Monday, June 16, 2008

Charting the Great Housing Bubble

There is a three part series in the Washington Post regarding the Great Housing Bubble. The main page is here. The first part focuses on the run up during the boom. It discusses how the mortgage industry changed and how collateralized mortgage obligations, CMOs, helped to fuel the subprime mortgage market. Now there were people willing, even wanting, to buy these products. One of the best passages in the first section is the following -

A mortgage lender could hire practically anybody. "It's not rocket science," Connelly would tell new hires, such as the busboy who quickly traded in his Toyota Tercel (value: $1,000) for a Mazda Miata sports car (value: $25,000). Pinnacle was running out of office space, forcing some loan officers to work on window ledges or out of their cars.
Interesting that there is no real requirement for the person helping people with the biggest investments of their lives. At least the realtor gets some training and requires a license.

The second part of the series focuses on the housing bust. Suddenly the subprime market popped. The thought was this would be contained only to a small population of borrowers and not spill over into the entire housing market or economy. Here is an important point about how loans during the subprime market -

As his team analyzed the individual loan files, Zimmer said he was struck by evidence of fraud, such as doctored bank statements. "Fraudulent loans were a big part of the subprime mess," he said. Mortgage brokers forged borrowers' signatures and pumped up their income, he said. People seeking to buy and sell a home for a quick profit lied that they were going to live in the home -- qualifying for a lower interest rate. But People's Choice calculated that it would have been too complicated and expensive to go after fraud, Zimmer said.

Fraud was being committed but a such large levels that it was almost impossible to prosecute. Some of the fraud was committed so people could live the American dream of home ownership. Other times it was just for a mortgage broker to get a bigger piece of commission. It still seems as if no one has been or will be accountable - aside from losing a house and/or a job.

For most of these callers, he had nothing to offer. "What happened was the values had dropped, the credit scores had dropped, and the loan programs had gone away," Connelly said. "I would hang up the phone and be frustrated that I didn't have a solution."
With the subprime market disappearing overnight there was nothing to offer people. There were no real choices except eventual foreclosure - a stage we are still at with many buyers. The discussion also explores the changing role the fed took along with the ever evolving view of the housing crisis.

Tomorrow concludes the series with a discussion of the aftermath. However make sure you stop by the main page and look at the four interactive charts featured - in The Anatomy of a Meltdown: The Credit Crisis with focuses on Global Wealth, Federal Reserve, Wall Street and Main Street.


Tom said...

I'd say that it wasn't just the people that were hired to man the phones and fill out the forms that were lacking in training but also the people at the top making the decisions.

More realistically they probably knew what they were doing and just looking to get as much money as they could and get out after having packaged up and sold the mortgages. With the tech bubble over they needed a new way to support their current incomes.

Those that were buying these products should have really taken a closer look at what was going on and the risk involved. I mean c'mon. It's a damn package of loans given out to people that normally couldn't get a loan, at a time when house prices are growing by unprecedented rates. On top of that these loans are given out at a higher interest rate.

I'm tired of people hiding behind and excuse of ignorance. If you couldn't see this coming you had no position making the bonuses you were making.

Anonymous said...

White collar criminals always gets away with more. And when people claim they did not know or they were just following procedures it probably is even murkier. If the intent is not evident cases can be difficult and expensive to prosecute.

Plus imagine finding a jury who can really understand the complexities of some of these cases. If the Fed chairman needs an explanation on how some of these hedge funds work imagine a jury - eyes would just glaze over. Throw in the chewbacca defense and any trial would end either innocent or in a hung jury.