Are you changing your behavior in response to current events? - Page 8

Re: Are you changing your behavior in response to current events?

Well, if you want fair...

Then definitely give my money away. That's good. Thanks. Gives a whole new/old meaning to the word "confidence." I'll just keep paying my mortgage (and, um, taxes!) over here, like always, good citizen that I am. I don't expect to be "bailed out" for my good behavior.

But my only expense besides food is gonna be Netflix, so don't count on me to restart the whole blamed economy, ok?

Holidays are coming. What's your gift list look like? Mine's pretty full of Xmas cards bought at "the dollar store" last year. That's all you're getting and you'll be happy about it.

MC

Re: Are you changing your behavior in response to current events?

Thanks


I'm not well known for my sensitivity - hell I 'step in it' all the time. However your choice of words in several post has me feeling... sensitive. Maybe a more positive collection of adjectives would have been more constructive?

I would say more but I'm late for my 'cry-therapy for men' class.

XXOO

-Eric

Re: Are you changing your behavior in response to current events?

Now this is scary - Nearly 1 in 6 homeowners is ‘underwater’ - Mortgage Mess - MSNBC.com

Re: Are you changing your behavior in response to current events?

Thanks for the suggestion, Eric, but considering the tenor and quality of what I was replying to, plus a personal history of prior discussions with the author, I think the diction was appropriate.

Now, if it's making you feel "sensitive", I would find that . . . surprising.

Just curious, Dave -- is it a coincidence or deliberate that you're echoing the famous phrase (and book and movie title) about the Enron crowd, namely that they were "the smartest guys in the room"?

M.

Re: Are you changing your behavior in response to current events?

You have made some very definitive statements. Maybe you could provide some examples or evidence which would distinguish these statements as more concrete than most other urban legends.

Re: Are you changing your behavior in response to current events?

I certainly wouldn't call it a "rip off". In many respects, the comparison is a valid one. The Enron guys were very smart, and much of what they did wasn't crooked, just aggressive. (Most of the crooked stuff came in when the aggressive stuff started to go south on them.) What they did required a lot of smarts, but it also demonstrated some of the limits of the "greed is good" philosophy.

M.

Re: Are you changing your behavior in response to current events?

You made the claim "the captains of industry are telling people... house prices will forever continue to increase at 10%......Don't worry: if you can't make payments, sell at a great profit.....when the mortgage brokers and banking professionals are counseling people to take mortgages at 35%+ of their gross income. "

The only evidence of that claim you can provide is articles related to the current president speaking about consumer confidence, partisan op eds about the current president, a Google search about no-doc loans, and a fictional script?

Where is the part where you show 'captains of enterprise' talking about a housing market with no limit for growth?
Here is a captain of industry for you speaking in 2005;
Buffett and Munger warn of real estate 'bubble' - May. 2, 2005
(btw - The Oracle has been BUYING lately)

Where do you show any substantial number of people advising folks not to worry about their mortgage payments or counseling people to take mortgages above their means?

You won't - and the reason why is because loan officers are not financial advisors; They have no obligation to borrowers other than to assist them in acquiring a loan -which IMHO is a critical flaw as I discussed in a prior post.


Here is an article you might do well to read and grok;
Psychological Aspects of the Financial Crisis: In Warren Buffett We Trust? | Business Mind Hacks You may not like it since it does not scapegoat certain parties you seem to have an affinity to affix all blame to...

Re: Are you changing your behavior in response to current events?

Wow. Fred Foldvary of The Progress Report wrote this in 1998:

Foldvary on economic trends, macroeconomics, forecast land price inflation money supply tax reform Henry George

Re: Are you changing your behavior in response to current events?

Wow. Pretty prescient.

Re: Are you changing your behavior in response to current events?

Given the events of the last week I thought you all would appreciate this market commentary I found. It is only about :30 seconds long and VERY insightful.

Re: Are you changing your behavior in response to current events?

I can give you one concrete example-

Here in Northern VA, when I was shopping for a home in 2004, the mortgage broker got me pre-approved (not pre-qualified, but pre-approved) for $550k home with 10% down, on a $60k annual income. She informed me that the underwriter had no issue doing this, because I had such a great FICO score.

Speaking with friends and neighbors who bought around the same time, this was relatively commonplace here.

And, no, I did not take them up on that offer.

Re: Are you changing your behavior in response to current events?

