Banker's lament: 'Nobody foresaw what would happen'

News item from today's L.A. Times: Small banks that backed homebuilders and developers are suffering the repercussions of bad loans: "... as foreclosures rise and home prices fall, many smaller banks and thrifts that backed residential developers and home builders are watching black ink turn red and are spending uncomfortable amounts of time with regulators. The financial institutions also are enduring jabs from critics who say they tossed lending standards out the window."

Here's the money quote: "PFF Chief Executive Kevin McCarthy said in an interview that his bank started pulling back on land loans two years ago, anticipating a downturn like "the normal economic cycles we've always had out here."

"But nobody foresaw what would happen to the housing market, or that sub-prime mortgages would collapse so completely," he said.

Sound familiar? Here's Countrywide Chairman Angelo Mozilo back in March: "The problem that we face today was unanticipated and is much more severe than any cycle in the past.... It bears noting that no one predicted the severity and force of the housing downturn that followed."

With all due respect to the money men, it bears repeating that many did predict an epic housing bust. Angelo and Kevin clearly were not listening, but this bust was predicted on blogs like housing panic and www.patrick.net and by bearish economists such as Christopher Thornberg. Biggest boom leads to biggest bust. Biggest bubble leads to biggest bubble popping. What goes up must come down. Etc.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[farinhite_451]

By nobody, I think he meant nobody that mattered.
Or at least it wasn't being discussed in the locker room of his country club.

It reminds me of that exchange in the movie "Titanic"

Crew member to Rich Lady: "Half the people on this boat are going to drown!"

Rich Lady, smugly: "Well, not the better half."

[E]

No "hat tip" to Housingpanic.com?

Patrick.net is fluff compared to Keiths hard hitting blog.

[Michael Snyder]

To paraphrase Lord Toranaga from "Shogun": "And in the end when they are cast out into the cold, or on their knees ready to slit their bellys they blame joss or the Gods but never themselves."

[Keith]

This should read "Nobody cared what would happen." I have access to the internet, and this disaster has been on my horizon for at least 1.5 years. These people who didn't see it coming were in the middle of everything. They saw it coming, they weighed the destruction of shareholder value and widespread foreclosures against the bloated paychecks they were receiving for their part in seriously damaging America's economy, and they decided that their paychecks were all that mattered. Many have been publicly shamed and fired, but they have kept all the money. Where is the punishment? There isn't any. This is the same pattern that anyone who pays attention sees over and over. Don't act surprised, and don't believe the shocked executives. This is now how America works.

[Uncle B Waits For Perot @ Mt. Pelerin]

Could this be an Eagle Scout worth listening to? Ross Perot seems to be showing us the mother of all bubbles here, in technicolor:

www.perotcharts.com

Note to self: Don't get old. Don't let children get old. The next 50 years will be "interesting."

[amir]

I agree with you Peter.

Warning bells were ringing all over. From famed economists to regular people to some smart cats on Wall Street who were betting against the market. This is not an unanticipated black swan.

The banks were making so much money short term in packaging these loans they forgot about the long term. It was convenient denial.

[adoptivefather]

Yeah and nobody saw the possibility that demand for oil would overwhelm the available supply either.

Here is actual dated email I sent after a meeting with my favorite real estate friend. Names changed to protect the innocent - otherwise in actual form sent.

Date: Wed, 16 Nov 2005 12:54:04 -0800 (PST)
From: adoptivefather
Subject: Prediction
To: My Real Estate Friend

OK ++++++. I have our bet (breakfast at winner's choice with loser buying)on my calendar. My side says real estate down 40% (or more) in five years. You need to give me the benchmark for today's local price that we can look up then.

GM is huge story developing that is symptom of the weakness in American economy (in my view). GM stock is back to its 1987 level and falling. 1987 was 3 years into beginning of current bull market. But S&P has stagnated at same level 1,225 for 24 months.

[Nelcisco]

No one predicted it Angelo Mozilo?

I did back in '04, but I was told "nahh, real estate always goes up and up and up and up". Donald Trump said so at his Learning Annex seminar, what the hell do you nelcisco, you're just a mortgage consulant who knows basic numbers, 60k a year household can afford $650k
neighborhood and sustain it.

