Countrywide: 'Exhibit A' for lax lending

Saturday night/Sunday morning reading: The New York Times' Gretchen Morgenson writes a hard-hitting profile of Countrywide Financial, and it's not pretty. "Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers."  Morgenson writes that Countrywide pushes borrowers into higher interest rate loans, nickels-and-dimes them with unusually high fees ($100 to e-mail documents), and is "Exhibit A" for lax lending. Tough stuff; it won't win Countrywide any friends in Washington.

The N.Y. Times also reports, "The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950."

The Great Loan Blog has a short, sobering post worth reading:
"The loose financing is gone. Stated loans are on life support. ... The market for ALT A and subprime mortgages is DEAD. ... It's time to save and be prudent. Back to reality. The punch bowl of easy money is gone. Parties over it's time to sober up."

Our take: We agree -- two major changes have occurred in the market in the past six weeks or so. Easy money dried up; and the drumbeat of negative housing news reached the point where even the most clueless buyer can no longer buy a house in L.A. with the expectation that its value will rise quickly and significantly.  These are body blows to a market that was already weakening.

Comments? Thoughts? Insights?
Photo Credit: Reuters

Comments

[sunsetbeachguy]

The tan man is going to be in serious trouble, no 1099's, no fiduciary responsibility and $400M of sold options.

If you were a federal prosecutor, your dreams are of a case like this one.

Berner Ebbers & Ken Lay will have a new cell mate.

[investorguy]

It's interesting... I'm still getting 3-4 faxes a day from Alt-A and sub-prime lenders.The rates are up, but the terms aren't tighter. There seem to be more private investors getting into that part of the business, rather than institutions.

It might be interesting, Peter, to talk to some of the big hard money guys -- like Brookview Financial . They drive and dictate a lot of the investor activity in the market, which will be significant in the recovery.

[BetterVillage]

The lighter side of Angelo (and a couple of darker sides as well):

http://images.google.com/images?hl=en&q=angelo+mozilo&gbv=2

It's like he's trying to outdo Kramer in the Seinfeld "basting" episode.

Can you imagine how thick that skin must be?

[pugtv]

CHA-CHING!!! Where do I sign up for a class action suit? Someone get in there to prevent Countrywide from shredding the evidence (a la Enron).

Looks like I'm going to have to short my BofA stocks too.

[Cal]

I always thought Mozilos comments regarding "growing into the downturn" were absolutely insane (because of how they were structured), I was a bit relieved to see CFC hit with the same turmoil as everyone else because that meant the market made sense. I really hate it when things dont make sense.

There businesses who can grow into downturns, they are the ones that take the long slow road and dont grab for the quick buck. Someone like BofA can grow into this downturn, they portfolio their loans, have a large deposit/customer base to access and arent overly exposed to the dangerous part of the market. I think they will absorb CFC servicing portfolio, they cant take the bank portion of CFC, and IMHO the vaunted CFC "origination platform" is overrated and BofAs internal loan origination platform will be all they need to grow. There isnt nearly as much value in CFC as I think some of the shareholders think there is.

For the pricing article, Global Insight said this: "In California, prices are expected to decline 16 percent — or about 20 percent after taking inflation into account." by 2009 in their prediction.

[John T Watts]

It is interesting that the New York Times article tries to predict the future with regard to the price of homes. But how much of the value of a property is based simply on the whims of the market place? As long as home buyers thought the price of homes would keep going up people continued to invest in homes. When it seemed like they were no longer going up, they stopped. How many buyers are simply waiting in the wings for a bottom? All the while, the population of the country keeps going up and people continue to want to live indoors. What does that tell us?

[William E. Jones]

The lending business has a huge conflict of interest at its core. In theory, the lender is hired by the borrower to obtain a loan for him or her. This means that the lender has a fiduciary responsibility to get the best deal possible. In reality, the lender here is getting the best deal possible for the lender, not necessarily the borrower. Given the complexities of the mortgage business, especially for a first time home buyer, a borrower cannot be expected to know the business better than a lender, which he has to be in order to be sure he is getting the best deal possible. What a mess.

