patrick.net

Or zombie home equity, zombie homes, zombie HELOC, zombie realtors, etc.

Palo
1. These loans are sold to institutions, not individuals. They are not traded in the same sense that ford bonds are traded. You CAN’T buy one. 2. Nobody is going to jail. The liability is limited to $

From the way it is described, the law is still trying to expand the liability from the shady broker to the actual fund that had nothing to do with anything except took over the holding of the actual notes. That is what people find unacceptable, and they are just using examples of stock investors to illustrate what a bad idea it is. The argument that it is just $s not actually jail time is bad. That's like me robbing you and saying, hey, I'm not going to kill you, I'm just taking your car.

PaloAltoRenter (PAR) (who should spend some time on the Pimco web site learning about bonds) Says:

> 1. These loans are sold to institutions, not individuals.

Many “individuals” own mortgage backed securities (just like they own Ford bonds).

> You CAN’T buy one.

Have you ever tried?

> I give up on this topic. It’s clearly way over people’s heads.

I’m not joking about the Pinco web site (that is still down for some strange reason) there is a lot of great information and you (and others) will learn a lot about bonds.

PAR,

It IS frustrating. Endlessly frustrating, and complicated. I happen to think there was a pretty good exchange of ideas and I actually learned a lot. We're in uncharted waters here so I don't believe the Enron analogies are necessarily applicable.

Since I'm in retail, I tend to look at things from a retail perspective but forcing the issue by pushing the blame to the end user (in my mind) only serves to cloud the issue. If we assume that (as always) it's the evil-doers on Wall Street that are solely to blame, that works for most people.

But please consider this, they would have needed willing accomplices. Any firm worth it's salt isn't just going to turn over it's book of clients to a "pedophile". Many of the now laughable former firms listed on the Mortgage-Implodo-Meter once had a loyal client base that trusted them! For a price, they willing allowed themselves (and by proxy) their clients to be exploited. Had there been any semblance of responsibility on the part of the MB's much or possibly none of this would have happened.

TOS
May I just say that it is very important to remember that many REVOLUTIONARY ideas that looked SENSIBLE ON PAPER resulted in great carnage (Communism, Fascism, the cultural revolution…)

The Stevenson-Wydler Technology Innovation Act of 1980 expanded the authority of the Department of Commerce to promote a policy of supporting technology transfer and the use of government scientific and technology resources (Stiglitx & Wallsten, 1999).
The Small Business Innovation Development Act of 1982 (SBIR) required government agencies in charge of R&D to set aside a percentage for grants (Stiglitx & Wallsten, 1999).
The National Cooperative Research Act of 1984 loosened antitrust research on private collaborations (Stiglitx & Wallsten, 1999).
The 1986 Technology Transfer Act made it easier for government researchers to work with entrepreneurs. This law allowed government agencies to enter into R&D agreements with the private sector (Lyons-Johnson, 1998).
An executive order in 1996 by President Clinton encouraged the development and use of technology through the transfer to the private sector, which he believed was best at developing new technologies and bringing them to market (Stiglitx & Wallsten, 1999).

Eburd
One of my friends went to NM for a week for business. When he came back, he rambled on about cheap food and groceries were there. As if he had just gotten back from Vietnam or Thailand. ( I've never been to those places but NM seems just as different to me.-Malcolm)
I guess as a California lifer, it would never occur to him that maybe it’s that things are -expensive- here.

True but you don't think about it till you go somewhere else. The UFO museum in Roswell is probably the tourism hub for the N.E. side of the state. When you show up the admission is $5. There were maybe 20 other people there, and I was wondering, how in the world is this place here. I've stayed at a couple of nice motels with indoor pools and hot tubs for $50. I've had more fun on this trip than say going to SF just because you don't feel like you have to padlock your wallet here. Everything just seems fair and reasonable. We heard a Crimestoppers bulletin offering a $1,000 reward for the arrest of a guy who broke into a car and stole a stereo and cds. The total value of the property was $785.

Eburd
One of my friends went to NM for a week for business. When he came back, he rambled on about cheap food and groceries were there. As if he had just gotten back from Vietnam or Thailand. ( I've never been to those places but NM seems just as different to me.-Malcolm)
I guess as a California lifer, it would never occur to him that maybe it’s that things are -expensive- here.

True but you don't think about it till you go somewhere else. The UFO museum in Roswell is probably the tourism hub for the N.E. side of the state. When you show up the admission is $5. There were maybe 20 other people there, and I was wondering, how in the world is this place here. I've stayed at a couple of nice motels with indoor pools and hot tubs for $50. I've had more fun on this trip than say going to SF just because you don't feel like you have to padlock your wallet here. Everything just seems fair and reasonable. We heard a Crimestoppers bulletin offering a $1,000 reward for the arrest of a guy who broke into a car and stole a stereo and cds. The total value of the property was $785.

My brother bought a car with an unknown history. It was a pretty shady deal. When he registered the car he had to buy a bond that would be paid if someone else challenged his ownership. Off topic but I think it is an interesting short story.

