Dec312014
Thieves of the housing bubble were ordinary people
The free money offered during the housing bubble turned many good people into thieves.
People are basically honest and will do the right thing if given the chance; however, people are also opportunistic, and if encouraged and enabled to steal, many ordinarily good people will go down the wrong path: Lenders led many astray. During the housing bubble, lenders were desperate to loan money in what they thought were low-risk, high yielding investments. The advertising to entice homeowners to become loanowners was both effective and too-good-to-be-true.
The housing bubble turned many good people into thieves. Most were petty thieves who merely gamed the system to get free money. This same group now feels completely justified asking for principal reduction as if that were an entitlement instead of what it is, government graft.
Over the years, I have collected many stories of housing bubble grift, but the occasional newspaper article or daily HELOC abuse story doesn’t delve into the sordid details of the worst offenders. The people who really know how bad people behaved are the fraud investigators. Six years after the housing market peaked, investigating fraud is a booming business.
CSI: Housing Bust
In this business, the best employees are the most paranoid ones.
By Beth Raymer — June 2012
As viewed from Frank Alpan’s cubicle, through the glare of two flat-screen monitors, the collapse of the housing market looks a lot like a crime scene. Clicking his way through electronic case files, he hunts for clues: a strange font on a pay stub, numbers on a W-2 form that don’t add up. He is continually amazed at just how sloppy some suspects can be.
Alpan (whose name has been changed, as his company’s policy forbids unauthorized employees to speak to the media) spends eight hours a day at this desk in Digital Risk’s office building in suburban Maitland, Florida, reconstructing the exact circumstances that led so many Americans to buy houses they couldn’t afford. The cases he has seen reveal a country gone berserk: a woman in Ann Arbor who refinanced her home five times in five years but neglected to tell her lender that she had quit her job;
During the housing bubble, the median household income in Irvine, CA was about $85,000 per year. For five consecutive years from 2002 to 2006, the median home price rose on average about $85,000 per year. Any Irvine homeowner could have quit their job and lived off the appreciation in home equity. Apparently, some people did.
a concrete finisher in Las Vegas who applied for 15 mortgages in one week;
That’s knowing how to game the system. There is always a delay between when a loan is approved and when record of the loan shows up in the public records. If a borrower times all their loans to be approved in this small window, each bank is unaware of the others simultaneously approving loans. Of course, lenders require a borrower to sign a statement stating they are not processing multiple loans, but this is hardly a deterrent to a determined thief. Maybe, if they changed how to obtain public records in order to prevent this, there would be less abuse and less good people led into the wrong path. People will always game the system and so it must be made impossibly hard to achieve and thus preventing it as a whole.
Seems that we are not there yet.
Pastors—dozens of them—who doctored bank statements, bought houses they couldn’t pay for, and then filed for bankruptcy. “The nice thing about pastors is that their church shares information when asked,” Alpan says. “Pastors are always an easy [fraud] claim.”
Keith Ritter from the post Grifters for God is an ordained minister.
…. Once problems are uncovered, clients can try to recover money. … The information that analysts dig up unsettles Alpan. “There’s nothing you can hide,” he says. “This is why auditors are so paranoid.”…
Alpan’s reviewing the case of a grocery-store manager in New Jersey who paid $120,000 for a home whose value then jumped to $220,000. Over the course of a single day, the manager took out five home-equity lines of credit. A week later, with half a million dollars in his pocket, he walked. The scheme is called shotgunning, and Alpan sometimes wishes he was unscrupulous enough to have done it. “I could have been a millionaire,” he says, snapping his fingers, “just like that.”
It is tempting, isn’t it? Whenever I profile the property of a really egregious HELOC abuser who took out $500,000 or more, I get a small pang of jealousy. There was so much free money given away by stupid lenders, sometimes I feel like I missed a great opportunity.
One of every four files Alpan reviews contains a hardship letter. Such letters are meant to win the bank’s sympathy, but more often than not, they end up highlighting the lies the borrower once told. “I was selling cars … making $2,100 a month, and they cut my hours,” explained one borrower, though his mortgage-loan application had said he earned $350,000 a year as a regional manager for a Big Three automaker.
He was making $350,000 a year if you count the mortgage equity withdrawal. If you count the free money from the Ponzi scheme, most liar loans weren’t lies.
One hardship letter that went viral around the office began, “I did a lot of coke, and now I can’t afford my mortgage.”
ROFLMAO!
Alpan scowls as he plows through the files. The infinite variety, as well as the sheer tonnage, of bad behavior has clearly affected him.
It’s affected me too. Profiling HELOC abuse cases day after day has made me very unsympathetic to the loan owners who play the victim card.
I am always shocked by the sense of entitlement some thieves have.