Isn't loans a great business? $650k loan, option A.R.M., charge 1% in the front, 2% back in yield spread thats $19,500 to the broker 75% split if you're licenced is $14,625 commission on one loan file, 3 of those a month
what do you think, 22yr old with no education making
$43,875/mo. Get that blk on blk 5 series beemer ordered I'm com'in to get it

OH BUT WE DIDN'T KNOW THAT OUR RECKLESS GREED WOULD CATCH UP WITH US. Thats what Mozilo is really saying.

[yingyang]

Unrelated to this topic but what is a "Home Buyer Downpayment Gift Assistance Programs"? I never heard of this. Is this a good idea for a new home buyer without much cash? How has this program effected the current crisis? Will this be available in the future? Thanks

[Doug in Toronto]

There are none so blind as those who will not see.

[peteviles]

E writes, "No "hat tip" to Housingpanic.com?"

Thanks, E, I just added the link. Hey, your voice sounds familiar.... have I heard you commenting here under another name? Don't worry, I won't tell.

[sunsetbeachguy]

For the record, Housing Panic is more irritainment that information.

there are hundreds of housing bubble blogs to pick from, Housing Panic is near the bottom of the list.

[Warren Ying Bells]

Ying-yang,
Don't buy for at least a year, or you will regret it for the next decade.

[are they crazy]

And let's not forget thehousingbubbleblog.com. Highly intelligent and full of info & wit.

[burpnrun]

It's hard to look into the future when personal greed gets in your way.

[Nelcisco]

yingyang, there are a couple of down payment gift assistant programs that are non profit organizations
it works in conjunction with FHA, one of them is the Nehemaia program and the other is Ameridreams which is the one I'm putting my borrowers on.

But the file like I said has to be FHA, meaning full doc
not stated and a 31.48% debt-to-income ratio.

[shockg]

E writes, "No "hat tip" to Housingpanic.com?"

Thanks, E, I just added the link. Hey, your voice sounds familiar.... have I heard you commenting here under another name? Don't worry, I won't tell.

Peter, Please out the desperate bloggers who post under diferent names.

[Uncle B Waits For Perot @ Mt. Pelerin]

"Irritainment" -- love it.

I think some of us are suffering from "blognosis" as well.

Here's some real estate tabacky to chew on:

At CR (calculatedrisk.blogspot.com), they pose the following question: Residential Housing Completions are down 50% from 2006 peak, yet residential construction *employment* has only gone down 15%. Why? (illegals were not counted on the way up or down)

Read the post and comments.

[Laker]

It is such a huge BS.
I don't have PhD in Economics or Finance but I do have common sense. Everybody with at least that knew that this thing could not last....
Especially people that were here in the 1989-1995 RE cycle.
People like Mozillo knew not only that this will happen, they actually cashed out their stocks (mozillo selling he CFC stock just before it going from $50 to 5...)
So Pleeeeeeeeeeeeeeeeeeeeeeeeeeeese.

[PeonInChief]

I'm not surprised that they "didn't know" about the housing bubble. The bankers and analysts had no ability to comprehend how much trouble borrowers were going to be in if prices didn't continue their upward climb. All they had to do was simple arithmetic calculations, but they were entirely unable to comprehend the economic situation of people who only make $40K a year--that it wasn't a matter of stretching, but a serious hyperextension error.

In addition I don't think these same people and, for that matter, most of the commenters on housing bubble blogs, understood the precariousness of being a low- or moderate-income tenant, particularly in areas without rent control and just cause eviction. Many people wanted nothing more than housing security and a pet.

[Fred]

All of us amateur economists saw this coming. And these are professional money men, whose every day was spent (or should have been spent, I should say) analyzing economic data.

[JamesW]

I worked for Countrywide and back in 2005, management would tell us that the prevailing train of thought was that there would be "consolidation" in the industry and the smaller players would go under. That was all code for "it's going to hit the fan"

[RZ]

I knew this was going to happen, and I don't have a degree in economics or a job in investing or banking. To me it was always common sense - people were spending beyond their means on credit and at some point it was going to go ka-boom. Either Kevin McCarthy's head is empty between the ears, or his pants are on fire.

