Edmund L. Andrews writes that nobody duped him. He duped himself. He had covered all sorts of financial meltdowns as an economics reporter for the New York Times, but when he bought a home in 2004, he thought he could beat the odds. “Everybody had a reason for getting in trouble. The brokers and deal makers were scoring huge commissions. The condo flippers were aiming for quick profits. The ordinary home buyers wanted to own their first home…”
Over the past two years, the United States housing market and related markets have lost $12 trillion in value. One out of eleven home mortgages are delinquent. One out of six homes are under water, meaning that owners owe more on them than they are worth.
In 2009, expect three million American home owners to lose their homes to foreclosure.
Andrews writes that as he began to drown in debt, he learned ways to borrow even more money and boost his credit rating at the same time.
Edmund is proud that he’s outlasted two of his three lenders.
He writes that free markets can become corrupt and self-destructive. Tom Sowell points out in his book the mortgage meltdown that the meltdown was caused overwhelmingly by bad government policy, not by the corrupt of capitalism.
How did it become the received wisdom that this mortgage meltdown was the fault of capitalism?
Edmund says he was able to get a mortgage on his dream home without having to document his income and ability to repay the loan. He calls this “faith-based lending.”
Edmund emphasizes that his loans were all legal. Shouldn’t the government have regulated more to prevent people such as himself from doing stupid things?
He told his story to Alan Greenspan, who spent the first two hours of the interview explaining that he had done nothing wrong as chairman of the Federal Reserve.
In exchange for not verifying Edmund’s income, American Home Mortgage upped his interest rate by one-quarter of one percent. That added about $1,000 a year to his mortgage payments.
Then Edmund could not get that loan. He had to settle instead for a loan without stating any income. I was a “no-ratio” mortgage. American Home Mortgage would only verify his assets, not his income. They would not care about his debt-to-income ratio.
In 2007, American Home Mortgage went broke.
In 2004, Merill Lynch’s chief North American economist David Rosenberg reported that housing prices were far beyond fundamental values. Home prices were going up faster than American’s ability to pay for them, so Americans were taking on more debt. They were about tapped out. The housing boom was not sustainable.
In 2004, Southern California had the fastest rising housing prices. It was also the home of innovative home financing. Many of America’s biggest subprime lenders were born in Orange County — New Century Financial, Ditech Funding, Ameriquest, Option One, Long Beach Mortgage. They charged high fees and high interest rates to borrowers with low incomes and low credit scores. Ditech and First Franklin developed some of the first no-money-down mortgages.
Southern California’s economy tends to swing between boom and bust. Home prices are among the highest in the country. Southern California has long been home to numerous entrepreneurs and entertainment industries. Their economic fortunes varied wildly from year to year. Lenders were willing to gamble.
Due to land use regulations, Southern California has a severe shortage of land. The population is booming. This leads to rising prices.
Paul Reddam, founder of Ditech Funding, said that the mortgage industry was based on three legs — the person’s ability to pay, the person’s willingness to pay, and the person’s collateral at stake. The mortgage industry gradually realized you could still do a very nice business without one or two or all three of those legs.
Edmunds bought his home at the peak of the market and an interest-only loan.
Here’s the essence of the subprime gospel: No borrower is inherently too risky for a loan, riskier borrowers are lucrative, and you can pass off the risk to someone else.
Alan Greenspan believed that real estate was a local business and there was little chance of a nationwide recession in housing prices.
Greenspan didn’t care much for economic models. He was interested more in anomalies, facts that challenged models, facts that you did not expect.
In the mid 1990s, Greenspan became convinced that American workers’ productivity was rising faster than the stats showed, thus allowing him to keep interest rates low and allowing for more growth without much inflation. He was right.
The dot com crash led to $6 trillion in losses, but the American economy kept on steaming. The real estate crash of 2007-2009 caused $12 trillion in losses and the economy tanked and the world went into recession.
Edmund refinanced his home in 2006 to repay all his credit card debts. His lender? Fremont, which specialized in “scary loans to scary customers, and it charged steep fees and interest rates.” It did not deal with customers. It bought loans from mortgage brokers.
The president of Fremont told Edmund that his goofy gardener told him that he was buying loans in Phoenix with 100% loan-to-value loans.
Almost every player in the mortgage boom tried to pass on the risk to somebody else.