By Jim Spencer
SpencerSpeaks.com
John Head doesn’t like to say, “I told you so.†But the
It’s not over yet. Not by a long shot.
Head has represented victims of aggressive lenders. His clients lost homes they were misled into buying. Head has been a strong voice for consumer protection. He called out
More than a year ago, Head knew and said something others probably knew, but wouldn’t say. He said that making billions in mortgage loans to people you knew couldn’t afford the payments would eventually bite someone besides foreclosed homeowners.
“It’s going into other sectors,†Head told me in a recent conversation. “For instance, truck sales are down.â€
That, he explained, is because many people finance major purchases with the extension of home equity lines of credit. Home equity dries up in a real estate market forced in the dumper by the collapse of sub-prime loan repayments.
It is all of a piece. And the piece began with the assumptions of people collecting exorbitant fees on the sale of homes to folks who couldn’t afford them. It continued with the packaging of bad loans into mortgage-back securities, which financial institutions sold to greedy investors with the promise of high-percentage returns.
Head was among the few voices who from the beginning swore that it was madness to build investment portfolios with securities backed with even a few loans guaranteed to default.
Today, he still laughs at the notion that Wall Street was capable of blending good and bad loans into investment instruments that could succeed in the long run.
To understand where the sub-prime loan mess is headed, Head urges a look at declines in overall real estate prices. Anyone forced to sell a house right now is going to get screwed by the practice of making home loans to folks who couldn’t afford them.
If I wanted to know where this is going, Head told me to look at a website called The Mortgage Lender. The mortgage lender web site includes an “implode-o-meter†that reports on the number of “major
There is also a hedge fund “implode-o-meter†for investment groups that are now struggling to pay investors the fat returns promised on mortgage-backed securities. Since mid-2007, the website reports, the number is 14.
The lending scandal that Head warned against more than a year ago has gotten so bad today that the stock market must rely on the Federal Reserve system to bail it out. On Friday, Fed Chairman Ben Bernanke promised to “act as needed†to keep the credit situation from ruining the overall economy.
That probably means a drop in a critical interest rate controlled by the Fed. Such a cut will free up credit.
But even if that happens, it will only be aimed at protecting the broader market, not the folks who got creative in their attempt to line their pockets by exploiting poor and middle class home buyers with adjustable rate mortgages that virtually guaranteed foreclosures.
“It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions,†Bernanke said Friday during a speech in
Those effects, Bernanke said, have been nothing less than devastating.
“Although this episode appears to have been triggered largely by heightened concerns about sub-prime mortgages,†the Fed chairman explained, “global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans. In part, these wider losses likely reflect concerns that weakness in
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Copyright 2007 by Jim Spencer. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.
3 users commented in " Soothsayer of Sub-prime Scandal Says It’s Not Over "
Follow-up comment rss or Leave a TrackbackSorry, Jim, but this one is not up to your usual standards. Mr. Head is not necessarily wrong, but he sure is superficial - and by extension, so are you on this subject. Studies show that most foreclosures occur in houses purchased for investment purposes, with very few owner-occupied houses falling into default and foreclosure. Yes, there have been a lot of bad decisions made - throughout the entire real estate chain. By the way, let’s not perpetuate the myth of “subprime” mortgages. Let’s call them what they really are and always have been - high-risk loans.
Too many real estate agents were happy to earn a commission by putting people into houses they could not afford with mortgages they could not handle. Too many mortgage brokers (unregulated in Colorado) were only too happy to put poeple into mortgages they knew could not be serviced, knowing that there was no way the system would come back to them. Too many appraisers were only too happy to “affirm” that a house was worth considerably more than it was just to get a fee and to qualify the poor sap buyer for a deal he should never have been in. As for Wall Street, my economics textbook says there are supposed to be penalties for failing in a capitalistic society. I haven’t seen any of those who succeeded volunteering to give back the money they got as rewards. Well, they can pay the penalties of failure, too.
Jim,
Your column is right on the mark…that being said, you surely should feel some sort of outrage at John Edwards for his involvement in Fortress (an offshore hedgefund that was heavily invested in Greentree and other subprime entities known for predatory lending practices). Any talk that he was not aware of their activities either makes him an idiot, a liar, or incompetent. Nobody invests that type of money without knowing where it is coming from or going. Not to mention his postion at the fund.
The outrage should be two-fold, one for his recent denouncement of the subprime mortgage industry from which he and his campaign have greatly benefited, and two for his b.s. talk of two Americas when he is parking $16M in an off shore company for tax reasons. Look it up.
John Edwards, like so many others, simply acted on the advice of professionals. Everyone thought this was a great idea a couple of years ago, and don’t forget, Jim, in your list of perps, the builders who overbuilt and dumped their product on the market knowing it was not worth the appraised value. Even after everyone else took their cut, there was plenty of sugar left for the construction industry (and now Home Depot is teetering on the brink). They still can’t believe it’s over: the fix-and-flipper seminars are still signing people up; the fly-by-night mortgage companies are still advertising insane rates; and the builders are still breaking ground on yet another development, all in the face of the grim figures on housing sales. I think they all knew how stinky these loans were (they even put illegal immigrants into subprime mortgages) because look how fast they passed the burden on to someone else and how the PR people sold investors on the packaging of the good with the bad. Even if the refinancing provisions of Bush’s FHA programs help some folks, or even the promises of Congress to come up with something broader come true, the bitter truth is that most foreclosures will go through because the value of the house is less than the value of the loan, and no one will touch that situation now. It’s going to be grim. A lot of those McMansions are not even suitable as rental properties.
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