House of Cards Review (CNBC)
“Let’s hope we are all wealthy and retired by the time this house of cards falters.”
– Internal Email
WALL STREET, 12/15/2006
Click here: www.nowuknowonline.com/video/cnbc-house-of-cards-preview
to view the introduction video!
Evictions across the country are happening every 20 minutes in nice, up-scale neighborhoods.
The show starts off highlighting a few individuals facing foreclosure and shows how bad some of the homes get due to foreclosure.
Not only do foreclosures affect neighborhood values, some of the homes have public health concerns because the homes with pools sit for so long.
The question was raised, “Is the American Dream really to own a home?”
The program goes to show all of the big named companies that are failing and got government bailout money.
Without the belief that borrowers will pay the creditors back is what caused the CREDIT CRISIS!
The credit crisis began after the 911 attacks. The US economy was already in a recession from the .dot com buss and things got worse. So the Fed started cutting interest rates to get the economy going again. As a result, the cost of borrowing money began to get cheaper and cheaper and mortgage rates were falling and falling! Lowering interest rates made buying more appealing, but rising property values made buying tougher and tougher.
“If values continue to rise faster than income, the value of homes would have to fall after a while.”
Buying a home became tougher to afford due to skyrocketing prices. In order to accommodate all the buyers, the banks decided to figure out a way for buyers to afford the homes. In came the exotic mortgages that made it possible for anyone to buy a home.
The state of Florida was the birth of the subprime mortgage. A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result of their deficient credit ratings, would not be able to qualify for conventional mortgages.
Traditionally it took over 90 days to issue a loan to a borrower. During the housing boom, a loan could get done in a week.
In steps Fannie Mae and Freddie Mac! Both companies provide liquidity for small and large banks to keep originating mortgages. They do so buying issuing MBS (mortgage-backed securities to investors). A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. Traditionally Fannie and Freddie had strict guidelines for banks to originate mortgages, but as both companies got into accounting troubles, someone needed to step up and provide that liquidity. In steps Wall Street!
Wall Street entry into the mortgage industry was the boost it needed because it was so much opportunity and unregulated. In order to accommodate all of the new buyers, Wall Street bought mortgages from small and large lenders. This spurred the growth of a lot of upstart companies that originated any and every type of loan. This birth the Alt-A/Liar loans that allowed buyers to get homes with no money down, state your income, or have no documentation or income at all. As long as these companies had a buyer for this product, which was Wall Street, they could continue to create loans for any and every type of buyer, even if they really could not afford the loan.
The push was to get everyone into a home. This message came from the President, the government sponsored enterprises (Fannie/Freddie), and every advertisement on TV and radio pushed the idea that buying a home was the American Dream and everyone needed to be a part of it. More and more mortgage brokers, lenders, and real estate agents were pushing buyers to get into ARMs, or adjustable rate mortgages (Interest-only in many occasions) because this made buying a home more affordable. With ARMS, this is when the rate is locked for a few years then adjusts according to its respected index. The objective was to refinance or sale the home prior to the rate adjustment, and the assumption was that property values would go up forever.
Everyone was participating in the housing boom. Individual consumers were making a lot off the sale of their homes and then moving into bigger and nicer homes using many of the exotic loan products. And the way people were able to get into the homes is because they were falsifying information on their mortgage applications and exaggerating their income. As home values continued to increase, the American consumers were able to refinance their homes and spend, spend, spend. Business was booming for many retailers! In many cases, consumers were refinancing pulling out all of the equity in their homes. Some were taking out 2nd and even 3rd liens on their homes using it as a piggybank.
More and more companies were being created allowing the consumers the opportunity to pull the equity out of their homes. People wanted access to the equity in their homes fast and in a hurry. One example of this was a company called Quick Loan Funding. The goal of this company was to close these loans fast and they could do so because there was no regulation of the industry. Anyone could be a loan officer and it showed! For some, purchasing a home is the biggest investment they will ever make and the people providing the funding were individuals who knew nothing about the business. Their goal was to close as many loans no matter the cost.
Homes turned into ATM machines and the economy was striving. In 2004, homeowners withdrew over $900 billion dollars out of their homes. A lot of the companies responsible for providing this funding had little experience in this industry. The owner of Quick Loan Funding bragged that “he never saw a loan that Wall Street wouldn’t buy.”
In 2004, President George W. Bush bragged about the shape of the economy. Homeownership was at record levels and everyone was spending due to increasing home prices. As things continue to get better, new products would need to be created such as the ‘Pick-A-Pay Mortgage’ in order to continue feeding this boom. With a pick-a-pay mortgage, instead of making a full mortgage payment or even a full interest payment, you would pay partial interest payments. So instead of paying down the mortgage, the value of the mortgage would increase. The theory of this program was that property values would continue to increase and it didn’t matter that your loan balance was going up instead of being paid down. This allowed more and more buyers to afford a bigger, more expensive home; pay less, and pay as little as possible on a monthly basis.
Wall Street professionals had an idea that the people getting these mortgages could not afford these homes, but it didn’t matter as long as they could pool them into securities and sell them to investors. In step the rating agencies: Moody’s, Standard & Poor, and Fitch. The rating agencies determine if the investments are safe or risky. The AAA-rated securities are worth more because they are safer investments. The incentive for the rating agencies to provide a good rate is that they will the companies will continue to feed them business.
