardboard box, swing the ten grand into a six-way mortgage on a tear-down, rip the building down and collect on urban renewal grants, which we roll into carbon-depletion credits and re-package the whole thing offshore. The banks are in line, Wall Street’s behind it and the pension trusts are hungry.
It’s gonna be big.
"A large increase in early defaults on recently originated subprime variable-rate mortgages casts serious doubt on the adequacy of the underwriting standards for these products," Bernanke said.
Like Ben says, not to worry, it was all just a little dustup over inadequate underwriting standards.
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