Month in Review: September 2007
[Previous Months in Review available here: Aug 07, Jul 07, Jun 07, May 07, Apr 07, Mar 07, Feb 07, Jan 07;]
There I was, one September morn, reading a blog post
During September, I decided that the appropriate noun to describe subprime was ‘mess.’
We’re all subprime stakeholders here
It’s not exactly a scandal — which requires a scandalizer, and for which role the New York Times auditioned Angelo Mozilo, CEO of Countrywide, in a story sufficiently confusing and irritating it took me three posts to dismantle it, in Get out your hatchets: Part 1, the chaff, Part 2, the wheat, and Part 3, the kernels:
In a previous five-part post on the rating agencies’ role in all this, I observed that S&P blew a whistle on itself on piggyback loans in April, 2006, at least in term of raising their default risk. That’s a far cry from eliminating the product, especially for a lender that has a thirty-year track record of innovating successfully at the homeownership frontier.
And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95% of a home’s appraised value and required no documentation of a borrower’s income.
Same comment: with the benefit of hindsight, it may seem obvious that Countrywide should have shut off this pipeline earlier, but as Larry Niven said, any damn fool can predict the past.
Larry Niven, whose first rule was, “never throw shit at an armed man.”
As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70% of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)
Heck, I’d lend to the devil incarnate if I had a solid first mortgage and only 70% LTV.
Got 70% LTV, honey?
Scarcely were the pixels dry on this post than Mr. Mozilo did something that the Times didn’t mention and that I should have considered, as I observed in WWAD?, shorthand for What Would Angelo Do?
What will Mr. Mozilo do? As reported by the AP:
LOS ANGELES (AP) - September 7, 2007 - Struggling lender Countrywide Financial Corp. said Friday it will cut as many as 12,000 jobs as it struggles to deal with challenging conditions in the mortgage industry.
[…] Having dealt with the balance sheet (the unsold loans), Countrywide would not have taken long to notice that the engine was now running idle, and thus moved to shut it down, at least for a while.
The company said the cuts, amounting to as much as 20% of its work force, are needed because it expects new mortgages to fall about 25% in 2008 from this year’s levels.
Where will the cuts be? Why, in the engine room:
The job cuts are expected to center primarily on the company’s production divisions and its general and administrative support areas, Countrywide Chief Executive Angelo Mozilo said in a letter distributed to employees Friday.
The job cuts, therefore, should be seen not so much as 20% of workforce as 30-35% in originators — the engineers. […] Was this the right move?
I think of you all as individuals
What of the laid-off originators?
Each employee at Countrywide is considered an important member of the Countrywide family,” said David Sambol, President and Chief Operating Officer. “While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people.”
As I implied in the previous post, it’s inevitable that Countrywide will be sued (if it hasn’t been already). […] Here, the anticipated future plaintiffs undoubtedly will be looking for serious or systematic evidence of misdeeds such as those implied by the Times article. […] Countrywide’s most recent action, laying off 10,000 people, is not without its external risks. Some of those people will be upset, and if they have tales to tell, they will want to tell them. As I wrote before:
Once the employees have been laid off, what retribution is possible?
If there is substance of the Times’ imputations, this most recent event will likely accelerate its surfacing.
If such evidence doesn’t surface, perhaps it was never there in the first place.
Cracks in the story?
Nor is subprime exactly a crisis (which implies imminent doom), nor a saga (which needs a protagonist).
Operators are standing by to take your call
However one views subprime right now, it is a mess, particularly with the risk of massive writedowns as lenders and investors face the question: Structured finance: mark to bottom?
Will the banks have to mark their positions to bottom? Billions in earnings, and multi-billions in shareholder value, ride on the outcome.
Amounts firms may have to revise, in billions of dollars (firm, followed by their potential write-downs and their 2006 profit).
Goldman Sachs $3.1 $9.4
Lehman Brothers $2.8 $4.0
Morgan Stanley $1.7 $7.5
Merrill Lynch $0.7 $7.3
Bear Stearns $0.7 $2.1
That’s a lot of shekels … and a little bird tells me there may be lots more.
Big writeoffs coming in the fourth quarter!
My little bird was right: Merrill announced $8.4 billion in writeoffs, the biggest quarterly number in its 93-year history, five times the estimate. Now the CEO’s job is in jeopardy.
Do ya think I’m a sexy CEO?
The rolling subprime mess, and the complications of recapitalizing loan portfolios and modifying loans that have been securitized, led me as a public service to offer up a modest legislative proposal in Subprime: The case of targeted legislation: Part 1, the pain, and Part 2, the proposal, with this central element:
Here’s a proposal for consideration:
How does it stand up?
Guilty, or not guilty?
