An Almost Ubiquitous Conviction
Some housing bubble news from Wall Street and Washington. Associated Press, “Construction activity plunged in July by the biggest amount in six months. The Commerce Department reported housing activity fell by 1.4 percent, more than double the 0.6 percent decline in June, and has now declined for a record 17 straight months as home building suffers through its worst slump in 16 years.”
From Bloomberg. “Homebuilders are scaling back to try to trim the glut of unsold residential properties even as companies are still adding offices and factories. We’re going to see another leg down, mostly because of the pain the big builders are taking, said Ken Mayland, president of ClearView Economics LLC. ‘The full effects of the market volatility really haven’t found their way into housing yet. The August declines may be even bigger.’”
“Federal Reserve officials got an earful from critics at a weekend retreat arguing they should use regulation and interest rates to prevent asset-price bubbles.”
“Otmar Issing, former chief economist at the European Central Bank, and Stanley Fischer, head of the Bank of Israel, were among guests at the Fed’s summer symposium in Jackson Hole, Wyoming, to challenge the hands-off approach.”
“‘The position that ‘this isn’t an issue for central banks’ has lost some support,’ Issing said in an interview at the gathering. ‘The tide is turning.’”
“‘Central banks, probably on more occasions than they would like to admit, should respond to asset-price bubbles,’ said Fischer, who taught economics at the Massachusetts Institute of Technology Fed Chairman Ben S. Bernanke worked on doctorate (a) there in the 1970s.”
“James Hamilton, an economist and former Fed research adviser, warned that if the central bank doesn’t tackle the loose lending standards that contributed to the housing bubble, politicians will, potentially doing more damage. U.S. legislators blame the central bank for insufficient action to stop predatory lending practices.”
“‘It would be wise for the Federal Reserve to be clear on exactly what changes in regulatory authority could help prevent a replay of these developments and pre-position itself as the advocate to get these implemented now,’ said Hamilton, a professor at the University of California at San Diego.”
From Reuters. “In rare public criticism of Alan Greenspan, a former government official who authored a famous rule of central bank policy said on Saturday that ultra-low Federal Reserve interest rates had stoked the U.S. housing boom and subsequent bust.”
“‘A higher federal funds path would have avoided much of the housing boom,’ said John Taylor, former U.S. undersecretary for international affairs. ‘The analysis also suggests that the reversal of the boom and thereby the resulting market turmoil would not have been as sharp.’”
“Taylor argued…the unusually prolonged period of low Fed rates were misinterpreted by financial markets as a lasting change in the Fed’s policy responses to inflation — further evidence that the U.S. central bank is to blame for the housing debacle.”
“‘A key lesson here is that large deviations from business-as-usual policy rules are difficult for market participants to deal with and can lead to surprising changes in other responses in the economy,’ Taylor said.”
“Federal Reserve policy makers underestimated the role that housing plays in triggering recessions and merit an ‘F’ grade for their failure, said Ed Leamer, director of an economic forecasting group at UCLA.”
“‘Something’s wrong here,’ Leamer wrote in a paper presented to a conference in Jackson Hole. Leamer said in an interview today at Jackson Hole that some former ‘hot markets,’ such as pockets of California, may see declines of 30 percent to 40 percent.”
“In his paper, Leamer said ‘highly stimulative’ monetary policy helped stoke a ‘hot’ housing market. ‘This is an event which I think to a large extent was preventable.’”
“‘The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting,’ Leamer wrote. ‘The worst time to stimulate the economy with loose monetary policy is when the wave is starting to rise. That is going to make the crest all the higher, and the crash all the more catastrophic.’”
“He added that there’s ‘very little possibility that a rate cut would make much of a difference’ at this point. ‘Once the wave has peaked and is crashing, there is not much that can be done to quiet the waters.’”
“Would cheaper money relieve the anxiety in financial markets about shoddy mortgages and declining home prices?”
“‘The reason there isn’t a market for these credits is that people don’t know what price they should be trading at,’ said Leamer. ‘That’s not going to be affected by a small change in the federal funds rate.’”
“Other experts attributed the real estate frenzy to other factors, in particular to an explosion of exotic mortgages that allowed people with low incomes and weak credit to buy houses with no money down and deceptively low initial payments.”
“‘It’s too easy to blame the Fed,’ said Robert Shiller of Yale. Shiller blamed mass psychology for the bubble, an almost ubiquitous conviction that housing prices would simply keep climbing at double-digit rates.”
“Freddie Mac, one of the largest providers of financing for U.S. home mortgages, on Tuesday said it broke from its plan to sell one if its standard mortgage securities each quarter amid a glut of securities in the market.”
“Supply in the $7.2 trillion mortgage bond market over the past two months has ballooned as investors have cooled to purchases of even ‘AAA’ rated securities.”
“‘We and the dealers that we work with are seeing a market with considerable supply with all fixed-income programs’ said Michael Cosgrove, a Freddie Mac spokesman. ‘At this time it doesn’t make sense to provide more supply to the market.’”
The LA Times. “A year ago, Countrywide Financial Corp. CEO Angelo R. Mozilo was boasting that the looming shakeout in home prices and hike in mortgage interest rates would usher in a period of remarkable prosperity for his company.”
“Today, the picture looks much different. The tone of executives’ comments has gone from complacent to almost apocalyptic. The company’s traditional frames of reference for the performance of its loan portfolio, he added, may no longer be ‘a fair comparison in light of what is happening to real estate values.’”
“As for loans that the company has packaged and sold to investors in the bond market and on which it retains some liability for defaults, executives said in July that it was too early to say what those losses will be. David Sambol, the company’s president, told analysts in July that it was ‘providing for future losses [in its mortgage portfolio] at a level that is greater than anything that we have ever seen.’”
“Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007.”
“‘There really had not been for our models…very much in the way of historical empiricals’ to help Countrywide compile accurate predictions, Sambol said.”
