patrick.net

So let me see if understand the proposal: I borrow money beyond my means. I spend it all -- perhaps in pursuit of the American dream of homeownership but also possibly on a nice car, nice vacations and a lifestyle that I was unable to afford (but by gosh surely deserved). And now, because I can't pay the money back, I get even more money because, well, someone gave me too much money the first time? Sign me up!

No, Sandibe. If you commit fraud you will be prosecuted. Believe it or not, there are bad seeds out there that committed plenty of fraud on unsuspecting people. There are plenty of greedy homeowners too but let's try to make the distinction.

I echo Sandibe's thoughts. So if a bank loans money for someone to start their medical practice and that Dr dispenses drugs to everyone in pain, is the bank liable ?

What we are witnessing is the classic as old as time - pass the blame - game. From a politician's point of view, SOMEONE needs to be punished. Cannot be the FBs - that will alienate the vote banks. Cannot be the Wall Str banks who sliced and dice the debt to make money on commissions, because they sponsor the campaign. So who else ? The actual people who gave the money ... YES ! They made us do it.

I am sure there is some Aesop Fable related to this.

Sandibe,

Exactly. This is the single biggest problem I have with this proposal. Aside from (a) basically giving sleazeball mtg. brokers & banksters a free pass (see DinOR's rants), it (b) more-or-less auto-confers "victim" status on FBs, regardless of what the circumstances really were.

Was Casey Serin a victim? Does he (and his lawyer) really deserve the right to sue the pants off some pension fund because they happen to be the final bagholders in a long-assed chain of deliberate, systemic fraud and risk-passing by the REIC?

Where was the "fiduciary responsiblity" of the f**king banks or the mortgage brokers when they originated the loans? Like DinOR says, if you can't make your MBS bondholders whole again, then why are you allowed to keep your license and just open up shop elsewhere? Why isn't your fraudulent ass in jail --along with Mr. Serin's?

No, Sandibe. If you commit fraud you will be prosecuted.

PAR, however much I wish this were true, it's simply not. The fact that CS is still operating his website, despite admitting to multiple counts of mortgage fraud in plain sight --hell, practically *daring* the authorities to prosecute his boney ass-- is sad proof of this. The feds obviously have no desire to go after small-time actors like him, and even *less* desire to go after the banksters & REIC, who are by and large, financing our elections.

bill gross at pimco has written a great piece on the subprime mortgage market's possible repurcusions has on our lives
http://tinyurl.com/2zfsv6

Interesting mixed signals:

http://money.cnn.com/2007/04/10/real_estate/alta_alive.moneymag/index.htm?postversion=2007041016

On the one hand, there is some pullback from MBS investors. On the other hand, Alt-A category loans, including no-doc, option ARM basically NINJA loans, are still widely available, at least anecdotally. This seems ridiculous in today's environment. There will be SO MUCH PAIN down the road. We are totally screwed as a nation and as an economy.

HARM,

This is exactly why I think the brunt of the blame (and the pain) belongs squarely with the MB's. They weren't in it for the borrowers (as is there entire claim for even existing!). They sure as HELL weren't in it for the lenders.

They were in it for THEMSELVES! This much, should be apparent! You're absolutely right, the compensation schedule was stood up on it's ear as they conned prime borrowers into Alt-A paper and Alt-A borrowers into Subprime paper! AND got paid BETTER the harder the f@cked these people!

Of all the parties in this equation (and they're all guilty) ONLY the MB's got to screw on BOTH ends! Now these guys got the notion they can just fold up their tent, move down the road and "tweak" their model ever so slightly and walk away from the mess THEY created? Huh-uh. HELL no.

Mutually-assured destruction and all.

LOL :lol:

@Person,

Like DinOR pointed out, so-called AAA-rated "prime" paper is really turning out to be not-so-prime after all. The housing bubble not only grossly distorted risk premiums & lending patterns, it also distorted perceived loan quality. I wouldn't assume large public/private pension funds are A-ok, just because they only bought "prime" GSE-issued paper.

AAA (2005) = Alt-A (2008)
Alt-A (2005) = BBB (2008)
BBB (2005) = ZZZ (2008) etc...

From Ben Jones' blog:

Sub-prime woes start to hit less-risky lenders

“‘There’s no question the credit problems we’ve seen in sub-prime are blending into Alt-A,’ said analyst Matthew Howlett. ‘It’s reflective of the poor underwriting that has gone on in this sector.’”

