I knew about the 3% down, the 0% down, the Greenspan cheering of moving from fixed mortgages to ARM loans, the move from 7 year to 5 year to 2 year ARMs.... eventually the interest only loans. I knew I was sitting in Michigan where my house barely appreciated and felt I was reading stories of a different country - what "y'all" were doing seemed like a parallel universe. A magical place (with no regulation and house ATMs). But even in all my reading I had not come upon the truly magical option ARM loan. Nope, not until the cover story of BusinessWeek in October 2006 [Nightmare Mortgages] Then I got scared.
Those were my moments... and I didn't even know about all the acronyms that we were due to learn about (CDOs, MBSs, CDSs) - or that our investment banks were 40:1 levered hedge funds in drag. I was scared without even knowing about that portion of the mess... until it started leaking out in 2007. But as pundit after pundit came on CNBC through 2007 and said "it's just a subprime problem, we'll be out of it soon - and housing is just 4.5% of GDP - stop fussing" I kept shaking my head... and began blogging about how subprime was a symptom of a disease; not the disease. I was an outlier - with some of these few "outlier" economists and strategists huddled in a dark corner of the internets or financial TV ... apparently no one else read BusinessWeek or about our friend Zareh.
But as most pundits who live in the world of group think began to be proven wrong through late 07 and into 08, I was happy to report that reality was coming upon us - and the lovely Alt A mortgage [Mar 19: Alt A Mortgages Beginning to Break Down] and option ARM mortgages and eventually the prime mortgage would bite us repeatedly.
Now as we sit here having our Federal Reserve buy huge swathes of these underwater "mortgage based securities" (triple AAA baby!) because "the market is not pricing them correctly" I'd like to showcase this quite excellent story from the Wall Street Journal which succinctly tells about our bubble of yesteryear - and what we are buying that is SO undervalued. So undervalued in fact, that no one in the private sector wants to pay anywhere near prices offered - but the government/Federal Reserve is happy to! I mean it's not really THEIR money - it's ours - so if it blows up; no biggie - we can print more. This shows what we will subsidize in the year(s) ahead as Obama & Co take even stronger actions to make sure homes go to the "right price" and people who made bad decisions are protected from the market forces. And what exactly is going to make us a whole lot of money down the road once the "market normalizes" and these loans are "paid off" (ahem). Just wanted to let you know where your money is going... and why the Federal Reserve balance sheet (which in the end we are on the hook for) is becoming a garbage strewn lawn. I included pictures to boot since a picture is worth a thousand of (my) words.
- The little blue house rests on a few pieces of wood and concrete block. The exterior walls, ravaged by dry rot, bend to the touch. At some point, someone jabbed a kitchen knife into the siding. The condemnation notice stapled to the wall says: "Unfit for human occupancy." The story of the two-bedroom, one-bath shack on West Hopi Street, is the story of this year's financial panic, told in 576 square feet. It helps explain how a series of bad decisions can add up to the worst financial crisis since the Great Depression.
- Less than two years ago, Integrity Funding LLC, a local lender, gave a $103,000 mortgage to the owner, (step 1) Marvene Halterman, an unemployed woman with a long list of creditors and, by her own account, a long history of drug and alcohol abuse. By the time the house went into foreclosure in August, Integrity had sold that loan to Wells Fargo & Co., (step 2) which had sold it to a U.S. unit of HSBC Holdings PLC, (step 3) which had packaged it with thousands of other risky mortgages and sold it in pieces to scores of investors. (step 4) (you do realize what step 5 is... you, the taxpayer will now own this priceless mortgage that the market is not pricing correctly - a bargain dear sir/madam. Should go very nicely right next to the credit card receivables, the auto loan receivables - we have quite a nice portfolio shaping up, you and I)
- Today, those investors will be lucky to get $15,000 back. That's only because the neighbors bought the house a few days ago, just to tear it down.
- At the center of the saga is the 61-year-old Ms. Halterman.... Ms. Halterman hasn't had a job for about 13 years, she says. She receives about $3,000 a month from welfare programs, food stamps and disability payments related to a back injury.