“Mortgage lender NovaStar Financial Inc. said Tuesday it was all but eliminating sales of new loans and will lay off more than 30 percent of its work force as it deals with continued deterioration in the mortgage market.”
“‘In better times for the industry, operating a sizable mortgage banking business to feed loans into the portfolio made strategic sense. But the secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment,’ said CEO Scott Hartman, in a news release.”
“NovaStar canceled a rights offering designed to raise $101.2 million for the subprime mortgage lender and said its auditor expressed doubt about the company’s survival.”
“Deloitte & Touche LLP told NovaStar it wouldn’t be associated with the rights offering unless the company made additional disclosures, according to a NovaStar statement today. The changes would include ‘an explanatory paragraph about the uncertainty of NovaStar’s ability to continue as a ‘going concern,’ NovaStar said.”
“The U.S. subprime crisis could herald tighter mortgage policies in Europe and retail lenders could be especially reluctant to grant 100 percent loans on property purchases, analysts said.”
“Arturo de Frias, chief banking analyst at Dresdner Kleinwort in London, forecast a ‘widening of spreads but that is good for the sector. There will be more differentiation between what is more and less risky.’”
“‘If there is less availability of credit in general, there will be less availability of mortgages,’ said Alan Webborn at SG Securities in London. ‘It is likely the terms will be tougher and a little more restrictive.’”
“In Italy, lenders could become stricter with new categories of borrowers, such as employees on temporary contracts, and reduce loan-to-value ratios for borrowers in general to 80 percent from near total coverage.”
The Independent. “Bullish Finance Minister Brian Cowen has said that the current turmoil in the property market is ‘neither unwelcome nor surprising’ despite plummeting house prices around the country.”
“In comments which will renew questions over his stewardship of the nation’s finances, Mr Cowen has rejected claims that his policy of ‘cooling down’ the property market has badly backfired.”
“The difficulties in the Irish property market were highlighted last week at a new housing development in Delgany, Co Wicklow, where people who bought houses for €700,000 have been shocked to learn that new houses of similar design on the same estate are now being sold for €595,000 — a drop of €105,000.”
“‘For most people, the value of their house is a constant factor. It is a home to live in, not an investment to be tracked like price changes on the stock market,’ he declared.”
“Mr Cowen claimed there is now much better value both in the new and secondhand market than a year ago. ‘A climate of price moderation is a far more comfortable place for buyers than a market driven by hype. Even home owners trading up or down who may take longer to sell will be in a better position as buyers than in an overheated market,’ he asserted.”
“‘The recent turnaround from unsustainable house price escalation in 2005/2006 should be neither surprising nor unwelcome. It is in everyone’s interest that the housing market should evolve to an orderly and sustainable growth pattern, in terms of prices, lending and output,’ he added.”
National Mortgage News. “National Mortgage News is publishing its exclusive ranking of the nation’s top subprime lenders in 2Q — and the news isn’t pretty. Mortgage bankers originated a paltry $53.4 billion in subprime loans during the second quarter, the industry’s worst showing in five years.”
“Here’s just one of many startling facts in the story: subprime accounted for just 6.3% of all home mortgages originated in the quarter, compared to 20.4% for all of 2006.”
“First Horizon mortgage chief Jerry Baker recently sent out an e-mail to his employees. He wrote, ‘This situation quickly evolved to a complete investor pullback from purchasing any form of loan or credit product or pool of products extended by banks and other financial institutions for virtually any purpose…Over the last several weeks the result has been that there have been almost no buyers for credit or debt products at any price.’”
“Friedman Billings Ramsey on the mortgage insurance industry: the outlook ‘over the next six to 12 months continues to be challenging. The most significant near-term issues facing the space, in our opinion, are (1) the chance of more-onerous capital standards from the rating agencies, (2) the potential for earlier-than-expected loss development eclipsing near-term revenue and (3) worsening home price depreciation impacting loss severity.’”
“The California Association of Mortgage Brokers recently held its annual convention. The exhibit hall had 110 booths. About 15 of them were empty because of no-shows…”
BTW, MSM reporters, if you need any proof that the Fed knew something was wrong for a long time, check here:
‘From the ( Federal Reserve meeting in December 1999),AG: ‘Owners’ equivalent rent is going to start to accelerate unless I misread how asset prices interact with consumer prices. The reason is that the ratio of owners’ equivalent rent to the value of housing has been going down continuously, and the implicit rate of return that that is suggesting cannot credibly be expected to continue.’
“the implicit rate of return that that is suggesting cannot credibly be expected to continue.’
In 1999 he says this. Purfick. Just purfick.
Ben, it is interesting that the 2005 post drew 2 comments. My, my how your blog has grown.
It is quite amazing how early on some market watchers spotted the bubble. And quite incredible that the Fed says bubbles are impossible to detect while they are inflating, and can only be dealt with after they burst.
It’s the ostrich approach to risk management.
I don’t see how it is possible for folks not to see this bubble. Same with the DotCom bubble. How blind (and deaf) can one be?
The Fed on interest rates, housing prices, and monetary policy in 9/2005: “Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission.”
The Fed and “Mr. Bubbles” knew what they were doing from Day One.
Go to Google and type in “the money masters”. Watch the 3 1/2 hour video. Expanding and contracting the money supply is a great tool for a central bank. The video may be a little conspiratorial but it is very educational. You won’t thing this debt bubble was in any way accidental.
Suck the sheep in with cheap easy credit then tighten the money supply and they become lifetime serfs of the banks? the older generation always told us to stay out of debt while the shysters told us debt is wealth.
Most people that remembered the great depression are dead. It was time to have another one.
“further evidence that the U.S. central bank is to blame for the housing debacle.”
