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Friday, August 17, 2007

OT: The Collapse At Countrywide

Yesterday, Countrywide Financial Corp. drew down all of an $11.5 billion credit line in a last-ditch attempt to fend off bankruptcy. Countrywide's crisis is merely the latest in a long list of mortgage originating companies, many of whom were subprime and "alt-A" originators, such as the Rangers' former park name sponsor Ameriquest, or American Home Mortgage, who recently filed for Chapter 11 bankruptcy. The subprime/alt-A business model, from what I can tell, followed the Underpants Gnomes business model prevalent in the early ought's, except it actually had a middle part. It went something like this:
  1. Find somebody with a house, or who says he can build a house.
  2. Find a somebody who wants to buy the house. Income verification? Mortgage fraud? What's that?
  3. Write the loan.
  4. Sell it to a patsy.
  5. Profit!
It used to not matter if the contracting parties engaged in one of the two types of mortgage fraud (lying about income or overstating the value of the property), for two reasons: first, everyone was doing it, and second, big-time presidential candidates want to bail out the lenders and the "homeowners". Hillary Clinton is, of course, as complete an idiot as exists on the face of this earth; outside the Beltway, we cannot simply raise taxes (or issue more Treasuries) and make our household budgets larger. That such a proposal rewards arguably illegal activity on both ends of the transaction should not go unnoticed; both groups need sound punishment instead, the companies on the dissection table of bankruptcy on the one end, and houses returned to collection agencies for those who cannot pay the mortgage.

For some months, I have been wanting to share this picture I took in Goodyear, Arizona on our way back from spring training:

This is an abandoned Albertson's supermarket. For blocks around it is nothing but (apparently) unoccupied homes. How bad is the overbuilding in the Phoenix area when new subdivisions can't even support basic infrastructure like an Albertson's?

My banker recently told me a story of a fellow who, without any kind of income documentation, controlled five houses in the Phoenix area, assets totalling something like a million dollars in theoretical value. (He's in bankruptcy now.) Those houses were built on the idea that somewhere, somebody would find a mortgage for those homes, probably a subprime mortgage, but they never did. I have recently heard how cruel this is to families who had no other option but subprime, but riddle me this: how are the torrents of cash this sluice gate opened a good thing for those people, either? It will wreck the credit of thousands, perhaps millions, once they make the discovery that they can't keep up with the payments, something the bankers — who, quaintly, used to have their own depositors' money at risk — should have known. Worse, it artificially inflates property values, putting those same bottom-of-the-ladder customers ever further away from home ownership.

Countrywide, we are told, is not like the others; they have actual businesses servicing mortgages, actually run a bank, and are lately writing their own loans against their own customers' deposits. Why does their chairman, then, say things like this?

"I've been doing this for 54 years," [Chairman Angelo R.] Mozilo recently said during a speech in Beverly Hills, California. For many years, he said, "standards never changed: verification of employment, verification of deposit, credit report."

But then new players came in with aggressive lending policies. Names like Ameriquest, New Century, NovaStar Financial and Ownit Mortgage Solutions set a new, lowered standard, changing the rules of the game, Mozilo said.

"Traditional lenders such as ourselves looked around and said, 'Well, maybe there's a (new) paradigm here. Maybe we've just been wrong. Maybe you can originate these loans safely without verifications, without documentation,"' Mozilo said.

In fairness to Countrywide, Mozilo has railed against exactly these practices, but no matter to the depositors at Countrywide Bank, who yesterday were seen forming long lines to get their cash out, a scene largely unheard-of since the Great Depression. (Disclaimer: a small portion of my portfolio is in Countrywide. Not a shot I called.)

All of which is a roundabout way of saying that for those people with bulletproof credit scores and documentation up the gazoo, it's a good time to be buying real estate, at least in theory. We successfully negotiated a deal on a new house yesterday, so we're gonna be moving pretty soon. As a result, posting may come to an abrupt halt at some point in the next few weeks. Word as it happens.

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my favorite Countrywide story the last few days is Merill Lynch changed their rating from 'Buy' to 'Sell' just Tuesday.

a little late, Merrill, don't ya think?

good wrtie up on this whole thing Rob.
a little late, Merrill, don't ya think?

Interesting tie-in to the Ariz Republic story last week on what problems were being caused by the abandoned (foreclosed) houses. West Nile virus, for one thing (mosquitoes in all those suburban swimming pools). It's beginning to sound like the whole country is in colony collapse disorder

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