Thursday, August 23, 2007

American Home on the Free Range Horse Nugget Manufacturing Pulsar

This year, as borrowers with adjustable-rate mortgages saw their monthly payments rise, more and more of them had trouble coping with the bills.


The first group affected were borrowers with low credit scores who received subprime loans from companies such as Countrywide Financial.


Buuuuuuuuut soon, even borrowers with higher credit scores -- American Home's Alt-A borrowers -- started showing signs of strain. *

Ah, yes, the Alt-A's. What are Alt-A's?

Alt-A loans are issued to people with high credit scores, but the loans are considered riskier than prime loans because they require less documentation of income.


One might think a lender would wish to document income rather than just go on the word of the borrower and his/her credit rating agency. Yet apparently it's entirely otherwise: Because some people have high credit scores, they submit less documentation.

...or is it,

Some people have high credit scores because they've lied to credit rating agencies (submitting less, or false, documentation), therefore American Homers assume more risk, and demand less documentation?


Some people have high credit scores because credit raters are under pressure to rate people upwards regardless, therefore we need no steenkin documentation?


We lenders will happily believe whatever tumid turds borrowers give us because Alt-A loans will cost them more than Primes, so more money for us?

The gap between the bureaucratic measuring process of credit rating (tracking one's past record of timely debt payments) and the promise of power to maintain that rating (credible guarantee of future income) is the barn door that allows enthusiastic USian Bullshit free range. Borrower, credit-rater, lender are just different parts of the same Intestinal organ. As conditions deteriorate, the energy to squeeze out ever more baroque arabesques of steaming piles has no choice but to rachet:
American Home's business model worked well when the housing market was booming. But when falling home prices led to record-high defaults and delinquencies on Alt-A loans, a company like American Home would feel pressure to continue increasing its loan volumes to maintain its standing with creditors, analysts said...

Kind of like Iraq -- the bigger the disaster, the more resources you need to fund the full faith and credit of your credibility.
"The market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative," said American Home Mortgage's chief executive Michael Strauss.

"The company employee base will be reduced from over 7,000 to approximately 750."

The market volunteered its own credit rating:

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Anonymous Anonymous said...

Catastrophic Liquidity Event and the Mortgage Market

8/24/2007 7:54 PM  
Anonymous tom said...

A few years ago a woman I knew was thinking of having a house built. She encountered folks who were more than willing to offer her Ninja loans (great term).

"Just a little higher interest."

It was all the rage. It was relying on the absence of regulation, the assurance that any regulator not already garotted by Bush would look the other way.

When one wants to understand what motivates political action and moneyprods in USia, it's this -- not issues, not "values," not "competing visions of democracy" -- no, it's stuff like "which of these assholes is less likely to pester my sleazball operation?"

8/24/2007 9:09 PM  
Blogger Jon said...

Why can't the government, the lenders, etc. risk an intervention that is different than just providing additional liquidity ? The conditions leading to the sub-prime lending fiasco were enabled .. why shouldn't here be some government assistance (let's say like deposit insurance) be extended such that when sub-prime borrowers go to re-set mortgages, they have the option of negotiating a fixed-term 20 year or 30 year mortgage, with a premium of (say) a quarter or half point above current LT fixed rates for the risk diversion, rather than face the process and the costly-to-all-parties processes of foreclosure or bankruptcy.

Well, why not ? Probably less costly and fairer to all participants than flirting with armageddon. But such an initiative would probably be derided as 'socialist'.

8/25/2007 11:41 AM  
Anonymous phil said...

The loans once originated are then packed as securities and sold to mutual funds, pension funds, insurance companies, etc. So when the defaults ripple through the system, you as an ordinary investor or pension recipient suffer. The key is that those originating the loans do not hold them. Also the rating agencies understated the risk to the upstream investors. Bottomline, the suffering is widely distributed to those who had nothing to do with the scam.

8/25/2007 1:54 PM  
Anonymous tom said...

What's being moved off, out, up and away is risk. The original loans or bundles are sliced, diced and minced into tranches and sold to phalanxes of middlemen who carve them and attach rates of interest allegedly correlated with the degree of risk per tranche.

It sounded good at the time: Each according to his tolerance.

As Phil says, the cluster bombs are now distributed through the system; no one can determine the degree of danger with any precision.

8/25/2007 7:10 PM  
Blogger Tom Matrullo said...

I've been remiss in not pointing to this excellent piece by Kia - it's really all there.

8/29/2007 10:39 PM  

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