MORAL HAZARD AND MBS Mortgage finance is conceptually simple. A saver lends money to a homeowner so he can buy a house. He then pays her back in installments, principal and interest, until the loan is extinguished. These flows of money were traditionally piped back and forth between savers and homeowners by local savings banks, or thrifts, designed for the purpose. Over the years, however, the "plumbing" to convey these flows has evolved into a nightmarish Rube Goldberg machine of securities, derivative instruments, vehicles, and intermediary markets. Moral hazard neatly encapsulates one thing that can go wrong with this complex…
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Paul Sarbanes must have put something extra in the coffee. "Weeks not months" indeed. Just nine days after the Sept 20 Senate hearing "Calculated Risk: Assessing Non-Traditional Mortgage Products", the agencies have released their new guidance.[1]

On September 20, the US Senate held a very important hearing titled "Calculated Risk: Assessing Non-Traditional Mortgage Products".  I’ve started writing a guide to the resources on the hearing site.  It’s located in the Doom "Pages" list, upper right of our home page.  Look for Study Guide: Senate 20Sep06 Exotic Mortgages Hearing. The intention is to provide a resource with links to key news reports and resources, and a guide to the three hour long audio transcript. There is a tremendous amount of good stuff packed in the hearing site, and much of it may prove to be of enduring value….
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Maintained by John M. On September 20, the US Senate held a very important hearing [1] titled “Calculated Risk: Assessing Non-Traditional Mortgage Products”. Press coverage was pretty extensive considering it was just a hearing hosted by two obscure sub-Committees of the Senate Banking Committee. The main theme was new non-traditional, “toxic”, mortgage products like interest-only or option-ARM loans. Witnesses were a half-dozen director-level loan regulators (all but one female, for what it’s worth) and five mortgage industry / consumer group representatives (all male). The Senators hammered away seeking assurance that the new loan products would not go out of control…
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On Thursday, Nadia Chernyak wrote a sensitive story [1] for The Cornell (University) Daily Sun. I’m presuming she is a student herself or someone in touch with that generation. The piece goes beyond the chronic housing problems for the many students in Ithaca NY to look at affordability issues for ordinary folk in the region. It notes that the underlying problem will take years to work out. I believe it will be people like Ms Chernyak who will ultimately dig us out of the problems arising from the burst of the housing bubble. Below I’m reproducing my response to her…
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On the morning of September 13, there were two more or less simultaneous meetings about the housing bubble in Washington DC. It’s been a slow process working through the resources on the two event sites, but at least one interesting item has presented itself. In his prepared testimony to the Senate,[7] OFHEO Chief Economist Patrick J. Lawler let drop that the oversight agency tries hard to eliminate ‘appraisal bias’ from its house price statistics. A brief search revealed that all the way back in 1999 OFHEO saw a "perceived tendency" for such a thing.[8] "Appraisal bias can result from the…
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On Saturday, Union-Tribune columnist Logan Jenkins posted a piece [1] suggesting real estate values in downtown San Diego would enjoy long term support. The reason he gave was surprising. He thinks, based on a story in the current issue of The Atlantic, that there is a megatrend in America for smart and creative people to cluster together in a few desirable locations, keeping prices permanently high but crowding out the less worthy citizens. Were this analysis sound, it would be horrifying. Luckily, this MSM-promoted trend dissolves immediately on inspection. I’ve decided to respond to Mr. Jenkins so he can stop…
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Over the last couple of months, the Dallas Morning News has yielded a fat bunch of finds for Doom’s "Relevant Articles" list. Reporter Steve Brown,[1] [2] [3] and columnists Pamela Yip [4] and Danielle DiMartino [5] [6] [7] [8] [9] have all been writing good stuff that we’ve been happy to link on the sidebar. Unfortunately, Danielle has just announced [11] she is leaving bubble journalism, effective today.

And yes I did say slavery During the course of a Wednesday morning radio interview [1] with Twist, host Charles Goyette [2] made an interesting remark. "It’s the buyer’s fault, after all," he said, implying that home buyers, whether investors or homeowners, are grownups and responsible for the obligations they enter into. Regular reader "Mike" made a similar point [3] earlier when he took me to task for using the "S" word (slavery) [4] late last month to describe the likely fate of many middle class borrowers should they actually have to pay the principal and interest on the loans…
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THE POWER OF … huh? In this episode I’ll be trying to say something sensible about a company I’d never heard of three weeks ago. Washington Mutual, now officially [1] "WaMu", is America’s sixth largest bank and the largest S&L to survive the epic 1980s S&L crisis. It would appear to be a major player among the private label lenders who took so much of Fannie’s and Freddie’s mortgage business once the bubble generated an abundance of sub-prime loans. Recently some funny stories started attaching themselves to the WaMu name (including the one about the name change). Eventually enough pieces…
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On Wednesday, there will be a good opportunity to watch, and perhaps even participate in, a dialogue about reform for Fannie Mae and Freddie Mac. Here’s the scoop from a story in the DSNews. "James Lockhart, director of the Office of Federal Enterprise Oversight, and U.S. Senator Chuck Hagel, R-Neb., who are both pushing for urgent GSE reform, are scheduled to discuss plans to reform Fannie Mae and Freddie Mac at a breakfast Sept. 13 in Washington, D.C."

NOW BATTING FOR AMERICA: THE OCC "The lending system has run amok and real people are going to get hurt."[1] That was said, in an unguarded moment, by the lead author of BusinessWeek’s current cover story [3] on the human impact of toxic mortgages. She has evidently spent months with industry insiders, and these people aren’t just concerned, they’re emotional. This episode will look at what people are saying now, and what smart people were saying months or years ago, about the "suicide loans" that proliferated during the great Millenium housing bubble. As well, we’ll be looking at what they…
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Twist’s post Thursday on sub-prime lenders attracted an especially thoughtful comment from regular reader "Mike". I’m repeating the whole comment here, edited [1] into point form. Please refer back to the post for the Mike’s original version and the context. One of the best things about this site for the last few months has been it’s focus, in a non-partisan and open way, on the direction and impact of housing prices and value. As a frequent reader can I just say “we get it” with reference to the quasi-government and sub-prime lenders and perhaps suggest that publishing version "VII" of…
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The helium has not yet entirely leaked out of the party baloons at 3900 Wisconsin Avenue, NW. Fannie Mae won a tremendous victory when the DoJ stopped its criminal investigation against the company. Their stock immediately surged something like five percent on the news last Thursday and held steady as a rock through all the carnage to the sub-prime lenders in the two trading days since. This company lives and dies by political risk, and that risk is at a multi-year low this week. Nevertheless, I worry. They are in a real business after all, and some nasty stuff is…
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WHO’S BEEN SWIMMING NAKED? One fine evening earlier this month I was sitting in Tim’s [1] at Penhorn with my old friend D____ after a stroll through his lovely Dartmouth neighborhood. I was just biting into my double-chocolate when he said, "John, you’ve been telling me for years that the GSEs exist to support mortgages to people of modest means that banks wouldn’t otherwise touch. Now you’re telling me in part V that these ‘private label’ lenders are buying huge amounts of loans that don’t even meet Fannie’s standards. Should I be scared?" After some hemming and hawing and a…
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