More finger pointing by the various guilty parties. I agree that the FED had a lot to do with this, but everyone from the persons taking out too large a mortgage, to the builder who built too much “luxury” housing, to the loan originators who gave out loans to anyone who would fog a mirror, to the big banks and the hedge/derivative guys and the rating agencies all were up to their neck in it as well.
Yep, let the Blame Game begin:
“FED, FED bo BED Banana Fana mo MEDs fee fi do DEAD. FED.”
I notice you had FED and MEDs in the same verse. Is that conscious choice?
FED, MEDs and DEAD. Yep, I was conscious at the time.
It’s not whether you win or lose, it’s how you lay the blame.
I agree - mass psychology had a lot to do with this bubble - as well as the all the previous bubbles in history. Everyone starts to talk about the rise in a particular asset, be it, tulips, oil, internet IPOs, or real estate. The value spirals up and then the academics deem the rise a new economic phenomena (definitely not a bubble). Next time around, it’ll probably be baseball cards or custom made car rims.
This bubble would have never gone anywhere if lenders stuck to prudent standards and borrowers did not expect 30% a year price appreciation. The fed is only one player in a huge multiplayer game.
This bubble would have never gone anywhere if lenders stuck to prudent standards and borrowers did not expect 30% a year price appreciation. The fed is only one player in a huge multiplayer game.
Looser lending standards were the main reason for this bubble. If people couldn’t have gotten 100% loans, many of them wouldn’t have been in the game, speculators included.
I blame the lending more than anything ,but the whole darn Nation thought real estate always went up and nobody was taking a risk .God ,you would of thought that somebody would of noticed that we already had about 70% ownership and maybe ,just maybe ,there wouldn’t be buyers left who could afford the increases .It’s just interesting how the REIC had banner sales years (like 2005) when the affordability index was so low in most regions .Could it be that people couldn’t really afford what they were buying and alot of fraud was taking place ? These borrowers had nothing to lose with zero down. No bail-outs .
Looser lending standards were indeed the main driver of the bubble, but to be honest, I will blame the real lenders (me included), not just the Loan Originators. Everybody and his brother was reaching for yield. In all cases this involved leverage of some kind, not always obvious. In the simple case of making a fixed mortgage loan with a reasonable (?)LTV ratio like 80% or 70%, one is inducing the sucker (homeowner) to leverage his own bet in a manner that would not be permitted in the stock market. Because house prices are Sticky On the Way Down, amortization might take care of the real lender in the case just described. The FB never really feels he is drowning, because his house probably gets paid off at about the same speed that it depreciates. Well, at least, that’s how I’ve planned it in my own reach for yield … one of the reasons why I don’t write many notes longer than 15 years. The lenders who gave LTV 100% or 110% are getting what they deserve, and so are the idiots who bought “securitized” versions of the same loans.
You are spot on with the loose lending standards.
But another thing driving this scheme was also the result of the FED, Low rates, which means NEGATIVE ROI.
You were a loser if you did not borrow, because asset price inflation was eating your savings (and still is), while the pigs were helping themselves to an asset price boom trough.
I love how the FED treats inflation in general, and the housing bubble in particular, as some “occurrence” created by uncontrollable forces. Both are intentional creations of the FED. Their job, from day 1 in the year 1913, was and is to INFLATE.
The RE bubble was an intended act designed to recreate the wealth effect that the stock market crash erased. They knew we were hearde straight back to the 1930s. They used housing to regreate the wealth effect because it is the only thing this economy has going for it. What else have we done in this country to make money, besides selling overpriced houses and stocks to each other?
The FED is so full of shit, but it amazes me that the public remains too blind to see it…….
Fool me once, shame on you. Fool me twice…..won’t get fooled again.
Ahh.. Gotta love those elgant words spoken by our elegant leader, “Dubyah”.
The final frontier.
Scotty: On Earth, we have a saying: Fool me once, shame on you. Fool me twice, shame on me.
Chekov: I know this saying. It was invented in Russia.
The California Association of Mortgage Brokers recently held its annual convention. The exhibit hall had 110 booths. About 15 of them were empty because of no-shows…”
Meaning that 95 of them actually had some shyster standing in them to peddle some toxic product or another?
If they had been smart, they would have filled those 15 empty booths with talent scouts from other professions the brokers might be qualified to work in, such as Taco Bell, McDonald’s, Dunkin Donuts, etc.
But I guess they weren’t smart enough.
‘professions the brokers might be qualified to work in, such as Taco Bell, McDonald’s, Dunkin Donuts, etc.’
It’s a great time to……super-size my fries!
Now is a great time to uhm, buy or sell fries.Yep, they are not making any more fries.
Low interest rates alone weren’t the problem. It was the deadly combination of low rates and non-existent lending standards.
If traditional standards had stayed in place, we’d have more homeowners in houses they could afford, with historically low rates on their mortgages.
But no, people used “exotic” financing to stretch way beyond what they could afford.
Agree completely Lisa. Even with fixed rates near 4% the housing market would have cooled in 2003… still a bubble but not the absurd bubble heights reached by 2005-6.
The shame is that so many homeborrowers did not lock in those fantastically low rates but to squeeze out just a bit more house went the ARM route. Talk about short term thinking…
And maybe that is the one true culprit here - an economic system wide dependency on short-term, get-rich-now thinking. It infected all levels of finance, and so became the ‘normal’.
I would guess that the current players most fear a new normal.
AKA Greed
Lisa brought up an even more important (IMO), yet overlooked issue the other day that needs further exploration.
She related the story about a couple who just up and allowed their home to go into foreclosure, not because they couldn’t service the debt but because it was obviously a losing proposition when rental rates,etc were factored in. If this solution catches on with the public (herding) as a viable alternative then this bust might see pricing 80-90% off peak in some areas. Well below replacement cost.
Vast tracks of homes being abandoned to banks that have no recourse other than to take back the homes and try to sell them. Throw in the further tightening on available loans with these walkaway-defaults and we got ourselves a full on rout of the RE industry.
