NYT--How Missed Signs Contributed to a Mortgage Meltdown

[TexasLawyer]

How Missed Signs Contributed to a Mortgage Meltdown

By NELSON D. SCHWARTZ and VIKAS BAJAJ
Published: August 19, 2007

All through last year, Jim Melcher saw the signs of a rapidly deteriorating American housing market — riskier mortgages, rising delinquencies and more homes falling into foreclosure. And with $100 million in assets at his hedge fund, Balestra Capital, he was in a position to do something about it.

So in October, as mortgage-backed bonds were still flying high, he bet $10 million that these bonds would plunge in value, using complex derivatives available to any institutional investor. As his gamble began to pay off in the first months of 2007, Mr. Melcher, a money manager based in New York, plowed the profits into ever bigger wagers that the mortgage crisis would worsen further, eventually risking some $60 million of the fund’s money.

“We saw the opportunity of a lifetime, and since then events have unfolded on schedule,” he said. Mr. Melcher’s flagship fund has since doubled in value, even as this summer’s market turmoil cost other investors billions, forced the closing of several major hedge funds and pushed the stock market down 7 percent since mid-July. This week, Mr. Melcher is heading to Paris for a vacation with his wife.

The extent of the turmoil has stunned much of Wall Street, but as Mr. Melcher’s case makes clear, there were ample warning signs that a financial time bomb in the form of subprime mortgages was ticking quietly for months, if not years. As far back as 2001, advocates for low-income homeowners had argued that mortgage providers were making loans to borrowers without regard to their ability to repay. Many could not even scrape together the money for a down payment and were being approved with little or no documentation of their income or assets.

<snip>

http://www.nytimes.com/2007/08/19/business/19credit.html?em&ex=1187582400&en=af1569c90c20d0d3&ei=5087%0A

[sandnsea]

1. Minimum wage workers do not get mortgages

This is a lie and I will say it every time somebody posts this garbage. I don't care who says it or writes it. Low income people did not cause this problem.

[KansDem]

4. I'm with you on this one...

Yesterday, NPR reported on this mess and came very close to placing blame entirely on the poor, as if they crammed themselves into mortgage offices and beguiled the loan officers into giving them loans they knew they had no intention of repaying.

It was very clear who NPR was attempting to blame...

[depakid]

17. That's EXACTLY what the corporate media is doing

Welfare queens driving Cadillacs.

No mention of shady dealing- or what ought to be arms length transactions- but almost never are, due to the fine print that's buried in these deals.

Had Congress at the very least reform Truth in Lending to account for these obvious problems, perhaps the situation wouldn't be as dire as it is.

[sandnsea]

19. I can't believe DUers adding to it

I swear I hate people. Vipers, everywhere you look, doesn't matter what party, bunch of blood sucking vipers ready to sneer down at anybody - except their own neighbors where the problem really lies. I am so thoroughly disgusted I can't even see straight.

Poor people with mortgages. What a fucking joke. Did they all forget they've been complaining about poor people being squeezed out of affordable housing? Now they want to say these same homeless poor people went and lied their way into mortgages.

God what a bunch of fucking idiots I swear to god it is no wonder we've got the mess we've got.

[depakid]

20. Bsically, they're falling for one of the biggest fallacies in economics

Mainly that people are "rational actors" with sufficient information to make responsible decisions.

In the real world, people are often driven by emotion- and the drive to own a home is a particularly strong one, reinforced by societal norms. Moreover, as I mentioned- people do NOT have sufficient information (especially sufficient information conveyed to them in a form that they can understand.

Hence- no arms length transaction. More like what Carlo Cipolla called a "bandit scenario."

So it's no surprise that we find ourselves in this sorry situation.

[ThomWV]

7. They do when they can lie about their earnings and noone checks

And that is one of the basis of the problem. It wasn't that people who were making $10,000 were getting loans based on their ability to repay, it is people who were making $20,000 and wrote that they were making $60,000 on the application that are a partial cause of the problem.

[sandnsea]

11. Lies lies lies - 68% homeownership

The 32% who STILL don't own homes are the low income people who you are trying to blame this on.

