Forgive Mortgage Brokers for They Know Not What They Did

The Mortgage Brokers of America are trying to tell us they did not realise what was happening. “Forgive them for they know not what they did,” seems appropriate in the circumstances.

Seriously though does anyone believe the Mr Quinn, the out-going Chairman of the Mortgage Bankers Association of America when he said,

“Everybody believed that house prices would just keep rising. We and everyone else, had unprecedented confidence that it was a golden age of finance. We thought we had solved everything – no more recessions, no more inflation.”

Which planet did this guy come from? As recently as 2000 they were saying similar things about the Internet as the DotCom bubble crashed.

Here is an extract from an article written in February 2007, three months before the sub prime crisis began to surface, by Robert Reich,

“Last year, more than a million families lost their homes to bank foreclosures — a 42 percent jump over 2005…”  And,

“The anything-goes lending practices of the past few years has made many creditors and investors very rich. But it is taking a large toll on the poor and near-poor. The responsibility of bank regulators isn’t just to maintain the solvency of the financial system. It’s also to help Americans buy homes — and keep them“.

The only good thing at that meeting was a protester trying to handcuff someone. That someone happened to be Carl Rove who was a guest not a Banker. She just should have got Mr Quinn.

I remember a police sting operation in LA I think some years ago to round up a whole bunch of criminals. They sent them all a letter saying they had won a prize in a lottery. Once all the criminals arrived to get their prizes the police shut the doors and arrested them all.

Why wasn’t it done at the Mortgage Bankers Association Meeting? A missed opportunity I think as there is a case to answer.

There is no doubt in my mind that Mortgage Brokers knew the risks of lending money to people who could not pay. They tried to off-set the risks by securitizing the mortgages and selling them off to others. A sweetener was added which was to escalate the interest rate over time. This was probably worked out using a flawed modelling program to calculate the percentage of mortgage defaults if housing prices dropped.

Again a quote from Robert Reich’s article of February 2007 says it all,

“The Mortgage Bankers Association estimates that in 2007, more than $500 billion worth of mortgages will be adjusted upward.”

Unfortunately they figured for only a small drop in house prices. They never expected a massive drop in house values – a black swan event as Naleb of “Fooled by Randomness” fame might say. But it happened and their flawed modelling went out the window.

I am sure many people living in houses in the same street as these new home owners became suspicious, especially when the houses were sold just a few months later for more money. Yet because their own house price was going up they did not worry.

Then as they drove down the road and saw hundreds of new houses being built and hundreds more being put up for sale for a second or third time they knew something was not right. When everyone was talking about “House Flipping” that should have sounded the alarm bells.

When the new neighbour didn’t appear to go to work and mentioned they were buying their second or third investment property that should have been cause for panic.

What I am saying here is whilst Mortgage Bankers used flawed financial models to justify their slack lending practices, the average long-term home owner should have relied on their instincts and listened to their inner voice that was telling them something was not right. It was time to sell even if you really didn’t want to. It was time to get out of the market fast and rent for a while.

Hindsight is wonderful for making people look smart after the event. That is not my aim here as I know people have been hurt.

In Australia I should take a note out of Prof Keen’s book and sell my house. Our housing bubble is much bigger than the USA’s was. I won’t sell because I am unlikely to convince my wife who is an eternal optimist.

What I am trying to say is Baby Boomers need to learn from all this turmoil and rely more on what they see and hear as they move around, than what the financial gurus keep telling them.

Baby Boomers need to learn to trust their instincts going forward and to educate themselves in how to avoid being sucked in by smart marketing to invest in the wrong things and often too late to get out even.

In the USA if the check-out chick, the taxi driver and the waitress were telling you how well they are doing investing in property this was a wake up call to maybe get out of property. No disrespect intended to these hardworking people, many got caught and are hurting too.

The US Housing Bubble caused the credit crisis and has crashed the share market this time round. Most of the world was oblivious to the problems until it was too late.

Markets will come back, House prices will stabilize. Baby Boomers need to learn to protect their nest eggs and control them so that can stand aside when their gut instincts and life-long experiences tell them something is not right.

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