- Four decades ago, when she bought the West Hopi Street house for $3,500,
- Her lender, Integrity, was one of a flurry of small mortgage firms that sprang up nationwide during the boom, using loans from big banks to generate mortgages to resell to larger financial institutions. Whereas traditional mortgage lenders profit by collecting borrowers' monthly payments, (that's so un-innovative!) Integrity made its money on fees and commissions. (yes! yes! innovation!)
- The company was owned by Barry Rybicki, 37, a former loan officer who started it in 2003. Of the boom years, he says: "If you had a pulse, you were getting a loan."
- When an Integrity telemarketer called Ms. Halterman in 2006, she was cash-strapped, owing $36,605 on a home-equity loan. The firm helped her get a $75,500 credit line from another lender. (very kind of them)
- In early 2007, she asked Integrity for help, Mr. Rybicki's records show. This time, Integrity itself provided a $103,000, 30-year mortgage. It had an adjustable rate that started at 9.25% and was capped at 15.25%, according to loan documents.
- For a $350 fee, an appraiser hired by Integrity, Michael T. Asher, valued the house at $132,000. "I can't appraise it for the future," Mr. Asher says. "I appraise it for that day." (keep in mind in that era, mortgage brokers used to shop around appraisals - they'd give the business not to the most accurate but to the one who gave the highest appraisal!) T.J. Heagy, a real-estate agent later hired to sell the property, says he can find only one comparable house that sold nearby in 2007, for $63,000. (that's ok, we cannot be bothered with facts - just make the appraisal as high as possible and we all win here)
- At closing, on Feb. 26, 2007, Integrity collected $6,153 in underwriting, broker, loan-origination, document, application, processing, funding and flood-certification fees, mortgage documents show. A few days later, Integrity transferred the loan to Wells Fargo, earning $3,090 more, Mr. Rybicki says. (not bad, $9K in fees for a house worth... umm... well, it just sold for $5K more than the fees)
- Ms. Halterman says she spent it on new flooring, a fence, minor repairs and food. "No steak or lobster," she says, "hamburger and chicken." Soon the money was gone.
- When Wells Fargo sold Ms. Halterman's loan to London-based HSBC, it got bundled with 4,050 other mortgages and used as collateral for a security issued in July 2007. More than 85% of the mortgages were, like Ms. Halterman's, "subprime" loans to borrowers with blemished credit.
- Credit-ratings firms Standard & Poor's and Moody's Investors Service gave the new security their top "triple-A" ratings, which suggested investors were extremely likely to get their money back plus interest. (sorry I just had to get back up off the floor - laughing too hard) Other loans backing the HSBC-issued security were souring, as well. As of November, 25% were foreclosed, in the foreclosure process or at least a month delinquent, Mr. Atteberry says. (triple AAA baby!)
- Some $4.1 trillion in American mortgages were put into securities such as these between 2005 and 2006, including $1.6 trillion in subprime or other high-risk home loans, according to Inside Mortgage Finance, a trade publication.
- Among other investors, the Teachers' Retirement System of Oklahoma bought $500,000 of the new security, according to chief investment officer Bill Puckett. Also buying in was bond-giant Pacific Investment Management Co., which declined to comment. (hi PIMCO! Nice buy)
By the time we write off these investments down the road (quietly in some back office in Washington D.C.) , and realize we've lost 30-40-50% of the value, it will be some small footnote and we'll be too engrossed in the next bubble the powers that be have us enthralled with. So don't worry about - just please keep sending your tax dollars to D.C. - we have mortgages, auto loans, and credit card debt to buy. All triple A - I assure you. Little blue houses, medium pink ones, large brown ones - all on our dime. We're getting a heckavu deal! (even if the Fed REFUSES the media's freedom of information requests to see WHAT they are buying and from WHOM - just TRUST THEM!) Boo Yah!
Just remember, it's all ACORN's fault.
[Oct 9: WSJ - Nearly 1 in 6 Homes Underwater]
[Sep 26: 15% of Americans Spend 50%+ of Income for House Payments]
[Aug 12: Bloomberg: One Third of New Home Buyers in Past 5 Years Now Underwater]
[Aug 4: WSJ - After the Bubble, Ghost Towns Across America]
[Jul 10: Foreclosure Activity Map]