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How many foreclosures - and what kind of loans?

The world economy is melting down because of the US Real Estate market, at least thats the story that we are being fed by the nightly press. The story is that millions of homeowners have joined the likes of Tom Joad and his family and are sleeping in boxcars, thrown out by predatory lenders who couldnt wait to steal a little money from the little man.

Those thieving capitalists...

Here's a little perspective:

Gee. Most people have either a Prime Fixed or dont have a mortgage at all. Only a small number - a single digit small number - of "Sub Prime" loans.

So how many foreclosures are there and from what category:

Gosh, 43% of forclosures are in the subprime adjustable rate area.

( from the fantastic Larry Kudlow Money Politics)

What we have just proven here is the far out Nobel prize winning theory that that the subprime adjustable rate loans are risky to lenders.

I don't deny that there is trouble in the housing industry, what I do deny is that this is a shock and a surprise. Banks and lending institutions work diligently every hour of the day in figuring out who is a good risk and who is a bad risk on who is the best person or company to loan money.

It's fundamentally what they do.

Someone telling me that the banks didn't know that these loans were risky is like telling me that the insurance companies didnt know that insuring homes on the coast of florida was a big risk.

Of course they know, that's their job.

They play the precentages. You bet that paying a small amount of insurace premium each month will cover you if anything goes wrong, and the insurance company bets that lots of people paying the monthly premium will cover any losses.

So if you are a bank, and you have lots of "subprime loans", are you really that surprised when they go to straight to hell? No. You knew it was a risk. You probably had the person taking the loan get Private Mortgage insurance.

Oh wait, you mean to say that some of these loans were so risky that the person getting the loan couldnt qualify for Private Mortgage Insurance? or that by getting PMI the person would have enough money every month to get the loan?

And you're telling me that it didnt send red-lights-a-clanging-and-warning-bells-a-flashing on the loan officers desk?

Really?

Ok, so youre a bank, you are flush with cash because of the booming economy and you dont make money by sitting on it, you make money by lending it. The only part of the market you can expand into now ( because most everyone who can buy a house already has one ) is the sub prime market. This would be the market of people who dont own a house, and have had some problem with their credit score.

Sure, rich pickings in there, but that area comes with risk. So it would seem to make sense to me that you would as a bank, prepare for that risk, maybe set aside a certain amount of money to cover those potential losses in the event of, God forbid, the risky subprime loans dont get paid on a right honorable payment schedule according to the terms therein.

And here's where Mr. Sarbanes and Mr. Oxley come into the game.

You see, back on the last boom and bust cycle some 8 years ago, some geniuses in the Congress decided it was those nasty capitalist companies telling people things about their companies that got all those poor consumers in trouble.

You remember dont you?, The glory days of the stock market when there were people who bought Pets.com for 60 dollars a share, expecting, ( nay demanding!) that they make a profit and angry to the point of lawsuits to find that dog food really doesnt ship well in 60lb bags through the USPS when you can just drive down the street to get it at the same price - right now.

"Something must be done", said the people and Congress stepped in to make it so. So of course, Congress began to make sure that companies didn't send out too much good information about how they were doing, so as to unnaturally influence the poor and hapless victim, the consumer and shareholder. That horrible deceptive activity by those nasty captalists resulted in the passage of the Sarbanes/Oxley act, which is to American business what the McCain/Feingold act is to politics.

Oh good, Congress has saved us all from the predatory stock market profiteers, we can all rest easy now.

Sarbanes Oxley did a lot of things to American companies, almost none of them good and almost none of them solved any of the problems they were intended to solve. One thing it surely did was invoke the law of unintended consequences. Now under Sarbanes Oxley, companies have to be very careful about how they communicate and what they communicate. Unfortunately, that means that when there is good news, they rarely talk about it because things might change for the worse but when there is bad news, they wont shut up about it because if things get better no one will notice the bad activity. Since Sarbanes Oxley, you constantly see cases where stocks have "exceeded their quarterly projections".

What Sarbanes Oxley did was to cause companies to muzzle good news, and to amplify bad news and this is what you see happening today with the US Real Estate Market.

Either that or all banks suddenly lost their ability to determine who was a good risk and who was a bad risk, or its just possible that many banks are using this problem as an opportunity to throw lots of underperforming loans in risky areas and bad properties out under the rug of "the nationwide sub prime disaster - "which is not our fault dear shareholders but the fault of unforseen consequences and market forces...". After a few bad quarters the bank suddenly finds itself in the land of 'milk and honey' because the only loans they have are of the "high return, low risk" category.

"...Wall Street reports today the surpising rebound in the mortgage industry after 4 straight quarters of bad news..."

I'm not saying that banks and lending institutions arent deceptive - they are. I'm just saying that I find it hard to believe that this "Subprime lending disaster" is a surprise or as big of a problem as its being made out to be.

I mean, who would have thought that folks with 70,000 a year income couldnt really afford to make payments on a 750,000 house?

Probably the same people who bought Pets.com stock in 1998.

Posted @ December 14, 2007 07:13 AM | Current Affairs