Real Estate Realist

Dec
28th

Sun

Washington Mutual built empire on lending frenzy

You simply cannot make this stuff up. If it weren’t so hilarious it would be pathetic. Honestly, somebody in Hollywood, PLEASE make a movie about this Wa Mu supervisor’s story.

As a supervisor at a Washington Mutual mortgage processing center, John Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way, and WaMu, as his bank was known, was all about saying yes. Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved. “I’d lie if I said every piece of documentation was properly signed and dated,” said Parsons, speaking through wire-reinforced glass at a California prison near San Diego, where he is serving 16 months for theft after his fourth arrest — all involving drugs. While Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said. “In our world, it was tolerated,” said Sherri Zaback, who worked for Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ” At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

Oct
8th

Wed

Iceland teeters on the brink of bankruptcy

The “canary in the coal mine” of the global credit crisis is lying on the bottom of the bird cage.

REYKJAVIK, Iceland — This volcanic island near the Arctic Circle is on the brink of becoming the first “national bankruptcy” of the global financial meltdown. Home to just 320,000 people on a territory the size of Kentucky, Iceland has formidable international reach because of an outsized banking sector that set out with Viking confidence to conquer swaths of the British economy _ from fashion retailers to top soccer teams. The strategy gave Icelanders one of the world’s highest per capita incomes. But now they are watching helplessly as their economy implodes _ their currency losing almost half its value, and their heavily exposed banks collapsing under the weight of debts incurred by lending in the boom times. “Everything is closed. We couldn’t sell our stock or take money from the bank,” said Johann Sigurdsson as he left a branch of Landsbanki in downtown Reykjavik. The government had earlier announced it had nationalized the bank under emergency laws enacted to deal with the crisis. “We have been forced to take decisive action to save the country,” Prime Minister Geir H. Haarde said of those sweeping new powers that allow the government to take over companies, limit the authority of boards, and call shareholder meetings. Thousands of Britons have accounts with Icesave, the online arm of Landsbanki that regulators said was likely to file for bankruptcy after it stopped permitting customers to withdraw money from their accounts Tuesday. A full-blown collapse of Iceland’s financial system would send shock waves across Europe, given the heavy investment by Icelandic banks and companies across the continent. The speed of Iceland’s downfall in the week since it announced it was nationalizing Glitnir bank, the country’s third largest, caught many by surprise despite warnings that it was the “canary in the coal mine” of the global credit squeeze.

Oct
6th

Mon

Next: The Mother Of All Bank Runs? - Forbes.com

Nouriel Roubini is one of the guys who, years ago, warned everyone that the current financial upheavel was inevitable. He is worth listening to.

When investors don’t trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system. The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates—as it may now—a total meltdown of the U.S. financial system could occur.

Not for the faint of heart.

SNL - Washington cast of characters. Oh, this is so very funny.

Sep
29th

Mon

Concise video on the Fannie and Freddie element of this mess we are in.

Andrew Jackson

Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out and by the Eternal God I will rout you out. If the people only understood the rank injustice of our money and banking system, there would be a revolution BEFORE MORNING.

Sep
24th

Wed

Senator Christopher Dodd on Fed Chairman Bernanke’s message to legislative leaders regarding the financial crisis (about 5:30 point in video) -

“I don’t want to use the language, because the language has an impact. But…when the Chairman of the Federal Reserve described the situation to us, there was a pause for about 10 or 15 seconds when nothing was said. The air came out of the room. It was that startling a description of where we were…. This is not just the financial markets here, it’s global…. We’re gonna be talking about this for decades.”

So, is Dodd’s (and Bernanke/Paulson’s) scary message a fair and accurate assessment of the financial crisis that we face, or is this a ruthless move by powerful forces to further socialize the U.S. economy. My belief is that both are true. Economically, we are sick to the point of near death, and the “cure” is potentially worse than the “illness. Like Senator Dodd said, “we’re gonna be talking about this for decades”.

Aug
19th

Tue

Credit crunch may take out large US bank warns former IMF chief - Times Online

When the big money guys step out from under the burden of propriety that accompanies their positions of leadership at places like the Federal Reserve, or the International Monetary Fund, they sure can get to the point, can’t they. Kenneth Rogoff, formerly the chief economist with the IMF, in so many words is saying…”this credit crisis, you ain’t seen nuthin’ yet!”. FDIC, you might want to consider another premium increase for your member banks too, because like lots of others in the know, Rogoff fully expects the wave of coming bank failures to include at least one whopper. The IndyMac failure alone will likely tap the FDIC for about 15 percent of its cash on hand at the time of the failure, and the prospect is for the next big bank failure to make the IndyMac payoff look like chump change.

