There’s always something to howl about.

And Wachovia Completes the Gang of Three

Wachovia board members have forced CEO Ken Thompson to retire  and Realtors should be popping champagne corks all over the nation.  Why?  Because Wachovia is the final reckoning of the Gang of Three and this may very well signal the bottom of the market.  Disclaimer #1: I usually write posts and comments backed by statistics.  Barry Cunningham will attest to that.  But this post is going to be more along the lines of a common sense case study; a thought experiment.

The Gang of Three
When the press first started reporting on the “sub-prime” crisis (a misnomer in itself, but we’ll save that for another day), a number of us were pointing out the real problems and what was to come.  There were three lenders to worry about and Countrywide, by virtue of its size more than any particular wrong doing, was used as the example.  In my weekly speeches to Realtors, I began to refer to them as The Gang of Three: Countrywide, WaMu and Wachovia.  The initial problems at Countrywide can be seen as far back as May of last year.  The set-asides at Countrywide were woefully inadequate, in my opinion, and that seems to have been borne out.  WaMu went down the exact same path and now, finally, we see Wachovia doubling the losses they originally forecast.  Why are these three lenders leading the Lemming parade off the financial cliff?  What do all three lenders have in common? (Hint: it’s not sub-prime loans.)  The common thread here is Negative Amortization Loans (cue ominous music).  Disclaimer #2: I am on record as being VERY against Neg-Ams (I have never written one for a single client).  Do they have a purpose?  Yes.  A few of my colleagues have used them effectively.  But I would venture to guess 75% of the neg-am loans produced were at least a by-product of greed if not out right theft on the part of the originator.

There is not space here to go into why these loans are, generally speaking, so abused and that is not the point of this post.  The point is that these are the big three originators of neg-ams (Countrywide, WaMu and Wachovia through their very questionable puchase of Golden West Financial) and all three have been crushed.  Back in August of 2007 I called the neg-am accounting debacle an iceberg that no one was seeing.  I propose to you that all three have now hit that iceberg.  Countrywide was driven to virtual bankruptcy, WaMu had to close down most of their wholesale lending and now Wachovia is going through the wringer.

The Problem (and Solution) IS the Press
So now we read and we watch as Wachovia cuts off its own head while they report staggering losses.  The press still refers to this as fall-out from the sub-prime crisis that spilled over into the general real estate market.  Typical of our sound byte society is the lazy, sound byte reporting that we still get.  No mention of neg-ams or accounting problems or the common thread between these three lenders.  Disclaimer #3: Please note the lack of any statistics to back these statement.  Again, this is an hypothesis; albeit, one which I believe to be pretty damn sound.  If you would like to do the research I will gladly share the credit.

So why is this good news for real estate? Because the very same investigative laziness that led to the outlandish headlines we have seen over the past 3 quarters and that contributed greatly to the exacerbation of the housing problems will now work in our favor.  We are already talking about the press as a vaccine in San Diego.  The problems weren’t as big as the press made them out to be and that hurt the market.  Going forward the problems may very well be bigger than we have experienced thus far (it is estimated that the foreclosure peak will actually not occur until 2010 or 2011) but the press will have grown tired of the story long before.  As a matter of fact, I am suggesting that Wachovia is the last big shoe to drop.  Once we are done throwing stones at Ken Thompson and shaming Wachovia for their losses, I predict the press will begin to move on to other stories more and more often. 

Celebrate!
Once the press moves on, real problems or not, we will begin to see consumer confidence rise and the real estate market will begin to turn.  It is already happening hear in San Diego.  Real estate agents rejoice!  With Wachovia doing the two-step, The Gang of Three has begun their final dance.  Open your champagne, toast the local press and celebrate the bottom of a make believe market.