“Howlett said part of the problem was that Alt-A lenders had lowered their lending standards. ‘We’re going to see more Alt-A loans perform badly because they’re not traditional Alt-A loans,’ he said. ‘They’re sub-prime.’”

bruceb,

Thanks for the link to Bill Gross' latest musings. His main thesis is that either housing prices will continue downward, or the Fed will be forced to cut rates and stimulate the economy (read housing market), or some combination of the two. He completely neglects to mention the effects this will have on an already weak dollar and our very weak international trade position. The possibly brewing China trade war in the news right now makes one pause on this point.

In his construct, JBRs are fine either way. Either home prices drop a lot, or they drop a reasonable amount with lower interest rates. I'd prefer the former, as a lower principle is always preferred - one can always refinance to a lower rate if rates plummet later.

Guys, I'll try to make one more point on this and then I'm done. (Whenever I hear the pitchfork-sharpening machine revving up in the background, I just leave the blog for a few days...) First, anytime someone mentions the word "fraud" on this board, everyone covers their hats (and their wallets) with tinfoil and screams about Casey Serin.

First of all, the article says zero about giving brokerages or bankers a free pass; it also says nothing about bailing out individuals who commited fraud. Can we assume, like reasonable adults, that some degree of fraud has been committed in the last ten years during this boom? When people who don't speak english are approached at the San Jose flea market and sold mortgages at 10X household income, this might actually be fraud. Don't kid yourself by thinking it hasn't been rampant. (Stupidity has been rampant too, but let's try not to assume that it was 100% of one or the other.)

Here's how I see the old days:

borrower -> bank

The bank holds the risk, the legal liability and the fiduciary responsibility. If bank hires shifty brokers, forges signatures on docs, inflates borrower income, etc. They are held liable.

Here's how I see it today:

borrower -> broker -> originator/warehouse -> investor

IN THE CASE OF FRAUD, SPECIFICALLY...
who do you propose should be on the hook? The mortgage broker who is now back at his old job selling cell phones at the mall? Is he going to pay people back for writing those fraudulent deals? How about the originator or the warehouse? Well, they in fact are on the hook. So let's try to call up New Century and get them to pony up money for the specific case of fraud committed. Oops. We're 37th in line... I hope there's some left when get to the front.

Everyone wants fiduciary responsibility but you completely miss the point that this can actually create fiduciary responsibility. Not being on the hook for anything means you don't give two $hits about fiduciary responsibility. If you might be held liable, you might actually take a look at what you're buying. Don't confuse this type of institutional investor with mom & pop.

"no one had enough incentive to keep the brokers in line"

True, and it's also their defense (or soon will be). We can go on and fault the ratings services (Moody's etc.) In my mind though it's the MB's themselves that still have the most egg on their face b/c they are the ones with the most DIRECT interface w/the consumer!

I don't expect Moody's to come down and rate e a c h_and_e v e r y stinking re-fi in the broker's pipeline of loans. It's equally unreasonable to expect institutional fiduciaries to grade this slop as well. There were breakdowns at several levels (and I'm not leaving the consumer out of this) BUT the MB had the greatest and most immediate economic benefit from this meltdown with the least amount of capital at risk.

Reckless investors shouldn’t receive any sympathy, Frank said.
Ohhhh.... I think we have found the ultimate "smoke test". We have all been wondering where the MBSs have been hiding. I believe someone on this board pointed out an overseas mutual fund they had was 40% invested in MBSs. Once Congressman Frank realizes that every pension fund and retirement account is "liable" (this is speculation), he may tone down his retoric. At least now we may actually find out where the bodies are buried.

In the last thread bruceb Says:

> Bill Gross at Pimco has written a great piece about
> the subprime mortgage housing market and it’s
> possible repercussions http://tinyurl.com/2zfsv6

I thought Randy might like to take a look at the URL since Gross also talks about Second Life.

Gross includes an interesting chart that shows that lenders were easing lending standards from 1991 to 1994 (I knew that rates were dropping from 1991 to 1994, but didn’t know that lenders were easing standards).

The tighter lending standards is just one more thing to add to the reasons why this crash currently underway will be worse than anything we have seen in the past.

P.S. This would be a good article for Patrick to link to on his main page…

FAB, I agree - I wondered also whether or not Bill Gross was checking in on this blog and others for material for this latest report of his.

PAR,

By and large... agreed. In that case the compensation model was totally out whack! Some guy (and I think I've seen him once or twice) that used to cell phones at the mall should *not* have been making 100-200-300K per year and those dollars would have been A) that much less the borrower was in the hole B) more of a risk premium to the investor or C) held in reserve by Mr. Cell Phone's employer to buy back loans he wrote that defaulted in the first year!