Auger, I agree. For example, how many FBs are sitting with the checkbook and the mortgage statements today, and figure they have 6-9 months before a foreclosure-forced eviction?
How many of them are going to go into survivalist mode and do the following:
– Stop paying the mortgage and taxes altogether.
– Use some of that to put together a rental deposit & security fund.
– Get the spouse and kids ready for their trip to “Wallyworld,” ie., their new rental life.
– Cut back on other expenses.
– Do the garage sale thing for a quick lesson in how little material things are actually worth.
People may be greedy and sometimes dumb, but they’re not always stupid. I think plenty of banks are getting jingle mail for Xmas.
Add in the fact that these folks I referenced were apparently not stressed for money. They just didn’t like losing their bet. No personal responsibility for their actions, just up and toss the keys. I wouldn’t be a bit surprised to see this become THE prevailing thought process once it is obvious it is a successful strategy.
Guy I work with who argued strenuously that RE wouldn’t go down (it’s different here), traded up from small house to large house (less than 1,000 sq ft difference, but with shiny surfaces) two years ago. He has a 30-yr fixed on a 300K mortgage, and has the wherewithal to make his payments - barely. Yet the other night even he tossed out into the conversation a line about wondering how tough it would be to declare bankruptcy.
That’s such foreign ground to him he probably doesn’t know the rules, but it did indicate to me the thought of jingle mail had passed thru his mind.
If this solution catches on with the public (herding) as a viable alternative then this bust might see pricing 80-90% off peak in some areas.
No they won’t go down that far as long as the area has a reasonable standard of livability (i.e. excluding places like central Detroit, etc).
Once prices go down to 100x rent you will see investors buy the places for cash flow (credit or no credit, they will attract buyers). I don’t think ratios have gotten any worse than 400x rent anywhere. Still, that’s a big haircut.
And who will the new renters be? The very same people who used to “own” the houses. Not in the very same houses, of course.
Greed, fast money was everywhere. Lenders, brokers, Wall St boys took advantage of this get rich window and real estate, flippers, many sub-prime home owner dreamers all were there. Reality sets in as some win some don’t. Such is life where common sense still matters on buying and Wall St. still knows there are plenty of suckers, fools who question not but want the awards now.
“They bought their tickets…..they knew what they were getting into…”
I say let ‘em crash.
You’re right. Lower rates would have pushed housing prices up to an extent, but not that much. The adjustment would have been much less, perhaps a few years without any apprecation rather than a crash.
It was the lending standards, and the HELOCs.
It used to be that to get a second mortgage you needed to say what it was for, and it had to be something good.
“Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007.”
I believe its proprietary system assumed that after you foreclosed on loans you knew people couldn’t afford, you could resell the property and (by tacking on lots of fees) make money on the foreclosure too. Instead, they have a loan backed by a depreciating asset, and in some states a non-recourse loan at that.
bingo
0 down
neg am
Didn’t you know real estate always goes up by 20% per year? I heard that about 1000 times the last few years.
And please don’t forget that greed was also encouraged by the flat 15% capital gains tax, and the fact that you could sell your primary residence every two years for a 500k profit per couple and pay no tax.
Sure it was the lending standards… and the fault would end there if these were portfolio loans. But the vast majority were securitized, and you have to ask then “Why the loose lending?” The answer to that is the ratings agencies rubber-stamped the loans for investors to scoop up, regardless of how poorly they were underwritten.
So I blame ratings agencies.
Unless the answer to the question “Why the bogus ratings?” is anything other than a) extremely profitable and b) none of their own money at risk, and c) can always play the ‘Our ratings are merely an opinion for which we are not legally responsible’ card if things turn south.
Let’s not forget…
The huge commisions that brokers made on selling the most toxic loans.
The high rate of return that investors could have gotten (and did get in the early years) from these toxic loans, if the housing market hadn’t collapsed.
But, “Why the huge commissions for toxic loans?” A lot of that was paid by the lender for YSP and PPP. The answer is that the lender can make even more money when that loan gets securitized. And the only way that loan can get sold to investors is if the risk is wildly misjudged by… the Ratings Agencies!
Two outcomes are possible by the ratings agencies doing their jobs—- either the bonds are rated correctly, and the yield doesn’t justify purchasing such a low-quality bond. Or the higher yield has to be propogated back to the borrower, who could then never afford the loan amount. Either way, those bond ratings are the valve on the spigot and the central point of breakdown of the whole system.
It didn’t take a genious to figure out that something paying 150 bps more than any other AAA paper might not be quite the same thing as a Treasury. The need for highly rated junk paper predated the rating agencies rate inflation. It started with British Pension funds who needed to add risk, but were legally limited to certain grades of investments (ie they needed paper that had a certain rating but the risk/reward characteristics of paper well below that rating).
Hmm – full circle:
Investors were looking for interest. Normal interest rates were low. Normal junk investments weren’t much higher, so where’s a good banker to look?
Enter MBS. Packaged by various banks, ‘rated’ by captive agencies, sold to investors at rates well above normal bonds. The Wall Street boys turned out ever increasing risk. In order to have the mortgages necessary to sell, mortgage brokers used to lowest possible ‘fog the mirror’ standard. Appraisers were coerced (they say) into appraising piggny number one’s straw home at more than the third pig’s brick (or stucco) haven.
Realtors quickly realized that if the price of a POS doubled their commissions doubled and so on.
Now, if interest rates were raised several years ago then investors may (not certain) have settled for treasury backed securities. If Wall Street hadn’t invented ever more dubious ways to separate the buyer from his/her cash, there wouldn’t havbe been a bubble. If ratings agencies had been honest, the junk Wall Street developed would have reflected the risk. lIf appraisers were honest homes wouldn’t double in price in a couple of years. And honest realtors would not have sold some of the homes they sold to the people they sold them to. And, if buyers weren’t greedy they wouldn’t fall for “home prices only go up” lines. Come on, what does it take in the line of research to find out that’s a lie? And, if realtors and buyers hadn’t been so greedy there would have been very little flipping going on.