Taking a longer view, I celebrated (yes!) the demise of a badly built property in Going somewhere to die, which led my friend Charlie Allen, the developer, to send some material for a two-part postscript, Somewhere to die, postscript: the greatest threat to property, and Somewhere to die, postscript: the past is ever with us:
The detrritus from our extended habitation is that cities gradually raise their ground level, as we bury our dead, drop and burn and mulch our trash. For that matter, the first habitations, caves or caverns like the cliff dwellings at Les Eyzies. The soil itself forms an archeological record in layers, just as prosaic Henry Hudson captures a time sequence of
In any city, for that matter on most properties, we stand literally upon the bones of those who walked the earth before (an idea H. G. Wells explored effectively in his Time Machine).
Government involvement, particularly in public housing, was featured in several posts, starting with my exasperation at the Boston Housing Authority in Management by ricochet: Part 1, Stimulus, and Part 2, Response. I expressed even stronger feelings against HUD and Congress in Slow mugging in broad daylight:
Since the new Section 8 contract renewals give owners no recourse should HUD short the funding, what incentive has HUD not to short the funding?
Some estimates suggest the Administration’s request could fall $2 billion short of an actual $8 billion need.
That is, 25% less than required.
In early 2007, Senate Appropriations Committee principals announced they believed the Administration’s estimate was $1.2 billion short.
[…] Systematic under-funding is outrageous, a word I very seldom use. It was outrageous when it first happened, it has been outrageous each time it has been repeated, it remains outrageous, and it is becoming even more outrageous. One runs out of outrage, yet the conditions persist.
A few weeks later, the Senate acted — more or less. As NAHMA reports it:
Senator Russell Feingold (D-WI) offered S. Amdt. 2848 to require the Secretary of Housing and Urban Development to submit certain budgetary information to the Congress. The Feingold amendment calls for increased accurate reporting on the costs of full funding for project-based Section 8 contract renewals.
Additionally, Subcommittee Ranking Member Kit Bond (R-MO) made a floor statement on Monday calling on HUD and especially OMB to “get serious” about funding this account. He warned OMB “you cannot walk away from this problem” and called on them to provide necessary funds through a budget amendment, as part of a CR [Continuing Resolution — Ed.], or through emergency supplemental legislation.
Mr. BOND. …Finally, I raise one issue we have not been able to address; namely, HUD and OMB’s failure to provide adequate funding for HUD’s section 8 project-based housing program for fiscal year 2008. To my colleagues and to OMB and to HUD, I say: Let’s get serious. This is a critical and important program which serves many of our most vulnerable citizens–low-income families, extremely low-income families, seniors, and persons with disabilities. If we don’t fund it, they are out on the street.
To my good friends at OMB, I say: You cannot walk away from this problem. This problem is real. It must be addressed or we are going to see a tremendous tragedy for the Nation’s lowest income and most needy housing residents.
While I am pleased with much of the bill, especially spending in critical programs, I have to say that we are on a collision course with the White House on the spending levels contained in this bill. Both sides are going to have to make adjustments. Some of the adjustments we have outlined are absolutely essential, and we cannot lose the benefit of the positive investments we have made in this bill. This is a very important bill. It is a very difficult bill because we have some extremely serious challenges to face. We understand the need to be sensitive to the budget needs, but there are real pressing human problems we must meet in this bill.
Unfortunately, they are not yet addressed.
The House and Senate must now name conferees to work out the differences in the bills.
I wish I could be optimistic. I am not.
Not looking good, bro
Congress subsequently held a hearing that observers characterized as one of the most remarkable they’d ever seen. At that link you’ll find the Web cast (about two and a half hours’ worth), from which I hope to post clips, but in the meantime, try fast-forwarding to 1:35 (Mr. Cleaver’s questions) and 2:25 (the chair’s summing up).
He speaks his mind very clearly at
More cheerfully, I touched on public housing favorably twice, first giving the nod to
A little over a year ago, I published an article in NAHRO’s Journal of Housing and Community Development, “The Ghost of Christmas Yet To Come,” that dealt with the systemic and economic breakdown of public housing as we know it. Its followup, “The Gordian Knot,” proposed radical change in housing authorities’ governance, ownership, and financial structure.
So what is a housing authority, in essence? What is the thing that distinguishes it from all other critters?
It holds a public trust — to provide quality housing at very low cost to those who are least able to find it in the private marketplace. Effectively a publicly accountable charitable institution, a housing authority receives public subsidy, via the indirect collection agent of government — if it doesn’t, the system breaks down completely — and deploys it for the public benefit of affordable housing and healthy low-income communities. That’s the essential function:
We can expand this single goal into a short menu of activities:
Everything else is a technical function, which means it can be contracted, and if it can, it should.
In terms more theoretical and pedagogical, I discussed what makes a non-profit, in Joined at the hip: what is a non-profit, contrasted the sotto voce tones of capital in What money says: the adventure of the dancing dollars, explored the accruing mortgage in Reverse appreciation
Because reverse mortgagors are overwhelmingly likely to be elderly, a thicket of consumer protection laws applies.
People must be at least 62 to qualify for a reverse mortgage. In
“So, tell me about these feelings of repressed hostility toward lenders.”
As for hostility toward lenders, see the top of this post!
Captain, I am sensing hostility to subprime lenders