As investors were looking for more ways to make money, the CDO (Collateral Debt Obligation) was birth. This is when individual mortgages are pooled to create an MBS and then Wall Street firms take pieces of the MBS to form the CDO. The notion was that mortgage prices would rise forever at a rapid rate.
Small towns were investing in this product called CDOs. The products were pushed by Wall Street firms as really safe, high yielding investments. The one town featured in the show borrowed money from future earnings from a hydro electric plant to buy the structured CDO products. The town was in debt and was looking for ways to raise money so they could invest in schools, nurseries, and homes for seniors along with other things. They bought these CDO investments and they were insured that this was a sure thing due to the boom in real estate. And the AAA rating from the rating agencies made the investment too good to be true. The bottom line is the investment is tricky and no one really understood how the CDO is really structured or how it would perform. But the town bought them anyway although this product was really a mystery!
In 2004, the CDO product was the “cash cow” on Wall Street. MBS was always considered a safe investment as long as people paid their mortgages. And with MBS, these products were so appealing because they have the backing of GSEs like Fannie Mae and Freddie Mac, which guarantees the timely payment even if homeowners foreclose. Creating CDO securities that had pieces of this product made this ‘a can’t’ miss investment. This product was very appealing for foreign investors. To keep this product in the hands of investors, the Wall Street firms had to keep buying mortgages. This meant that lenders all across the nation would need to originate loans to any and everyone to spur the demand. And as this market got bigger and bigger, Fannie and Freddie got into the game.
At this point in time, everyone was into the game of originating mortgages to keep the Wall Street firms pockets fat. In addition, individual consumers were building up more and more debt using their homes as ATM machines to get them out of debt, while getting more in debt at the same time.
By this time, the American Dream was real and everyone wanted to be a part of it. People were becoming paper millionaires because the value of their homes was skyrocketing. You could buy a new home and before it was finished being built; it was worth a $100k more. As housing was booming, more and more speculation was occurring. People were flipping homes, jobs were plentiful to keep up with the demand of home construction, and the economy was striving. At this time, no one was regulating this market, not the Fed or the SEC….no one. The lack of oversight led to the housing boom and real estate was the premier investment of choice.
In steps hedge fund manager, Kyle Bass who understood the phrase, what goes up must come down. He was banking on the housing market going bust. He knew that this trillion dollar market that was unregulated was soon to bust, which makes it a ‘house of cards.’ He understood that home prices were going up significantly faster than income and traditionally, they went hand in hand. He did some research on one company in particular, Quick Loan Funding and realized that these loans were not performing (meaning the borrowers were defaulting). He followed the loans to Wall Street and realized that the employees at Wall Street firms buying this product did not care how the loans were performing. As long as they could package them and sell them to investors, the money would continue to come in.
In order for the CDO products to be enticing to foreign investors, the bad loans needed to be mixed in with the good ones. This was done so the securities would get an AAA-rating. As long as the CDO securities had this rating, investors would buy. The rating agencies were rating the securities based on home prices rising forever. In addition, rating agencies could mix and match mortgage pools to make the securities better, and ultimately get an AAA-rating. The bottom line is that a CDO security could be rated AAA, and include a significant amount of bad loans that would not perform. What makes matters worse is the head of the Fed at the time; Allan Greenspan didn’t even understand this CDO security. But Wall Street kept pushing it and making money from it, while Kyle Bass went against the norm and profited heavily from it.
In 2006, things started to get bad. Many of the subprime mortgages begin to fail. As they begin to fail, many of the small and large lenders begin to go out of business. As the loans started to go bad, Wall Street firms cut off the lenders and stopped paying for the mortgages. From this, mortgage credit was harder to come by, new buyers could not get a home loan, and with no new buyers, home prices stopped going up. In addition, people with ARMs could not refinance and people started to foreclose on their homes.
To break it down even further:
1. Banks stopped lending
2. People could not refinance from the exotic loan products
3. ARMs adjusted and people could no longer afford the payment
4. People stopped paying their mortgages and other bills
5. People begin to foreclose
6. Property values begin to decline
7. Mortgage investments plummeted
8. Foreign investors started pulling out of the investments
9. Small towns that banked on the mortgage boom are now struggling
10. People lost jobs due to the decline in spending
11. Titan mortgage companies have went bankrupt and Fannie and Freddie were taken over by the government
12. Some of the major companies have received government funds from the government
13. Now we are where we are today
Great show. The problem with all of this is the individual homeowners are struggling and banks are getting bailed out. Loans were made to people that should not have been made and as a result, people got in over their head and have lost their homes. The blame starts at the top with Wall Street and Fannie/Freddie, and its spread to a lot of people. Greed took over and people wanted to take advantage of the situation and are now paying the price.
I think things get worse before they get better. With the loss of jobs, people not only stop paying their mortgages, they stop paying other debt as well. From all of this, credit will be harder to come by now and in the future, which means that having access to cash is more important than ever. The idea was that property values would rise forever, but that obviously was not the case.
We are all to blame for following the herd. It happened with the dot com boom, housing, Bernie Madoff, and so many other things. I’m pretty sure it will be something else down the road. Greed is the bigger factor to all this from the Wall Street cats down to the individual consumer. My bottom line is “if it’s too good to be true, it really is.” Go against the norm!
So who do you blame and what happens next?
I’m not a journalist, just a person with an opinion!