Flutterby™! : Countrywide woes

Countrywide woes

2007-09-09 13:34:34.594245+00 by Dan Lyke 13 comments

Countrywide Financial to lay off 10,000 to 12,000 over the next three months. Inside The Countrywide Lending Spree looks at why:

The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.

Wendy McElroy's entry from which I stole these links quotes extensively from the latter. Let's do what we can to make sure there are no bailouts.

[ related topics: Current Events Real Estate ]

comments in ascending chronological order (reverse):

#Comment Re: made: 2007-09-09 19:14:55.278902+00 by: ebradway

Hmmm... I think this clearly shows that there were unfair practices occurring in the mortgage business...

When start making claims about people reading and understanding their mortgages, please try to remember that if you are 1. white, 2. male, 3. come from a middle income family (or better) that your attitudes might be colored by latent privileged bias.

So let's look at a situation from another perspective. Say you are a black single mother. Your parents were welfare bound. You have a GED. You managed to get and keep a good job for 12 years despite being abandoned by your ex-husband (with two kids). A friend tells you that you should buy a house. You feel that maybe you're missing out on something because your friends are bragging about how much their house goes up in value. So you find an agent and then a house. The agent turns you over to the mortgage broker. The mortgage broker tells you that you are approved. Woohoo!

So what are the odds of this person: A. understanding mortgage types well enough to know that she got pigeon-holed into the sub-prime category instead of alternate-A, or B. the odds that this person will believe that she deserves better than just being told that she can buy a house?

If you look at my last post, at least in Denver, there is a significant inverse, correlation between housing prices and likelihood of default - and that's the inverse of what you might think. It's not well-educated people who over-extended themselves buying million-dollar homes who are defaulting. Assuming (the well-documented) correlation between income and education, and a correlation between income and housing prices, you get a correlation between housing prices and education levels. So we get to folks with lower levels of education facing higher rates of default.

It would be interesting, taking this a step further, to see what the relationship between education level and credit rating is. I suspect (and this is a big assumption) that you'll find and odd inverese correlation here as well. Folks with limited education and steady jobs tend to have better credit scores. And I bet that these folks are exactly the people Countrywide was pushing into sub-prime levels through their commission programs. And it's exactly these people who are facing higher levels of default.

So what do we do? People are being "penalized" due to corrupt lending practices. Do we assume caveat emptor and just let these folks suffer? I'm asking these questions in earnest because, as I've said before, any bailout will essentially be the government lending credence to the over-inflated housing prices. And that's bad, bad thing...

#Comment Re: made: 2007-09-10 00:40:58.992254+00 by: Dan Lyke

I don't have a good answer for those people either, other than that I've been screaming "no, buying a house with those numbers makes no sense" for several years. I feel no responsibility to either those who outrageously drove the prices up, or to those who are now finding themselves reposessing houses that won't have the value they were sold for.

As for protecting the poor minority person who got suckered into a loan, how far do we haev to go? If we didn't let actions have consequences we'd have to start by shutting down check cashing places, killing "payday loans", closing low end liquor stores, and... well... at some point if we're going to make that sort of determination we have to say "screw free will and self-determination" and pretend we know best for everyone.

Yes, real estate brokers and those who repeated the "your home is your biggest investment" (or an investment at all) bullshit are culpable, but so were the Wall Street analysts pushing Amazon at 440 in the late '90s. At some point, unless we're going to simply institutionalize a whole class of people to protect 'em from themselves, and classify them as subhuman, we have to offer that they're entitled to their own fuckups.

Yes, Countrywide did some underhanded things. So does General Mills (and my recent trip to Safeway and discovering prepackaged plastic containers of carrot and celery sticks with a little packet of dip is another rant), and every other commercial entity. Unless we let people learn that such entities often do evil, they'll continue to fall for this crap.

And housing prices will be artificially inflated and those of us who were fiscally responsible will see a few years of massive inflation while the economy catches up with housing.

So do I feel sorry for 'em? Yeah, somewhat. Do I feel responsible for them? Nope. I can't save the world, and there are lots of people out there who are motivated and want to better themselves who are as ill treated by circumstance, I'd rather help that class.

#Comment Re: made: 2007-09-10 02:50:37.128951+00 by: TheSHAD0W

You know, the best way to help these people is to ALLOW home prices to fall?