[Randy Adams]

William E. Jones, perhaps you meant to say "the mortgage broker has a fiduciary responsibility to get the best deal possible." The lender has no such duty. The lender is the seller of a product. The borrower is the buyer. The buyer must beware as in any purchase. It is no different than buying a car. You must educate yourself on the product or accept whatever fate you walk into if you fail to do so before making your choice.

I'm not sure what Mr. Watts is saying. Yes, the population keeps going up. But it doesn't go up THAT fast and there's plenty of new construction out there to be rented, as discussed in another thread. A corrective downturn in the property values in the entire California region is inevitable.

[MyLessThanPrimeBeef]

THere is a German movie called 'Die fetten Jahre sind vorbei.'

Loosely, I think it translates into 'The fat years are over.'

TIme to re-arrange the furntiure.

[Jude Foreman]

Randy Adams, the mortgage broker/loan originator is inheriting a fiduciary responsibility via many state regulatory laws, such in MN, OH, CO and recently IL. The problem with the law is that not every mortgage broker/loan originator is signed up with EVERY lender/investor. Even then, if they were then some lender/investor has to be "the best" and by law would get every loan in the US. It's a touchy subject. But, the funny thing is that these laws do not cover federally and state chartered banks- so they would NOT have to abide to the fiduciary responsibilities of placing customers in the best possible mortgage. Ironic, since its the very banks who dictate the brokers are the problem but they do not have to follow what's said.

[Kevin]

Randy you are right. Unlike a real estate agent who is a fiduciary to their client a loan broker is not. But William your email is right in suggesting that a loan broker have a fiduciary obligation to the borrower. This is a fundmamental change that has to occur if the system is to be improved.

When an agent is also the lender is a perfect storm for the consumer being misrepresented. Do you think most folks who represent clients on both sides and double dip can accurately manage the roles of being a fiduciary in real estate and while not being one the loan side. Hey consumers don't fall for the perceived benefit of a "one stop shop" when managing this process. Separate your lender from your agent and make sure you interview them and see to it that they pass the "smell" or "gut feel" test.

[AnnS]

"It is interesting that the New York Times article tries to predict the future with regard to the price of homes. But how much of the value of a property is based simply on the whims of the market place? As long as home buyers thought the price of homes would keep going up people continued to invest in homes. Posted by: John T Watts"

John - you leave off a HUGE factor and that is that homebuyers virtually never have the price of a house in their piggybank so they have to borrow. The 2 factors on value are:

(1) value is based upon the whims of the buyers - check. Fudamental marketing and appealing to buyers
(2) how do buyers pay for it - omitted.
(a) if cheap money, no downpayment and easy terms - more people can buy at higher prices
(b) if borrowing is more expensive (7% fixed not that 2% teaser ARM), downpayment is required (10 -20%, not 0) and hiher credit score & documentation is required versus just breathing - fewer buyers can buy and far fewer can buy at the higher prices.

Now if the NYT has said "housing prices are going to go up, up, up .Buy real estate now and get rich. Easy to refi because prices are going up", you would have believed that wouldn't you?

BTW - there are fewer people per dwelling in the US than as compared to even 30-40 years ago plus the median size of houses (2300 sq feet) is a LOT bigger than the median sized house 50-60 years ago (900 - 1000 sq feet.) Lots of room for your "increasing population" when the house has 4-5 bedrooms and more bathrooms than people.

There are 124, 521,886 housing units (apartments, condos, houses, anywhere people can live) in the US. 13,431,269 are VACANT. That is 10%. Rented are 36,771,635 or 33.1%. Owner-occupied are 111,090,617 or 66.9%.

13,431,269 vacant dwellings. At 2.6 people per household (median size), that would handle another 36,130,113 people in excess of current population.

Not exactly a housing shortage.

Since the US population was 120,000,000 in 1929 and is now 302,000,000, it took 78 tears to gain 182,000,000 or 2,333,333 a year.

At that rate, it will take 15 1/2 years to use up the currently available and unoccupied housing.