Among the thousands of fraudulent loans he has audited, the only common denominator is deceit. “It’s not just lawyers and pastors and CEOs who lie and scheme. It’s nurses and schoolteachers, too,” he says. “Everybody’s guilty; no one’s up to any good.”
The common man was the cornerstone of the Ponzi scheme.
People from all walks of life got involved.
Business owners and entrepreneurs financed their ideas with Ponzi house money.
And attorneys played their part.
And the squatters the attorneys enabled.
Many of these self-proclaimed victims think they have been so wronged they deserve to keep the money and the house.
And the senior citizens who found a way to make up for their lack of retirement savings.
It didn’t take money, experience or intelligence to play the game. Anyone remember Casey Serin?
And then, of course, there were the real thieves…
Like Zimmerman, Alpan used to work on the other side of the industry, at a firm that sometimes handed out loans to the undeserving. … When one man didn’t have the gas money to come in and sign papers, an officer drove the papers to him.
One Digital Risk employee came from a brokerage whose in-house motto was “Copy, paste, cut, delete. We’re not done until the loan’s complete!”
Quite a motley crew, wouldn’t you say?
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“I never intended to break any rules. I’m not in a position given the number of transactions to know about the movement of any specific funds.”
– Jon Corzine, former Chairman and CEO, MF Global
“As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
– Citigroup‘s former chief executive, Charles O. Prince
“I have no regrets about how Countrywide was run. We were a world-class company in every respect.”
– Anthony Mozilo, former CEO, Countrywide Financial
More like a credit bubble – 1999 made housing the Wall Street conduit. Didn’t take long to bust, did it? Happy New Year!
‘American Greed’ on CNBC is in it’s 8th season.
American Greed is an hour-long television show that profiles various cases involving corporate fraud and white collar crimes.
http://en.wikipedia.org/wiki/List_of_American_Greed_episodes#Season_8_.282014.29
I like that show. I’ve watched several episodes. It shows just how far people will go if they have no moral compass.
I wrote about this earlier this year: Mortgage and foreclosure crisis 2.0
RealtyTrac: Distressed home prices hit new 5-year high
The median sales price of single-family homes and condos in November stayed relatively flat compared to the previous month, coming in at $190,000. However, this is up 15% from a year ago, RealtyTrac’s November 2014 Residential and Foreclosure Sales Report found.
On the other side, the median sales price of distressed homes — those in the foreclosure process or bank-owned — produced very different results and reached a high of $128,625, the highest since December 2009, 35% below the median sales price of non-distressed properties, $199,000.
Distressed home prices increased at a faster pace, up 18% from a year ago while non-distressed home prices were up 14% during the same time period.
As a result, this might push more investors out of the market and open the door for homebuyers, explained Daren Blomquist, vice president at RealtyTrac.
“As the price of distressed properties reaches a new high, the pool of investor activity that has been fueling the housing recovery may dry up,” said Blomquist. “However, 20 states still saw annual decreases in distressed property prices so we will continue to see a fragmented recovery as investors move from once-hot markets such as Phoenix, Atlanta and many California markets and into markets such as Charlotte, Columbus, Ohio, Dallas and Oklahoma City.”
The median sales price — which included both distressed sales of homes in some stage of foreclosure and non-distressed sales — increased 35% from a trough of $141,000 in March 2012. But it still is 20% below the previous peak of $237,537 in August 2006.
In addition, short sales and distressed sales — in foreclosure or bank-owned — combined accounted for 12.6% of all residential property sales in November, falling 13.7% from the previous month, and down from 14.8% in November 2013.
Short sales accounted for 3.4% of all residential property sales in November, down from the previous month and a year ago and below the pre-recession average of 4.5% a month in 2006.
Apparently, I am not the only one who saw this coming….
Dramatic rise in delinquency rate validates analysis of downturn
It’s not even Jan. 1, but my analysis regarding the housing market trend of continuing on the path of a downturn rather than recovery in 2015 is already being proven sound. According to a published report in HousingWire by Brena Swanson on Dec. 30,” the national delinquency rate has come off its seven-year low and surged to its highest level in 10 months, as reported by Black Knight Financial Services’ November “First Look” mortgage report.”
This is most unfortunate “news” for those who bought into all the hype about our experiencing an economic as well as housing “recovery.” I am certainly not gratified to continue writing about our stagnant housing market, and wish that I was wrong in my analysis, but the fact remains that things are far worse than was consistently reported in much of the media leading up to and even following the most recent elections.
Although Ms. Swanson also noted in her article that foreclosure inventory continued to decline, reaching its lowest level since January 2008, the rise in delinquencies points to a likely future increase in foreclosure activity. Anyone who disagrees with that fact probably believed we would not have a housing crash in 2007. The magnitude of a 12% jump in delinquencies in November over the 6% rate in October should be a wake-up call for those still wearing rose-colored glasses.
