by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I floated an idea about a federal bailout, along the lines of Chrysler in 1980, of Countrywide Financial Corporation. I wanted to highlight two things in this post: Countrywide is in trouble and their trouble is our trouble. My premise is that the collapse of CFC goes beyond the 55,000 employees. I may have been guilty of thinking like Charles Erwin Wilson.
Jeff Brown replied, “Countrywide ain’t no Chrysler” and proved that my premise may be an insult to Adam Smith. His idea of a bailout was more along the lines of a Tom Clancy novel with Ben Bernanke playing Jack Ryan, Angelo Mozilo playing Dr. Strangelove, and Bank of America playing the United States Marine Corps. Life often imitates art so my money’s on Jeff’s covert bailout plan.
What really happened to the mortgage market ? They didn’t properly price loans for the risk they assumed. While Hilary Clinton is crying about the “poor borrowers” what about the poor lenders who got caught in the middle of this mess? Borrowers said “We’ll buy it if you give it to us on the cheap !”, Wall Street said “We’ll take the extra yield!”, and we all said “This time it’s different !” Extrapolations proved that a two bedroom condo on the Las Vegas Strip would sell for at least $5 million in this new economy, fueled by leverage.
Read Ralph Alter at The American Thinker:
The dirty little secret of the sub-prime crisis is the fact that sub-prime lenders failed to charge interest rates high enough to offset their expected level of defaults. Make no mistake: sub-prime lending is going to have borrowers who fail. Even conforming borrowers sometimes default. Enabling lenders to charge enough to make profitable loans to less qualified borrowers will result in a higher level of foreclosures. But it will also enable legions of “sub-prime Americans” to realize the American dream of home-ownership.
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Phil Hoover says:
I think Jeff Brown is right ~ CW will end up being acquired by B of A or Wells Fargo.
Both are diversified, large enough, and capable of incorporating CW’s real estate lending prowess into their organizations.
B of A supposedly was after CW earlier this year, but unwilling to pay CW’s then-current value.
And, as Jeff stated, I would guess that B of A is at the front of the pack of the 40 banks who are lending CW $11.5B on their credit line and that they are in direct communication with CW.
No one, especially 40 BANKS, lends $11.5B unless they expect to get repaid in one way or another.
Things have changed now, and I would imagine that an acquirer would think CW’s current stock price would be much more palatable.
And, I would imagine that Anthony Mozillo might wish he could’ve sold CW to B of A when his company’s stock was over $30/share.
But, then, he has cashed out nearly $140M of stock in the past year or less, and he’s in a pretty good position.
August 20, 2007 — 10:29 pm
Jeff Brown says:
Adam Smith indeed. 🙂
Everyone keeps coming up with ‘dirty little secrets’ about this new way of cheating at Monopoly.
I think the real secret isn’t a secret at all, and is hidden in plain sight – sometimes the best hiding place of all. What is it?
It’s that all the problems, and they’re big-time real, are marginal. I’m not belittling them by using that description. There are so many problems that even though they’re all more or less on the margin, they’re impacting the economy in a potentially disastrous way.
What I seem to be seeing played out though, is what you tipped me off to, Brian. It’s exactly BECAUSE these problems aren’t all big man-eaters that Bernanke can make a difference with one cut in the discount rate. A relatively small loan to Countrywide can make a difference. B of A can possibly lurk in the bushes (where everyone can clearly see them, by the way) deciding if they want to make their takeover play.
All the while Bernanke is possibly setting the stage for his rewrite of the Greenspan Fed Funds cuts of the late ’90’s. If he does start doing that, the added liquidity of the most recent money printing rampage along with the now cheaper money, might just right the ship.
Of course, as Brian’s pointed out, this won’t stop the many lenders who will fall during this process. And that’s where Mr. Smith comes in. The invisible hand will do its harsh but necessary business, and move on.
Meanwhile, back at the ranch, Mom and Dad are elated that Lassie found Timmy, and brought him home – and in time for dinner. 🙂
You give me far too much credit Brian. My take on this is built on keeping my mouth shut while you’re talking.
August 20, 2007 — 10:33 pm
Kaye Thomas says:
Brian.. An interesting premise and no doubt on target. Risk should carry a price and it didn’t. However I think this debacle is about more then just the high risk level that was not propertly priced.. it also has a lot to do with fraud and stupidity.
August 20, 2007 — 10:33 pm
Jeff Brown says:
By the way – HAPPY BIRTHDAY!
August 20, 2007 — 10:34 pm
Gary Miljour says:
Brian,
You make a great point of sub-prime lenders not charging enough in rate to offset their risk position. I have a good friend who manages an office for American General Finance. His company specializes in sub-prime lending from consumer loans, car loans, all the way up to sub-prime mortgages. When I spoke to him recently about this meltdown, I was surprised to hear that his company was not involved in this whatsoever. Curious I had to find out why. It was becuase they never went against their sub-prime principles. They have always charged higher rates and still continue to. Their default rates are very low and they train their staff at the branch level to collect on these debts. Great Article.
August 20, 2007 — 10:49 pm
Brian Brady says:
“By the way – HAPPY BIRTHDAY!”
Gracis, amigo. Soy viejo, ahora.
August 20, 2007 — 10:56 pm
Chris Lengquist says:
First, stop speaking French since I don’t understand it. 🙂
On a human being level I will disagree (strong word, maybe bring attention to would be better) with you on one point. While economically these people are right back where they started, emotionally and self-confidence wise they may never recover. Sure, there were many who gamed the system and could not care any less that they were foreclosed on.
But those that live on the economic edges fighting their way up the ladder that presented itself to them may be too crushed to move forward.
Darwinism, maybe. But real emotional scars never-the-less.
