It Wasn’t Me. 3 New Trends: The Housing Lawsuits Begin, Prevention, and Story Telling.
As human nature would have it, we love hearing stories in narrative form. From our evolutionary history, story telling has always been a way of passing on the past to future generations. We are good at this. In fact, that is why we thrive in reading novels and movies with a consistent arc and are able to quickly empathize with a lifetime of events and emotions in a book in 2 weeks or 2 hours via a movie. When we read enthralling stories our mind quickly can see the potential future for characters. “Don’t go there!†as we try to warn a character facing doom. Any good author has the ability to lay enough groundwork to keep you hooked. It is the art of foreshadowing. Getting the palette ready for the reader. Ask us to predict the actual future, and this is where we run into problems.
Nostradamus realized quickly that vague premonitions serve better than explicit predictions. For example, he used numerology and astrology to provide rather accurate premonitions of the future. So what does this have to do with the current housing market? It actually has a lot to do with it. For example, saying housing always goes up may prove you right once in awhile and saying housing always goes down has the same effect. Predicting the actual turning points with dates is another story. It is the case that our psychology isn’t wired to predict the future in great accuracy. Hence our fascination with fortune tellers and astrology. Many are trying to make it seem that this housing downturn and mortgage debacle suddenly dropped like a ton of bricks. Yet many either failed to see that they were heading off a cliff or decided consciously to bliss out and only focus on one side of the equation. It seems like the large percentage of people decided to use selective perception and hear and see what they wanted to see.
Now that the grey storm clouds are forming overhead and lighting is striking down on the mount of mortgage sin, redemption has come to receive payment. It has come down hard and is looking for repayment with interest. Unfortunately there is only so much you can squeeze out of a dried up mortgage with no potential or a buyer who is unable to pay his mortgage. What else are you going to do? We did away with debtor’s prison a long time ago and the fact that we are averse to waterboarding, I doubt that the public would allow lenders to use this technique to render payment. After all, as creative financiers have figured out, it is better for a person to file for bankruptcy under a repayment plan because at least that way you can get some compensation back. A person in jail has a hard time producing in society and has an even harder time paying any debts back.
Speaking of the law, this leads us into under chapter of this housing saga. We are now entering the stage of anger and the blame game has now started. Typical of our litigious society we fail to address the root of the problem and now we are seeing the army of lawsuits taking place. Prevention is always key but somehow it doesn’t seem like it is in the nature of many Americans. One third of our society is overweight. We all know that this leads to expensive medical problems later in life and a decreased quality in life. So why does it occur? Preventative medicine isn’t as popular as we would like it to be because there isn’t a large sum of money to garner from healthy people in the eyes of the medical industry. After all, simple things such as a healthy balanced diet, regular exercise, and mental relaxation are 3 simple ways to improve your life and increase your longevity and are free or practically free. Instead, we have folks that destroy their bodies with fatty foods over decades and one day decide they want to look like Brad Pitt. With the conditioning of instant gratification, they decide to go under the knife or rewire their stomachs without consideration for the long term. It is a vicious cycle. Years of neglect take time to undo. And even if you undo the physical appearance, you also have to change the core philosophy that drove someone to that point. This point drives home the fact why we are such a debtor nation. Everything is pushed to back. The dust is swept under the rug. But is the dust really gone? What happens should you lift the rug. Eventually you will need to clean up the mess. If your time passes and you leave this world, your dust will need to be cleaned up by someone else. I’m sure many of you do not want to leave your children or grandchildren a society with so much debt, that their quality of life will be diminished because we simply could not face up to the brutal fact that we currently have a spending problem in our society. Many want you to believe that we are finally facing up to this issue because of preventative foresight. No. The only reason that this nation is facing this credit debacle is because it is being forced by the back breaking weight of simply making the interest payments.
This game would have gone on longer and deeper if society dubiously kept playing into the game. The only reason that the game has stopped is because Wall Street giants, knowing something about finance and mass psychology, realized that we were nearing the tipping point and had to pull out if they were interested in retaining any profits. Like any well thought out Ponzi Scheme, those that got in early enough in the game made out like bandits and those that came in during the 11th hour are left holding the bag. Under the guise of financial prudence society was bamboozled into believing that somehow debt equaled wealth in the absurd calculus of pseudo-prosperity. You don’t own a leased Mercedes. You don’t own a mortgaged home. You don’t own that plasma screen that you bought on credit. Try missing a few payments and you’ll quickly find out who owns those things. Welcome to the next chapter of the credit game, facing reality.
