by Tanta on 8/29/2007 08:42:00 AM

It appears that Barack Obama has had the gall to suggest funding homeowner bailouts with fines from predatory lenders instead of the taxpayer's dime. You know what that means:

The proposal is among the most radical yet from a leading Democrat and comes as Washington tries to respond to a growing wave of foreclosures and a crisis in credit markets.

Yeah, too crazy. Just like that tobacco settlement thing . . . totally radical. Next thing you know they'll be playing the Internationale on the Senate floor.

Fear not, lovers of that which is not radical: the Maestro has blown in/been blown in/benefitted from the blow in/blown it/whatever:

The ill winds blowing out of Wall Street could have one well-known beneficiary: Alan Greenspan. The credit crunch of the last few weeks has put the former Fed chairman back in the news. Some pundits have suggested that Greenspan would have responded more energetically than Ben Bernanke has, while others have charged that Greenspan bears much of the blame for the market troubles because of the cheap-money policies implemented during his tenure. Just in time to take advantage of this buzz comes Greenspan's book, The Age of Turbulence: Adventures in a New World, which hits the stores on Sept. 17.

If you need me on September 17, I'll be at Barnes and Noble buying a copy of Zen and the Art of Motorcycle Maintenance.

by Tanta on 8/28/2007 07:32:00 PM

One of the things we've noticed--not to say beaten like a dead horse from time to time--is that in the last several years a lot of people who aren't very good money managers got much bigger loans that they could reasonably be expected to carry. A lot of people are out for the blood of these borrowers, demanding that they be "punished" for having done something powerfully dumb.

I am often reminded of this little gem, "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments," by Justin Kruger and David Dunning. They argue:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

I remain convinced that there's something wrong with blaming the financially inept for not realizing that they are financially inept, when those who are supposed to be financially ept--loan officers, brokers, financial counselors, advice columnists in business publications--spent the last several years refusing to tell them that they were financially inept.

Of course people who are in over their heads are surprised. They lacked the skills necessary to understand what "over their heads" might mean.

by Calculated Risk on 8/28/2007 05:39:00 PM

From Newsday: Ex-American Home Mortgage manager going to prison

A U.S. District Court in Alaska Monday sentenced a former American Home Mortgage branch manager to serve more than 2 years in prison ... in connection with wire fraud charges after he falsified documentation to secure "stated income" mortgage loans from American Home and Countrywide Financial.
...
In the American Home case, Partow, 41, helped a client refinance his home in 2006. Despite the client having provided accurate information about his income, Partow listed the income as $20,000 per month -- "an amount that significantly overstated [the client's] true income," according to Partow's plea agreement.

In the Countrywide case, he admitted to knowingly overstating an applicant's income to qualify the client for a loan in April 2004.
...
By misstating applicants' financial statuses, Partow enabled them to qualify for loans they might not otherwise have gotten.

Back in March, Tanta pointed out that there are two types of mortgage fraud: “Fraud for Housing” and “Fraud for Profit.”

In this case, it appears the mortgage broker overstated the borrower's income without the borrower's knowledge. So this would be a fraud for profit scheme, and I expect to see many more prosecutions of this type soon. If the borrower had overstated their own income, the borrower would probably not be prosecuted. Prosecuting fraud for housing usually isn't worth the effort, and it is difficult to distinguish between whether the borrower was committing "fraud for housing", or if the borrower was just overly optimistic (i.e. delusional) about the potential income from that side job cutting lawns.

I recommend reading Tanta's piece on mortgage fraud: Unwinding the Fraud for Bubbles

by Calculated Risk on 8/28/2007 05:30:00 PM

Here is the Countrywide 8-K filing regarding the BofA investment.

The Convertible Preferred Securities are convertible at the option of the holders, at any time or from time to time, into a number of shares of common stock equal to the Liquidation Preference of the Convertible Preferred Securities being converted, divided by the Conversion Price (as defined below), plus cash in an amount equal to any accumulated and unpaid dividends on such securities. The "Conversion Price" of the Convertible Preferred Securities is $18.00 per share, subject to customary adjustments.

Note: this is NOT a floorless convertible.

by Tanta on 8/28/2007 04:39:00 PM

Here's another little bit of data to fit into the big picture on refinances. It doesn't solve any problems or prove anything conclusively. It's from a Countrywide Capital Markets newsletter that I get (not on the web, I'm afraid.)

What this means is that, of the refinances into a 30-year fixed-rate conforming loan that Countrywide did in the six months prior to December 2005, 3.2% were borrowers refinancing out of an Option ARM. By June 2007, the number had increased to 11.4%.

At the same time, the percent of new FRM refis that were originally subprime seems to be slowing down.

This suggests that the number of subprime borrowers who can refinance into a conforming fixed is decreasing as we get toward a "residual" pool of subprime loans that either do not qualify for a 30-year fixed or whose monthly payment cannot be lowered with one.