No mortgage issuer is going to want to repossess a house with a $200,000 balance on the mortgage when it's valued at $120,000 - and umpteen-hundred of their mortgages are in the same situation. It gives the homeowners the opportunity to renegotiate their contracts. The lenders would rather restructure the loans at lower balances and continue collecting interest instead of trying to sell houses in a nonexistent market.

#Comment Re: made: 2007-09-10 03:17:45.16131+00 by: Mark A. Hershberger

I'm less confident that the bottom is going to fall out of the real estate market. Prices will flatten, but I doubt you'll see massive cuts.

Unless ... you mean areas the size of a 9-digit zip code, we're not going to see 40 percent declines in house prices.

Think of the equilibrium house price as the equilibrium rent times the equilibrium price/rent ratio. I do not see rents falling in real terms. Housing starts are below the level needed to keep supply in line with new household formation, especially in an economy with relatively low unemployment. So, if anything, rents are going to be drifting up.

(From http://econlog.econlib.org/archives/2007/08/time_to_panic.html)

And, yeah, looking at price/rent ratio makes sense to me.

#Comment Re: made: 2007-09-10 03:36:37.962461+00 by: Dan Lyke

Price/rent is why I haven't bought out here. Some of the closest price/rent ratios I can find are in the $500k buy versus $1500/month rent range, I'm seeing others that are far worse ($800k buy, $1800 rent, lots of $500k buy, $1200 rent). By my guesstimation, $1400/month should get you roughly $200k, so either 40 year or interest only options have permanently readjusted house prices and we no longer look at $700/month per $100k as our baseline, or something's gonna give.

#Comment Re: made: 2007-09-10 12:23:01.396288+00 by: ebradway

Thanks for switching this to an economic discussion. It's always easier and the posts tend to be shorter ;)

Price/Rent pretty much saved my wife and I from buying in Boulder last year. The condo we rent for $900/mo was up for sale for $179,900. Sure, that sounds like it's close sweet-spot in price/rent to encourage a buy. But we only pay $900/mo. Their is also a $200/mo or so HOA fee that the landlord picks up. The HOA fee includes water AND heat (big in Northern Colorado).

Economic disruptions do not follow a level distribution. Like so much of reality, they follow a bell curve with some spatial distribution. Right now, that bell curve is skewed slightly towards loss in value. Because it's a bell, that means your average is someplace just below 0% with some way below 0% (a deviation or two out) AND some houses are landing on the other end of the curve with a small increase in value and some way out there with good increases. Macroeconomics considers just the mean and rarely any other measure.

From a microeconomic, and economic geography, point of view one considers the spatial distribution and looks for correlations. Hence the earlier part of my argument. It seems that there is correlation between the houses a deviation or so below 0% and lower-income (which is a surrogate for lower-education).

This makes me wonder if there is a historical trend at play here. I mean, if we look back at the Great Depression, I wonder if there was a similar correlation. And to nod back at Dan's suggestions (and somewhat contrary to my own), how many people actually died or suffered extreme loss because of the Great Depression? By extreme loss, I mean they and their families weren't able to economically recover.

So maybe we need to plunge the economy into depression for a while. Nothing gets people to really reconsider the consequences of their actions like gross unemployment and hunger. We'd see fewer people driving (helping the climate crisis), more people growing their own food (and eating better), and more people taking personal responsibility for their health (because they can't afford two packs of cigarettes a day and a super-size Big Mac at lunch).

#Comment Re: made: 2007-09-10 13:20:23.943262+00 by: TheSHAD0W [edit history]

I think that, if the Fed weren't pouring cash into the system, we'd easily see a 50% adjustment in home prices in major markets. We'd also see a recession, but it would be short-lived as mortgage companies exploded and sold off their portfolios. Now, we're looking at years of inflation.

#Comment Re: made: 2007-09-10 15:11:19.272881+00 by: Dan Lyke

Eric, I'm not sure that they necessarily always follow a bell curve, but the rest of that point stands fairly well.

It occurs to me that perhaps the best way to manage this is to remove some of the impact of those who might have been screwed by unscrupulous lenders to more easily walk away from those loans. If someone looked at your house and said they'd take it as collateral for a negative amortization loan, or give you some sweet initial deal because they promised you that in two years you could refinance at the house's new price at a better rate because you now had 20% equity, then let them take that risk.

