Yes, I know it’s supposed to be pronounced wah-KOH-vee-ah.
I have been viewing the mortgage crisis and the resultant banking crisis through a different lens than most people. Sure, I try to send snapshots of what I am seeing, but it’s probably not what you are seeing. I have explained mortgage-backed securities at some length here, Wikipedia has a more in depth article here, and if this is a foreign term to you, reading those might cause the rest of this to make more sense.
In a nutshell, the house of cards started to come down when some investors realized that all mortgage-backed securities were not created equal: the ones Fannie and Freddie were buying up had much lower risk than the ones John Q Hedge Fund was buying. This made it more difficult to sell these securities; and if they could not be sold, the originator of the loan could not make new loans; and if those mortgage companies couldn’t make new loans, people might not be able to buy houses; and for a variety of social, political, and economic reasons, we couldn’t allow that! The obvious solution was to let Fannie and Freddie buy subprime paper. This would both revive the market for the stuff, and free up the Good Stuff for other investors (since Fannie and Freddie have a limited amount of money).
So by this time last year, Fannie had almost $50 Billion in subprime notes, and Freddie about $120 Billion. Spread the risk. I mean, love. Spread the love. Also by this time last year, the subprime crisis had caused its first corporate bankruptcy. If you only understand one thing out of all this, it should be this: All of us have a vested interest in this thing unwinding in as prompt and orderly a fashion as possible. Most housing is purchased using a mortgage; even rented housing usually has a mortgage.
Because I work in real estate, I deal with mortgage companies on a daily basis. I’m calling mortgage brokers; I’m trying to get pre-approval letters for clients; I’m trying to get short-sale approval; I’m trying to help clients purchase foreclosed homes. This being said, there were clear warning signs that IndyMac was in trouble. It was hard to read the situation, because the same signs were hanging in a lot of places, and still are.
Barring future disaster, Wachovia will survive in my opinion, because they are making sensible cuts now. You may have heard they are getting out of the mortgage business? It turns out “will no longer offer mortgages through brokers” effective Friday. You can still walk into a branch and ask to speak to a loan officer on Monday. That’s not a panic, but an orderly shutdown.
A lot of people are worried about WaMu and I can’t blame them. Wall Street has been worried for some time. Just yesterday they, like Wachovia, announced “billions in mortgage losses” for the last quarter. Getting them to approve short sales is like pulling teeth — apparently they want to foreclose and have thousands of REO homes to get rid of! People complain about their mortgage division’s practices. Not a month goes by that I don’t have at least 2 visitors to ShortWoman looking for some variant on “talk to a human at WaMu“. Things look bad for WaMu, yet it’s not the same warning signs as IndyMac.
And then there’s Wells Fargo. Jim Cramer has been telling us things are wonderful at Wells for a year now. Just today he reiterated that. Now, on one hand, Jim is a smart guy who has made a lot of money scrutinizing the balance sheets of banks and investing accordingly. He is looking at the situation from the top. I am seeing it from the bottom, and the sign is easier to read from down here. It’s the sign I saw at Countrywide (whose takeover by Bank of America is cruising towards completion). It’s the sign I saw at IndyMac.
Wells Fargo owns a lot of foreclosed homes. By my count they have about 500 listed for sale in my metropolitan area alone. And if you want to purchase one of them? You have to be approved by a Wells Fargo mortgage consultant. Your offer won’t even be sent in without a pre-approval letter from them! They will of course try to sell you a mortgage while they are at it. For a company that needs to sell property pronto, they are going out of their way to make it difficult to buy.
In closing: sometimes “equality” isn’t quite as good as everyone might like; when the budget gets too tight, even potentially life-saving medical care is optional spending; short version of the economic differences between Senator McCain and Senator Obama; the view from the bottom of our economy is pretty sad; and the iDiet (not an endorsement in any way shape or form).
This whole thing is such a mess, and what’s the most disheartening about it, to me, is that the motivation behind it all was simply greed greed greed. When I hear people who were involved in making these crappy loans talk, they all say that they knew something wasn’t right, but that they figured it was someone else’s job to watch and make sure things would turn out ok. In the meantime, people are losing their jobs and their homes.
Your blog is interesting!
Keep up the good work!