Oct 23
A video timeline of the development of the subprime crisis and the resulting economic mess we are currently dealing with:
Sep 04
Regulators and legislators are scrambling to prove their value in an election year. Following the federal response with the Housing and Economic Recovery Act of 2008, state legislatures are clamoring to offer their own resolution to the local crisis. With most information coming from consumer groups and the media, the initial proposal to “cure” subprime is often diluted in the reality of the mortgage market.
Can you legislate subprime away?
Mar 11
Here is another great article outlining the extending effects of the subprime crash. (As my colleague put it, “Ripple effects that will end up hitting responsible borrowers in their pocketbooks and their lifestyle.”)
From the National League of Cities:
“In addition to the after-effects of foreclosure on families, NLC is educating federal lawmakers about the unexpected consequences the current mortgage crisis is having on local governments. Foreclosed houses, which often sit vacant for long stretches of time, are contributing to the blight long-associated with abandoned properties. Local governments must bear at least the short-term costs of maintaining these vacant properties until they can track down the owner. This can be difficult since mortgages are resold among lenders and investors.
Additionally, since vacant properties all too often become havens for crime, local governments are bearing increased costs for greater police presence in those areas where foreclosed vacant properties are concentrated. At the same time, cities are forecasting that there will be decreased property tax revenues due to declining assessed valuations.”
To read the full article, click here.
Mar 11
In follow up to my post Ratings Agencies and the Subprime Crash, this story ran yesterday in Marketwatch:
“In the latest salvo in a now highly public war of words, rating agency Fitch accused bond insurer MBIA Inc. of asking it to destroy information used to come up with ratings and said it will continue to rate the firm’s subsidiaries without charge…”
Click here to read the full story.
Mar 10
“The subprime crisis is just the tip of the iceberg. Fundamental changes in American life may turn today’s McMansions into tomorrow’s tenements.”
Christopher B. Leinberger, The Atlantic Monthly, March 2008
Talk about a fascinating article. How far will the effects of foreclosures and the subprime crash really go? Stories about the suburban foreclosure epidemic are rampant, like this one and this one and this one – and that’s just a start.
I guess building and building and building on land reserve is not the best move after all for communities. It makes you wonder how much tax incentives and building subsidies many of these builders were offered for rampant housing production cost the taxpayer.
Click here to read the full article.
Mar 07
Interesting article on how ratings agencies have come under fire over the U.S. subprime crisis:
“Ratings agencies like Standard & Poor’s have come under criticism over the subprime housing crisis. Critics have said that the agencies acted too slowly in downgrading highly-rated securities linked to subprime mortgages…”
Click here to read the full article.
Mar 04
Do you lend in multiple states? Have the state auditors come a callin’? Are you feeling the ramifications of the Subprime meltdown in your very ordinary vanilla lending practices? Regardless of your lending practices, what has happened in the industry is going to impact you.
Auditors are combing through every detail in a transaction pouncing on the slightest infractions. Additionally as some of you may have experienced, these audits are also often subjective depending on a given auditor’s preferences and understanding of requirements.
Are you feeling the lack of risk mitigation in your business model?
Could you use a little CYA? And, that stands for “COVER YOUR ASSETS”!
More to follow…
Mar 04
The NPR reported today:
“It’s widely believed that inflated home appraisals played a major role in the mortgage meltdown. Now, Fannie Mae and Freddie Mac, two heavyweights in the mortgage finance business, have agreed that they will only purchase loans that meet new standards for independent appraisals.”
If you are as stunned as I was, you can click the through and listen to the full report here. It also gives some interesting information on the new Fannie Freddie appraisal institute…
Jan 03
Over the holidays, you get to see all of the people that are not “professionally” related to you. As many of them know that I have worked in the mortgage industry, I expected flowers and wreaths rather than gaily wrapped presents of monogrammed sweaters. For most of the planet, MBS and GSE have almost no meaning. They just hear meltdown… and that is bad. When my father asked me for a simple explanation of the mortgage meltdown over turkey, I was required to really think about it in terms that he could understand and use in his daily life. Here is my quick attempt to say it in layman’s terms.
The American mortgage market has long been considered one of the safest investments on the planet. As an investor, when you review lending your money, you look at the traditional 3 Cs: credit, collateral and capacity to pay. For many years, mortgage investors were small community banks or savings and loans. There were many established guidelines that maintained the integrity of the investment portfolio. Unfortunately, there just wasn’t enough money there. The American mortgage market plays in the trillions… not the millions that small community banks offer. So the problem became how to court investors of that magnitude to fund billions and trillions rather than millions. When Americans need investment capital, they go to Wall Street.
For over a decade, the American mortgage market has been invested in and paid for by the investments of Wall Street with their thousands of investors, from 401Ks and pension funds on the individual level to world banks on the macro. The base assumption was that these investments were relatively safe, as they are backed by real property, they are vetted through underwriting for credit and capacity to pay, and they have historical data to show the track record for repayment, allowing investors to assess risk vs. return. Based on that historical data, investors signed up in droves… and the engine of the mortgage market was turbo charged to offer both money (liquidity) and expanded products.
The perfect storm was created when the Fed continued to drop interest rates, inflation remained low and the value of real property continued to offer more than double digit appreciation year over year. For investors, there were no real tangible reasons to stop investing – the numbers were great. For Wall Street, they were able continue marketing their gains and started a whole revolution in products. With their wide pool to leverage, they started to back investments that were ever more risky, like 100% loans and Stated Income/Stated Asset. For lenders, they were able to offer new products that allowed an ever deepening pool of potential borrowers… some that we now know were probably not investment worthy. For borrowers, they were able to purchase more house with less emphasis on their 3Cs than ever before for both investment and for primary residences.
So what happened? The market changed. (Read more here) When the reality of the economy was that houses stopped posting double digit appreciation and real income started to decline, many of the persons that were marginal became true bad investments. In addition, a number of the loans were offered as ARMS to people were presented as a “stop gap” loan (one that you can refinance out of later… but would get you in the house now), but when they started to adjust, the borrower was incapable of making the payment or refinancing out of their home. Foreclosures started to rise.
Now lets go back to the secondary market and investors… when they see the foreclosures start to rise at unprecedented rates, they start pulling their investments. They looked, as any investor will, to more stable investments that don’t post losses. That big fat pool of money started to dwindle. That is the liquidity crunch you hear about. In the panic, investors pulled their funds and lenders started to cut programs and loan products that weren’t performing. In addition, they started to exercise the dusty clauses of their contracts that require those that originated the loans to “buy back” the defaulted or “incomplete” loans and service it themselves. The megalenders struggle, get discussions of bailouts and infusions from other megabanks…the small business owner closes.
For the borrower, especially ones in loans that were marginal, they are unable to refinance their loans. They are either unable to meet the enhanced underwriting criteria, the loan product is no longer available or they are upside-down on their house. This continues to exacerbate the crisis. For those borrowers that watched those “get rich quick” in real estate, they were invested in homes that couldn’t cover their investments and just walked away. Every foreclosure adds to the depreciation in the real values in local markets…and the problem quickly compounds.
Until such time as the American mortgage market can prove its investment worth to the world community, we are stuck. The moves that have been taken by the market are a step…but every person in the entire chain will be responsible for ensuring that we don’t face this crisis again. It is all about quality production and creating a track record that allows our investment partners to believe in a stable rate of return on investment.
