And the beat goes on… but sometimes it helps to have that little bouncing ball show us exactly what lyric we are singing this week. All together now:
Today the Fed suprised no one by opening the discount window to ailing siblings: Fannie Mae and Freddie Mac. Together they hold more than half of all mortgages in the US and the guarantee that they would not fail has been implied for some time. The Fed also intimated there would be no other bail outs in the foreseeable future. Who is walking the thin line? WaMu, Wachovia, Downey, Indy Mac (oops, they were written out of the chorus last week). Now it looks as if the Fed has reworked a few more lines and their song to the Wall Street firms goes a little something like this: if you can not fix your problem with the ability to borrow at 2.25%, your problem is not fixable.
This does not bode well for our short list. Downey is more of a regional and will likely go down under its own weight of Losses and Lawsuits (the real “L” words). Previous posts right here on BHB have fixed WaMu as the consensus “next big one” to fall. Wachovia, in my opinion, is more of a question mark. Straight-laced, tea-loving bank goes to a frat party where “everyone who is anyone” is drinking and the peer pressure just becomes too much. This is a hangover for which they are ill prepared.
What does this mean for real estate and the mortgages that drive its cycles? Here’s one thought: if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast. Any regional that has not already eviscerated it’s “improvisational jazz” lending will find themselves looking at a Wall Street that no longer believes anyone is above failing. If recent history has taught us anything it is this: the big firms currently involved in lending are either asleep at the wheel or lying outright. We watched Counrywide lie about their financials right up until the end. We watched WaMu take hits twice their predictions. Even Wachovia, a stalwart bank, was “surprised” by losses more than double what they had predicted for Wall Street. Not sure why anyone believes anything these firms say now.
I believe this all goes back to a problem that is not discussed in the media (whether for lack of a sound bite or just ignorance is anyone’s guess) and never given the light of day by these firms themselves: the accounting debacle tied to neg-ams. Want to know who is going down next or where “surprise” losses will most likely come into play? Look to the firms that made a killin’ putting clients into neg-ams. (And before some of you start commenting on how neg-ams are just a tool and can be a good loan to boot – you know who you are – let me say “I know.” Loaded guns are just a tool too. Cars are just a tool. I am in favor of both. But if I stand at the door handing out keys and guns to everyone as they leave the party… let’s just say the onus of responsibility comes back to me.)
I guess it is not so difficult to follow the bouncing ball afterall. I think I’ll go to bed tonight and dream about how attractive Fannie & Freddie have become lately. They just may be the only two left on the dance floor.
Jim Rake says:
re Lenders – Seems they were all asleep during their risk analysis/management class.
July 14, 2008 — 4:15 am
Wine Dog says:
The title companies have the same problem. All the management looked the other way while the money was made. No one stepped up to the plate and told the unscrupulous that “No” we aren’t going to play. The title companies took the premiums, the lender’s took to new loans. Now the chickens have come home to roost. I hope Wachovia does buckle. Those World loans were criminal.
Personally, I let my notary lapse so I wouldn’t have to sign up another family that didn’t speak English to a loan I was sure they couldn’t afford. I sat at too many kitchen tables with people borrowing money they had no business borrowing, calling LO’s for clarification and listening to their answers which I knew were lies. The good news is that those guys were the first to lose their houses.
July 14, 2008 — 4:54 am
Sean Purcell says:
Jim,
I agree. I watched the buy-outs and mergers and I can not for the life of me figure out what they are doing. Did Wachovia even consider the risks Golden West brought with them? At least B of A paid pennies on the dollar. What is WaMu’s plan going forward? Is anyone seriously looking at Downey Savings and thinking “I can make that profitable?”
How does one even go about hedging the risk inherent in a portfolio comprised primarily of a loan that is underperforming by definition?
July 14, 2008 — 6:18 am
Sean Purcell says:
Wine Dog,
Not sure what your beef is with Title companies (they only insure the chain of title, not the collateral value or appropriateness of the debt). I do lean to your side with regard to World Savings though.