Full circle. Plenty of room at the blame trough for everyone.
I think Bluto is saying it’s the government’s fault for limiting the types of investments that could be made, thus creating a huge vacuum of supply for the demand of all that money. MBS didn’t just enter the scene— it was sucked in. “Why was it profitable to mis-rate high yield securities?” Because the government made the rating itself valuable.
It’s interesting, and I was trying to track down the exact timeline of what happened to the pension funds when I ran across this really, really scary article about pensions investing in CDO equity tranches. OMFGWTF.
So I blame ratings agencies.
I don’t. If I can figure out that lending 100% of an inflated price to someone who lies about their income is a recipe for not getting your money back, so could all those seven-figure-earning pension and hedge fund managers.
Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007.
D’oh!
That’s a pretty big bamboozle.
Or an extremely poor “proprietary system.”
Bamboozled is a good word. It is unfair that Tan Man has tainted the word by using it inappropriately.
are there tanning beds in prison?
I sure hope that this guy had nothing to with the “proprietary system, as he has just gone to WaMu.
Bwaa
He was their Chief Risk Officer ! Talk about timing to jump ship.
IMO, out of the fire and into the frying pan. That old BusinessWeek article cited WaMu as the bank who booked profit on neg-ams as if the homeowner paid the fullly amorized amount. Enron accounting at its best. What happens when those neg-ams go belly up? Will WaMu be affected too? Maybe this guy is just trying to wring out a few more paychecks before retiring to Tahiti.
What wasn’t to like? Exploding values, huge profits and no risk.
What isn’t to hate? Falling values, little profit and massive risk.
Happy and silent on the upside; angry and loud on the down slope.
The boys at Jackson Hole are only now learning the dangerous insanity of this thing? Talk about 5 years late and $2 trillion short!
And to think that just a few scant years ago they were discussing the wealth effect at the Hole. Obviously there wasn’t much discussion about the probability of a “reverse” wealth effect. I guess the masters of the universe can study that particular scenario now.
Would you like to be the control group or the variable in this experiment?
This year, Jackson Hole.
Next year, Tony’s Pizza Shack in downtown Hoboken.
RE: The boys at Jackson Hole are only now learning the dangerous insanity of this thing? Talk about 5 years late and $2 trillion short!
Pretty much sums it all up in a nutshell, TOTL.
The buffoons in DC can point the fingers all they want to, but the damage has been done.
The horses, cows, and pigs have all run away, and the proverbial barn has burned down.
Next to go down in ashes will be the stock market.
So much for federal banking oversight.
Gonna be a nasty winter.
we need this man NOW and BADLY:
http://www.ronpaul2008.com
He has my vote and campaign contribution. Tough battle, David vs. “Goliath, Stearns & Sax,” so to speak.
I donated and will vote for him. And I usually vote Democrat. Too bad his social policy is pretty close 180 degrees from what I’d like. The democrap congress will keep that part in check, hopefully, without hampering the fiscal reforms too much.
Angelo Mozillio of CountryWide was hyping his company, telling listeners that only blue skies were ahead. Oh, yes….isn’t that what Lay, Skilling, Rigas, Sullivan, Stewart, Kozlowski, Swartz, Keating, Ebbers, Waksal, etc, etc, said before they crashed and burned. Actually, the millions of suckers who believed them got burned first. The USA is equal with Nigeria as far as corruption is concerned.
Speaking of Enron….
“NovaStar canceled a rights offering designed to raise $101.2 million for the subprime mortgage lender and said its auditor expressed doubt about the company’s survival.”
“Deloitte & Touche LLP told NovaStar it wouldn’t be associated with the rights offering unless the company made additional disclosures, according to a NovaStar statement today. The changes would include ‘an explanatory paragraph about the uncertainty of NovaStar’s ability to continue as a ‘going concern,’ NovaStar said.”
Loks like someone learned something from Enron…Deloitte & Touche. You can’t sell anything if the auditors make you disclose that your company is ready for hospice care in the documents. Just not going to happen. I almost hate to say it, but good for Deloitte. Then again, if the partners on the account thought it was going to cost them any money in the long term, their spines would have melted. This is a VERY good sign that the people who know the company best think it is dead.
No the scary part is that we are one of the the least corrupt of all.
“The USA is equal with Nigeria as far as corruption is concerned”
Who do you think taught Nigerian’s English and gave them computers?
Just think of the revenue $$$$$ the Nigerian Gov’t could make if they had to buy stamps instead of sending email’s to America.
aren’t you being a little harsh on Nigeria?
“Our whole place in the industry would have changed dramatically because we would have arbitrarily made a decision that was contrary to what everything appeared to be,” he said. Among other problems, mortgage brokers would have stopped offering the company high-grade or prime mortgages if it would not also accept lower-quality sub-primes”
So, let me get this straight… you say you knew it was coming, but because everyone else was jumping off the bridge, you did, too? It was more important to “keep your place in the industry” than to do what was best for your customers?
That sounds like a company I’d like to do business with! Where do I sign up?!
“Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007.”
Bugs: “eh Daffy, where’s Wiley E’s Acme catalog?
Daffy: “Well, those guy in fancy suits headed for Jackson’s Hole wanted to borrow it for awhile Bugsy”
Bugs: “eh, Daffy…don’t lend that out anymore…it has some very “proprietary systems” that the Warner Bros boys don’t want let loosened on the general public.”
“‘There really had not been for our models…very much in the way of historical empiricals’ to help Countrywide compile accurate predictions, Sambol said.”
