Thursday, March 3, 2011

Revenge of the Sub Prime Mortgage Nerds.

My apologies go to Twentieth Century Fox for my paraphrasing their 1984 movie, Revenge of the Nerds. The story line featured nerdy good guys outfoxing their tormentors, the jocks and socialites; the movie ended happily with the nerds getting the girls. Classic 1980s Hollywood comedy.

A rather comedic development occurred in the USA’s real estate collapse and world banking neo-failure: it looks like the nerdy homeowners are getting revenge on the big banks. It seems there are a significant number of foreclosures where the mortgage documentation wasn’t quite right. A computer signed the mortgage document instead of a human being. And the computer notarized the fake signature: they call it robo-signing. Judges have been throwing them out of court. Assembly line mortgage documentation didn’t hold up in court. One American mortgage officer was able to crank out 5000 mortgages per day using robotic mortgage underwriting. And now the banks are having trouble enforcing their foreclosures.

What a miracle is the human mind. In my investment book, Beyond the Bull, I postulate that there is no mind more crafty, more imaginative, more persuasive than that of a good stock broker. But maybe I was wrong. A good mortgage lender who is out on a limb is pretty good too. Let me ask you this: if you were stupid enough to hold a portfolio of mortgages with faulty supporting documentation and if your foreclosure actions were regularly being thrown out of court, what would you do? Here’s what they did: they pretended to be noble. In a gesture of humanitarian kindness, they offered to let the defaulting homeowners pay a reduced affordable monthly payment and allowed them to stay in their houses. Ah, the milk of human kindness! This, they rationalized, would keep millions of houses from being sold on the open market at fire-sale prices, and would actually help both the banks AND the home-owning public. All those forced sales were depressing the housing market, and if we just keep those houses occupied, well maintained and off the market, eventually, we will all muddle through this crisis.

This illusion, as all other illusions, has its flaws. What’s a $300,000 mortgage on a $250,000 house really worth? And if the monthly payments are so low that the $300,000 loan actually increases over the years, what’s it really worth? And if the banks reported the true value of that loan (and the millions of others just like it), what would the banks be worth? That’s the beauty of being noble. Everyone else tries to be noble too. The bank regulators don’t want another crisis; they don’t want to force the banks to be more accurate in reporting the value of their mortgage portfolios because, after all, the banks are being so kind to those poor folks who are unable to pay. Maybe this is the way banking will be conducted in the future – instead of having faith that people will pay their debts, maybe we can all have faith that it doesn’t really matter if people pay or not. Banking in the Age of Aquarius.

In early 2009 when American tax-payers bailed out their biggest banks, homeowners complained that it wasn’t fair. It was banker’s greed that pushed the mortgage business to ridiculous extremes, endangering the banking system, pushing the economy into recession and forcing millions of homeowners into foreclosure. President Obama’s bank bail out scheme was making those tax payer/homeowners responsible for the banks self-inflicted problems! It didn’t seem fair. But so extreme was the banks’ greed that they even screwed themselves! The homeowners who could least afford their mortgages are now getting their revenge. They are getting to stay in their homes at much reduced monthly payments. Sweet!

So, when all’s said and done, who really got screwed? People who moved into houses they couldn’t afford seem to be emerging from their debacle in reasonable shape. The banks and mortgage companies whose greed squeezed the system so hard, got bailed out. So, who got screwed?

It’s the responsible Americans who still need justice. They bought houses they could afford and dutifully made their mortgage payments. But their houses have dropped 30% on average anyway. There’s no revenge for them.

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