I have heard others defend World Savings as having the best underwritten neg-ams in the market (which in and of itself sounds a bit like saying the premiere deck chairs on the Titantic); but when you consider that they made up their own index and it was based on their own deposits… I call that a recipe for disaster.
>I let my notary lapse so I wouldn’t have to sign up… people borrowing money they had no business borrowing
Sounds like a person that can wake up and look in the mirror each morning. Kudos on your action over other’s rhetoric.
July 14, 2008 — 6:29 am
Michael Cook says:
I really dont think asleep is the right word. Its close the steroid situation in sports. If I dont do it, there are 100 guys waiting to take my spot that are more than willing to do it. Wachovia faces the problem of going to their shareholders every quarter to report earnings. Regional banks have it even tougher because they have to compete with large banks that are expanding like weeds. At the end of the day, its a concious (sp?) decision to take on more risk to keep the earnings train moving. More aggressive companies are praised in the good times and are dragged through the mud during the bad times.
When Countrywide was trading at all time highs, were they not making the exact same loans they were making weeks before the crash? The chorus of hecklers was much smaller then. We as a public love to point fingers and talk about how stupid these companies were in hindsight, but lets not forget the market (i.e. public) rewarded them for doing what they did. Companies dont create bubbles, the market and investors do. If investors would have said, wait a minute, those subprime/neg am loans are too risky, so we are going to punish the stock, I am 100% sure they would have ceased almost immediately.
Heck, even the rating agencies were on the train. If you can package subprime and neg/am mortgage into AAA securities and no one blinks, why not keep doing it? Obviously we have that answer in hindsight, but hindsight is the most useless type of sight there is. Particularly in light of the fact that the market will inevitably do this again in 10 or 15 years.
July 14, 2008 — 7:07 am
Thomas Johnson says:
@ Jim: They were not asleep-they were being fitted for their bespoke Savile Row suits so they could peddle this stuff to Norwegian villagers.
July 14, 2008 — 7:46 am
John Kalinowski says:
Sean – Great article! Can you please elaborate on the following comment:
>if you are a specialist in homes that do not play the Fannie/Freddie tune, you may want to create some more income streams and fast.
How does this pertain to the average real estate agent, and what are “homes that do not play the Fannie/Freddie tune”?
Thanks! – John Kalinowski
July 14, 2008 — 8:13 am
David Shafer says:
Sean, great article. M. Cook very salient points. Bottom line almost everyone chose to look the other way, lenders, investors, originators, realtors, and of course those home buyers. Everyone has perfect 20/20 vision in hindsight! I never sold a neg-am loan, but it was as much because of their expense as their higher foreclosure rate (although I knew both issues). Sold alot of stated income loans and interest only loans, still haven’t had one go bad yet! Bottom line, is suitability. I still think the consumer (both borrower and end investor) is the one that must bear the most responsibility. Interesting isn’t it the people with the least financial savvy (home buyer) and arguably the most savvy (mortgage bond investor) are the ones getting hurt!
July 14, 2008 — 10:26 am
Sean Purcell says:
Michael,
Thank you for your comments. The steroid analogy is interesting. But I am reminded of a study that was done back when I was competing (and striving to become Olympic caliber). Roughly six months before the Olympic Games they asked athletes if they would be willing to take a pill that would guarantee a Gold Medal and a World Record… but would cause the athlete’s death within five years. Something like two-thirds said “yes”. (Might have been as high as 85% but it’s been a while). The thing is, if you ask those same questions of those same athletes six months after the Games the percentage drops precipitously.
My point here is that corporations get caught up in the frenzy no different than people and that is no excuse. I watched the Wells Fargo reps mope around for a year or so because they were losing business to the more “progressive” lenders all agreeing to “take the pill”. Here we are a couple years later and many (most?) of those progressive lenders are “dead” while Wells Fargo stands at the top of the heap. Not everyone gives in to the peer pressure.
>When Countrywide was trading at all time highs, were they not making the exact same loans they were making weeks before the crash? The chorus of hecklers was much smaller then.