Anyway you slice it, these MB firms were giving out WAY too generous pay-outs with too little thought as to the consequences of the reckless hiring practices and internal policies.

PAR,

In short, they're all going to take in the @$$ (I just want to see the MB's take it first!) Once they're totally depleted, then and only then should we move upstream. There's plenty of "deep pork" to go around! :)

PAR,

Perhaps I was misreading you, so let me try to understand/paraphrase what you're getting at:

First of all, the article says zero about giving brokerages or bankers a free pass; it also says nothing about bailing out individuals who commited fraud.

I didn't see any proposed penalties mentioned for brokerages or bankers, only the MBS bondholders. But, hey, it's just some Bloomberg staffer's summary, so maybe there are some. I'll have to locate and read the actual bill (when it exists) to know for sure.

As far as "bailing out" individuals, you could say allowing them to sue MBS bondholders could be considered an indirect type of bailout, even if the taxpayer is not directly involved. If the individuals were really defrauded (and, yes, there are definitely cases where this was true), then should they be allowed to sue for damages? Perhaps, but why sue the MBS holder vs. the mortgage broker? (You know, the guy who "filled in" those income/doc sections for you, while glossing over all the fine print?)

This is why I meticulously avoid mutual funds holding any MBS. Sure, over the past few years, I lost out on mucho gains, but I still haven't done too badly.

PAR said:

Everyone wants fiduciary responsibility but you completely miss the point that this can actually create fiduciary responsibility. Not being on the hook for anything means you don’t give two $hits about fiduciary responsibility. If you might be held liable, you might actually take a look at what you’re buying. Don’t confuse this type of institutional investor with mom & pop.

Again, I'm all for creatin' some serious "FR" where none currently exists! The problem is, how to create it for the right people (perps)? Institutional managers may do the actual MBS buying (Fidelity, Vanguard, Pimco, etc.), but Mr. & Mrs. retail investor are the ones liable to take the financial hit if the investment Co. gets sued, no? I seriously doubt this proposal means Fidelity's CEO is going to be paying for legal fees out of his own salary & stock options, or am I missing something?

Barney Frank is a showboat and not much more. I would not vote for Barney Frank if I lived in his district.

SP,

That may have been Nouriel Roubini from an early CNBC interview. He said something almost identical to that just a few hours ago.

It sounds to me like what they're proposing is akin to holding liable investors in Enron/MCI. I suppose that the individual stockholders of those companies should be held accountable for fraud committed there, since they are the owners after all, and they're the ones that provided compensation to management.

While they're at it, just proclaim that people don't kill people, guns kill people. Sheesh.

astrid,

NOT... that there's anything w r o n g with that!

SP,

That guy on the radio may very well have been Nouriel Roubini:

http://www.rgemonitor.com/blog/roubini/187316/

He's been balanced in analysis, perhaps leaning a little toward the bear side on housing of late. But then again, who isn't these days other than the RE cheerleaders?

BearCat asked Barney Frank some questions so I sent them to Barney at his private e-mail address (his answers are below):

> 1. Should Reckless real estate investors (e.g.
> Casey Serin, people who take out 2/28’s, neg-
> am loans) get any sympathy, Mr. Frank?

Yes, Casey is a cute boy and we should put together a government program to help out any cute boys with man bags that may need our help.

> 2. Should Predatory borrowers, such as people who
> lied on their loans (e.g. almost everyone who went
> the stated income route), get off the hook Mr Frank?

Only Republicans should be punished for lying. It is OK if you are a Democrat and lie on a loan application or if you are a Democratic Congressmen and lie and say that you had no idea that your roommate was running a prostitution business out of your apartment.

> 3. It’s also good to look at the money flows. The flow of
> $$$ from Wall Street to the politicians (esp Sen Dodd)
> has already been discussed. Remember that Trial Lawyers
> are one of the big Democratic donor groups. Frank’s
> proposal will benefit them. Do we really need more lawsuits
> and more money going to lawyers?

Wall Street firms (that give to the GOP) need to be punished and we need more lawsuits (so trial Lawyers who give to the Dems will have more money).

P.S. I don’t really have Barney’s private e-mail address (or the private e-mail address of any other members of congress) but I’m pretty sure his answers would be fairly close to the ones above.

SP
"This here is a pig"

Yea this is slowly creeping back into the media.
It was clear to many that have known there is no difference
between subprime and Alt-A loans... just the media finally getting it.