Sorry Trader, I misread what you were saying. So to draw a parallel, you are saying, obviously to make the point, that if shareholders aren't liable, then a buyer of a stolen car gets to keep it. I get it.

The difference is that the buyer is an individual making the deal. (conducting the operation.)
A shareholder/bond holder by law and the design of the system is seperate and protected from the liabilities of the conduct of the corporation or the fund. You can argue the fairness, but we wouldn't have a market if it were different. Sometimes by design you have to set up established ground rules, and again, the actua perpetretor of the illegal activity, the MB is the one subject/accountable to the truth in lending law.

Alright then, let's just dismantle the entire system of corporation/limited liability, and commodities markets because a large number of truly stupid speculators made a bad purchase decision.
How come no one proposed the law when prices were going up?

It wouldn't be so bad but for the fact that the arguments aren't for helping the FB's they are just aimed at punishing someone who is rich.

Malcom,

What's frustrating for me is people seem to have quickly forgotten just how "yield starved" investors were. At one point (when I was still at FleetBoston) our money market yield was .58%. Uh huh. .58%.

Muni's were yielding as low as 1.98% (tax free of course) so a lot of older investors on fixed income were forced to either submit to MBS or go back to work? This is a generation that were around when AAA meant AAA. Even at that, the yields weren't all THAT f@cking great.

I just find it difficult if not impossible to believe that anyone here would suggest that these people be "held accountable" for their reckless lending? Sheesh.

FAB, no disrespect, but I know what a bond is. MBS typically sell in the lowest denominated chunk of about $25k. Read any prospectus on any non-fannie MBS and you'll see that it's way, way over the head of a retail investor. It's not the same as buying a bond for Ford, which is an extremely liquid product that gets marked-to-market by the minute. The market for MBS is extremely illiquid and do not get marked-to-market often. They frequently sit on a balance sheet and maintain their value in spite of rising delinquencies, relying instead on the rating agencies to retroactively downgrade. Ford, by comparison, is analyzed by the minute by hundreds of equity/debt research analysts.

So when someone says an MBS and a Ford bond are comparable, you'll forgive me if I don't run over to the Pimco site (despite the respect I have for Bill Gross) to figure out what a bond is... :)

Someone else already mentioned it, but it's worth your time to check out the CR post (Tanta's) on this topic:

http://calculatedrisk.blogspot.com/2007/04/bagholder-bondholder-liability-cant.html

DINO, you are factually correct. But I say, the irresponsible lending is punished by the loans going into default. The right investors who made the bad loans get punished, it shouldn't be the secondary markets. A lot of these loans went through Fannie and Freddie. Now you are liable for dealing with the government. I mean how much more cautious could a fund be than to deal with government agencies/sponsored companies?

PAR (and others),

I'm jumping into the debate a bit late, but as I see it, Frank's solution may indeed deter bondholders from freely funding subprimes (via deterrence), but it seems to be a convoluted solution to a convoluted problem. Frank himself says:

"Lenders this decade have increasingly relied on mortgage- backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted."

Wouldn't the simple, common sense solution be to change the system that allows dilution of risk? Why was this a good thing in the first place (other than making money off of subprimes)? What's lost here is that the basic investment principle that the potential for higher returns should come at the cost of higher risk on the downside. The entire system of MBS counteracts this principle. So ironically similar to the FBs motivations, average investors or even average fund managers over the past few years jumped at the chance of getting a high return at minimal risk.

Should these investors be liable for compensating the end user (FB)? Probably not, I'd say. This thing smells to me like a convenient excuse for someone in Congress wed to trial lawyer lobbying money to find another tort for trial lawyers to bank money from.

Gep
Okay, we’re not idiots although most of us are not geniuses either, so I hope you don’t think of me as either. I was not talking about state of today’s market, I was laying out the players in the real estate game and their involvement in the process. In that context, none of what I said is out-dated. It still holds true that the home buyer is responsible for paying off the home (whether they get a 1—yr I/O or a 30-yr fixed is irrelevant, they are just adjusting the WAY they are paying it off), and the involvement by each player does not change. My post merely points out who is involved, and what risks each take on. It has nothing to do with what the state of today’s market is like.

This point sums it up the best IMO. The can of worms in this whole thing boils down to people buying something the can't afford and then looking for someone to blame. The new American way. No matter what loan product they are given the point is that they can't afford the asset, and like he beautifully states it, the game of flipping mortgages to keep that asset is irrelevant. It is just a way to finance it. If you buy into a ponzi (and that is what this was because in order to keep it going you have to keep infusing more and more loans through refing with each one getting more and more expensive) then don't go looking for someone to blame. Certainly not the guy all the way at the end of the chain who ended up with the junk note.

What cracks me up is that a lot of these bad loans revert back to the originator anyway so we're still going to hold the bond market accountable?

Aha! I just figured it out, it's not the lawyers for the FBs. They're too small, it is the lawyers for New Century and those big players that must be behind this. God, all you have to do is follow the money trail. They are the ones losing big by having to take back the loans, and they now need someone to share the cost never mind the fact that the purchase contracts are crystal clear.