New Century Financial – A Leading Indicator
You don’t have to go too far back to see what was going to happen. Housing hit the 3rd rail in February of this year. When I talked about New Century back in February, a sudden revision sent the stock tumbling in February. Why was this so crucial? Well New Century was one of the “prime†subprime lenders. This was also the first major wave of resets to hit the market. Clearly it was a sign that other lenders would soon follow suit with more mortgage resets. Typical of the market, it brushed this off as only one example of an overextended lender and kept on moving along. We also predicted the drop of four other major lenders. Keep in mind that many in the mainstream media were still thinking that housing was hitting a minor bump in the road toward infinite prosperity. In fact, Alt-A was still untouched at this point and we all know how that is turning out since the ratings that were given to these loans are as good as the stated incomes folks put down. Can you see where this novel is heading?
WaMu – Appraisals Inflated?
If the cast of complicit characters is confusing, now we are realizing how incestuous this entire housing market really has become. WaMu announced yesterday that it is suspending it’s relationship with eAppraiseIT. From a statement issued by the company:
“
We have no further comment at this time.
The story of course is much deeper than that. New York Attorney General Andrew Cuomo is now suing the appraisal company. The allegation is that WaMu was pressuring eAppraiseIT to hit certain price targets:
“Cuomo said that
“WaMu pressured EA to employ exclusively a new panel of appraisers that WaMu hand-selected … specifically because they inflated property appraisals.”
This isn’t small potatoes either. From April 2006 to October 2007 the company provided WaMu with 262,000 appraisals. Like New Century was the tip of the iceberg for subprime lenders, is this the tip of the iceberg for other appraisal companies? Appraisal companies are not the only one under the lawsuit radar. Countrywide shareholders are now going after Mozilo and other higher ups regarding stock sales:
“Oct. 31 (Bloomberg) — Countrywide Financial Corp. shareholders sued Chief Executive Officer Angelo Mozilo and 19 other company officers and directors, claiming a stock buyback program allowed them to sell shares at inflated prices.
The defendants sold $842 million in company stock while issuing false and misleading statements about the financial health of Countrywide, the biggest
While Nero is fiddling while
This is far from over and it seems like it is the season for pointing fingers but again, much of this could have been prevented. If you want some other examples, you can take a look at some very moving accounts from the Great Depression. Here is a letter from a lawyer recounting his experience and here is a longer account of the Florida boom and bust from the 1920s. How will this chapter in history turn out?
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11 Responses to “It Wasn’t Me. 3 New Trends: The Housing Lawsuits Begin, Prevention, and Story Telling.”
“In fact, that is why we thrive in reading novels and movies with a consistent arch…”
I am a huge fan of your blog and analysis, I quote you almost daily, but I really have to jump in and point out that your narrative argument at the beginning of this article is full of misunderstandings about the very examples you are using.
This may seem like a trivial thing, but it is of fundamental importance to the development of a plot, you are referring to the story “arc” not an arch. An an arch in a shape, the curving inside part of something like a foot or a doorway. An Arc is a trajectory, a form that goes higher (ideally for a narrative), changing as it were, which brings us to the salient point: an arc is not consistent, it is defined by the very inconsistency of the narrative, things keep going up, this creates tension, before coming down for a nice conclusion. Otherwise you have a viking saga, an endless litany of names and events.
Furthermore, laying a good groundwork is ‘backstory’ or ‘exposition.’ Foreshadowing is, in fact, predicting the future, a portent for things to come, rather the very opposite of the way you are describing it. A consistent narrative should be predictable to a certain degree, this is the virtue of any solid story, but foreshadowing should let you know what *is* going to come-though a good writer will distract you from that knowledge. However, a writer depends on consistency and cliche to keep a story predictable. Not foreshadowing.
