As I continue to do research into the subprime crisis, time is at a premium. What I'm discovering will windup in future stories. Currently, I'm looking for any leads you might have on Bear Stearns & Co. — concerningits warehouse group, loan buybacks/early payment defaults and its trading desk. Send your e-mails (confidentialor otherwise to
Meanwhile, a recent column that I received a lot of positive comments on is pasted below. I updated it whereI could. Enjoy.
Headline:
Subprime: The Mess That Wall Street Hath Made
President Harry Truman had a sign on his desk that said, "The Buck Stops Here." The legendaryphrase is still part of the American lexicon, even though 60 years have passed and few of our civic and businessleaders step up to the plate when it comes to taking responsibility for financial and political disasters. As every mortgage executive knows, the business of lending money to consumers is in the throes of a disaster— at least it certainly feels like a disaster: 200 mortgage banking firms and platforms have closed since Decemberof 2006, 40,000 jobs were lost over the past few months with 30,000 more likely to disappear before year-end, probablymore.
Loan volumes are waning and the consumer is spooked. Even though the U.S. unemployment picture looks good, homebuyersare afraid to sign on the dotted line because they believe (and rightfully so) that the house they covet can bepurchased more cheaply if the just wait a month or two.
Predicting a bottom in this industry is never easy but chances are the market won't begin to recover until latenext year. Mortgage professionals from coast-to-coast, who are searching for work, are scratching their heads wonderingif they will have a job next year.
Sherri Markel, a Florida loan broker, recently wrote to me, detailing the dismal state of the mortgagebusiness there. Commenting on the Florida job market for brokers and LOs, she wrote: "Even with my three tofive years of mortgage industry experience and post-license-credited training, the chances of me being the candidategetting the job offer is about the same as hitting the lottery."
There are two mortgage markets out there right now: the conventional/government segment (Fannie Mae,Freddie Mac and FHA/VA) and the nonprime sector which is currently on life support. It boils down to this:if a mortgage customer has good credit they have nothing to worry about. Yes, the jumbo market is still a littledicey but loans are still being funded. The consumer may have to pay more but at least they can get a loan.
Then there's subprime-land. It's not pretty. You've read the articles in National Mortgage News,American Banker and other trade publications. The story has now become big enough that the generalmedia and networks are finally paying attention. The price tag is at $150 billion and counting. (A recent reportby Deutsche Bank says it could go as high as $300 billion.) Consumers are going to lose their homes andequity, and investors in subprime bonds have already lost billions. How did this happen?
The answer lies at the top: Wall Street. In the subprime sector the buck stops at the doors of Bear Stearns,Merrill Lynch, Lehman Bros., Nomura — take your pick. Will the executives at these firms takeresponsibility for the subprime mess?
This is what happened: Wall Street created the loan programs marketed by loan brokers and mortgage bankers.The mortgages were funded by non-depository wholesalers like Acoustic Home Loans, Mortgage Lenders Network,New Century, Ownit Mortgage (fill in the blank).
Not only did the Street create the programs and buy the end-product (mortgages), they financed many of the samenon-depositories they were purchasing loans from. These warehouse lines of credit and "gestation repos"were extended liberally. In 2004, when the subprime market took off in earnest, Wall Street wasn't exactly askingfor much in the way of financial ID — they were looking for volume.
And volume they got. In 2005, subprime production soared to a record $795 billion, accounting for almost onein every four mortgages funded that year. Ten years earlier subprime lenders originated just $35 billion (that'snot a typo), accounting for 5.5% of all loans originated.
Why did blueblood Street firms such as Merrill Lynch — known for peddling stocks to America's wealthy — go gagafor subprime? Answer: because they saw gold in the hills of housing finance. They also saw that Fannie and Freddiewere too busy licking their accounting wounds to compete against the Street in the nonprime market.
But Wall Street badly calculated which is what happens when people who think they're smarter than everyone elseenter a business. Street firms like Bear and Merrill thought they could buy billions in loans without doing muchin the way of due diligence on the loan files. (Note: this doesn't absolve sleazy loan brokers, AEs, the ratingagencies and house “flippers’ for their shortcomings either. But that's a column for a future time.)
Steve Halper, CEO of DataVerify, a software firm, said his company demonstrated its fraud preventionsystem "to every investor (including Merrill) on Wall Street. Their response was that they were making toomuch money to slow down the golden pipeline for any silly fraud tool."
I've heard the same story from several other industry executives. It's not just sour grapes from a vendor scorned.One insider from a large West Coast correspondent buyer recently relayed a story about how his company approacheda subprime wholesaler about buying more of its loan production.
The loan buyer, however, wanted to review 80% of the loan files they were purchasing. An executive at the wholesaler(name withheld to protect the source of the story) told the West Coast loan buyer that Bear Stearns was buyinghis production but was only reviewing 20% of the loan files. As you might guess, the West coast loan buyer didn'tget the account.
Wall Street played a larger role in the subprime industry than just banking and buying loans. Two years ago,some firms (Merrill, others) began acquiring subprime lending shops as a way to assure a steady flow of production.I would venture that all the heads rolling in the mortgage departments on Wall Street these days are a result ofeither those acquisitions or a lack of due diligence on loan purchases.
Will Wall Street run screaming from the subprime industry, red ink oozing from their pores? They already are.Street firms have amassed $210 billion in subprime receivables (servicing rights), or 18% of the market. I wouldlike to ask Wall Street one basic question: do you really think you belong in the origination and servicing business?Do you feel you have a mission to house Americans?
— Paul Muolo, executive editor, National Mortgage News (