August 21, 2007 — 6:27 am
Nathan Mathews says:
Brian –
Happy Birthday and thank you for another year of your wonderful blog posts, very insightful –
Nathan
August 21, 2007 — 8:39 am
Brian Brady says:
That’s the point I left out, Chris. Foreclosure can leave an emotional scar. One would hope that those people see it for what it is- an experiment that went awry and learn from it.
I don’t mean to imply that sub-prime borrowers gamed the system; they didn’t. They took a chance and 1 out of 10 fail.
Thanks, Nathan.
August 21, 2007 — 8:53 am
Chris Lengquist says:
Brian,
I know you care. That’s what I love about you.
August 21, 2007 — 12:00 pm
Chris Butterworth says:
Fantastic post – very well put. It isn’t any different from junk bonds being priced higher than treasury bills. Significantly higher risk should demand significantly higher returns (otherwise let the next guy in line take that risk!) Only in this case, the lenders took significantly higher risk (low credit scores, no income verification, and run-away appreciation rates on their collateral) with only a slightly higher return. Hindsight may be 20/20, but this one shouldn’t be too big of a surprise to anyone who took a step back from the frenzy a couple of years ago..
August 21, 2007 — 5:35 pm
cher says:
Chris makes a good point about the emotional part of losing a home and becoming a renter again. In my observation, some are affected deeply, some not.
At our AZ apartment we have picked up some tenants who went through foreclosure. Some are bitter while others are grateful to have lower expenses and a maintenance man at their beck and call.
You see, when you own a house and your kids plug up the toilet, it take a few days and $200 to get it fixed. Then, you have to take off work to meet the plumber. So you have the $200 bill plus the hours you lost at work. BIG EXPENSE. When you rent, you call maintenance, they come in with their master key and when you get back from work, that very day, your toilet is operating again.
August 21, 2007 — 10:42 pm
Brian Brady says:
There is no dishonor in renting until you can afford a home.
Good points about the “hidden costs” of property ownership, Cher
August 21, 2007 — 11:06 pm
I-Man says:
I think your statement about losers and winners is an oversimplification. Because of the increase in demand for houses by subprime, everyone else ending up paying more for their house. Those are the real losers and they far outnumber the winners IMO.
August 22, 2007 — 6:49 pm
Brian Brady says:
Interesting point, I-Man. Glad to have you here!
August 22, 2007 — 10:08 pm
Catherine says:
everyone has lost. So many people have not
only lost their jobs but now long careers are ending
since the market has been wiped off the map.
These are not in the hundreds they are in the
thousands across the nation. Some companies that have collapsed have taken some of their associates retirement funds with them. So many people that will soon become a statistic of their own industry.
Myself I have invested more than 12 years in this
industry and never had a problem getting a job, now
that I have one of the top collapsed companies on
my resume’ I can’t even get an interview to save my life. Had some colleges go to a job fair in the north west burbs of Chicago and an announcement came over the load speaker just before they opened the doors and said
“If there is anyone here from the sub prime industry this job fair is not for you, please exit out the back doors!” So now tell me.. there are a lot of losers in this whole nightmare
August 29, 2007 — 10:19 pm
Ryan says:
But why must we create a new social program which rewards poor financial planning? Why must we bail everyone out!
I wrote about my frustration and would like to here yours:
http://councilofnicea.blogspot.com/2007/08/busting-predatory-lending-myth.html
August 31, 2007 — 8:45 am
RE Investor says:
“But why must we create a new social program which rewards poor financial planning? Why must we bail everyone out! ”
I here this a lot on the bubbleblogs. I agree, for the most part. However, unfortunately we are all in this together. The bail out is just as much for the prudent people as the shysters. The reason is that this problem with “poor financial planning” will take down those of us who are just fine at planning.
Example 1: The stock market went down by 10% last month. Companies that had nothing to do with subslime had a large chunk of their stock value stripped because of psychology. How many people’s 401K’s, even deversified 401K’s were damaged by many thousands of dollars. That weakens the economy for prudent people just as much as people with “poor financial planning”.
Example 2: Some people would like to buy a house right now. They are not irresponsible, they just need to buy, either because of a transfer or some other circumstance that has nothing to do with flipping, or speculating – just a place to live. They move, they tell their company “I will start on X day” then at the closing table they are told – “sorry, the lender has pulled that program” or “your interest rate has just gone up and you don’t qualify”. Not fair, right? Do these people need a bail out? No, still effects them.
Example 3: Homeowner had purchased a new house based on the sale contract of their old house. The day before the close of escrow, the house that they had already packed up and moved from, thinking that the new buyer would take possession of, learn at the 11th hour that their buyer no longer can get a loan. Guess what, they no longer can move in to the new house, and they also moved their whole family already from the old one. Again, poor financial planners? No, still effected just the same.
Example 4: Foreclosures. Neighborhoods that are suffering massive foreclosures are also experiencing a rising crime rate. There are many neighborhoods that have people that have lived there for years that now are experiencing squatters, vandalism and increased drug trade. Think about where you live, now what would happen if your nieghbors got foreclosed and many other houses became vacant and unkept for a length of time. All of a sudden a “bailout” does not look like such a bad idea huh?
The bubble blog and hardliner mentality is great for a dot com bust, or tulip bust because then they can say “Well, they made bad decisions” but that will change really quickly when the bad decisions “others” made come home to roost in their own backyard. And that is exactly what happens in a Real Estate down turn of this magnitude. It WILL come to a nieghborhood near you, and it WILL become YOUR problem. So please think out your objections to a “bail out” before proclaiming the myopic view of “no bailouts. I don’t want to pay for peoples bad planning”. Keep in mind, you will pay, one way or another.
September 5, 2007 — 4:57 pm