That said, another great article. I really wish I could get my (former) Realtor to read up on what you are saying. He has no idea how the market works and is convinced that my waiting for the market to slide is just going to cost me more if I don’t strike while the market is soft. The signs of RE armageddon are all around us (no frog in the cooking pot metaphors need apply, this happened fast) yes the entire RE industry in San Francisco seems to think the boom times are just around the corner.
m+
Of course Pollyanna can always see the bright side, she never had an ARM.
What has happened to the economy, what will CONTINUE to happen to the economy, is nothing more than the results of the unspoken conspiracy that has been played by all parts of the mortgage equation.
It starts with the buyer. Willing to buy into sucker loans in exchange for being able to move into more house than they can afford, they agreed to any terms that were put in front of them, as long as it didn’t require any money down.
Sure, they knew their rates would reset. But as they signed, they had two thoughts running through their heads: I can always refinance later at a better rate; and: I can always sell my house for more than I paid for it.
Then you had the appraisers, paid by the industry, pressured to go along with it in order to avoid “killing the deal.â€
The mortgage broker was happy because they made more money; and the money they could make NOW had no relation to the collapse that the buyer would face LATER.
The “investment†companies loved it because they could convert this poison paper into so-called investments that would boost their stock price. And, as we all know, most only care about stock price, they are seldom interested in the details, as long as the price of the stock goes up.
The municipalities went along with it, happy that their tax base went up as this shell game was going on.
Everyone went along with it, believing that the music would never stop, believing that even if the music DID stop, there would always be enough chairs to go around.
This not-so-great generation of bankers and brokers, incapable of living up to the standards and work ethic of their ancestors chose, instead, to adopt a philosophy preached in the movie “Wall Streetâ€. The idea that making money was more important than producing; the idea that the moving of electrons is the same as the building of bridges and roads. The idea that living for today is ok, because tomorrow never exists.
And worst of all: at this time, when our must urgent needs call for leadership, for brave action in the face of all who oppose them, we discover that our congress and administration are just as weak, stupid, and amoral as the industry that created this problem.
At a time when we needed a Truman, a Lincoln, or even an Eisenhower, we’re stuck with a Fed, a congress and an administration who’s philosophy is “look important be importantâ€.
~
How do we solve it? Let them drown. Like a horticulturist who trims the weak and dying branches from a plant so that it may grow stronger with the future, now is the time to step back, say nothing, and let it all come crashing down on their heads.
As bad as it is, as bad is it will get, it will NOT hurt everyone. For every company that created these mythical profits; for every company who bought into these insane CDO’s, there are people and companies who saw them for the scam they were and wouldn’t participate.
Long after the jones-watchers, the $6 coffee drinkers have faded away, there will be those whose slow and steady financial progress was untouched by the poison they refused to drink.
The “Big shots†and “wheeler dealers†we all know will pass these same people on the way down. Although I suspect that they won’t have as much to say as they did when they passed these people on the way up.
What we need now is to shake the tree, and to shake it hard. Let what apples will fall, fall.
The tree, our country and our economy will be better in the long run for it. Until we can finally admit that “reality existsâ€, we are pouring sand in a gopher hole.
One final note: Watch carefully those who are willing to participate in the “housing fund†they are setting up to “help†the situation. Anyone willing to join in this farce is only doing it because their neck is out too, even if they won’t publically admit it.
Eappraiseit is not an appraisal company.
It is a Appraisal Management Company (AMC). BIG Difference
These AMC’s are are middlemen who (allegedly) change the appraisals when they are submitted to them. Why? See eappraiseit vs. pamela crowley, they take a steep cut from the appaisers fee and hire the crappiest, cheapest, churn and burn appraisers. Many of their appraisers appear to be the dregs of the appraisal profession. Although some of their appraisers are good, they have been finacially forced to work for eparasite. Word on the street is other large AMC’s are on many AG’s sites. Jill
All,
I’ve posted the weekly Southern California short sale chart:
http://www.doctorhousingbubble.com/forum/viewtopic.php?p=263#263
@variable,
Thanks for pointing that out and being a reader. In regards to foreshadowing, you are absolutely right that a good writer will make it happen without being so blatant. Maybe that is why most people that were preaching the book of a housing decline were seen as bubble Cassandras. They were flawed with the knowledge that housing would go down but what was the use if no one bothered to hear the yells? The foreshadowing I suppose here is those that predicted what is currently happening; the plot and groundwork has already been set for a few years. And even if you show an article like this to someone that has already written his own narrative of how this market will play out, will they listen? In their mind the Fed will come riding in on a white stallion named liquidity and the ending is this climactic happy Hollywood conclusion. Unfortunately I think this market has the makings of a Greek tragedy.