A previous article in HousingWire, written by market-savvy Trey Garrison and published on Dec. 23, stated that new home sales took a nosedive in November, plummeting 6.1%, according to the U.S. Department of Housing & Urban Development.
Adding fuel to the downturn “fire” is the report that the National Mortgage Risk Index for Agency purchase loans rose in November to 11.69%, which is up from an average of 11.29% for the prior three months, as reported in HousingWire on Dec. 19. The risk indices for Fannie Mae, Freddie Mac, the FHA, and the VA all hit series highs in the month of November. This report raised the specter that FHA loans could face a dramatic rise in defaults.
In the article, Stephen Oline, co-director of American Enterprise Institute’s International Center on Housing Risk, is quoted as stating that the increase in risk for all major government agencies over the past two years is “cause for concern,” and, “This is especially true for FHA loans, which would experience a tidal wave of defaults if we have another severe financial crisis.”
Some of the other points of interest that are perhaps validating my analysis that deserve close perusal include, but are not limited to, the following:
· Nonbank lenders are generating an ever-increasing percentage of riskier mortgages and are not under the same regulatory scrutiny as traditional banks.
· Some lenders, including Ditech and Mortgage 360 are actively promoting 97% LTV mortgages, as is Fannie Mae.
· As published in the MReport last Sept. 18, former Goldman Sachs executive Joshua Pollard sent a shocking 18-page report to the White House warning of a potential plunge in home prices that said, “Could put the country back into a recession before the ripples of the previous one settle.”
· The employment picture has not improved anywhere near that which is being reported in the media. Millions of Americans are no longer counted in the unemployment numbers because they have been unable to find decent-paying or meaningful jobs, or have simply stopped looking. The job participation rate remains dismal. Until that materially changes, our economy in general, and the housing market in particular, cannot substantially improve. This I repeat quite often because it is the number one factor keeping us from experiencing a real rather than artificial recovery.
The latest report on the delinquency rate surge, coupled with other obvious indicators such as those above, would certainly seem to validate my analysis over the past many months. Only time will tell — many factors could intervene to stem the tide of negative news. In any case, I will be observing and reporting the facts as they present themselves.
This article is a classic case of confirmation bias. He seizes on a single data point to validate his entire thesis about the housing market. The prior two months of September and October showed a declining delinquency rate so he doesn’t have anything resembling a trend to back him up.
See the top chart:
http://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/Dec2014/BlackKnightDec.jpeg
I’ve seen Trey Garrison complain that the MSM often suffers from a case of “One, two… trend!”. Yet HousingWire is guilty of the same offense here.
One month movement against the trend isn’t the validation he claims, is it?
Given that Morgan Stanley was one of the private equity funds providing the correspondent lending line, it should be no surprise that they determined the lending standards of loans they wanted to package and sell to investors.
DOJ probing Morgan Stanley’s relationship with New Century
After a year full of reaching billion-dollar settlements with some of the country’s largest banks over the toxic mortgages that led to the financial crisis, the U.S. Department of Justice reportedly has its sights set on another bank, Morgan Stanley (MS).
According to a report from the New York Times, the DOJ has begun examining the pre-crisis relationship between Morgan Stanley and New Century Financial, and Morgan Stanley’s role in “actively” influencing New Century’s risky lending practices.
According to the Times report, the DOJ is reviewing a mountain of documents provided as part of a lawsuit filed against Morgan Stanley by the American Civil Liberties Union in 2012.
In the lawsuit, the ACLU accused Morgan Stanley of encouraging New Century to write high-risk, toxic mortgages in predominately African-American neighborhoods in the run-up to the crisis.
“Hoping to realize large profits from the securitization of extremely risky mortgages, Morgan Stanley worked hand-in-glove with New Century, encouraging it to issue mortgages that ignored all of the most basic fair lending principles in order to create a large number of mortgages that could be processed and sold as securities,” the ACLU said in a statement at the time.
Now, as the case is progressing, the DOJ is beginning to look into the Morgan Stanley-New Century relationship.
From the NY Times report:
The documents indicate that Morgan Stanley employees were aware of the low credit quality — and occasionally joked about it — even as they continued to snap up loans from New Century. A top due diligence executive at Morgan Stanley, Pamela Barrow, wrote to a colleague in 2006 sarcastically describing the “first payment defaulting straw buyin’ house-swappin first time wanna be home buyers.”
“We should call all their mommas,” Ms. Barrow added in the email. “Betcha that would get some of them good old boys to pay that house bill.”
According to the Times report, internal documents from Morgan Stanley showed that by 2005 the bank purchased half of all the loans that New Century originated since 2001, for roughly $42 billion.
