If credit was worth something...
cred·it (krdt)
n.
- Belief or confidence in the truth of something.
- A reputation for sound character or quality; standing: It is to their credit that they worked so hard without complaining.
- A source of honor or distinction: This exceptional athlete is a credit to our team.
- Recognition or approval for an act, ability, or quality: gave them credit for a job well done.
- Influence based on the good opinion or confidence of others.
Let me first talk about how to make sure America is secure from a group of killers, people who hate -- you know what they hate? They hate the idea that somebody can go buy a home.
Remarks by the President
at the Department of Housing and Urban Development
Washington, D.C.
June 18, 2002, 10:30 A.M. EDT
I’ve had some time to read lately. Picked up The Big Short by Michael Lewis, read it in one night. Ordered Liar’s Poker by Lewis as well. That’s sitting on my nightstand, waiting to be opened, after I’ve digested the current crisis a little more.
I’ve purchased EConned by Yves Smith, the fine blogger at Naked Capitalism. I’ve also picked up Confidence Game by Christine S. Richard, the story of how hedge funder Bill Ackman uncovered leveraged fraud at MBIA as he shorted the company and eventually went up against the big guns (Eliot Spitzer and the NY Attorney General’s office, the SEC, and others) to prove the lack of substance and capital behind the largest municipal bond insurer in the US.
As some of you know, I am, at best, cancer and chemo-brain challenged and somewhat attention-deficit. My reading choices are making me more nauseated than I thought possible, given the daily Zofran I’m taking. My gut reaction has nothing to do with the quality of the content – in every instance cited above, the stories are detailed, reasonably consistent, and enthralling. It’s the rotting core that exists in our nation-wide financial and Wall Street culture that sickens.
There are random thoughts in these fuzzy recesses. I’ve tried to think through some kind of cohesive frame that justifies even a small portion of the monster that Wall Street has created. As I post, all I have are angry bits of broken knowledge, incomplete at best. (Where are those CDOs now?)
So hell, I’ll just throw it at the wall like a can of paint. Finance-free association, if you like.
The captains of finance and industry will tell you that the whole process of describing collateralized debt obligations and credit default swaps is too complex and sophisticated for the average American to understand. Really, this stuff at the simplest level is crap - empty paper with no value backing it and no tangible, fungible collateral to attach should the investment go bad. The Abacus Ac-1 2007 20070226 Pitchbook appears to state that there’s no there there.
No Legal or Beneficial Interest in Obligations of Reference Entities
Participation in the transaction does not constitute a purchase or other acquisition or assignment of any interest in any obligation of any Reference Entity. Neither the Issuer nor Investors will have recourse against any Reference Entitites. Neither the Investors nor any other entity will have any rights to acquire from Goldman Sachs any interest in any obligation of any Reference Entity, notwithstanding any reduction in the principal of the relevant class with respect to such Reference Entity. Neither the issuer nor any investor will have the benefit of any collateral delivered by any reference Entity nor any right to enforce any remedies against any Reference Entity.
In the past few days during my cruise on the web for links (and there are many that date back to 2005-2006 that warn of impending doom) I’ve repeatedly come across the theory that the ultimate blame for this crisis rests on the backs of homebuyers who wanted easy money and got it. That the blame lies ultimately and squarely with Main Street, not Wall Street. It was Main Street consumer demand that drove the growth of corruption. Blogs, newspaper articles, pundits’ theories, testimonies before Congress: so many sources find it facile to imply that if it wasn’t for the greedy homebuyers, there wouldn’t have been the creation of these risky mortgages.
Placing blame on the borrower does nothing to address the complete collapse of any legitimate credit underwriting process that was at one time in place between lender and debtor, banker and client.
The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.
Remarks by the President, June 18, 2002
How many subprime homebuyers were told that the future equity in their new house was money in the bank by a lender offering them what is now affectionately called a "liar’s loan"?
How many subprime lenders assured a potential borrower that the economy was strong enough that their income would only increase over the life of the loan?
How many borrowers were persuaded that they could easily refinance within the 2 to 3 year period before their Option ARM readjusted?
I know the American Dream. I was raised on it as a child of the 60’s. My folks, by the time they were in their forties, were established enough to buy a few small rental houses, then refurbish, renovate and resell them within two years in the 1960’s. Small houses could be purchased for a couple of thousand dollars at a pop in the small Oregon coastal community we lived in. The succeeding profit after sale of these properties was likely no more than another couple thousand dollars, after labor (most done by my father) and materials were factored in. These were the small steps taken by my parents on the road to their American Dream.
When my mother sold the family business in 1969 after the death of my father, she carried the contract for thirty years at 6.75% interest. The local community bank held the funds transfer in escrow and never charged more than $10 a month over the course of the payout. The mortgage was bought out twice by new individual buyers of the motel property, but the original note was simply assumed and paid on, with no renegotiation of the original principle by my mother; nor were the escrow fees increased by the bank. My mother generated a $454 monthly income from the sale of our business and the final amortized payment was made on December 1, 1999.
No packaging of borrower’s paper with other paper. No structured derivatives were designed synthetically to over-leverage empty paper assets against thousands of packaged small fry subprime mortgages.