"Bachus said he favors legislation similar to a law enacted in New Jersey in 2003 enabling homeowners whose loans are the result of predatory lending to gain compensation from lenders and investors who purchased the mortgages. The indemnity includes attorneys' fees, the borrower's total loan payments and the cost of terminating the borrower's remaining liability. . . ."

You guys can kiss your chances of home ownership goodbye unless you really can come up with 20% down. Holy Christ!

"while being allowed to shove the risk back down the chain to the originator in the event that someone sues for deceptive or predatory lending practices"

Bingo there it is, just like I thought. The big boys couldn't live with their own terms. Now you know where this is coming from, the corporate interests of New Century, and Accredited Home Lenders. I never knew 6% return on bonds was considered fat and juicy.

"there is no way to stop predatory and deceptive lending by writing fancy disclosures for consumers or forcing back enough loans to bankrupt the originators. We’ve noticed that the loans just get originated elsewhere."

So if you get a line of credit, and you do something wrong with the credit line, the bank is responsible. OMG!

Great article, sounds like something Peron would have done in Argentina.

PaloAltoRenter (PAR) Says:

> FAB, no disrespect, but I know what a bond is.
> MBS typically sell in the lowest denominated
> chunk of about $25k. Read any prospectus on
> any non-fannie MBS and you’ll see that it’s way,
> way over the head of a retail investor.

Most retail buyers of bonds buy bond funds (even for $1K government bonds since not that many people use Treasury Direct).

P.S. Remember $25K is not as much as it used to be and it might be more than Joe six pack plans to invest at one time but is not out of line for a typical Bay Area retail investor to invest $25K at once…

If we let consumers fail, they will educate themselves better next time.

I believe in Intelligent Design, but Social Darwinism does have some truth to it. The evolutionary imperative demands that stupid consumers should go to University Ave in Bumsville, CA.

The thing that makes me MAD in all the articles I read, is the builders and realters and brokers who just don't get the simple fact that they have colluded whether they realize it or not. What did they achieve?

THE MIDDLE CLASS IS PRICED RIGHT OUT OF THE HOUSING MARKET.

I don't want a "free" swimming pool.
I don't want "free" closing costs.
I don't want granite countertops and a hot-tub.

What I want is a cheaper house that I can afford. They are rearranging the deck chairs on the Titanic with hearings and regulations to attempt to prop up an unrealistic market. This will not work. Until they start building and pricing houses to historical norms of price versus salary, I will not buy a house with a bunch of overpriced "extras" that are there not to offer me good value but just to jack up their profits.

"Remeber 25K is not as much as it used to be"

Fixed income investors (sr. citizens) were (in some cases) having large chunks of their portfolios converted to "agencies". 100's and 100's of thousands of dollars. Even if you "could" live on $1,500 a month (25k X 6%) you'd still need to fill the other 11 months of the year. So...300k to have an $18,000 a year "lifestyle".

The yield starved investors also drove many "Hi-Yield" bond funds up 25-30% in 2002.

"The yield starved investors also drove many “Hi-Yield” bond funds up 25-30% in 2002."

Which helps make a point. People can sit back and nitpick how something doesn't line up with their agenda but they won't even consider the other spillover benefits. If making all this money is so easy why are there so many pissed off people who are supposidly smarter than everyone else who didn't do it?

Peter P
"I believe in Intelligent Design, but Social Darwinism does have some truth to it. "

We do think alike.

Vicente, just wait a little longer, you are going to get a really cheap house with all of those things. Be patient. Just save up for a really big downpayment though.

25K is chump change to a real investor.

It's the same people criticizing the system for excess who want to take thier measly $500 and turn it into $10,000 and then whine because no such mecahnism exists, so someone with $1,000,000 making 6% seems like excess to them. Gotta punish 'em.

Vicente Said..
"I will not buy a house with a bunch of overpriced “extras” that are there not to offer me good value but just to jack up their profits."

Try telling that to bunch of women! As Jack once said..."How do I get into a mind of a women... I take a man, remove reason and accountability".
The little lady realtors will label you as an "uncommited buyer with issues".

Sadly the market over the recent years have been driven more by 'Emotions' than any kind of common sense. Marketing of homes has been peppered with feminine charm. Former 800sq crack house is now a "charming Bongalo" and all the rest of the nonsense.

Hello
Yes, but believe it or not I actually care about others. I'm cleaning up either way. It is frustrating to me to hear people limiting their own futures because they haven't seen the other side of things as yet.

For my purposes I would love nothing more than a huge crash, no available credit or horrific interest rates, and a bunch of very nice properties with pools and granite to pick from.

"I believe in Intelligent Design"

Wimps!

I wish I wanted to live in NM, you could buy the whole middle of the state. In parts I calculated 70% of the lots are for sale. With a few million dollars you could literally buy the middle of the state at 900/acre and that's without negotiating.

LOL space

Peter did you ever hear the joke about people like us who don't believe in organized religion?

It goes then we must believe in unorganized religion. We sometimes meet on Sunday, if no one shows we move it to Wednesday night sometime, we just start when people show up, and we pick the book for the following week.