February 23, 2009

A business opportunity (shutting the barn door division)

We’ve all read about all the hundreds of billions of dollars lost by lenders and investors on mortgages made during the housing bubble that should never have been written in the first place due to low rent lying: Mortgage brokers telling buyers to make up jobs, income, spouses, and forget about other houses they own, previous bankruptcies, and the like. Appraisers adding 30% to values. Buyers claiming spouses they weren't married to, etc. etc.

I got to thinking: “If Procter & Gamble were in the mortgage industry, would they let themselves be taken to the cleaners by countless cases of petty fraud, the way Lehman Bros. and Washington Mutual and Fannie Mae and so many others did?”

No way.

If P&G were in the business of giving out a hundred billion in mortgages or buying hundreds of billions of other people’s mortgages, they would hire market research firms to monitor trends in the mortgage marketplace. They’d pay survey research firms to call up recent homebuyers to see how onerous their payments were turning out to be. They’d hire focus groups firms to talk to buyers and realtors and mortgage brokers to spill the beans about their business. They’d hire "mystery shopper" firms to pretend to be in the market for houses and see if any of the professionals were pulling any funny stuff. They’d have appraisers on their own payroll who were paid the same no matter how low they appraised the houses.

Procter & Gamble would spend the money to monitor the trillion dollar mortgage business as closely as they monitor the billion dollar toothpaste business.

But I’ve never heard of anybody being paid to monitor the mortgage market for monkey business. Have you?

By the way, if you think there might be a business opportunity here, go for it. Of course, even better, figure out what’s going to be the next Bubble after mortgages (alternative energy?) and set up systems that can help investors not be such damn fools in the future.

UPDATE: On second thought, the financial industry would just use marketing research reports on growing irrationality and funny business in the market to jump into the next big bubble even sooner and harder. Oh, well ...

My published articles are archived at iSteve.com -- Steve Sailer

27 comments:

RKU said...

This is nuts!

Henry Paulson walked away with $700M, I think Stanley O'Neil and that Mozillo guy each got something like $350M, most of the other top execs also ended up with hundreds of millions, while the small fry merely became multi-millionaires...

If they'd followed your crazy advice, they wouldn't have made even a small fraction of that sort of money.

What do you think they are, STUPID??!!

Wade Nichols said...

But I’ve never heard of anybody being paid to monitor the mortgage market for monkey business. Have you?

Yes. They're called "bank examiners", and they're employed by: FDIC, Federal Reserve, OCC, OTS, NCUA, State Agencies, FHLB, I think I've covered them all.

All of them obviously "sleeping on the job".

Henry Canaday said...

What if the the goverment started enforcing an equal-tooth-decay-by- race policy on manufacturers of tooth paste and dental floss? Maybe P&G would just give up market research and take the loot until Ch. 11 hit, then ask for a little financial bridgework.

Anonymous said...

There were definitely incentives for companies to look the other way, against their own purported self-interests.

Great video I found: http://vimeo.com/3261363

The credit crisis summed up in ten minutes.

SFG said...

RKU's got it. Management, especially upper management, was making out like bandits, so why should they quit? From their point of view, the whole thing was a success: they got rich. Even after the crash, they're still rich. Who cares if the company survives and all the secretaries and janitors lose their jobs if you get a billion dollars?

Jorn said...

Michael Lewis did, himself: [Portfolio-loong]

Anonymous said...

This comment by Lewis is a strong statement indictment of those who would pin the financial crisis on minorities. There were basically village idiots at the steering wheel of the vehicle that is America's financial system. Thanks for that link Jorn, it is fascinating.

"I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?"

Anonymous said...

Why should anyone in the mortgage industry have cared about the creditworthiness of their applicants? When you mortage your home, this means your lender has collateral roughly equal in value to the loan itself. And what hot collateral it was, too.

To make subprime loans and such work as an investment strategy, you need two basic things: first, housing prices must increase exponentially forever. This was well known to be inevitable.

Second, the terms of the loan need to be structured so that the bank can milk as much as it can from the foreclosure sale. In the best-case scenario, when 100% of the proceeds from the foreclosure sale go to the bank, then their ROI = the appreciation of the house between loan origination and foreclosure sale + whatever monthly payments the poor sucker managed to make. Back in the good old days of 2004 this was a recipe for riches.

I can't very easily find specific data on foreclosure sales, but I suppose that only the principal needs to be repayed, this would leave some money left over from the sale if the house appreciated. Whether the banks could suck up that remaining bit through some funny terms in the loan (neg-am would help but I don't think most subprime loans were neg-am, interest-only periods and balloon riders would at least lower the reduction of the balance and I think these were more common) or some quirk in the sale process (the bank is supposed to "repair" the house before selling it, this looks like an opportunity for throwing in extra costs), I have a feeling they managed it one way or another.

testing99 said...

