Banker's blues; or, as ye sow, so shall ye reap

[unixronin]

So it turns out homeowners who bought on subprime mortgages are't the only ones whose shirts are on the line.  There's a few things the mortgage companies haven't been publicly telling, according to this San Francisco Chronicle article.

You see, there's an awful lot of investors who bought heavily into mortgage-backed securities that turned out to be backed by these subprime mortgages, many of them overseas.  They all have a legal and contractual right to require that the lender buy back the securities — at face value — should it prove that there was fraud in the origination process.  Say, if it should turn out that the mortgagees' income and assets had been massively and systematically falsified in order to float the loans.  (Just hypothetically speaking, of course.  Because that would never happen, would it?)

Those securities are actually worth maybe ten cents on the dollar.  And guess what, the fraud in originating the mortgages they're based on was massive.  (According to the guy who wrote this article, the loans made in the 2004-2006 period that weren't fraudulent are the minority.)  What's more, there's abundant documentation that just about everyone in the industry knew about it, and knowingly looked the other way, because in the strange thinking of the US financial industry, even a bad debt looks good — on paper — as long as the numbers are big enough.  (Where did we get this weird idea that being owed money is good even if the debt is almost certainly uncollectible?)

The basic capsule summary here is, the US banking industry has knowingly exposed itself to what amounts to a run on the bank for all those bad mortgage-backed securities, on which they're legally and contractually obligated to make good.  And if the foreign investors they swindled all line up waving their securities and demanding their money, the US banking industry — including even the largest banks — will collapse.  Unless, of course, the government can figure out a way to bail them out with taxpayer money.  (Most likely borrowed ... yeah, that's right, bail out bad debt with yet more bad debt.  Brilliant!)  The ballyhooed interest rate freeze "to keep working families in their homes" isn't really about families at all — it's an attempt to buy time for the banking industry to sweep the evidence under the rug (or run it through the shredder).

They could, of course, choose to default on the securities and repudiate the debt.  I'm sure the consequences of such an action on the financial standing of the US are obvious without further explanation.  Especially since you just know they won't learn anything from this fiasco — greed will win out, just like it always has, and ten years down the line they'll have dug themselves another hole just like this one.

(Article pointer from bikergeek)

Comments

[skellington.livejournal.com]

The problem is that the actual originators, who filled out the fraudulent applications, are mostly small time shops up to medium sized sub-prime operators. Most of them have already filed for bankruptcy and there's no blood in that stone, so to speak. (See http://ml-implode.com/)

The securities firms are mostly off the hook, since they just bought packages of loans, and were not responsible for doing any kind of due diligence on them. The criteria of the loans being packaged (i.e. sub-prime, no documentation) were in the prospectus for the securities.

Also, the majority of the loans were "prime", and not sub-prime or "Alt-A". These almost certainly didn't involve fraud, except possibly in the appraisals. However, given that the bubble kept inflating, I think most appraisers are going to be able to skate as well.

The rating agencies (Fitch, S&P) are probably toast. Even if they don't get sued, no one will trust their ratings after "AAA" (top) rated debt turned out to be worth pennies on the dollar mere months after the rating.

And anyone who bought ANY house in California or one of the other bubble markets in the last 2-4 years is going to be in some serious trouble.

I'm sure there will be lawsuits, and they'll be targeted at the deepest pockets, but I predict most of them won't go anywhere.

Tons of great information on "http://calculatedrisk.blogspot.com/"

[unixronin.livejournal.com]

That does look like an informative site. Thanks.

[ilcylic.livejournal.com]

Hrm. Maybe it's time to go buy more gold.

[unixronin.livejournal.com]

I understand the price of gold has been driven up to around $850 per ounce by other people thinking exactly that.

[ilcylic.livejournal.com]

$800 or so, but yeah.

Frankly, I'd rather lose a bit of money owning gold than make a whole lot of money owning gold, y'know what I mean?

[unixronin.livejournal.com]

Uh ....... no, I don't think I follow you. Unless you mean buy-and-hold rather than buy-low-sell-high.

[ilcylic.livejournal.com]

No, I mean that what it says about the state of the economy, for gold I bought at $800 to end up trading at $500 is far more comforting that what it means for gold I bought at $800 to be trading at $20,000.

Because if gold is at $20k, there's probably a whole lot of very bad shit going on with the dollar, and subsequently, my ability to acquire food.

[unixronin.livejournal.com]

Ah, gotcha.

[elegantelbow.livejournal.com]

According to the guy who wrote this article, the loans made in the 2004-2006 period that weren't fraudulent are the minority.

Does he mean loans strictly made in SF? I can't imagine that it's true across the US.

[elegantelbow.livejournal.com]

In October, Goldman Sachs issued a report forecasting an incredible 35 to 40 percent drop in California home prices in the coming few years.

