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Thursday, September 20, 2007

Seeing who's behind the curtain...


The current round of ARM resets and the round of defaults and foreclosures; accompanied by much gnashing of teeth and wailing “what happened?” in Washington, is finally exposing the wizards who’ve been behind the curtains in the sub-prime mortgage market. Those zero down loans and no-doc loans had always seemed to be too good to be true and guess what – they were. The free lunches being handed out turned out to be filled with spoiled milk and sour grapes and now the stomach aches begin for the homeowners who fell for those lines.

And speaking of bellyaching, it’s a bit hard to stomach the outcries for a bailout from the greedy sub-prime loan market companies. They have been chumming the water and in a feeding frenzy for years, taking advantage of unsophisticated borrowers and the risk-taking home-flippers alike. Now, they are begging for relief from the very risks that they created. It is somewhat delightful to watch the even bigger sharks – the hedge funds that swoop in and buy up distressed assets and companies for pennies on the dollar – now feeding on these sub-prime lending companies.

Of course the little guys in all of this - the homeowners – are left to fend for themselves again. I’m reminded of Norm’s comment to Cliff on one of the Cheers TV episodes – “It’s a dog eat dog world out there; and, I feel like I’m wearing Milk Bone underwear.”
Now there are some who would say that these folks brought it upon themselves by also being greedy – for reaching for more house than they could really afford. Perhaps that’s true in many cases. I’ve actually seen quotes in local newspaper stories from distressed homeowners who are in foreclosure where they state just that. That’s a pretty mature thing to admit; but, it’s likely the first step to dealing with it and getting on with life. You’ve got to learn from mistakes, not let them just depress you (see my post in mid-August on Learning from Mistakes). In some cases folks who did have the wherewithal to buy that bigger house got laid off afterwards, so the “reached for too much” argument doesn’t apply to them. They just got unlucky, through no fault of their own. Our state economy has been like quicksand for a few years now.

So, back to our theme of the day. What was behind this sub-prime lending curtain turned out to as big a disappointment as in the Wizard of Oz. Instead of some nice, bumbling old man in a wizards outfit, we had a bunch of sleazy operators out to make a quick buck – not all, mind you, but a bunch all the same. I found it interesting that some of the same CEO’s that were involved with the S&L loan scandals of the 80’s (sometimes called the largest theft in the history of the world) were also running some these sub-prime loan companies this time around. Apparently, they all served what little time they were given or paid whatever the fines were for their S&L fiasco; and, then, turned around and got right back in the home loan business, many in the sub-prime space. There ought to be a national registry for loan scammers like there are state registries for sex offenders, so that we could keep these guys away from our money. Once a thief, always a thief, I guess.

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