[ben]

People want to live indoors, but there is a little problem of affordability. Many people want to live in Beverly Hills, but can they afford it? How many people can afford those $500,000 crackshacks in Compton or Bakersfield? It was all done with smoke and mirrors financing and now that the world has been burned, they are no longer buying the toxic CDO's. Without investors to buy the debt, where will the financing for those overpriced homes come from? I guess they'll just have to rent for less than 30% the cost of borrowing from the bank.

That is what the real estate bulls don't understand. Basic math and finance .

[ben]

Yes the population goes up, but did it double or triple in California between 1998 and 2006? Did wages double or triple? Ever hear of the dotcom bubble?

[webcosmo.com]

These guys actually created this problem. Government, real estate, banks everybody knew its coming. But nobody did anything. Its so sad consumers is always the looser.

[happyrenterorange county]

I have enjoyed every bit of madness. We became convientently ignorant of the facts and reality. Banks and investors equally participated knowningly or not but they do own the responsiblity for fine prints. Can we go back and ask ourselves what was the reason you gave money to mr x, with no ability to pay for it, who is going to ask questions,????????
I am sure without madness and prices of 2000 adjusted to inflation, most of us can afford to live in the dream homes we live in now.
Just for broad a overview, in economy we need to spend money into dinning, buying clothes, cigarattes, and beer, so that we have money in circulation and not tied up in some dead account for sure in some bank or stock owned by few people?? hedge fund.
We need money in circulation, flow with regular credit and spending flow. I am dead right........

[John K]

As a reader from the Denver area I'm assuming the median price of a home will decrease by another 5% or more during the next year or two in the LA area. Most metrics would suggest a greater decline but so many of my friends and colleagues in LA think it is the best place to live, paying a huge premium relative to median income. Chris Thornberg, formerly an economist with UCLA, now with Beacon Economics has been a real estate bear for a few years. However, even he, if I recall his presentation correctly is not predicting a big decline. He just thinks you want see any appreciation for another 7 years or more. What suprises me is the differential between what a 2,000 s.f. (for example) rental home will cost you monthly versus the monthly mortgage payment on 2,000 square foot owner-occupied home. Southern California has been very unique in that folks are willing to pay 1.75X to 2X more a month for the same living area as long as they have their name on their property mortgage. (The ratio is places like Denver, Atlanta and Houston are closer to 1:1, with a slight premium going to the ownership portion of the equation.) Of couse in the past it has been b/c of the realistic expectation that price appreciation will fatten your wallet. Since those days are over, at least for a few years, I predict there will be more of an equilibrium between montly rental prices and mortgage payments. Normally that would be achieved through a combination of higher rental rates/payments and lower mortgage payments. Since mortgage rates aren't going down it must be the principal portion of the equation, not the "n" or the "i" part of the equation. I really enjoy reading a lot of the postings on this site, the Southern Calif market has always mystified me a bit. I have thought about moving back to California but at this point I would rather have the easier lifestyle in Colorado. If prices fall a lot in Southern Calif I might move back, but it would have to be a bigger decline than what I am predicting. A very well reqarded economist, A. Gary Schilling, was quoted on Bloomberg.com the other day saying we should buy long-dated treasuries, predicting rates with a 3 "handle" on the 30-year T. He thinks we are heading to a deep recession, which I doubt, but don't completely dismiss.

[Pat]

Except that population growth is exponential in nature and there are a lot of poor people who are overcrowded/homeless who could use those empty units right now.

[Spencer McMullen]

Well in California, mortgage brokers are licensed by the Department of real Estate and are fiduciaries of the borrowers. The main culprits seem to be the banks and lenders operating under a finance license as they are not licensed individually. Funny how they point the finger at brokers. Not all brokers are perfect but there is a licensing system in place and they can be disciplined. Who is there to punish the bad apples who work for banks and mortgage bankers under a CFL license??? Nobody.

We had a rising market where people could lie to buy a home they couldn't afford. now those who should never have bought are losing out. In the process the banks are tightening as they cannot sell many of the loans that were easy to sell 6 months ago. This is causing harm to people who should be able to buy. It will be a bloodbath but don't ask your realtor.