The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares. Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely. “The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,” Prof Rogoff said at a conference in Singapore. In an ominous warning, he added: “We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks,” he said.

Aug
18th

Mon

AP IMPACT: Weak rules cripple appraiser oversight: Financial News

I tried to quit the appraisal profession several years back because I got sick of being treated like a whore by my lender clients. Today, I am still a real estate appraiser, but thankfully I no longer have to deal with the lender clients directly. Instead I deal with intermediary appraisal management companies that keep the lender and appraiser away from each other. I make less per appraisal, alot less, but it was the only way I could stay in this business. Now, I am just holding on for dear life, and waiting for this trainwreck to get fixed, and I think that can happen. This article is right on point. The problem that allowed the level of fraud we have seen is that the current regulations have no teeth, just as the article points out. This guy quoted at the end of the excerpt below has it pretty well summarized: Ray Haynes, an appraiser from Cherryville, N.C. “And they threaten you. They say, ‘If you don’t play ball with us, we’ll go somewhere else.’ And they do. I’ve seen my business shrink. They’re all doing it. It’s hard to stay honest.”

As soaring home prices set the stage for America’s great housing meltdown, a critical step in making sure those home sales were a fair deal — the real estate appraisal — was undermined from within.

After the nation’s last major banking disaster, Congress set up a system to catch rogue appraisers. Their game: inflating the value of homes at the direction of equally unscrupulous real estate agents and mortgage brokers, whose commissions are determined by the size of the deals.

But a six-month Associated Press investigation found that the system is crippled by both the bumbling of its policemen and their inability to effectively punish those caught committing fraud.

And despite ample evidence appraisers are pressured into inflating home values — sometimes to prices in support of loans that are more than buyers can afford — the federal regulators charged with protecting consumers have thus far made a conscious choice not to act.

“The system is completely broken,” Marc Weinberg, the former acting director at the federal agency charged with monitoring the appraisal industry, told the AP before he retired earlier this year. “It’s amazing that the system ever worked at all.”

“The appraisal reforms of the late 1980s were good reforms,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School of Business. “But they were not sufficient to prevent what we have seen … because regulation without teeth is not regulation.”

To be sure, there are many causes of the housing crisis — lenders who allowed people with spotty credit to buy homes with little or no money down, mortgage brokers who focused on selling loans without regard to the borrowers’ ability to repay, investment bankers who bought and sold risky mortgage-backed securities. A few of the worst offenders — appraisers included — have been put behind bars.

But experts and industry insiders, including appraisers who feel betrayed by colleagues who don’t follow the rules, believe the failure to effectively monitor the real estate appraisal industry contributed to housing’s collapse.

There is no doubt, Wachter said, “that fraud has increased and appraisal fraud has increased in a way to exacerbate the problems.”

This is the way the system is supposed to work: Typically, an appraiser receives an order from a real estate agent, lender or mortgage broker to inspect a property. Based on a physical inspection of the home and comparable sales in the area, they develop an estimated value for the property. That figure is used by banks to set the home’s value as collateral for the mortgage loan.

Appraisers are supposed to come up with a value free of any outside pressure. But more than three dozen appraisers nationwide interviewed by the AP said they often felt pushed by a real estate agent or mortgage broker to fraudulently inflate a property’s value. They supplied the AP with documents from lenders asking them to “hit a number.”

“The higher the loan amount, the more money brokers and lenders make in the deal,” said Ray Haynes, an appraiser from Cherryville, N.C. “And they threaten you. They say, ‘If you don’t play ball with us, we’ll go somewhere else.’ And they do. I’ve seen my business shrink. They’re all doing it. It’s hard to stay honest.”

I Love Subprime - Wait for it… yes the singing begins eventually.

The Endgame Nears For Fannie and Freddie - Barrons.com

Could this be the week when both Fannie and Freddie get sucked up by the Federal government. Both stocks are in a freefall at this time based on the Barron’s report. I remember sharing the potential financial fallout from the subprime mortgage mess with a fellow appraiser last year, and he told me I was just being way too negative, making things out as much worse than they were. I wish he had been correct. Congratulations Mr. and Mrs. John Q. Public, your future adoptive twins, Fannie and Freddie, just got a whole lot uglier.

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer’s dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’ $19 billion of subordinated debt also suffering losses.

Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements concede the outlook is even grimmer well into next year. Shares of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) have lost around 90% of their value in the past year, with Fannie now trading at $7.91, and Freddie at $5.88.

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie’s equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn’t much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

What’s more, the fair-value figures reported by the companies may overstate the value of their assets significantly. By some calculations each company is around $50 billion in the hole.

Jul
14th

Mon

Fannie Plan a `Disaster’ to Rogers; Goldman Says Sell - Bloomberg.com

Like Jim Rogers or not, you have to admit that he speaks his mind, and he has a track record for getting things financial very right. Rogers weighs in on the weekend shenanigans by Paulson et al, and would you believe that Jim Rogers is aghast at their idea to throw tax dollars at the disasters known as Freddie and Fannie…God bless the United Socialist States of America!

The U.S. Treasury Department’s plan to shore up Fannie Mae and Freddie Mac is an “unmitigated disaster” and the largest U.S. mortgage lenders are “basically insolvent,” according to investor Jim Rogers. Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson’s request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies’ shares may fall another 35 percent. “I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, 65, said in an interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.” The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a “long way to go” and advised buying agricultural commodities. “They’re ruining what has been one of the greatest economies in the world,” Rogers said. Bernanke and Paulson “are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.

Jul
12th

Sat

Fannie Mae Ugly - WSJ.com

It remains to be seen what the bailout of Fannie Mae and Freddie Mae will look like, and make no mistake, there will almost certainly be a bail out. The folks at WSJ suggest that their particular socialist “solution” is better than the current GSE practices, which can be described as “privatized profits and socialized lossses”.

Investors continued to flee Fannie Mae and Freddie Mac yesterday, almost as frantically as the political class tried to reassure everybody there was nothing to worry about. Allow us to sort the good (there isn’t much) from the ugly. In the good category, Treasury Secretary Hank Paulson swatted back reports of a government “nationalization” of the companies – which would mean making explicit what has long been an implicit taxpayer guarantee of their liabilities. This would instantly add $5 trillion in liabilities to the federal balance sheet, doubling the U.S. public debt burden and putting America’s AAA credit rating at risk. This is the nightmare scenario for taxpayers. Less reassuringly, Mr. Paulson said, “our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.” This suggests that Treasury thinks the two companies have enough capital, or can raise enough in private markets, to ride out any mortgage losses. We’re not so sure, and neither are investors, who have kept bidding Fan and Fred shares to new lows on fears of insolvency. The most immediate danger is that investors will shrink from rolling over the debt of the two companies, leading to a run a la Bear Stearns. Mr. Paulson is trying to reassure people that the companies are sound, but after Bear everyone has the heebie-jeebies. With so much on the line, we’ve been suggesting that Treasury and Congress step up now with a public capital injection to help the companies ride out their losses.

Jul
11th

Fri

Wall St brokers face Fannie, Freddie worries - Reuters

The problem with the financial sector is that all of these characters have been swimming around in the same septic pond for so long that they are all contaminated by the sewage that is the mortgage/credit crisis. Virtually none of these institutions is free of the muck and the stench, and to make matters worse they are entangled and intertwined, so than when one drowns, inevitably, they drag some of the rest down to the depths with them.

Worries that the government may nationalize struggling mortgage finance giants Fannie Mae and Freddie Mac created yet another source of problems for beleaguered U.S. banks and brokers.

Fannie and Freddie, which purchase loans from banks and mortgage companies, together own or guarantee $5 trillion of debt, about half of all U.S. mortgages. These U.S. government-sponsored enterprises (GSEs) also loom large on the balance sheets of the country’s financial institutions.

“GSE exposures create another area of likely write-downs,” said Fox-Pitt, Kelton analyst David Trone.

Trone in a research note estimates that JPMorgan Chase’s total exposure — holdings of GSE debt, mortgage-backed securities and counterparty risk — is $87 billion, or 69 percent of its equity.

Citigroup has exposure of $51 billion, or 40 percent, while Goldman Sachs has the largest total exposure among investment banks at $14.2 billion, or 32 percent of equity.

In addition, GSE bonds and mortgage securities generate underwriting and trading business that have fueled Wall Street profits for years.

“Freddie is insolvent and Fannie is running on fumes. They’re going to end up being nationalized,” said Len Blum, a mortgage markets veteran and partner at investment bank Westwood Capital. “The entire financial web depends on them. If they failed, it would make Bear Stearns look like a picnic

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