As I mentioned before - the loan officers job is simply to sell you a loan. Their job is not and never has been to financially counsel you on whether or not you can afford it. They only counsel you on the maximum amount they can get you approved for - which was the case in your example. The current structure leaves it solely to you to determine suitability and affordability. Loan officer =//= financial advisor. Not even close.

ie - a Circuit City hack can 'pre-approve' you to purchase a 72" 1080p HDTV but it's up to you to determine if you can afford it and if it is suitable for your needs. Loans are sold in the same way - suitability is solely up to the purchaser.

I personally feel loans should be sold in a way similar to investments - where a commissioned rep has a responsibility (and liability) to determine suitability to the customers circumstance. There presently is none; no recourse or liability to the salesperson who set up a borrower with an unsuitable loan. Many if not most borrowers assume a lender has a responsibility for suitability. It should be so. With that simple change we would not likely be in this mess.

Re: Are you changing your behavior in response to current events?

Very seldom will any lender will refinance a delinquent mortgage - ever.
Nobody has denied that people took out loans they were ill equipped to afford. Nobody denies that the SINA and NINA loans were abused, and nobody argues that there wasn't considerable sleight-of-hand and ignorance on the secondary market - so I'm really unclear of your point or how it relates to your prior claims.

Re: Are you changing your behavior in response to current events?

"As I mentioned before - the loan officers job is simply to sell you a loan. Their job is not and never has been to financially counsel you on whether or not you can afford it."

Well, when banks were keeping mortgages, their job was to protect the bank from bad loans. So maybe they didn't provide financial counseling to people, but they made those judgments. After banks started packaging mortgages, it no longer mattered because they weren't taking the risk, it was getting passed on to others.

Re: Are you changing your behavior in response to current events?

Exactly! In the 'good ole days' the recourse was natural - bad loans hurt the originators much closer to home. Bad loans could be traced right to the originator - who would find himself in very hot water. (we could see why they would prefer complex secondary markets!)

With suitability recourse, the onus would be back on the loan officer to originate quality loans. It would be much more difficult for special interests (Congress, Lobbyists + Co.) to mandate bad loans ("affordable housing") to lenders and there would be much less need for further heavy government oversight. Personal responsibility works whenever it is applied.

Re: Are you changing your behavior in response to current events?

I understand your point, Eric, but there's a disconnect between the two halves of the bolded sentence (and that's without even considering the fact that many of the bad loans we're now dealing with weren't "mandated" by anything except the profit motive, since banks made their money from the upfront fees).

It's the absence of regulation that allowed the derivatives market to thrive, thereby ensuring that, when a loan went bad, the damage wasn't confined to one bank's balance sheet but was spread throughout the system. In your "good ole days", there was a transparency to a bad loan; everyone could see what it did to a bank's balance sheet. Now, no one knows exactly what it does to the dozens (or hundreds) of institutions that have a tiny slice of that loan contained in various mortgage-backed securities whose values are effectively set by the investment bank wonks who created them. Or rather, by their computer programs -- which means that, in a crisis, no one trusts the values. As Warren Buffett is supposed to have said, "Beware of geeks bearing formulas!"

Everyone has their personal rogues' list for this mess. Having witnessed the 1994 small-scale rehearsal for this meltdown, which took place in a corner of the mutual fund industry, I place at the head of my list an influential voice who insisted for years, and still says today, that derivatives don't need regulation: Alan Greenspan.

M.

Re: Are you changing your behavior in response to current events?

It's going to be interesting to see whether regulated exchanges such as the CME will be able to begin to clear some of the OTC business. Despite the overwhelming evidence that the current predicament was fueled by derivatives that were not regulated, not transparent, and contained enormous counterparty risk, I have a feeling the firms trading these will still be resistant to change.

Re: Are you changing your behavior in response to current events?

I suspect you are confusing the portion of my statements about the origination of loans with my statements about the packaging and wholesaling of the loans.

Regarding the profit motive; you are correct, lenders do make a fee when the loan is originated. If it is a crappy loan it then goes on to get hidden in the muck of the current system.