Ah. It looks like this article is specifically about California.

[unixronin.livejournal.com]

Possibly. I have difficulty imagining that the banking industry made enough bad loans in California alone to bring down the entire US banking industry.

Then again, maybe it's more of a house of cards than we realize....

[wyrdling.livejournal.com]

california holds a huge chunk of the US population, proportionately. and the home prices are unbelievable. or were until the bubble starts deflating....

where i lived out there 2004-2004 the median home price in my county was 1 million. rents were equally awful. guess why i left?

[unixronin.livejournal.com]

Uh, lemme take some guesses .....
[ ] Wacked-out politics
[ ] $750,000 for an 8'x8' garden shed on a 12'x12' plot
[ ] Brown smog clouds over the cities
[ ] Worst traffic congestion in the US
[ ] All of the above

[wyrdling.livejournal.com]

(uh, and it was '03-'04.)
well, the politics everywhere i live are wacked out. i was in a largely rural county with a major metropolitan center in it brushing up against the edge of the la metroplex, so there was a lot of city kids/farm kids gunning at each other in the county which made for some interesting scrapes.
luckily, i lived on the family farm, which, thanks to property taxes, even after the agricultural adjustment, and the particular crop's distribution model, eat up all the profit from the farm. as grandma says -"it just pays for itself." which is better than a rent or mortgage, but not good for a business. and left me nowhere else to go live at that particular point. my aunt, who owns a couple homes, said that no one could afford to live in them besides people on Section 8. talk about upside down?
i lived in the country. thank heavens. had no interest in driving to la. yuck. but on certain days on certain times half of la would descend upon the highway (trying to get out of the yuck for a weekend) and the roads would be near impassable.

so... most of the above. i was in a relatively nice place, considering the options. but my aunt, on a lark, while she was house hunting, went looking online to see the places she could buy at the same prices in upstate ny- and found all these sprawling mansions and whatnot. whereas she was looking for a four bedroom house with a little more space. but there's no jobs to speak of in that part of ny either. the population is plummeting.

supply and demand, i guess.

[house-pundit.livejournal.com]

I suspect what will happen with a lot of these houses is future landlords will buy them up at foreclosure auctions, fix them into rentable condition--which in some cases will take more than others--and rent them. In some cases, the rental may be right back to the former inhabitants.

That's not as financially unsupportable as it might seem for the landlord. Getting the house for cheap, and getting rent pretty close to the former mortgage payment would have been on a prime loan financed at a fixed rate, the landlord makes pretty good money.

There are all sorts of seminars down here about how to make big money in foreclosure real estate. Those buyers for cheap will be sitting on value much better than gold, in the current market.

The families getting thrown out have to live somewhere, and in most cases can afford to rent, but not to own. It makes a lot of market for the new landlords.

The banks lose out, and their investors, including the holders of sub-prime mortgage securities.

Investments have risks. In a free market, the economy isn't unplanned, it's just not centrally planned. When you invest money, you hire yourself as one of the planners and managers of the economy. If you do a good job, you get promoted automatically, for as much as you want to put in or keep in the system. If you do a bad job, the position is self-firing.

People buying investing in those sub-prime mortgages were making those mortgages possible. The bad loans wouldn't have happened without the investors who, by proxy, agreed to make them. Screw "fraud"--anybody with half a brain could tell a lot of bad loans were being made and that buying into making them was moronic. A bunch of bad economy-managers fired themselves, and better (hopefully) economy-managers will hire themselves in their place.

Gold's a bad investment right now. Never do what a whole huge gang of people with conventional wisdom are doing, because most people are stupid. Never do any old other thing just to be contrarian. Find a particular other thing the panicky or exuberant or herd-like people are forgetting about and do that. Particularly, what they're overlooking by that specific stupidity.

In this case, if you have money to invest and time to be a landlord, there's a hell of a lot of money to be made in foreclosure real estate. A lot of money to be made in US companies that make goods in the US and export them, particularly to Europe. US companies that sell domestically are good, too. The dollar will likely be falling quite a bit more. The EU won't like US goods getting cheaper there, but I don't think they're going to be able to do more than slow the dollar's slide.

China has finally hit the wall I predicted a couple of years ago and can't afford to keep buying up dollars at the rate she has been. She's been subsidizing her exports, for years, by artificially propping up the dollar in international currency markets. She couldn't do it forever.

[unixronin.livejournal.com]

Gold's a bad investment right now.

Particularly having just been bought up to $800-$850 per ounce. Buy high, sell low is never a good plan.

China has finally hit the wall I predicted a couple of years ago and can't afford to keep buying up dollars at the rate she has been. She's been subsidizing her exports, for years, by artificially propping up the dollar in international currency markets. She couldn't do it forever.

An interesting perspective. I never thought of it that way.