Lying For a Very Cushy Living

There are three significant sides to this story; those who will take
the hit for bad loans, those who will lose everything they worked
decades to build and those who got fat.

I just love the self-serving talk about the sub-prime mortgage market
and the huge losses that are about to fall out of that debacle. For
anyone who’s late to the party, sub-prime relates to the quality of the
applicant, not the mortgage rate. Sub-prime, baby, as in

  • No credit history
  • No money in the bank for a cushion
  • No down payment
  • No bother to verify employment
  • No hope, no future, no way they’re going to repay

There are three significant sides to this story; those who will take
the hit for bad loans, those who will lose everything they worked
decades to build and those who got fat.
In the first category, I have very little sympathy for anyone along the
food-chain of the lenders. They took advantage of the housing bubble
and a proliferation of mortgage packaging entities that were new to
everyone and so complicated as to be beyond understanding.
The Setup:
A ten-year housing bubble that made anything you stumbled into buying, automatically worth 10-20% more each and every year. Alan Greenspan, then chairman of the Federal Reserve Board
let the whole thing slide like a river under his feet. Add to that a
decline in long-term mortgage rates and you had the cautious as well as
the ignorant re-negotiating their mortgages. Thus were provided to the
sharks, unending schools of bait-fish and blood in the water.
The Sting: The ignorant were led to believe they could not
only lower their monthly payment, but grab a substantial amount of cash
for doing it. Just sign on the dotted line and we’ll deposit the cash next week.
DreamhomeThe Sting, Part II: Your equity in your present home is sufficient to buy that dream palace on the next street or in the next town at the same monthly payment you’re making now. Don’t wait to sell your present home—just sign on the dotted line and we’ll close on your dream home. This was (and is) the stuff of Shakespearean tragedy.

These were mortgages, the Fed would have you believe, that have made it possible for people with poor credit, scant savings and modest incomes to buy homes. Wrong! They have made it possible for people with poor credit, scant savings and modest incomes to lose their homes by fraudulent representations.
What the hell was going on? The confluence of lowered interest rates
and rising home values (bubble, bubble) created yet another vehicle for
a virtually unregulated hedge fund industry. These funds are called
hedge funds either because they hedge against loss or because they
periodically trim their investors —you be the judge. At any rate . . .
. . . it was kind of like a football game. The mortgage salesman took an application, cashed his fee and handed it off to the bank or savings and loan he worked (and I use that term loosely) for. The bank issued documents, based on the number 0, took their fHandoff
and handed off to mortgage packagers, usually a Wall Street investment bank or derivative thereof. The investment bank, put a bunch of worthless mortgages together, salted the mix with a few honest deals, took their cut
and neatly reversed field, letting fly a hail-mary pass of questionable
documents down the sidelines to the waiting arms of any number of open
These are known in football as the go-long guys. They took the several cuts
that go-long guys are privileged to take, marketed the newly devised
instruments and were supposed to gallop them into the end-zone of
increased real-estate values.
Unfortunately, they were blind-sided by an unexpectedly early end to
the up-market, fumbled the ball and, when it was recovered, investors
found all the air was gone. Flat ball. No one has a pump. Game over before the come-from-behind guys could come from behind.
Alan Greenspan mumbled about overheated real estate, but then Alan
was a mumbler and he was close (some said long past due) to retirement.
Alan saw the salesman pocketing a commission on any deal he could write, fraudulent or not. He knew the banks and S&Ls were no longer holding the paper they had signed off on. He intimately understood the packaging Wall Street was up to. His Fed acquiesced in allowing the hedge fund jockeys to write un-understandable investment documents. Exactly two years ago, I wrote of Greenspan

man who helped Bill Clinton engineer the first federal surpluses in
memory, almost overnight became the man who cheered as Bush gave it all
away to the rich and bankrupted us as a nation.  The man who agreed as
Clinton paid down the national debt only recently agreed with President
Bush’s plan to quadruple it.  The only thing recognizable in Alan is
that the man who failed to see the dotcom bubble still fails to see the
real estate bubble.   

And now, with Alan long gone, poor newly-minted Federal Reserve
Chairman Ben Bernanke has to run out onto the field. In his
striped-shirt, he’s supposed to unpile the players, certify that the
ball is truly flat, possibly call the foul and assess 20 yards for unnecessary roughness.
But against whom?
Surely not the mortgage salesmen, just brought up from used-car
special-teams, they merely hiked the ball. The foul was called way down
field. The banks and S&Ls? Where’s the foul? They found eager and
willing buyers at a profit. The Wall Street packagers? “C’mon, ref, it
was a brand new running play. Where does it say in the rules the ball
has to have air in it and when did the air actually leave, before or after the hit?”
Don’t even look to question the hedge-fund guys, they’re up in the
skyboxes, sipping chardonnay. Not to worry, stocks go up, they go down
and money is made in both directions. Who’s to worry except a few
hundred thousand poor losers? None of them sky box types.
And while we’re discussing these finer points, I came across this absolutely brilliant investment device. It’ll be a while before it feeds up to hedge-fund altitude, but get this:
We find homeless people, give them $10,000 for their cardboard box,
swing the ten grand into a six-way mortgage on a tear-down, rip the
building down and collect on urban renewal grants, which we roll into
carbon-depletion credits and re-package the whole thing offshore. The
banks are in line, Wall Street’s behind it and the pension trusts are
It’s gonna be big.

“A large increase in early
defaults on recently originated subprime variable-rate mortgages casts
serious doubt on the adequacy of the underwriting standards for these
products,” Bernanke said.

Like Ben says, not to worry, it was all just a little dustup over inadequate underwriting standards.
Media comment;

1 thought on “Lying For a Very Cushy Living

  1. The mortgage lending business is in deep trouble. Check out:
    So far, about 14 percent of mortgage lenders (by market share) have disappeared.
    The subprime market is dying.

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