Tuesday, July 7, 2009

The New Subprime

Morgan House wrote an interesting article that appeared recently on the Motley Fool Website.


The causes are more fundamental than those identified by the author in the following two paragraphs of the article:

1. "In short, many "prime" borrowers might just be subprimers with inflated credit scores. This is also true for people who used the proceeds from home equity loans on one property as a down payment for another. The big down payment made the borrowers look financially fit, but it was all an illusion that didn't reflect their true creditworthiness. They were simply moving debt from one inflated house to another."

2. "In addition, the housing bubble's income distortion also made millions appear more creditworthy than they really were. According to noted economist Mark Zandi, 23% of all new jobs created during the 2003-2006 recovery were housing-related. This includes everyone from mortgage bankers at Citigroup (NYSE: C) to construction workers at KB Home (NYSE: KBH) to (ostensibly) checkers at Home Depot (NYSE: HD). To some degree, the prosperity of all of these jobs was artificially magnified. In a wildly extreme example, Faber's book describes people who went from delivering pizza to working as mortgage brokers making $20,000 a month. (I'd assume they ultimately wound up in the unemployment line). All of this created a stunning short-term illusion of prosperity that allowed armies of borrowers to qualify as "prime" when they were far, far from it."

Due diligence, or should I say Honest Due Diligence, on the part of the lender would not permit granting any high rating to these borrowers. As of last week, the Hudson City Bancorp which is good sized, has six (6) defaults in New Jersey. Yes, six, not six thousand. All of these six are due to second mortgages issued by large "Banks." Hudson City Bancorp (HCBK Quote) Chairman, President and CEO, Ron Hermance, has noted that he realizes a good profit from each of these defaults, because he underwrote, if memory serves me correctly, only a fraction of the current actual value today!!! He and his mortgage writers just did their homework and loaned on value. ALL of the phony reasons cited for lending to people whose property had much lower values were fraudulent.

This was ALL the same scam. The scam is turning in phony information with inadequate documentation. I have bought and sold lots property over the years. In the last twenty years I had to provide proof of everything. That included two years of Federal tax returns!!! That was true when I bought my current house in Tucson in 2000. The need to prove ability to pay went away in the last few years.

Phony credit scores are irrelevant. Where was the due diligence on the part of the issuing lender and on the part of the receiving lender?

There was a lot of fraud because the fees and bonuses for being a conspirator in this large scale conspiracy to commit fraud were so large.

OK, the "Writers" at mortgage companies of the low or no documentation mortgages and the bank officers who purchased them were crooks. We can identify further the appraisers who asked "what number are you looking for"?

Let us not forget the folks at the rating agencies who rated the credit worthiness of these sliced and diced phony "financial instruments" as AAA when it was clear they were intrinsically worthless. If you are lending to those who will not be able to meet the payment in 39 months, then you know there is no one who will be left to buy from them at that time in the future. That means prices will have to fall. That means refinancing at higher prices will no longer be possible. The rating agencies should have flagged that! However, the rating agencies were paid by the lenders, often big banks., The government encouraged the phony ratings so it could say the Gross Domestic Product was rising, as it was actually falling.

Stupidity did play a role, but this had nothing to do with stupidity on the part of all the conspirators I have mentioned.

This appears to be grounds for prosecution under the Rico Act. We just need to find an aggressive and relentless prosecutor who can be guaranteed protection for himself and his or her family by the same folks who guard the President. "POTUS is moving" would then mean Prosecutor Of the Undeserving Sleaze-bags is traveling.

I really am simply pointing out the causes stated in the articles, while interesting, are not the actual root causes, which are the ones I have noted.

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