Tuesday, January 29, 2008
To All My Right Wing Friends Who Say That Private Enterprise Needs No Government Regulation... I give you Exhibit A of why that's Fucking Stupid.
House Of Cards: The Mortgage Mess
Jan. 27, 2008
(CBS) It was another nervous week for the world's financial markets and for Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. At the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.
It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.
And as correspondent Steve Kroft reports, it started in places like Stockton, Calif.
Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong.
A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.
Real estate agent Kevin Moran represents 102 properties and says all of them are in foreclosure.
Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.
"If you see a 'for sale' sign in this neighborhood, that probably is a sign of distress, right?" Kroft asks.
"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.
The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities.
"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."
As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.
"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.
"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.
Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.
Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.
"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.
"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.
"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.
Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.
But Jerry Abbott, who runs the Coldwell Banker office in Stockton, says it didn’t concern the borrowers, many of whom were getting mortgages for more than their houses were actually worth.
"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."
"So, they were getting paid to buy a house?" Kroft asks.
"They were getting paid to buy a house. Yes. Yeah," Abbott says.
And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.
"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.
Abbott says borrowers got the money, without a down payment.
Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'" Grant says.
"And he got a cut, too?" Kroft asks.
"Yes, oh, yes. Everyone gets a cut," Grant says.
Almost all of the people involved in the transactions made huge amounts of money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.
Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.
"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.
It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.
All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.
It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.
"Did you understand any of this?" Kroft asks.
"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.
"But you knew this was a big decision, right? You were borrowing hundreds of thousands of dollars," Kroft remarks.
"I didn't really look at it like that," Fontenot says.
"How did you look at it?" Kroft asks.
"I looked at it as far as my family. I can get my family off of this block," he replies.
"And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different."
But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.
"The house keeps going down, payments keep going up. Where's the logic in that? And how can we fix it? I mean, that's what this whole thing's about for us is how can we fix this? And if we can't fix it, then what do we do?" Matt Valdez asks.
"Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense," Stephanie Valdez adds.
"That's what you agreed to do when you bought the house," Kroft points out.
"Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way," Stephanie Valdez replies.
"You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks.
"You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" she says.
There is a certain cold logic to just walking away.
Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.
"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."
"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.
"Just a business decision," Kroft says.
"A business decision that has to be made," Moran agrees.
"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.
Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."
"What do you mean?" Kroft asks.
"Lenders and borrowers," Grant says. "Everyone was gaming the system."
That is not to suggest that there aren’t huge losers in all this and much suffering and particularly hard-working people who have lost their dream. Home values are plummeting, and the housing sector - one of the largest and most vital parts of the American economy - has ground to a standstill, pushing the country towards recession.
The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them.
"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.
The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.
"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.
"How much on the dollar, do ya think?" Kroft asks.
"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.
Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."
Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."
It’s that anxiety that spooked the world’s stock markets last week, that and the knowledge that things are likely to get worse, at least for a while.
"Still houses going into foreclosure?" Kroft asks Kevin Moran.
"Yeah. I don't think we're 40 percent into this. I think we've got a long way to go," he predicts.
There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes.
The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board.
"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."
"It's still spreading?" Kroft asks.
"Yeah," Grant says.
In the past few months, Wall Street's top investment banks have written off more than $120 billion in losses related mortgage backed securities, and some are now under new management.
Two of the fired CEO's responsible for the biggest losses rode off into the sunset with some free money of their own. Charles Prince of Citigroup collected $29 million on his way out the door; Stan O'Neal of Merrill Lynch left with $161 million.
(CBS) It was another nervous week for the world's financial markets and for Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. At the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.
It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.
And as correspondent Steve Kroft reports, it started in places like Stockton, Calif.
Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong.
A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.
Real estate agent Kevin Moran represents 102 properties and says all of them are in foreclosure.
Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.
"If you see a 'for sale' sign in this neighborhood, that probably is a sign of distress, right?" Kroft asks.
"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.
The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities.
"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."
As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.
"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.
"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.
Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.
Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.
"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.
"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.
"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.
Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.
"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."
"So, they were getting paid to buy a house?" Kroft asks.
"They were getting paid to buy a house. Yes. Yeah," Abbott says.
And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.
"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.
Abbott says borrowers got the money, without a down payment.
Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'" Grant says.
"And he got a cut, too?" Kroft asks.
"Yes, oh, yes. Everyone gets a cut," Grant says.
Almost all of the people involved in the transactions made huge amounts of money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.
Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.
"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.
It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.
All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.
It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.
"Did you understand any of this?" Kroft asks.
"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.
"I didn't really look at it like that," Fontenot says.
"How did you look at it?" Kroft asks.
"I looked at it as far as my family. I can get my family off of this block," he replies.
"And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different."
But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.
"The house keeps going down, payments keep going up. Where's the logic in that? And how can we fix it? I mean, that's what this whole thing's about for us is how can we fix this? And if we can't fix it, then what do we do?" Matt Valdez asks.
"Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense," Stephanie Valdez adds.
"That's what you agreed to do when you bought the house," Kroft points out.
"Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way," Stephanie Valdez replies.
"You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks.
"You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" she says.
There is a certain cold logic to just walking away.
Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.
"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."
"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.
"Just a business decision," Kroft says.
"A business decision that has to be made," Moran agrees.
"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.
Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."
"What do you mean?" Kroft asks.
"Lenders and borrowers," Grant says. "Everyone was gaming the system."
The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them.
"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.
The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.
"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.
"How much on the dollar, do ya think?" Kroft asks.
"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.
Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."
Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."
It’s that anxiety that spooked the world’s stock markets last week, that and the knowledge that things are likely to get worse, at least for a while.
"Still houses going into foreclosure?" Kroft asks Kevin Moran.
"Yeah. I don't think we're 40 percent into this. I think we've got a long way to go," he predicts.
There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes.
The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board.
"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."
"It's still spreading?" Kroft asks.
"Yeah," Grant says.
In the past few months, Wall Street's top investment banks have written off more than $120 billion in losses related mortgage backed securities, and some are now under new management.
Two of the fired CEO's responsible for the biggest losses rode off into the sunset with some free money of their own. Charles Prince of Citigroup collected $29 million on his way out the door; Stan O'Neal of Merrill Lynch left with $161 million.
Labels: American Corporate Republic
# posted by The Punisher @ Tuesday, January 29, 2008 
