by Bill McBride on 12/06/2008 11:03:00 PM
Saturday, December 06, 2008
From Frank Rich at the NY Times: The Brightest Are Not Always the Best (hat tip Kevin)
In our current financial quagmire, there have also been those who had the wisdom to sound alarms before Rubin, Summers or Geithner did. Among them were not just economists like Joseph Stiglitz and Nouriel Roubini but also Doris Dungey, a 47-year-old financial blogger known as Tanta, who died of cancer in Upper Marlboro, Md., last Sunday. As the Times obituary observed, “her first post, in December 2006, took issue with an optimistic Citigroup report that maintained that the mortgage industry would ‘rationalize’ in 2007, to the benefit of larger players like, well, Citigroup.” It was months before the others publicly echoed her judgment.Tanta's first post is worth rereading: Let Slip the Dogs of Hell. Of course Tanta had been a commenter for almost two years before she started writing for CR. Here are some comments from June 2005 (yes, 2005!):
Regarding those bagholders . . . I've worked in the mortgage industry for two booms now. The problem with the "why are the lenders stupid" question is not that they aren't stupid, but that the bag is too dispersed to be held by any one particular idiot. The lenders keep making 100% CLTV interest-only loans to borrowers with a 50% debt-to-income ratio on a grossly overpriced property because Fannie Mae will buy the first mortgage and GreenPoint will buy the second mortgage and Radian will write pool insurance for it. Your average bank or S&L believes it is successfully laying off the risk on the Real Deep Pockets who are Too Big To Fail. It has also been my personal experience over the years that the OCC and OTS are not enforcing the old requirements that the people who approve credit policy be insulated from the people who make override bonuses on production volumes. Last thrift I worked for (ending 2005) had a chief credit officer reporting to the national sales manager. Then you look at who the powerful executives are at lending institutions: these are people who take themselves to be exceptions to the rule that The Market Can Bite You, and they want to make loans to borrowers who are like them, because they think people like them are not credit risks. Overleveraged speculators buying McMansions with a 401(k)loan are the demographic equivalent of the mortgage managerial class. The really interesting question in my mind is when the first mortgage insurance company will burst into flames. The MIs have already backed off a great deal on the toxic stuff, which is why you're seeing all the 80/20 or 80/15 loans, and so they might save themselves. In that case, look at the HELOC lenders. The only advice I ever have regarding the stock market is, "short the HELOC lenders."And more:
Tanta | 06.27.05 - 9:51 am
I have been spending the morning working on an anti-mortgage-fraud protocol for a bank client. Realist is on the money about the hidden speculator/flipper loans, but it's even worse when you add the fraud levels and all the "Stated Income" loans. People lie about their incomes without compunction because they believe that they will be making that much money in X years, just as they believe that they will be moving in X years and so need an ARM, or that they can sell in X years if rates go up. The mortgage industry is qualifying a whole bunch of borrowers based on "conventional wisdom" about how the future will be just like the past except it will have bigger kitchens and another half-bath.And more:
The other elephant in the room is refinances. The other link between interest rates and prices goes like this: rates go down, people refinance, refinances mean the property is reappraised, the reappraisal sets the next sales price. Most appraisal fraud (besides the sleazy flip scheme stuff) comes in when someone needs cash and the appraiser is leaned upon to provide sufficient value. Once that new value goes into the databases . . .
Prices aren't just a matter of what buyers will pay. They're also a matter of what lenders will lend.
Tanta | 06.27.05 - 2:17 pm |
CR, I just read the Business Week piece. Frankly, whenever I see David Duncan being quoted, I surf to the next item.
"Yet in spite of the profit pressures, Duncan told BusinessWeek that he believes lenders on the whole are behaving responsibly. One reason: If lenders resell a mortgage into the secondary market and then the borrower defaults, they can sometimes be forced to buy the loan back, eating the loss. He says he's not worried that the industry is setting itself up for a wave of defaults."
Right. Repurchase warranties prevent moral hazards. These people make my head hurt.
Since the secondary market players can put (some) loans back onto the original lender (sometimes), the SMP have an incentive to write lots of latitude into their credit guidelines. Then the lenders use "secondary market guidelines" to prove to their nervous credit policy people that their own loan policies are "respectable."
Lenders believe they'll end up repurchasing loans like homebuyers believe they'll sell at a loss next year.
Tanta | 06.27.05 - 6:02 pm |
Posted by Bill McBride on 12/06/2008 11:03:00 PM