It was a whole bunch of greedy people who caused this crash - but it sure as hell WAS NOT the poor.

[Tansy_Gold]

16. In the late summer of 2002, I worked for

the "community development" department of a small municipality, a suburb of Phoenix. Part of my job was to help screen applicants for housing rehab grants. Although we had many properties that qualified, we had few people who did, because most of the properties were rentals, not owner-occupied. Many owners of rental property tried to get rehab funds, because they were having difficulty renting their units. No one wanted to pay rent on crappy, run-down shacks when for a little bit more they could BUY a new house in a new development being built just outside town.

The families who were being suckered in were people who had no experience of home ownership. The salespeople at the developments and the mortgage brokers who made the money available just wanted to sell houses. They didn't want to help people pay off mortgages. You've seen the commercial for Capital One mortgage, where the woman asks the lender "What are all these fees for?" and he says, "Oh, that's just normal stuff, nothing to worry about." Well, that's exactly what happened to a lot of the home-buyers in that community five years ago. Fill out the paperwork and include the husband's $8/hour job, plus the wife's $6/hour job, plus the daughter's occasional babysitting money, plus the mother-in-law's social security plus the other daughter's child support which she didn't get very often but she could provide a couple check stubs to "prove" to the lender that she did get it. Next thing you know, they've sunk every cent they have into a bare minimum downpayment -- sometimes even putting it on a credit card -- and they're moving into the house. And the first payment rolls around and it's $300 higher than expected because these first-time homeowners don't understand about escrow for property taxes and insurance, and right off the bat they're struggling.

But of course it's their own fault for not being educated, for believing the dream that's dangled in front of them by every conceivable medium: tv, radio, pop culture, movies, etc. etc. etc. You're not an American if you don't own your own home.

It's never the fault of the salespeople who are hungry for another commission so they can buy the new car or take the kids to SeaWorld for the fifth time this summer. It's never the fault of the mortgage brokers who just want that signature so they can sell the paper and get their money out of the deal. It's never the fault of the developers who buy up cheap farmland and throw up 500 cheap little houses and are eager to take their money, declare bankruptcy so they don't have to fulfill promises, and then reorganize under another name.

Oh, no, it's never the fault of the municipalities that give the developers a green light to cut corners and put the burden of infrastructure on the taxpayers. It's always the fault of the poor people whose real crime was wanting to have a better life, to get out of the rat- and roach-infested rental that cost as much as the mortgage payment (but not as much as mortgage plus taxes plus insurance plus interest on the downpayment plus the down-the-road-when-we-can-pay-for-it-better adjusting interest rate). It's the fault of the poor people who didn't know any better and didn't know who to ask for help because the sellers and the lenders told them they didn't need any help.

Give me a break. Those of us who have mostly been lucky enough to know what we can afford and what we can't, and can afford quite a bit of what we want anyway, should never judge those who don't have anything but want so much of what the rest of us take for granted.

Tansy Gold, who should get off her soapbox and do some laundry.

[sandnsea]

18. And that STILL wouldn't qualify

It takes more than 2 minimum wage jobs to qualify for a mortgage, it always has. I watched who got these loans the last few years and it was median income young people, and boomers taking advantage of them and moving up. This is putrid and morally bankrupt to blame it on the poor.

[UpInArms]

21. If I could recommend a post for clarity of thought

and conciseness of meaning, this would be it.

Thanks!

[sandnsea]

22. Minimum wage workers do not get mortgages

Anybody who has truly made minimum wage or near minimum wage knows it. Homeownership is at 68%. The other 32% are the people Tansy thinks have been lining up to tell people stories to get mortgages they don't deserve.

[jmowreader]

26. The "no one checks" IS the problem here.

When I got my mortgage, I needed a year's pay stubs from my current job and a bunch of stuff about previous jobs...fuckers even asked about how much I made in the Army I left four years previously.

And the lender was very clear about this: if you make $20,000 and you put down you make $20,001, you'll NEVER get a mortgage.

Now they don't do credit and employer checks? No wonder we're on the edge of the Greater Depression.