However - profit is not the root of the problem. Without congressional pressure these loans never would have received the 'pseudo endorsement' of FNMA/FHLMC. Loan originators will originate whatever products they are given - that is their job. It was not loan officer 'greed' so much as congressional 'oversight' on the secondary market which started the original snowball rolling for this problem. (though 'greed' still played a role-on all levels)

Here is an interesting article about it;

Blame Fannie Mae and Congress For the Credit Mess - WSJ.com

I quoted only a portion but I encourage you to read the whole thing. It is not the sort of issue that lends itself well to a single quoted paragraph. (pun intended)

That is the original congressional 'oversight', but the congressional 'oversight' I was referring to in my prior post was about future mortgage business. I am highly suspect of allowing 435 ignorant, self-serving PR hacks more authority in the mess they helped create.

Now - to the first part I spoke (of the loan originators) ... Suitability recourse is where a commissioned loan officer could be sued by the borrower and lose their license, for originating a loan which they did not reasonably determine was suitable for that borrower. That is the present system for how investments are sold to consumers by commissioned sales reps. (If a person is financially damaged by an investment that can be determined was unsuitable for them then the investment professional is in serious trouble. That is not so with a lender)

If that were the case, then lenders would be considerably less likely to originate loans that are based on fraudulent or inappropriate assumptions. The loan officer would (finally) have a duty to the borrower to make certain that the loan is appropriate for their financial circumstances.

That would result in enhanced diligence at the basic level for loan suitability - and therefore quality. Congress could pressure FNMA/FHLMC all they want - but if loan officers won't originate an over-abundance of shady 'sub-prime' loans (for concern over suitability) then we would not have this circumstance.

In other words - congress could mandate million-dollar loans for babies - but no loan officer would ever originate it if there were enhanced diligence for originators...


I didn't really follow the rest of your post. Maybe you could edit it for more clarity or post a follow up...

Re: Are you changing your behavior in response to current events?

The rest of my post refers to the huge issues your WSJ authors attempt to sweep away under the deceptively simple phrase "and mortgage-backed securities" (they use it several times). Their article is entirely in line with the WSJ's party line, which has been screaming about Fannie and Freddie for years. Now, while I have to give them their due for raising the alarm so early, at the very same time, they were also completely dismissive of any concern about unregulated use of derivatives (those "mortgage-backed securities" again), preferring the Greenspan approach of lettting the market use them to allocate "risk".

I know my limitations. My knowledge of derivatives is sufficient to allow me to follow someone else's presentation, but not enough to frame a succinct overview beyond what I've already presented. Maybe Brian Perry or someone else can help.

I'll say this, though. If you have no sense of the central role that derivatives played in the current situation, then you're missing a crucial element. So are the WSJ authors, IMO.

M.

Re: Are you changing your behavior in response to current events?

The only derivative I know is the reverse of the integral.

--
H

Re: Are you changing your behavior in response to current events?

I suspect that is everybody's. Including the market makers.

I've not denied derivatives were problematic. I'm simply suggesting that they would not have become such a problem had the mortgages been underwritten with more consideration to the borrower's suitability. The derivatives blew up because the mortgages blew up.

IMHO derivatives are simply an illusion to get high returns with low risk; Anybody with half a brain knows that can't work. Risk is ALWAYS relative to returns. Smart people every so often fool themselves and one-another into thinking they've found the magic exception. Proving that intelligence and wisdom really are different attributes... (Clerics pwn Magic Users!)

I am not going to give financial counsel online - but I would suggest that everyone follow Greenspan's rule: "If I don't understand it I don't buy it." and rule of acquisition #218: Always know what you're buying.

Re: Are you changing your behavior in response to current events?

I agree with all that, as far as it goes. Where we disagree, I suspect is this: I don't think the mortgages blowing up (specifically, the subprime market, but we don't have to limit it to the subprime market) would have been sufficient to take down major financial institutions like Bear Stearns or Lehman Brothers if they were just mortgages. It's because the derivatives blew up in a chain reaction that those institutions failed.

Let me try it this way: A bank holds a $500,000 mortgage on a property, and the mortgage goes into default. What does the bank have on its balance sheet? Well, presumably you can get some idea by appraising the property and projecting what the bank will realize in a foreclosure sale. So the bank can restate its financials, and anyone looking at those financials can be fairly confident that they represent the bank's true condition.

Now, suppose instead that it's not a bank but an investment banking house. We'll call it Grin and Bear It, or "GBI" for short. GBI doesn't issue mortgages or hold foreclosure rights. Instead, it holds a bunch of paper known as collateralized mortgage obligations (CMOs) with face values assigned to them by another investment banking house that issued the paper based on a pool of mortgages. Let's take one piece of paper with a face value of $500,000 that represents "tranche 3" (whatever that is) of this pool of mortgages, which is supposed to pay 7% interest per annum.

