[kj] Corporations and banking houses

[B. Oliver Sheppard]

Brendan,

In the U.S. right now there's a big fiasco about subprime home mortgages 
from vicious mortgage bankers; there's a record amount of foreclosures 
and folks losing their homes. I rent, so I'm not being affected by the 
foreclosure fiasco (yet) though it could drive previous homeowners into 
the rental market, bumping up rents, which would affect me.

On another note, hopefully Jaz has not fallen into the paranoid "New 
World Order" conspiracy stuff, the folks who used to say "Jewish 
bankers" (The Rothschilds, etc.) but now use the more P.C. "banking 
houses," though still secretly they mean Jews -- on John Birch Society 
type stuff ("Get out of the UN because it's run by Jews, and they 
control the Fed Reserve," etc.) . Jaz doesn't seem like the sort to go 
for that shady post-Nazi stuff. Having said that, yeah, I'm not fond of 
corporate fat cats, bankers or not, myself.

-Oliver

============


Foreclosures Force Suburbs To Fight Blight
NYT

SHAKER HEIGHTS, Ohio — In a sign of the spreading economic fallout of 
mortgage foreclosures, several suburbs of Cleveland, one of the nation's 
hardest-hit cities, are spending millions of dollars to maintain vacant 
houses as they try to contain blight and real-estate panic.

In suburbs like this one, officials are installing alarms, fixing broken 
windows and mowing lawns at the vacant houses in hopes of preventing a 
snowball effect, in which surrounding property values suffer and worried 
neighbors move away. The officials are also working with financially 
troubled homeowners to renegotiate debts or, when eviction is 
unavoidable, to find apartments.

"It's a tragedy and it's just beginning," Mayor Judith H. Rawson of 
Shaker Heights, a mostly affluent suburb, said of the evictions and 
vacancies, a problem fueled by a rapid increase in high-interest, 
subprime loans.

"All those shaky loans are out there, and the foreclosures are coming," 
Ms. Rawson said. "Managing the damage to our communities will take years."

[...]

http://www.nytimes.com/2007/03/23/us/23vacant.html



[And an explanation from the Washington Post:--]



The Washington Post
'No Money Down' Falls Flat

By Steven Pearlstein
Wednesday, March 14, 2007; D01

Today's pop quiz involves some potentially exciting new products that
mortgage bankers have come up with to make homeownership a reality for
cash-strapped first-time buyers.

Here goes: Which of these products do you think makes sense?

(a) The "balloon mortgage," in which the borrower pays only interest
for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state
his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the
agreed-upon interest and principal payment, simply by adding to the
outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second
mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on
an artificially low initial interest rate, even though he or she
doesn't have sufficient income to make the monthly payments when the
interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than
50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a
job as a mortgage banker, but you may also have a future as a Wall
Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced
these "innovations," but it has also begun to combine various features
into a single loan and offer it to high-risk borrowers. One cheeky
lender went so far as to advertise what it dubbed its "NINJA" loan --
NINJA standing for "No Income, No Job and No Assets."

In fact, these innovative products are now so commonplace, they have
been the driving force in the boom in the housing industry at least
since 2005. They are a big reason why homeownership has increased from
65 percent of households to a record 69 percent. They help explain why
outstanding mortgage debt has increased by $9.5 trillion in the past
four years. And they are, unquestionably, a big factor behind the
incredible run-up in home prices.

Now they are also a major reason the subprime mortgage market is
melting down, why 1.5 million Americans may lose their homes to
foreclosure and why hundreds of thousands of homes could be dumped on
an already glutted market. They also represent a huge cloud hanging
over Wall Street investment houses, which packaged and sold these
mortgages to investors around the world.

How did we get to this point?

It began years ago when Lewis Ranieri, an investment banker at the old
Salomon Brothers, dreamed up the idea of buying mortgages from bank
lenders, bundling them and issuing bonds with the bundles as
collateral. The monthly payments from homeowners were used to pay
interest on the bonds, and principal was repaid once all the mortgages
had been paid down or refinanced.

Thanks to Ranieri and his successors, almost anyone can originate a
mortgage loan -- not just banks and big mortgage lenders, but any
mortgage broker with a Web site and a phone. Some banks still keep the
mortgages they write. But most other originators sell them to
investment banks that package and "securitize" them. And because the
originators make their money from fees and from selling the loans,
they don't have much at risk if borrowers can't keep up with their
payments.

And therein lies the problem: an incentive structure that encourages
originators to write risky loans, collect the big fees and let someone
else suffer the consequences.

This "moral hazard," as economists call it, has been magnified by
another innovation in the capital markets. Instead of packaging entire
mortgages, Wall Street came up with the idea of dividing them into
"tranches." The safest tranche, which offers investors a relatively
low interest rate, will be the first to be paid off if too many
borrowers default and their houses are sold at foreclosure auction.
The owners of the riskiest tranche, in contrast, will be the last to
be paid, and thus have the biggest risk if too many houses are
auctioned for less than the value of their loans. In return for this
risk, their bonds offer the highest yield.

It was this ability to chop packages of mortgages into different risk
tranches that really enabled the mortgage industry to rush headlong
into all those new products and new markets -- in particular, the
subprime market for borrowers with sketchy credit histories. Selling
the safe tranches was easy, while the riskiest tranches appealed to
the booming hedge-fund industry and other investors like pension funds
desperate for anything offering a higher yield. So eager were global
investors for these securities that when the housing market began to
slow, they practically invited the mortgage bankers to keep generating
new loans even if it meant they were riskier. The mortgage bankers
were only too happy to oblige.

By the spring of 2005, the deterioration of lending standards was
pretty clear. They were the subject of numerous eye-popping articles
in The Post by my colleague Kirstin Downey. Regulators began to warn
publicly of the problem, among them Fed Chairman Alan Greenspan.
Several members of Congress called for a clampdown. Mortgage insurers
and numerous independent analysts warned of a gathering crisis.

But it wasn't until December 2005 that the four bank regulatory
agencies were able to hash out their differences and offer for public
comment some "guidance" for what they politely called "nontraditional
mortgages." Months ensued as the mortgage bankers fought the proposed
rules with all the usual bogus arguments, accusing the agencies of
"regulatory overreach," "stifling innovation" and substituting the
judgment of bureaucrats for the collective wisdom of thousands of
experienced lenders and millions of sophisticated investors. And they
warned that any tightening of standards would trigger a credit crunch
and burst the housing bubble that their loosey-goosey lending had
helped spawn.

The industry campaign didn't sway the regulators, but it did delay
final implementation of the guidance until September 2006, both by
federal and many state regulators. And even now, with the market for
subprime mortgages collapsing around them, the mortgage bankers and
their highly paid enablers on Wall Street continue to deny there is a
serious problem, or that they have any responsibility for it. In
substance and tone, they sound almost exactly like the accounting
firms and investment banks back when Enron and WorldCom were crashing
around them.

What we have here is a failure of common sense. With occasional
exceptions, bankers shouldn't make -- or be allowed to make --
mortgage loans that require no money down and no documentation of
income to people who won't be able to afford the monthly payments if
interest rates rise, house prices fall or the roof springs a leak.
It's not a whole lot more complicated than that.