Steve --

You don't get it.

P&G are in the consumer products business. They get a bad rep, poison in Tylenol, tainted Peanut Butter that kills people, they potentially face going out of business, from a combination of lawsuits and people just not buying their products.

Their profit margin is relatively thin.

Now, mortgage companies are NOT in that business. They are first and foremost, the bidden hired of the government, which directs them who to lend to and who not to lend to. The mortgage companies don't care if most of their mortgages go belly up, because they don't keep them -- they bundle them up and sell them.

Let's review: P&G, stable, repeat customer business, small margin, high volume.

Mortgage companies, unstable, no repeat customer business, high margin, small volume.

Why are you hung up on mortgage companies acting like mortgage companies? It's like expecting P&G to act like say, a small scale custom food producer. The requirements for each type of business drive responses.

Chief Seattle said...

Steve, this is OT, but the New Yorker just borrowed your Shepard Fairey article. Yours is better.

Anonymous said...

What “anonymous” doesn’t understand is that the current regime in America is an alliance between the Overclass (the undeserving rich and powerful) and the Underclass (the mostly undeserving poor and less powerful).

Such an alliance is hardly without precedent in history. In the late Roman Republic, the wealthy often played the role of champions of the proletariat in campaigning for more power for themselves.

So it isn’t a case of “blaming minorities” but of noting that the ideology (and it is a self-serving ideology) of the Overclass to suppress the problems of promising the moon to an uneducated and undisciplined underclass as the expense of the working and middle class is a recipe for disaster.

Most of the criticism made here at iSteve has been aimed at the Overclass for pushing loans for minorities who don’t have the capacity at present to pay off the loans or even service them for a “decent” period of time. There may be some debate over whether the Overclass knew they were pushing a policy that would blow up or whether they were blinded by an ideology of “equality” but it could be a mixture of motives. In the end, the Overclass is definitely motivated against the interests of the working and middle class as it sees that “middle” as a brake on its own lust for power.

In fact, Conservative critiques of the lust for power, whether over people or over nature, have been quite common for the past century, although one wouldn’t know it if one focused only on the Neocon media and authors, who of course aren’t conservatives.

Anonymous said...

Wow, that is a fascinating article:
And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

Anonymous said...

This comment by Lewis is a strong statement indictment of those who would pin the financial crisis on minorities
And who exactly is "those"? Not the fast majority of people around here.

Anonymous said...

On this topic, I noticed the other day a post at Climate Audit mentioning the original fradulent Boston Fed study that was used to further bolster support for the 1990's CRA "reforms." I linked to the Climate Audit post b/c a) its a cool site and b) I'm lazy and the post has lots of links and c) commentary from the paper's authors.

headache said...

Well, as you pointed out, the financial industry did not WANT to know what's going on. They needed this petty fraud in order to foist an even larger fraudulent scheme on the big money of this world. A lot of the European rich and the financial industry are croaking on the fraud which Lehmann and co perpetrated on them.

Its funny you mention alternate energy because it already has had a series of financial scandals, at least in Europe. No sex scandals to date. Apart from that, how are the politicians going to explain to us in 10 years time, when the science calls their bluff, that it was such a good idea to blow trillions down the rathole to stop "global warming".

Anonymous said...

During the bubble, I knew somebody who puts up those "we buy houses" signs, makes lowball offers to buy distressed homes, and then sells them to low-income people. He said that he won even if they defaulted, because he got the house back - which would have been true until the value of houses plummeted.

beowulf said...

I must admit, this story warmed my heart...

Homeowners' rallying cry: Produce the note
ZEPHYRHILLS, Fla. (AP) — Kathy Lovelace lost her job and was about to lose her house, too. But then she made a seemingly simple request of the bank: Show me the original mortgage paperwork.

And just like that, the foreclosure proceedings came to a standstill.

Lovelace and other homeowners around the country are managing to stave off foreclosure by employing a strategy that goes to the heart of the whole nationwide mess.

During the real estate frenzy of the past decade, mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.

http://www.google.com/hostednews/ap/article/ALeqM5hLOuvy9fguykC2NydTDrkqqyybvQD96DHN5G0

Eric Stratton, Rush Chairman said...

"Overclass is definitely motivated against the interests of the working and middle class as it sees that 'middle' as a brake on its own lust for power."