@Malcolm,
You are absolutely right that a large part of the system is rife with corruption. From the buyers, appraisers, lenders, Wall Street, and government. Are there good people in the industry? Absolutely! But we wouldn’t have gotten to this point if millions didn’t buy into this bubble concept. I’m reminded of the use for Option ARM mortgages. Ideally these are designed for investors who have better use for their cash and plan on selling their homes in a short time or investing the extra money in higher yielding investments. But look at the data and you’ll find out it is a way for people to squeeze into overpriced homes while they lack the income for conventional financing. Do we have the exception to the rule of the person making $300,000 a year? Absolutely. But this isn’t the majority. Generalizations are generally true. Let us not even get started on the subprime market. Why it took so long for people to realize that giving loans to people who have demonstrated a lack of credit management is beyond me. Always use the “me†test in regards to investing. Would you give John and Michelle a $500,000 loan if you knew they only made $50,000 a year?
The inability of groups to anticipate bubbles or macro events seems to be inborn. We are now facing an energy crisis of epic proportions which will make this “liquidity” crisis look like peanuts. We are at $96 oil, and no one seems to notice. It won’t be long, and this same type of cycle (denial – further denial – then blame and attack) will start again.
Some of that oil price is due to the sinking US dollar. Over the past year, Euro vs US$ has gone from 1.28 to 1.45, Canadian $ vs US$ has gone from 0.88 (and as low as 0.85 in Feb) to 1.07-beating the previous record from 1957. That’s a 13% decrease in value vs one and 21% decrease vs the other. Granted, a fair amount of the Canadian dollar value is based on speculators buying, but some of that is based on higher commodity prices, kind of a vicious circle, as it were. Still, even $83.52 is comparable to the historically high prices of the early 1980’s.
@Ron and Doug,
I agree that some of the boost in oil prices has a direct connection with the declining dollar. In fact, I think that with gold at $800 an ounce and oil nearing $100 before the winter cold season, the Fed had to temper their language. They threw the market the .25 basis point bone but realize that inflation is occurring even if the BLS data doesn’t show it. I would even argue that a large part of the current stock market year gains are based on the declining dollar since many companies are multi-national and global thus providing a hedge against the falling dollar.
It is not surprising that the lawsuits and finger pointing are starting to escalate. That is human nature. I question who exactly is going to be purchasing all of this excess inventory? In many areas of the country there are 10-12 months worth of homes available? Will easing credit be enough? I doubt it. Where will the buyers come from? Overseas? Will we begin to see Southern California, Florida, Phoenix, and Las Vegas bought up by foreigners capitalizing on a lower dollar? What about solving our illegal alien population at the same time by selling them homes in the high foreclosure parts of the country? Can you see the ad? Become a US citizen and get you dream house all at the same time!
Ok, a little far fetched…but seriously, who is going to buy the inventory?
@Malcolm,
So what we have left after the dust settles that you’re so anxious for is failed capitalism because the truth is the American Dream for many will be a fantasy in our low paying, inflationary, rental society. See the whole thing was hyped to work for years and because of a ‘race to the bottom’ for peon wages and sewatshop jobs, the middle class here got shafted by corporate capitalistic globalization. Now we have the true state of things…economic uncertainty, more unemployment, and a Welfare State coming with no welfare in the coffers. Say thanks also to the private Fed for orchestrating this collapse. Let it all fall down where it really lies…the contradictions of the financialization stage of late capitalism. Wake up.
Are their short sale charts for other areas of the country too? and if so, where would I find that information?
I read the lawyers letter from 1930s. Quite telling…almost Nostradamus-like!
Instead of laying blame, I wish that discussions could address what we can do about solving the problem. Americans are good at getting themselves into problems BUT also ingenious at getting out of them. There will be some who profit tremendously from this situation. When opportunity knocks it might as well be us who answers…
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