[desidude]

In 2004, myself and colleagues in SCE, have discussed this issue and ebaten it to death. Actually, I for one was the ONLY one talking about housing coming down and rest of them mostly , No not in Ca/LA etc.

some of them bought homes in later part of 2004 and upto 2006, after I left that place.

I talked to some of them and check their home prices once in a while.. and they are like, down yes, but not by much in LA. may be 10-15%

[MyLessThanPrimeBeef]

The US military needs to secure our supply of Nile alligator dung, which, according to ancient Egyptians, is the perfect cure for blindness, especially blind bankers.

[RO]

Title correction: Noone //wanted// to foresee this happening.

Why when you're making so much money? Totally understandable, I wouldn't want to stop making money either. Why do I feel like this is being reported as a bad thing? The market will correct itself and we'll all move on.

[Lou]

Anyone who states that this problem could not have been forseen should never be listened to again.

[E]

Pete...

Of course you have seen me post under another name from time to time. It's fun...what can I say. Notice how hot'n'bothered ShockG is!

WRT the sunsetbeachguy and his reference to HousingPANIC as being one that should be at the bottom.

1. It was one of the originals.

2. It had the links to the relevant issues and stories.

3. It was pretty damn accurate.

Yes, there are plenty of idiots over there but they are just noise.

You know...like ShockG

[Cindy]

I volunteer for a consumer org. I help answer complaints about home builders and warranty co's, research the news for the website, and other tasks. The consequences of the growing housing bubble were on my radar a long time ago, too. I recall reading predictions of exactly what happened, at least as long ago as 2003 or 2004. And that was just on the issue of toxic loans, inflated appraisals, lax lending, etc. Shoddy new home construction was and is a part of this problem with respect to the millions of new homes that have gone up in the past few years. Built quickly, with unskilled labor, and increasing construction shortcuts, many new houses will not last the life of a mortgage anyway. Quite a few of them leak or have other serious problems that will cost someone--usually the owner--many thousands or they will walk away from it if the cost is overwhelming, which it often is.

For anyone working in finance to claim they didn't see this coming is insane or a bald faced lie. Some of these industry people should go to jail. If any of us unconnected little people took out the economy we'd be in jail. Instead, some big co's big shots paid inconsequential fines to HUD or whoever without admitting wrong-doing. Typical! I for one won't be buying a house again. There is too much fraud and deception in this industry for me to even feel it's worth my time to sort thru all the scum to try and find an honest person anymore.

[SD Dan]

There's been ample warning for years as far away as your local news rack.

The Economist magazine has been warning about housing bubbles in the US since 1999 (!), and devoted a large special report to "the housing bubble" in June 2005.

A few weeks earlier, on May 26 2005, they said "Some sceptics, including this newspaper, have long argued that America suffers from a housing bubble. Now most analysts accept that there is indeed a bubble at least in some areas, notably southern California".

By 2005, housing bubbles had burst in Australia, Spain, and other countries... and they saw the same symptoms in the US, just delayed a few years. The Economist called it like they saw it, but not many listened.

[JL]

Dean Baker, co-director of the Center for Economic and Policy Research, wrote this article in August 2004 and followed it up with many more reports and op-eds.

http://www.thenation.com/doc/20040816/baker

[Chris M]

I too saw this massive bubble coming at least 5 years ago. My wife and I sold our house after it doubled in value.. much to my surprise! We now still rent in a nice area of San Francisco and our rent is payed with the interest from our house sale back in 2003. So for these, so called, banking experts to say that "Nobody saw this coming... " is total rubbish! What they should say is, "we were making so much money on funny creative loans that we were blindsided by the obvious bust that was inevitable"!!!

[Gordon Gartrelle]

Pete: do you think Angelo Mozilo will get indicted?

[Alice B.]

FDR's campaign slogan was "A chicken in Every Pot"...GWB's slogan was "A house for every immigrant, legal or not"!!!