The NAR economists are a joke and the simple fact is that expectation of large gains and easy financing fueled the boom in real estate. Now prices are dropping, in many area homes are 10% less than last year and still sitting. The best time to buy is the bottom of the market. In this instance it is easy to see when that will be, when the availability of financing gets easier, and not just for the Fully documented, 20% down 750 FICO score borrower. Prices need to come down, the rise was due to fraud and greed. Its time for many people to get real jobs, not just flip real estate or trade stocks.

[Cal]

John K:"Chris Thornberg, formerly an economist with UCLA, now with Beacon Economics has been a real estate bear for a few years. However, even he, if I recall his presentation correctly is not predicting a big decline. He just thinks you want see any appreciation for another 7 years or more."

From his presentation on 08/15/07:

p.22

http://www.beaconecon.com/products/Presentations/fidnhbo07.pdf

"Prices will continue a slow decline for 07 and 08
– Speed depends on rest of economy
– Total downward adjustment: 10% to 20% locally"

[Govindan]

Who are the foreign investors? They are the ones who export goods and services to the U.S. When you export goods and services there are two elements - cost and profit. If investors invest profit in the U.S. economy it is should be welcome. However, if the investors invest reserve funds that may include cost of their exports (basically asking the labor to forego their enjoyment so that U.S. citizens can have a cheap home) it is economically and socially dangerous. Foreign investors have been investing in the U.S. housing and also the war in Iraq. This has kept the U.S. inflation low. During the same period all over the world there has been inflation. The Fed made a mistake of raising the interest rates in the last two years, primarily eyeing the foreign investor funds. The only way to correct the mistake is to reduce the interest rate by at least two full points and print more money. Inflation is always better than a recession.

[longdriver]

10%~20% declines is a fantasy in SoCal. How can prices increase 300% due to easy money, speculation and in many cases fraud and only see a 20% decline in the correction? My home tripled in "value" in a stretch of 4 years. You'de think I would be happy about that but I'm not. I would like to move up and the move up but places I like are now over a million. Hell, I doubt I could buy my current home at it's absurd "value". Home prices will correct back to the traditional cost/income curve. It might take a year, it might take 10 years but it will happen. Personally I'd like to see a quick return to normal prices. I think a long protracted slide will be far worse for the overall economy.

[pete]

Folks don't buy till there is a 40-50% reduction in median prices across the board.

[J.White]

I sold in 2005 at the top of the market ( bought at $500K, sold at 1.1M). I am sitting on the sideline and waiting for the prices to go down 20-30% to get back in. The people who bought the property from me bought it with 100% financing, so maybe I will buy it back at the price I paid for it in 2002? I am in no hurry.

[Sam]

The reality is one year from now nothing will change, sub prime loans will be back, new loan products more risky then before will be back and high risk deals will close. This is because of a core issue, no whores in chain such as RE Brokers, Loan Brokers, Mortage Companies, Title Companies, Gov't etc. get paid until the deal closes. These pack of whores will make sure it will be business as usual asap, watch.

[flaaash]

Govindan,

Are you out of your mind? Lower interest rates? That will only devalue the dollar even more and facilitate growing debt of the average American. The lax days of borrowing at cheap interest rate and spending like no tomorrow are gone. Raising interest rate will achieve three things, 1) control inflation, 2) increase foreign investment into our treasury bonds, keeping the dollar relatively strong, 3) keep frivilous spenders from falling further into debt.

[Cal]

So Sam, who will be buying up the subprime loans and the even riskier loans you propose are on the way? With the mortgage market being headline news on Bloomberg and CNBC every day, with gov't regulation stepping in, with big gov't banks with exposure and some even blowing up, and with interest rates rising.

Are rich aliens going to land and decide that the mortgage market is the new hot place to put their money? The game only works if you find a sucker to hold onto the bag, we seem to be running short of those.

[Phil Apino]

In 1991 home prices declined.
In 1992 home prices declined.
In 1993 home prices declined.
In 1994 home prices declined.
In 1995 home prices declined.
In 1996 home prices declined.

It happens.