[heidler1]

10. Greenspan caused it by making the cost of Fed. money so low the Banks loaned it out

with no down or very low down payments. This caused the stock market to go way up and house prices to go way up. Now interest rates are still low, but they are higher than the inflation rate. I'm just happy that the shit hit the fan while Bush was still in there.

[sandnsea]

12. It's the ARM's that are the problem

It doesn't matter one wit whether somebody put down a down payment or not. If they hummed along making their mortgage payment for 3 years - and then couldn't when it adjusted, then THAT is the problem. That problem happened to people with all sorts of income backgrounds. Not to mention, scams that were set up to cover the down payment for MEDIAN income families who thought it was a charity. Turns out it was just realtors creating their own 501c's to launder down payment money through. This was caused by a ton of reason but I'll be goddamned if I let anybody blame it on poor people who can't even afford rent anymore.

[MsRedacted]

25. Amen! It's the fault of the Hedge Funds. NT

[malaise]

2. DUers didn't miss those signs

I've been reading warning posts for well over a year. Enablers like the NYT chose to ignore them.

[annabanana]

5. Right. .not "missed",

ignored. . No one wanted to be a downer in the happy happy joy joy parade. .

[burythehatchet]

3. Yeah, OOPS!

Remember when Enron's execs were pumping up the stock price with phony numbers, and selling short on the side. at the same time they had to keep up the marketing illusion that teh company was going great guns. That's all this is. Nobody missed anything. But the scam-makers just need to clean out and let the shit flow downhill. WHen it gets down to the working class, it will mean that a depression is upon us.

[madrchsod]

6. you certainly did`t need a weatherman

they make money going up then going down....

[DeSwiss]

8. There is another aspect of the subprime loan debacle....

....that has received scant attention. I posted a thread on it back in June:

Baby Boomers Will Eat Bad Subprime Loan Investments Made By Pension Fund Managers

Posted by DeSwiss in General Discussion
Sat Jun 02nd 2007, 04:57 AM

In the unfolding nightmare that is the subprime loan debacle, it turns out that a large segment of the population invested in these loans are the pension funds of retirees and baby boomers. Many of these funds are administered by religious and public pension fund entities for service workers, teachers, firefighters and police. The pension funds hold these loans in the form of bundled-up "toxic waste" Collateralized Debt Obligations (CDOs). Yet the current spiraling out-of-control that we are seeing now with the subprime loan foreclosures didn't begin yesterday, it was a little further back.

This is ironic because many of these same retirees and baby boomers elected a Republican Congress back in 2000 and 2004, whose majority made it possible for such a slanted mortgage playing field to be created without inquiry or investigation. And the Bush Administration appointed the sleaze-bag lawyers, accountants and business people charged with oversight responsibilitites over Wall Street and in the real estate banking industry. Who then turned their backs. As one low-to-moderate income family after another slides into mortgage default and loses their home. A now it comes full-circle....

Full thread: http://journals.democraticunderground.com/DeSwiss/316

- K&R!!!

[Karenina]

13. HALLO!!!

:hi: Punkt, Feierabend.

Ross Perot called it THAT GIANT SUCKING SOUND.

[sandnsea]

15. And McMansion buyers

who thought they could live on equity forever and now can't take out home loans to cover their credit cards and SUV's and Disneyworld vacations. They bought into this interest only and ARM refi's too.

[SoCalDem]

9. Not "missed"...IGNORED. n/t

[1932]

14. They knew it was going to happen.

[GeorgeGist]

23. Ignorance is bliss

[KharmaTrain]

24. For Every Loser There's A Winner

Money just doesn't vanish into thin air...if someone is losing it, someone else is cleaning up. Here's a case in point. Many others also made off on hedges and other funds banking against the housing market. Some moved off shore and...while those markets tanked as well, they also had been cranking far hotter than Wall Street and are likely to rebound faster.

Last April I met with the VP of the local branch bank who was warning of the large number of foreclosures and defaults and how that was going to bring down the market...saying he was strongly advising to invest in hedges and foreign funds. The debt balloon has been large in this country for a long time and the decrepid bankruptcy bill has made thing even worse.