I agree. Yes, Countrywide was making those same poor decisions for quite a while. Many of us were calling out the problem long before it became popular to do so. Having said that though, not many people listen to the chorus of people crying out “the king has no clothes” when the king is surrounded by great wealth. An unfortunate disconnect between our common sense and our enamorment with money.
>Heck, even the rating agencies were on the train
I would go a lot further than that. And I have. The ratings agencies deserve a GREAT DEAL more blame than they are receiving (or will receive). Dead on Michael.
July 14, 2008 — 10:42 am
Sean Purcell says:
Thomas,
so they could peddle this stuff to Norwegian villagers
Love it…
July 14, 2008 — 10:57 am
Sean Purcell says:
John,
FNMA & FHLMC have pretty specific guidelines and mortgage limits. I don’t pretend to be an expert on what they are in various states but talk to your lender and they will know for sure.
My point is that anything outside of these guidelines, what we have called Jumbo, Alt-A and sub-prime, are going to become even more limited. Sub-prime is pretty much gone now anyway. Indy Mac was an Alt-A specialist and you see where they are. For the past six months or so about the only thing we have been doing outside of the Fannie/Freddie box has been Jumbos and I don’t see how they survive for the time being.
The regionals and local lenders are going to feel the squeeze even greater now. The big lenders are consolidating under Fannie/Freddie guidelines. We are being served any flavor ice cream we like… so long as it is vanilla.
This is a natural (and to some degree necessary) reaction to the bacchanal that has been lending for the past half decade or so. My point, however, remains the same: if your niche is not primarily made up of homes that fit Fannie/Freddie guidelines, you are going to find your choice of flavors severely limited.
July 14, 2008 — 11:17 am
Sean Purcell says:
David,
Bottom line, is suitability
AMEN.
Interesting isn’t it the people with the least financial savvy (home buyer) and arguably the most savvy (mortgage bond investor) are the ones getting hurt!
Interesting observation. Could be argued a couple of ways. In a perfect world the home buyer is the most financially savvy… because they are using the services of a very savvy originator who is looking out for their clients’ long-term best interests. Of course, that has not been the case. Instead we have had a great many originators who were, at best, poorly educated in financial matters and were, at worst, taking their clients for everything they could.
On the other hand, the mortgage bond investors may not have been so much savvy, but rather dependent on the ratings agencies. Intelligent approach to investing? No. But common just the same. I think I would argue with your point (but only for fun) that the two extremes are getting hurt the most, but due to their respective advisors in the middle.
July 14, 2008 — 11:44 am
David Shafer says:
Sean, yes would agree with you that the advisors failed. But I would also argue that the investors knew better than trust these folks because they knew how the game is played! As for the home buyer. “When banks compete, you win” has to be the best piece of propaganda put out there in the last decade. All eyes on the rates, while the foxes were in the henhouse. If the average mortgage originator even had to have as much training as the average real estate sales person, then we might have had a different story. I kept talking to MOs who had no finance education, and/or been bankrupt/foreclosed and/or were babes in blankets (young and inexperienced) and/or were former used car sales people lacking any moral authority for advising and/or simply were to dumb/not curious to learn how to do it right. I remember going to a networking meeting last year and having a MO tell me he was thinking about getting out of the business to sell something else, but he had a large option arm pending and “you know they pay 3 points on the back end and I got one point on the front.” I just walked away in digust. If I were king I would require a license to sell mortgages and to get that license you would need some combination of bachelors degree in relevant degree/experience/passing a real test.
July 14, 2008 — 12:01 pm
Sean Purcell says:
David,
I share your disgust. We may have different methods for solving the problem (and I am pretty sure we’ve debated them here before 🙂 ) but we both feel the revulsion that an ignorant, greedy originator causes. Too bad the clients are not able to pick up on that nauseous quality early on…
July 14, 2008 — 12:10 pm
Brian Brady says:
Sean,
Define “greedy originator”. (please be a bit more precise than Justice Stewart’s definition of pornography).
July 15, 2008 — 5:24 pm
Sean Purcell says:
Brian,
Nice question. Had to work at that a bit. Please see the post referenced above and “have at it!”
July 16, 2008 — 8:56 am