Black Monday:
“…and then it went dark”
Another decent up day in the stock market on all this good news.
low interest rate = higher house prices
loose lending standards = uncontrolled speculation
everyone is expecting that a rate cut is coming. Rates down - BooYah!, oh wait, spending down, hiring down, sales down.. oh wait I forgot , the fed is lowering rates Booyah??
More News to Make The Stock Market Go Up
Countrywide May Trim Up To 10,000 Workers
Countrywide Financial Corp., is contemplating slashing its work force by 7,000 to 10,000 workers, according to industry officials close to the situation. Read on…
NFI Cancels Stock Deal & Cuts More Jobs
Subprime lender NovaStar Financial said Tuesday that it has canceled a previously announced stock offering that would have bolstered its liquidity, a decision that raises new doubts about its future. Read on…
FirstAm to Slash Payroll
The First American Corp., a provider of mortgage-related and other business information based in Santa Ana, Calif., has announced that it expects to slash its payroll by approximately 1,300 full-time equivalents in the third quarter. Read on…
ComUnity Lending ‘Moving to Sidelines’
ComUnity Lending Inc., Morgan Hill, Calif., has announced a decision “to mitigate the risk of the market by reducing our volume and moving to the sidelines while we wait for sanity to return to the market.” Read on…
HUD to Implement FHA RBP System
To augment its recently announced FHASecure program, the Department of Housing and Urban Development plans to take administrative action to implement a risked-based pricing system by Jan. 1 so the Federal Housing Administration can price its mortgage insurance premiums based on a borrower’s risk profile, according to a senior HUD official. Read on…
Regulators Urge ‘Proactive’ Servicing
Federal and state regulators are urging mortgage servicers to be “proactive” and assist homeowners who are facing a jump in their monthly payments due to an approaching reset of their adjustable-rate mortgage. Read on…
FBR: B&C, Alt-A Dive Will Be ‘Very Disruptive’
The sudden drop-off in subprime and alternative-A lending from $700 billion in the first half of this year to $300 billion in the second half will be “very disruptive” for mortgage banks that relied on nonagency originations for the bulk of their profits, according to a Friedman Billings Ramsey report. Read on…
VA Names New Home Loan Director
The Department of Veterans Affairs has quietly promoted Keith Pedigo and appointed his former deputy Judy Caden to be the new director of the VA home loan program. Read on…
Mortgage Cadence Names Marketing Chief
Enterprise lending software vendor Mortgage Cadence Inc., Denver, has added Michael Hammond to its executive team as chief marketing officer. Read on…
COFI Dips
The Eleventh Federal Home Loan District Cost of Funds Index declined by less than one basis point in July. Read on…
Block Again Tagged as Zacks ‘Bear of the Day’
H&R Block, the Kansas City, Mo.-based parent of Option One Mortgage, has again been labeled the “Bear of the Day” by Zacks Equity Research, Chicago, this time for Sept. 4. Read on…
Fitch Downgrades SACO B&C Classes
Fifty-two classes from nine issues of SACO mortgage pass-through certificates totaling nearly $518 million have been downgraded by Fitch Ratings as a result of changes to its subprime loss forecasting assumptions. Read on…
Commodore CDO Classes Downgraded
Two classes of notes issued by Commodore CDO II Ltd., a collateralized debt obligation, have been downgraded by Fitch Ratings. Read on…
(Talk about 5 years late and $2 trillion short!)
Perhaps $5 trillion. Assuming a 20% average national reduction from NAR’s 2Q06 Median Home sales price ($227,100) and over 110 million owner-occupied units (census 2Q-07), the loss in paper value nationally would be just over $5 trillion.
Theoretically, based on a 40% to 50% decline, I could “lose” $400K to $500K from a peak price of $1 million for identical houes, but it wouldn’t matter to me since I paid $209K and paid the mortgage off. The only effect is maybe my kids could afford to live in the neighborhood someday.
But how many people either borrowed and spent the paper gains, paid peak prices, or were counting on the paper gains for their whole retirement?
Maybe it isn’t too big to bail. The national debt clock is at $9 trillion.
So perhaps they’ll just borrow another $5 trillion to allow borrowers and lenders to continue to live in the style to which they have become accustomed, while passing the cost on to future generations who will be worse off. Perhaps they can even be forced to pay more for housing, in order to pay for more cruises for seniors who sell, under this plan.
Is it me or does the US sound more and more like a banana republic every day?
Jay, I hear ya. I was on the phone this AM with the office of my CONgressional reps. It’s over, folks. Washington is a complete, derelict, rudderless ship. CONgress is so disconnected from the people they purport to serve. I guess they are too busy keester-poking, bribe-taking or brown-nosing their corporate bosses. As an institution, it is toast, I’m sorry to say, because I believe in the republic, or representative democracy. I wish I was a surgeon, because I’d offer to go to Washington and perform a few emergency surgeries to separate heads from posteriors, pro bono. Heada$$ectomies.
I used to work there (SysAdmin for 12 Members of the US House) and you are dead-on. The thing is, it HAS to get worse before it gets better, since 90% of the population pays no attention. Once it effects them, the bums get tossed.
Whether you are an (R) or a (D) is irrelevant. If they’re an incumbant, vote for the opposition.
Brian, I don’t even work there and I know how bad it is. I actually knew the day an internal email between staffers in my former CONgressperson’s local office got forwarded to my ex by mistake. The seething contempt they have for their constituents is not to be believed, but that’s OK, I return the sentiment 100fold. Also, it is all a big joke to them. Sometimes I wish for a meltdown, where all bets are off, so I can see some of these turds suffer like they’ve made the populace and above all, the Armed Forces suffer.
“Whether you are an (R) or a (D) is irrelevant. If they’re an incumbant, vote for the opposition.”
I disagree with the implication here. Both R and D suck these days and they’re both status quo. Throw both those bum parties out. Vote something that’s not R or D, except for maybe Ron Paul. Although I think Ron Paul is an L hiding as an R.