What about lettuce-backed securities? Are similar actions being considered?

How about subprime Harley loans?

http://www.thestreet.com/_tscrss/markets/activetraderupdate/10347201.html

A double whammy for the Boomer - he's out of money, and there goes his peni$ extender!

Space_Ace,

Along about 2004 I lost sight of it altogether. I mean... why bother? The difference between a 500 FICO and an 800 FICO was about a 1/4 point or $53 a month in payment. FICO didn't matter, down payment didn't matter, pffft.

OT, but does Larry Birkhead have anything to do with Alt-A & subprime loans? That's all I can find any new stories about lately.

skibum,

Good on Doug Kass. Just a sensible guy. Kind of wonder why anyone would need to make a payment on a 10-15K motorcycle though? Is boomer THAT strapped? Uncanny correlation to subprime, isn't it?

Is boomer THAT strapped?

Clearly, boomer needs to strap one on.

Sorry about the crassness.

PAR, I sympathsize with the desire for a borrower who actually has been defrauded to be able to collect against a solvent party, but I think the bondholders should not be that party for three reasons.

First, as HARM and others have already pointed out, the bondholders are the ones who ultimately bear default risk. They eat the loss if the borrower cannot pay, and you are basically asking them to pay twice. If there is fraud, the bondholders are victims too. In fact, they are probably even more so because they are victims of not only fraud perpetrated against the borrowers but also victims of fraud perpetrated by the borrowers.

Second, the bondholders are the least capable of the parties in the chain to detect fraudulent borrowings. MBS represent interests in large blind pools of mortgages. The bondholders have no idea who the individual borrowers in the pools are and, even if you can get past the privacy concerns about making the details of each mortgage in the pool widely available, have no practical way of verifying the circumstances under which the loan was originated. I suppose the bondholders can assume the risk of a lawsuit and factor that risk into the purchase price for the bonds (or ask for a higher yield), but that's just another way of increasing the cost of borrowing -- which may be a good thing overall, but there are better ways to accomplish this result than opening the floodgates to lawsuits.

Third, MBS can be traded. If you extend liability to individual bondholders, how would you apportion liability as bondholders buy and sell out of particular bonds? In addition, a pool of mortgages gives rise to different tranches of MBS with different grades depending on payment priority. How would divide liability among the different tranches?

Call me cynical, but this just another example of politicians making asinine proposals for publicity purposes.

FAB (or anyone else for that matter who might have insight into this question),
How hard is it for originators to tell that a loan applicant has "multiple primary residences"? As far as I'm concerned, multiple loans to speculators who had no intention of living in the home is what caused this mess. Short of getting mutliple loans in a single month, is it correct to say that lenders turned a blind eye to the primary residence issue? For heavens sakes, bloggers seem to be the only one reporting on this type of fraud. I, for one, think an ownership rate of 69% is not unrealistic... of course this would be in a market where Casey could not defraud the system.

$53 Bucks can go along way each month...

$10 entrance fee
$ 1 can of 7-up
$42 exchanged for single -- 42 x $1 bills
having a 21 yo college hootie show off here snatch 1 ft from my
face for buck a pop.

When you get to my age thats PRICELESS !!!!

I would agree with PAR on this.

"Let the buyer be aware."

They bear the risk and rewards (and the blame
if anything goes wrong).

Otherwise they are asking for someone else to bear
final bill(costs) ... Well Im sure not the one for pay for it.

HARM said: Why sue the MBS holder vs. the mortgage broker

I don't believe it's a case of either/or and I don't think the article suggests this. The article doesn't say that you can't sue the broker. In fact, you already can sue the broker. That statute is already on the books. The MBS holder can also sue the broker. UBS just sued New Century for misappropriating funds: http://www.kesq.com/Global/story.asp?S=6333139&nav=9qrx

My interpretation here is that it's not shifting blame at all. It's widening the tent of blame--with specific regard to fraud--so that all participants in the value chain have some skin in the game. And, perhaps more importantly, the legislation is following the money. New Century is broke and the debtors are lining the block. Did they do bad things? Probably. But once their account hits zero, there's no more money to hand out.

Why should the bondholder skate and (in some cases where the defrauded individual has not defaulted) continue to earn money from a crime that's been committed? If you buy a stolen Picasso from me, it's not necessary for you to go to jail but that doesn't mean you should just be able to keep it.

If you buy a stolen Picasso from me, it’s not necessary for you to go to jail...

It is if one should reasonably have known that the Picasso was stolen.