People who didn't have any equity to begin with will have been roughly paying rent for the time they occupied the house, the lenders who were unscrupulous take the brunt of the economic impact, housing prices will do what they will in a free market.

#Comment Re: made: 2007-09-11 03:11:54.72248+00 by: ebradway

Sorry for breaking up the context a little... But I think your rant needs some threads tied:

As for protecting the minority person [who got suckered...] from themselves

We aren't protecting them from themselves, we are protecting them from predatory lending. Your statement is given from a position of privilege: you were raised in an environment where you learned to trust your judgement; you have the intelligence and education (formal or otherwise) to be able to differentiate between a "good loan" and a "bad loan"; you are used to being accepted.

Yes, there are folks out there who, when given the worst of shit, grab ahold of their bootstraps and yank themselves up. But most people, who come from poor environments, think and feel that they "deserve" nothing better than the shit they get. They don't expect to be "accepted", especially when that means being "accepted" for mortgage. When they are "accepted", they don't question it - they rejoice in the simple fact that someone accepted them.

You know that old saying "you don't look a gift horse in the mouth"? I think that's what's happening here.

I think the other part of the problem (and this is where I get riled up about "our forefathers meant for the country to be like x,y,z (i.e. libertarian)), is that you assume that your experience is the "common human experience" and that to treat anyone less than you feel you can handle is to treat them as subhuman. One of the reasons our society has grown into a much more socialist system than the forefathers spelled out is that the nation they spelled out was designed for rich, educated, white men. We've since figured out that there are other kinds of people out there.

So yeah, while I think pretty much everyone is capable of free will and self-determination, I think that there are many more people than you might expect for who those are very abstract concepts. Not that these folks are "sub-human" - they are human and they define what human is.

#Comment Re: made: 2007-09-11 03:12:52.811598+00 by: ebradway

Whoops - that last post was out of order. I came back to a computer and found it at the Flutterby login - and logged in. Low-and-behold, there was my post...

#Comment Re: made: 2007-09-11 16:15:23.388633+00 by: Dan Lyke

I think this is the first time I've wanted threading, usually I like the fact that discussions are easily dragged away from a previous topic...

No argument that I had an exceptional upbringing, but by the same token you could look at all of the places I haven't accomplished more and chalk that up to issues in the culture in which I was raised.

Poverty is a relative state; there will always be poor. However, I do like things that promote a society where people can change their situations, and inspiring those on the bottom to better themselves lifts everyone, so I'd ask two questions :

How is any bailout that uses my resources going to ensure that the people who didn't understand their mortgages turn a skeptical eye towards hucksters and shysters in the future? And how is this going to help their children break that same cycle?
How are our current fraud laws insufficient that these people can't sue organizations like Countrywide and the National Association of Realtors for fraud and damages?

#Comment Re: made: 2007-09-11 19:30:05.066228+00 by: ebradway

Good questions Dan... but first, I have to disagree about threading. I think many conversations die on Flutterby because they get loss to focus creep.

I haven't a clue how to manage bailouts (hence my other harder-lined comment). Sometimes the best possible answer is to let the suffering continue or even exasperate it to get the suffers to change their own condition.
Again, your speaking from a privileged position. Access to the legal system is not as level as it should be. People coming from positions of low-self-esteem might feel they can't afford a lawyer, might think they don't have a chance against 'the man', or might just feel they deserved what happened to them.

I guess the answer is to attempt to empower these people. How to empower them? I don't know. Maybe that gets back to the hard-lined: let the pain grow until they are empowered to do something about it. Or maybe it gets back to all that crazy bureaucracy surrounding equal access - like affirmative action.

#Comment Re: made: 2007-09-11 20:00:31.708656+00 by: Dan Lyke

I think this thread's changing my mind on threading...

on #2, I don't have any numbers, but I'd bet that if there were profit in it, the ambulance chasers would be advertising for their third or half of the result. You can't drive through a low income neighborhood without seeing ads for laywers who'll take automobile accident or worker's comp claims on commission...

In fact, if anything, I'd guess that "the poor" resort to lawyers more often than us in the middle class.