Monday, August 20, 2007

Subprime mess: take two

There is nothing surprising in the subprime mortgage business meltdown.

Don't believe any regulators, real estate agents or mortgage bankers who say otherwise. They knew.

Now the fed has jumped in to pump liquidity into the markets and to lower interest rates, which is great for the suit-and-tie crowd that made the subprime market the sham it became, but the folks at the bottom are still looking at soaring mortgage payments they can't afford. Excuse me for asking, but where is the help for them?

The subprime market is falling apart because it is riddled with ethical and legal corruption, which a lot of folks realized a long time ago, but ignored because the money was so. damn. good. Besides, if you didn't look, you wouldn't see the rot.

About 10 years ago, Milwaukee was hit with a wave of real estate fraud. Eventually, more than 500 properties, most in the central city, were caught up in fraud conspiracies prosecuted by the US attorney's office.

500 properties! Imagine walking in a straight line past 500 houses. You would have to walk a pretty good distance.

The scams the bad guys ran back then took advantage of weaknesses in the subprime market and the vulnerability and ignorance of the people who borrowed there. Just like today. Things haven't changed, though they may have gotten a bit worse.

I spent a great deal of time in the late '90s and early 2000s investigating the crooks and subprime bottom feeders.

Here are some of the things that were wrong then and now.

Loans requiring little or no down payments. In the late 90s, subprime mortgage lenders were settling for 5% down with 95% financing. Sometimes the lenders would quietly refund -- or kick back -- the 5% to the buyers. Now subprime lenders are advertising 100% financing and openly telling the world that credit histories and ability to pay will not be verified.

Shock! Surprise! Lots of people who shouldn't have gotten a loan actually did! Who would have thunk it?

Inflated appraisals. In the late '90s, lenders eager to write the loans would seek or tolerate, or not notice blatantly fraudulent appraisals that vastly overstated the value of properties. In one instance, two properties that were in reality several miles apart were described as being within a few blocks of each other. The lie went undetected, in part because the appraisal was given a "desk review" by someone in California who didn't know a thing about Milwaukee.

The state legislature really needs to establish a few new rules for appraisers like, maybe, demonstration of basic competence. The Milwaukee Common Council understood this in 2001 and asked the state to license appraisers, but couldn't even get a bill introduced. Now the city is trying again. The ladies and gents in Madison could have made the subprime fiasco a little less painful if they had acted back then, but they didn't. So please, please act now.

Far away corporate lenders. Then and now, the appraiser gets paid for delivering what the lender wants to hear; the real estate agent gets a commission based on the vastly inflated sales price, which is based on the bad appraisal; and the lender writes a huge loan and promptly sells the paper, raking in a really nice profit. The big bank or corporation that bought the paper is probably 1,000 miles away and doesn't really care about that particular mortgage, which is one of hundreds of mortgages purchased in a big package, as long as the good performers in that package do better than the bad performers and the money rolls in.

And when the poor sap who ignorantly paid tens of thousands of dollars too much for the property defaults on the loan and loses the house to foreclosure? The far-away mortgage owner hires someone to go look at the property. And that someone comes back and reports "This property is a piece of crap. You will never get your investment out of it."

The big corporate mortgage owner, because it is run by smart people who want to maximize profit and because it doesn't really give a damn about Milwaukee and its neighborhoods, knows that improving the property and then selling it will only make wetter the bath the company already has taken.

So the corporate mortgage owner simply walks away from the property.

It falls into disrepair. The city comes and boards it up. And boarded up houses become blights on their neighborhoods, attracting crime and depressing property values.

Nothing's changed. A system designed to be ripped off is being ripped off.

This time, though, the government is stepping in to throw billions to ease the financial wounds at the top of the economic pyramid, while the bleeding goes on and on and on at the bottom.

The system is still broken and entirely corrupt in very many ways, but with time, people will forget and the cycle will begin again.

3 comments:

Anonymous said...

Maybe people should UNDERSTAND what they are signing before they sign the mortgage. Maybe they should realize what they can and cannot afford. I do not think anybody put a gun to their head.

I do think that some of these lenders are at fault for loaning people money who probably could not afford it, but the ultimate responsibility goes to the person who borrowed the money.

Anonymous said...

Gretchen,

Wasn't one of George Bush's campaign highlights from the last election on how he made it possible for so many people to realize the American Dream and own their own home? Maybe we should bill him.

tim

Jamie Gunn said...

Gretchen - I agree with everything that you stated - however, it seems like you are letting people off the hook for their personal responsibility. If the values are inflated (as I believe they were) - no one was putting a gun to people's head and forcing them to accept loans for 10's of thousands more than their homes were worth. Supply and demand - the demand for the homes was great, money was easy, and people screwed themselves. ARM's are really not all that difficult to understand.