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.