Flash forward nearly forty years. When my older sister decided to refinance her house (which she’d owned since 1969) in 2007 in an attempt to increase her monthly income until she became too old to continue to maintain the property (a time period she estimated as around a year and a half in the future), she entered into a Pay Option ARM in 2007 with a well-known, well-advertised lender. She signed the papers on a refinance that required interest only payments of $1300 a month for two years.
After two years, the payments would reset to anywhere between $2200 a month and $2600 a month. She was assured by the loan officer that she would have no difficulty in either refinancing again or selling the property before the reset occurred. My sister made approximately $3000 a month from Social Security and as a home health provider for her disabled adult son, along with a small amount from a tiny 401k. She was 68 years old in 2007.
She had never before negotiated a mortgage loan or handled the financial requirements of the family in the forty years she’d lived in her home. Her deceased husband (dead in 2002) had done all of the financing over the years. My sister was not a sophisticated borrower.
Four weeks after signing the papers on the loan, my sister was diagnosed with cancer and a month later she was dead. In the intervening two years between her death and the final release of the house to the foreclosure gods, the refinance paper on that property was sold three times to three different entities. My sister’s daughter, my niece, attempted to try and ferret out who the responsible parties were who held the original note so that at least she could discuss the unraveling of the ownership, but inevitably the process failed – a direct connection between loan servicer and mortgage holder could not be found. My best guess is that it went from GMAC to Wells Fargo to a BoA servicing company responsible for divesting foreclosures and REOs. In two years.
But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. (Applause.) And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. (Applause.) He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.
Remarks by the President, June 18, 2002
The upstream market for these kinds of mortgages flowed into a vortex of greed. Well-known, well-advertised lenders got their risky assets off of the balance sheets by reselling the paper, paper was packaged together into securities – both risky stuff and decent stuff, securities were then sold and resold, sliced and diced, leveraged multiple times in multiple ways (try to figure out what a CDO squared is), and finally insured against through credit default swaps. Over time, between 2000 and 2006, over $4 trillion CDOs were pushed out internationally. The cost looms ahead because the risk is still out there, off the books . It’s probably a greater risk than anyone knows.
Between 2002 and early 2008, roughly $1.4 trillion worth of sub-prime loans were originated by now-fallen lenders like New Century Financial. If such loans were our only problem, the theoretical solution would have involved the government subsidizing these mortgages for the maximum cost of $1.4 trillion. However, according to Thomson Reuters, nearly $14 trillion worth of complex-securitized products were created, predominantly on top of them, precisely because leveraged funds abetted every step of their production and dispersion. Thus, at the height of federal payouts in July 2009, the government had put up $17.5 trillion to support Wall Street's pyramid Ponzi system, not $1.4 trillion. The destruction in the commercial lending market could spur the next implosion.
(emphasis mine)
As in the case of Goldman Sachs, a few investment banks and hedge funds covered ass by back-filling potential CDO failures with insurance through CDSs when the CDO business got shaky.
Market makers. Market monsters.
In June 2007, Goldman soft-peddled its increasingly dark view of the mortgage market. In a quarterly filing to the SEC, the company glossed over the calamity its traders were seeing on a daily basis, reiterating that, "The broader credit environment remained strong, although the subprime sector within the mortgage market continued to be weak."
***********
Not until October, after the SEC's accounting branch pressed Goldman for more details of its subprime exposure, did Goldman reveal in a letter that it held a net short subprime position "during most of 2007 . . . and therefore stood to benefit from declining prices in the mortgage market."
A week later, Goldman's controller, Sarah Smith, informed the SEC that between Nov. 24, 2006, and Aug. 31, 2007, Goldman had reduced its investment in subprime mortgages from $7.8 billion to $462 million.
The trail begins at the bottom of the hill. The view from the summit is obscured. A mirage.
How many individual loan documents were fraudulently "fixed" to make it into a loan portfolio by lenders like Countrywide, or Franklin Financial, or Washington Mutual and then rapidly pushed upward into the meat grinder of derivatives portfolios and packages? The market would not have existed or sustained at the bottom if there was no appetite at the top.
Remember Angelo Mozilo? Countrywide’s CEO, now reviled as the orange monster of subprime, and who is apparently still under investigation by the SEC of fraud, underlined it best as to how dangerous the house of cards was in a series of 2006 emails to his underling at the time, David Sambol (Sambol later briefly became the Countrywide CEO when Bank of America took over the company):
(Angelo) Mozilo went on to write that he had "personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan [sic]." Mozilo noted that, "[i]n my conversations with Sambol he calls the 100% sub prime seconds as the ‘milk’ of the business. Frankly, I consider that product line to be the poison of ours."
Furthermore, in an April 7, 2006 email to Sambol concerning Countrywide’s subprime 80/20 loans, Mozilo fumed: "In all my years in the business I have never seen a more toxic prduct. [sic] It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down ...the product will become increasingly worse. There has [sic] to be major changes in this program, including substantial increases in the minimum FICO.... Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production."
Mozilo cashed out with $129 million in stock in August 2007 as the milk turned to poison. No indictments to date (that I'm aware of).
In a world where I find myself "going short" on time, the future of our children, our society, indeed the entire global economy depends on reaffirming and reinterpreting the merits of "going long".
More remarks from the President, June 18, 2002
And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)
We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home. (Applause.)
The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. (Applause.)
The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. (Laughter.) There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.
It is essential that we make it easier for people to buy a home, not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.
Time to medicate.