Although I think Ron Paul is an L hiding as an R.
If he weren’t such a social reactionary I might agree.
And the future generations is now. That recent 30 year income comparison showing a 10% drop in real income screams save you fools, save!
“So perhaps they’ll just borrow another $5 trillion”
From who?
Let’s get those 6 month T-bill rates back up into the 15% range.
Man, if I could make 15% guaranteed, I’d rent forever. Probably two places. Come, cherie…let me show you my other rental…
like it!
RE: Perhaps $5 trillion
That’s precisely the number I’ve had rollin’ around in my head, WT E.
‘No battle plan survives contact with the enemy.’
-Colin Powell
‘We have met the enemy and he is us.’
-Pogo
Fitting epitaphs to the demise of Countrywide, led to slaughter by their own design.
No battle plan survives contact with the enemy.’
-Colin Powell
Powell is quoting the Prussian general, von Moltke, who said it first. Rove likes to use it too, though he wrongly attributes it to Napoleon.
Thanks. I’m solid for attribution, though I pulled this off a ‘Quotes-R-Us’ link.
Look you had to have a good downpayment, a good jod, a good credit history, money in the bank and still convince the bank you were going to make payments on time. During this gold rushof rich overnight flips which has now turned out to be a bunch of fools gold maybe a lot of this can be traced back.
The whole housing meltdown along with jobs lost, pension scandal, and inflation, can be traced to “deregulation” which has now come back to haunt lots of people.
Or greed.
The other thing no one is taking into account with that good job, is that before the lax lending you had to be at that good job at least 2 years or have 2 years of employment in the same field if you changed jobs. There’s going to be lots and lots of people changing careers that will not have that 2 year record. The buyer pool is shrinking and shrinking and shrinking.
Deregulation of energy screwed us in California. But that is almost always the goal of deregulation.
No rules? No oversight? Let the fleecing begin!
yes, lets re-regulate airlines.
You say goodbye, I say hello…
http://www.azstarnet.com/business/199492
“Federal Reserve officials got an earful from critics at a weekend retreat arguing they should use regulation and interest rates to prevent asset-price bubbles.”
Me thinks that these guru’s find themselves in a one horse race. Looking back after the fact, yes there was a stock market asset bubble. Looking back after the fact, yes there was a stock market asset bubble. Their horse in running at the back of the field with blinders on after the rest of the field has left the track. The Feds should be asking themselves right now ‘How many industries like the house and commercial construction business, the auto business, the big box businesses have borrowed from future sales with their perpetuation of the “How much’a month it a’gonna cost me plan”. The answers to this question are going to reveal the depth of the coming financial debacle not only on our economy but the world economy.
The world economy better hope that the Asians start spending like drunken Americans to take up the slack
““The U.S. subprime crisis could herald tighter mortgage policies in Europe and retail lenders could be especially reluctant to grant 100 percent loans on property purchases, analysts said.””
Especially reluctant? Why would it ever make sense to give a 100% loan on a house? As other posters have noted, renters have more skin in the game than that.
By the way, and I may be the last poster on Ben’s blog who doesn’t know this: If the Federal Reserve is a privately-owned bank, who, exactly, are the owners? Individuals? Corporations? Is there a list?
http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm
Added to my Finance Favorites! Thank you!
DC — thanks. “The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects.”
Was George Orwell the founder? Couldn’t have been Rod Serling. We hear, it’s not government…it’s private. Well, it’s not exactly private, either, it seems. Seems reasonable to expect that taxpayers pay for the cleaning crew at their buildings, for starters. How is that “private?” I suppose we should ask a fifth-grader.
Orwell? No, Congress. There are all kinds of congressionally chartered organizations - some are fully funded by the taxpayers while others are not allowed to receive a penny of federal money. And countless variations in between.
I just wish they would not refer to it as “private.” If it cannot earn money from private sources, then it is either governmental or quasi-governmental. But the implication often made by the media is that the Fed is independent. That probably is true in the same sense that GAO is independent, but behind the curtain is Uncle Sam.
Other examples:
Tennessee Valley Authority (TVA)
American Red Cross
National Trust for Historic Preservation
I hope no one missed this one over the weekend, from the Economist. Analysis of worldwide impacts of the housing bubble pop from three different standpoints– optimistic, pessimistic, and worst-case.
PDF FILE!! You’ve been warned.
Thanks for the link, I though it was good .
(“Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007.”
“‘There really had not been for our models…very much in the way of historical empiricals’ to help Countrywide compile accurate predictions, Sambol said.”)
at least they didn’t use words like
unprecedented
unforeseen
dislocations
I suggest saving “26 sigma” for a bit later, when things get rough.
“‘There really had not been for our models…very much in the way of historical empiricals’ to help Countrywide compile accurate predictions, Sambol said.”
-Huh?
How about Palmdale / Lancaster / Inland Empire bust of the 1990’s for ‘historical empiricals’.
When you overbuild and sell to bad credit risk that is what happened
How do you build models without sufficient historical data? Any model should have included the possibility of at least a 20% correction in prices and 5% default rate. We haven’t even come close to approaching those numbers yet and their vaunted model is falling apart. The incompetency in upper management is sickening. No wonder we are unable to compete with the rest of the world.
They could of used the 1926 real estate crash in Florida as historical data, in that the lending was easy .How about the 1929 stock market crash that followed a margin call pursuant to easy lending as sufficient historical data ?
They could of used decades of data that show that low down loans had higher default rates ,(to the point that they were usually insured ).
I just think that WALL Street had alot of potential money investors looking for a little higher yield ,and Wall Street stood to make tons on that investment money .
For the renters this may be of interest. It is a pretty serious scam by some serious folks.
http://www.10news.com/news/13962225/detail.html
It is really too bad that there are criminals who continue to make a bad situation worse.