Again, from the Times report:
The documents suggest that the primary way Morgan Stanley guided New Century was in contracts that spelled out the kinds of loans the bank was willing to buy in pools of mortgages. A 2006 term sheet said that the bank wanted a $1 billion pool to be at least 85 percent adjustable-rate mortgages, with at least 75 percent of the pool to include a prepayment penalty. And it dictated how many loans the bank wanted from various geographic regions.
An internal Morgan Stanley report also said that the bank got a “ ‘first and last’ look each month at any whole loan sales by New Century and in exchange Morgan Stanley provides balance sheet liquidity for New Century.”
That was my take on this as well. How is this breaking news? Of course the investors set the lending guidelines. Otherwise, there wouldn’t have been any capital available to make these loans.
The same situation exists today. The only difference is Fannie/Freddie/Ginnie are the investors and they set the rules for 90% of the market. The remaining 10% is set by the institutions that invest in Jumbo loans.
I have to imagine that the attorneys for Morgan Stanley are asking the same questions. This is hardly a covert conspiracy. This was simply doing business back during the housing bubble, and its basic form is still how this business operates today.
I would like to believe this, but it sounds like wishful thinking to me.
Perfect economic mix set to boost housing in 2015
After a few so-so years, the housing market and related stocks could be primed for a big 2015.
Next year is shaping up to be one of those rare times when strong economic growth is accompanied by low interest rates, the perfect mix for these names, according to a historical study of stock prices using Kensho, a quantitative tool used by hedge funds.
CNBC looked at the periods since 1980 when GDP was above 2 percent, yet the 10-year Treasury yield remained under 2.5 percent. In total, there has been about one year or four quarters of time when both these conditions were met and homebuilder stocks were far and away the standouts among stocks in the S&P 500.
Housing stocks have “been unexciting and dull the past two years,” wrote Carter Worth, chief market technician for Sterne Agee, in a note to clients Monday. “We believe many homebuilding/home furnishing/building product stocks are about to come to life.”
Fundamental analysts like the stocks heading into the new year as well with the group, on average, having an “overweight” rating on Lennar, D.R. Horton and Pultegroup, according to Factset.
“Low investor expectations make builder stocks attractive,” wrote Deutsche Bank’s Nishu Sood in a note to clients Monday.
Deutsche Bank believes investors are ignoring the stocks because there isn’t a “strong, unequivocal, accelerating housing recovery,” yet the companies should benefit through decent volume growth, strong margins and share buybacks.
Data today on home prices and Wednesday on volume fit the modest but growing theme.
The Case-Shiller Home Prices index rose by 4.7 percent year-over-year in October, according to economists. Pending home sales for November tallied a slight, 0.5 percent increase, economists expect.
The yield on the 10-year Treasury was most recently at 2.2 percent, down from near 3 percent to start 2014. A revision of third-quarter GDP last week showed that growth was a monster 5 percent. Economists subsequently raised their expectations for 2015.
“In total, there has been about one year or four quarters of time when both these conditions were met and homebuilder stocks were far and away the standouts among stocks in the S&P 500.”
This article represents data mining at its worst. There is nothing statistically valid about 4 quarters worth of performance data.
Reposting here as I want to make sure he sees this:
Keith? KEITH? Wherefore art thou Keith? Im back at noon today as planned – where are you?
Are you finally embarrassed and cowtowed into silence? If not, you should be. Let this be a lesson for you Keith. If you make a once-in-a-lifetime call (i.e. 50% off 2011-2012 prices) you will be held accountable. The internet has a long memory Keith – this will be your signature moment in the public sphere.
You will go down in the same pantheon as the Irving Fisher “Permanently high plateau” call of 1929. 50 years from now, our granchildren will be mindsurfing the antequated system called “the internet” and will stumble upon your words and laugh at how horrendously wrong you were. This is your legacy Keith – own it.
The BI article was a good find.
Thanks. BTW, if you (or anyone else for that matter) wants a good laugh, go to BI and plug in the search term “Jurow” and you will see 10-20 articles (all written after the bottom was in) based on the following formula:
1. Headline screeching DOOM just around the corner (could have been added by BI so maybe not Jurow’s fault)
2. Body of the document subtly hinting in very criptic terms that a massive calamity is about to happen.
3. Comment section whereby Jurow really would impugn himself with VERY specific predictions of a near term CALAMITY, all written with a certain cocksure arrogance (i.e. Im as sure of this as I am the sun will rise tomorrow).
Seriously, its a real treasure trove. If you want to laugh, head over there do a search and enjoy!
I used to read more “astute” comments about real estate on this blog. Now it seems like a bunch of juveniles bickering about who was right or who was wrong. Perhaps you guys should take this to patrick.net and leave this blog to people who really want to have an intelligent conversation.
The comments ebb and flow with the events of the day. Right now, not much is happening in real estate, so people discuss other matters. I see this every November and December as the market goes into hibernation.