Now suppose one day the interest payments either stop completely or are less than they're supposed to be, because of defaulting mortgages. This should give GBI some sort of recourse. For simplicity's sake, let's say it gives GBI the right to call the note. But the outfit that issued the note can't pay the face value. Why? Because everyone holding those notes is clamoring to be paid at the same time, and the issuer doesn't have enough available cash to pay it, having never expected such a scenario to occur because the computer geeks who designed these things and ran the models assured everyone that such a thing could never, ever happen.

So now GBI has this asset on its books with a face value of $500,000, but what's it really worth? GBI has no clue. You can't sell it to anyone. You can't measure it against a piece of property that can be appraised. The most you can measure it against is the right to maybe recover, years down the line, in a litigation or bankruptcy; and we all know how much that's worth.

All of sudden, GBI's $500,000 asset is worth about zero. Sure, GBI could put a different value on it, but no one will believe it.

Multiply that (admittedly oversimplified) scenario by several million, and that's how these institutions go from having billions to having nothing almost overnight. And it's why they stop lending to each other, and suddenly there's a credit freeze. Mortgage defaults lit the fuse, but derivatives were the explosive.

M.

Re: Are you changing your behavior in response to current events?

Derivatives themselves are not the problem; rather, it was (is) the unregulated aspect of some of them that allowed the mess the grow to unimaginable levels.

The price of a derivative is based on many factors, notably the price of the underlying security, the time to expiry, current interest rates, historical volatility, etc. In the case of OTC derivatives, the largest factor turned out to be counterparty risk. These firms never imagined they have to contend with an AIG or Lehman bankruptcy. The closest they came was during the Long Term Capital Management hedge fund meltdown in 1998, which ended up costing 14 firms (Goldman, Merrill, et al) almost $4 billion. I remember wondering at the time why these firms would agree to pay huge sums to bail out LTCM. As is clear now, allowing LTCM to fail would have resulted in widespread panic and a possible domino effect similar to what we've seen recently. I wonder whether Paulson regrets allowing Lehman to fail, but at some point you have to let the chips fall where they may.

The other aspect under heavy scrutiny is the mark-to-market rule. I don't think there is an easy answer to what to price some of these securities should be marked at. It's easy to say that they are worth whatever someone will pay, but fire sale conditions aren't indicative of the intrinsic value. Just think if you had to sell your house in two hours and all the buyers knew you were desperate...would you get anything close to true value?

Re: Are you changing your behavior in response to current events?

Yes, it's a variation on a "run on the bank." For every dollar a bank gets from a depositor, they can lend out 7 dollars or more. Eventually they'll have $100 million in deposits and $700 million in assets. If all the depositors came to the bank and demanded their $100 million, the bank would not be able to pay, essentially because of the time it would take to unwind the corresponding loans. And in unwinding the loans under duress (while everyone else was also unloading), the prices would get crushed.

Re: Are you changing your behavior in response to current events?

See, Brian, that's why I need your help.

And BTW, I agree that derivatives per se aren't the problem. But allowing them to continue being used without limit or oversight in the aftermath of not only Long-Term Capital, but also the 1994 meltdown of the CMO market, was the kind of irresponsible behavior that I think history will judge very harshly. At least I hope so.

M.

Re: Are you changing your behavior in response to current events?

Private sector loans, not Fannie or Freddie, triggered crisis -- McClatchy

Re: Are you changing your behavior in response to current events?

Well the only debt we have is our house (bought new about 2.5 years ago). We both paid off our credit card debt right before buying the house (about 27-31k between my wife and I) and we refuse to get any more credit cards despite being able to get perks like airline miles and cash back. While those "perks" seem good in theory the idea even having a credit card frightens me. I'm simply too stupid to have a credit card. I have yet to find anything that I cannot buy online with my visa check card so that seems like a good alternative. Over the course of the last year we have bought 2 laptops, 2 desktops, new camcorder, 3 dslrs, new speakers & sub, a tractor and 2 lazy boys. We simply do NOT need anymore crap than we have now. We actually get good use out of everything we have purchased and didn't go in debt so at least part of the guilt isn't there.
We don't have any kids but do have family members that sometimes need financial help. For that reason it's probably best that we save a much as we can for them. That really is more important than buying more junk we don't need.