Duh ! The Housing bubble is to blame again
—- QUOTE FROM SITE —-
According to authorities, the scam has recently popped up because the type of locking system on most homes for sale needs an access card.
However, the glut of available homes on the market has reduced the supply for the access cards, so many agents have been forced to use older systems.
———- END QUOTE ———–
Isn’t Jackson WY where all of your rich celebrity types hang out as well?
No, we hang out at Paris’ place.
Nothing but the best for our celebrity bankers.
You wouldn’t want them to be forced to mingle with the hoi polloi, would you?
I was just in Jackson, but I didn’t see anybody who looked like anything but me - a tourist.
Interesting comments. Amoung others, the 30-40% decline in prices for California. Reason being is that around 3 years ago, I sat down and actually spent a few hours looking at my realistic finances. Despite being in the upper 10% category, buying even the cheapest home in my neighborhood, which at the time was around 450-500k, I would be spending well over 50% of our income just for the mortgage. I speculated that a 30-45% drop in prices would yield a more satisfactory result. Interesting how economists now make this obvious conclusion now post-boom.
Secondly, economists are making these statements about if “this” had been done, then the downward fall wouldn’t have been so severe. As far as I’m concerned,the prices have really not changed enough to raise my interest or anyone else’s for that matter.
The proof is that I spent all weekend around my town via bicycle. I recall last year on labor day people were still packing open houses despite a suspected downturn. This year and for the last month or so, there seems to be almost no interest in the homes and of the countless many for sale, even less seem to have open houses. So there they sit. I can wait.
I recall last year on labor day people were still packing open houses despite a suspected downturn.
It was the last chance to jump on the bandwagon before it went off the cliff. What did you expect the lemmings to do?
You guys want to hear something sick? One of the local “Shopper” type papers in Chandler, AZ is already talking about the Super Bowl in Glendale next year, about 5 months away, and (I paraphrase) how the “renewed attention to the Valley (the Phoenix metro) and our quality of life will help the housing market”. Read it hard copy at a coffee shop on Monday, so no link.
I guess 2007 is done, real estate wise. So let’s get the ball rolling again on the “Super Bowl bounce”, the “Spring bounce”, the “Out of School bounce”, the “Summer bounce”, the “back to School bounce”, etc!
and don’t forget the dead cat bounce…
That’s nothing. The 2010 Winter Olympics are going to keep double-digit appreciation going in Vancouver, BC for another 3 years.
Well that’s what all the “experts” are saying.
If it isn’t the Fed’s job to stop asset bubbles, it shouldn’t be their job to fix the mess they create.
Somehow I doubt that is going to happen. People love the profits. It’s the losses that they don’t have the stomach for.
That’s one of the problems when bankers are allowed to give tens of millions of dollars to politicians.
“…bankers…” and countries that receive massive amounts of foreign aid from the US taxpayer. It would be pretty slick if 10% of that money found its way back here each year, for the purchase of politicians.
In fact more than 10% does find its way back to the US, for most US “foreign aid” is actually tied to the purchase of US-made weapons, which are about the only in-demand export that the US has these days.
Prime example is Israel, which has always been one of the top US aid recipients and #1 for more years than any other country.
“In his paper, Leamer said ‘highly stimulative’ monetary policy helped stoke a ‘hot’ housing market. ‘This is an event which I think to a large extent was preventable.’”
“‘The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting,’ Leamer wrote. ‘The worst time to stimulate the economy with loose monetary policy is when the wave is starting to rise. That is going to make the crest all the higher, and the crash all the more catastrophic.’”
“He added that there’s ‘very little possibility that a rate cut would make much of a difference’ at this point. ‘Once the wave has peaked and is crashing, there is not much that can be done to quiet the waters.’”
**********
It only took until the 8th or 9th month of 2007 for Ed Leamer to encapsulate what people have been saying around here for two years, or more.
“Ed Leamer and UCLA” - late to the bandwagon, again, of course.
“‘It’s too easy to blame the Fed,’ said Robert Shiller of Yale. Shiller blamed mass psychology for the bubble, an almost ubiquitous conviction that housing prices would simply keep climbing at double-digit rates.”
Shiller is right on with his views. Remember the NAR and David L. stating that home prices would never fall? This is exactly why the professional associations should be banned from lobbying any member of Congress, etc. They are as much to blame as any other insitution involved in the housing mess. My view point is that the NAR should lose it’s not for profit status since it is in the business to inform the public of buying opportunities, while lining their own pockets with new realtors at the publics expense. The public needs to step up to the plate and take action against the cheerleaders who mentioned that home prices would not fall and that now is a good time to buy a house. The public needs to step up the preasure on professional associations such as the NAR to assure that these unethical Washington organizations lose their not for profit status!
My view point is that the NAR should lose it’s not for profit status
That would be completely moot, because the NAR doesn’t make profits. Its owners are its only customers, just like any other industry lobby.
the fed will be too late as they would have to drop rates 2-3% to help homeowners as we are entering the peak of the resets in october. so 1/4 point cuts will do nothing. only a gov’t bailout would do something if people behind could have their morgage bought by FHA or FNM or fre. but, the gov’t will be too slow to save those who should not get saved. i don’t see high prices in housing in the best interest of the people, because it was high unaffordable prices that drove exotic loans. and, of course many were speculators hoping after the 2 year reset the house would be worth 20% more and they would not have to pay capital gains too! well, they lost the bet..turn in the keys! and, of course the fed is to blame.they knew of the stock bubble and they knew they were creating the housing bubble based on easy cheap credit!
“National Mortgage News is publishing its exclusive ranking of the nation’s top subprime lenders in 2Q — and the news isn’t pretty. Mortgage bankers originated a paltry $53.4 billion in subprime loans during the second quarter, the industry’s worst showing in five years.”
If subprime loans are bad, isn’t a decrease in their origination a good thing?