For 200 years, give or take, our country has been unusual in that the ruling elites were generally of a fairly benign, even benevolent disposition toward the citizenry. We have entered an era now where we have become more like the rest of the world, that is to say, the ruling elites despise their citizens. Once that is understood, it's easy to see why there is so much support in DC for things like out-of-control immigration. Those in charge want a new people to govern, one that is less hung up on pesky matters like clean, accountable government and a decent economy.

sj071 said...

No need for repeated calls to look at Roman Republic:

JIM ACOSTA, CNN CORRESPONDENT (voice-over): School bus driver and mother of two, Minta Garcia got the letter every homeowner dreads, your mortgage is in jeopardy of going into foreclosure.

MINTA GARCIA, DISTRESSED HOMEOWNER: We're going to be losing the house. We're going to lose everything.

ACOSTA (on camera): You think you're going to lose everything?

GARCIA: Yes.

ACOSTA (voice-over): Her message to the president...

GARCIA: Stop with the foreclosure.

ACOSTA (on camera): Stop the foreclosures?

GARCIA: Yes. Right now, because if people are losing houses, losing jobs, what are we going to do?

.......

ACOSTA: Like countless other Americans, Garcia admits she and her husband bought more house than they could afford, but she says the lender made the purchase all too easy. Now her mortgage is worth more than her house.

(on camera): How much was the house when you bought it?

GARCIA: Eight hundred.

ACOSTA: Eight hundred thousand dollars?. And how much is the house worth?

GARCIA: Right now, it's like $675,000 on the market.

Thrifty, hard-working and industrious citizens all look like village idiots now...

RKU said...

For 200 years, give or take, our country has been unusual in that the ruling elites were generally of a fairly benign, even benevolent disposition toward the citizenry. We have entered an era now where we have become more like the rest of the world, that is to say, the ruling elites despise their citizens.

Yes, I think this is a very important point.

But I'd argue that for the last few centuries, the governments of most of the Northern European countries also fell more or less into this same category, though perhaps not as much as the U.S. That's one crucial reason why those countries were so much more successful than those in Southern Europe and the rest of the world.

And although things have changed enormously in the U.S., I'd say that things have changed less in the rest of the world, while some countries such as China now have also moved in that very positive/patriotic direction.

Anyone want to bet which countries will be more successful in the future?...

Rortybomb said...

Probably not. How did GE do in those regards vis-a-vie P&G? Take a look at GE's "WMC Mortgage" group, which took an insane hit:

http://seekingalpha.com/article/40989-ge-plans-to-shop-its-wmc-subprime-mortgage-unit

If you listen to This American Life's episode "The Giant Pool of Money" you meet a jerk who makes $1.2m/year selling mortgages to people "that don't have a pot to piss in." He buys Tara Reid expensive champagne with the money. They mention that he works for WMC Mortgage, but don't mention that he actually works for GE.

Anonymous said...

GARCIA: Yes. Right now, because if people are losing houses, losing jobs, what are we going to do?

You know, there in fact is already a social safety net in place for the middle class. It's called bankruptcy, and Ms. Garcia should feel no shame in availing herself of it. If, to use that wonderfully apt term, the Overclass sleeps long and deeply with gazillion dollar bonuses for running companies into the ground, then the middle class is certainly entitled to take advantage of whatever escape hatch the legislature provides to them.

This is why I think the recession will continue: bankruptcy is going to lose its stigma with people who previously would have moved heaven and earth to avoid it. When Joe Middleclass realizes he will pay three times the value of the house on the mortgage, then his home is no longer an "investment" or "where the heart is." It's a wealth-destroying black hole that is gobbling up money that could go towards future wealth-generation, like his kid's college, savings, etc.

At that point, bankruptcy is the economically sensible option.

--Senor Doug

Mark said...

The meltdown: it was the Harvard WASP mafia!

Svigor said...

This comment by Lewis is a strong statement indictment of those who would pin the financial crisis on minorities.

Nice straw man. Please never stop beating it.

Mr. Anon said...

"sj071 said...

Thrifty, hard-working and industrious citizens all look like village idiots now..."

I would not call a schoolbus-driver who buys an $800,000 house "thrifty". The other term you used does however sound appropriate.

Anonymous said...

Mark said...
The meltdown: it was the Harvard WASP mafia!


Tad! Biff! Muffy! Sperry Topsiders! Princeton supper clubs! Robber barons with monocles and silk top hats!

Melvin Gibson said...

Tad! Biff! Muffy!

The dirty international goyim are behind the banking crisis and, between tennis dates, are responsible for all the wars in the world.