The "Maestro", Alan Greenspan said he "didn't see it coming"! How anyone can believe one single word out of the mouths of these corrupt, criminal, evil monsters...is beyond me!

Did anyone stop to think about how "high" is "high"??? Did anyone really think the $100K shacks in Watts were going to the moon; or the $300K tracts in the Inland Empire??? How high was high???

The only reason the upscale properties are still inching upward is because of the nearly worthless dollar; your new buyers are speaking Chinese, Farsi, or Persian.

And last, but not least, the rich Mexicans are moving into upscale border cities in San Diego and Texas...taking advantage of the bargain basement prices. They say it's to escape the drug cartel battle on the border...but give me a break!

It all started with uncontrolled, mass immigration - legal, but mostly illegal! We have only seen the tip of the iceberg...wait until all 20M of them receive 'amnesty', and bring 25m MORE of their relatives from Mexico...chaiin migration! Wait and see!!!

[Alice B.]

FDR's campaign slogan was "A chicken in Every Pot"...GWB's slogan was "A house for every immigrant, legal or not"!!!

The "Maestro", Alan Greenspan said he "didn't see it coming"! How anyone can believe one single word out of the mouths of these corrupt, criminal, evil monsters...is beyond me!

Did anyone stop to think about how "high" is "high"??? Did anyone really think the $100K shacks in Watts were going to the moon; or the $300K tracts in the Inland Empire??? How high was high???

The only reason the upscale properties are still inching upward is because of the nearly worthless dollar; your new buyers are speaking Chinese, Farsi, or Persian.

And last, but not least, the rich Mexicans are moving into upscale border cities in San Diego and Texas...taking advantage of the bargain basement prices. They say it's to escape the drug cartel battle on the border...but give me a break!

It all started with uncontrolled, mass immigration - legal, but mostly illegal! We have only seen the tip of the iceberg...wait until all 20M of them receive 'amnesty', and bring 25m MORE of their relatives from Mexico...chaiin migration! Wait and see!!!

[pad]

"NOBODY" ?!!! What about Case-Shiller who predicted this burst for the last 4 years.

[Malcolm]

It has been very frustrating to be told all along that the housing bubble couldn't pop to now "no one could foresee it coming." I know I foresaw it, and I still have my original emails to Patrick from Patrick.net from years and years ago. I was predicting this as early as 2003-2004, and am now owed $50 by someone I made a bet with in 2006 about my prediction for 2008. No one foresaw it? I don't think so.

[Laker]

Malcolm, I hope you pegged the $50 you won at the bet to inflation...you $50 dolla from 2006 bet are worth 15-30% less...inflation my friend...

[Natalie]

Reminds me of the young man, just convicted of murdering his parents, tearlessly asking the court for lenience due to the fact he is an orphan. Everyone that has lost, is losing, and/or will lose in speculative real estate because of greed-inspired decisions and actions - well deserves it. No Kleenex needed here.

[N-Dr-Lo-R]

"so much money short term in packaging these loans they forgot about the long term"

Short term is the only kind of term that exists in any consideration in the US anymore. Many exist in a world of self-delusion and wishful thinking.

[FormerReader]

Stop publishing this trash reporting...no wonder the Tribune is going down. I guess that's something else that no one anticipated...!!!

[Anonymous]

No one could foresee the housing crisis...

No one could foresee the levees would fail....

No one could foresee the insurgency....

No one could foresse they would fly planes into buildings....

Sound familiar?

[FPD2005]

Any of the 18yr old high school graduate LO's that originated these BS loans between 97 and 05 could have told you the housing market was going to bust. It was so vanilla. Now the 40 year mortgage vets that created the loan programs allowing the consumer to "buy more house for the money" are the same ones that are pleaing ignorance? These guys whored out thier company names with worthless paper and bs valuations playing pimp. Shame to everybody, (consumer, LO, appraiser, UW, title, Corp Execs, and economists). Nobody wanted to admit the good times had to end. Its was like we all went to a party, got drunk then woke up and realized there was a huge mess and we raced to make sure we weren't the last one left to clean. I don't feel bad for anybody who has a bad loan. We're all responsible. We all partied, now we all have to clean.

Cheers!