Wall Street History

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Wall Street History

07/01/2011

A Look Back at the Housing Bubble, Part II

Continuing with my look back at the housing crisis and some of what both I, and others, were writing as the bubble burst, I refer to material found in my “Week in Review” archives.

“You’d be hard-pressed to find someone who has written more than I have on the real estate bubble, and I’m continually amazed by those who offer we’ve already hit a bottom. Robert Froehlich of DWS Scudder went so far as to say the subprime mortgage crisis ‘will be the most hyped disaster that never occurred since Y2K.’ Right, Bob, but then you have mutual funds to hump so I’d expect nothing less. How the heck can you compare Y2K, which indeed proved to be nothing (though I was taken in by it myself) to a real estate debacle that has caused real pain to a broad class of Americans; those who can least afford it? It’s that kind of irresponsible shillery (my word of the week) that gives Wall Street a bad name.

“Every few weeks I have to repeat myself on a key point. When we do hit bottom in the real estate market, it is not just going to bounce right back up. Think of the plight of the Kansas City Royals baseball team. They last won 90 games in 1989 (92-70). They then stair-stepped down the next four seasons before flat-lining, with the worst period being the last five-year stretch, 2002-2006. Or, since Detroit’s housing market is suffering as bad as any these days, think the Detroit Lions. We will bottom and stay there.

“But we aren’t close to that bottom yet. I also have a confession to make. Until recently I didn’t know what the definition of an ‘Alt-A’ mortgage was, the class between subprime and prime. You know, for Alt-A, I’m told, lenders are finally demanding 5% down! This isn’t even subprime, and yet you can still get one without little documentation and basically no money down. So doesn’t that make Alt-A really the same as subprime?

“Andy Laperriere of ISI Group in an op-ed for the Wall Street Journal.

“ ‘According to Credit Suisse, the number of no or low documentation loans – so-called ‘liar loans’ – increased to 49% last year from 18% of purchase loans in 2001, a nearly three-fold increase. The investment bank also found that borrowers put up less than a 5% down payment in 46% of all home purchases last year.’

“ ‘The Alt-A market has increased sevenfold since 2001 and accounted for 20% of home-purchase loans last year. Fully 81% of Alt-A loans in ’06 were no or low documentation loans. Why have borrowers employed this kind of risky financing? Because it was the only way many of them could afford a home in some of the hottest housing markets, where prices more than doubled in five years.’

“There are some idiots out there, snug in their castles, who go on the air and say ‘It serves them right.’ That’s simply cruel and my heart goes out to those who made some very bad mistakes in judgment, or were flat out swindled.

“I also am not one of those free marketeers who say the government needs to stay out of this mess. Wrong! Think back to the Tech Bubble. What was one thing Alan Greenspan could have done that would have without a doubt lessened the pain? Raise the margin rate. What one thing could the Fed, the FDIC, or the Comptroller of the Currency have done during the real estate boom? Insist that mortgage documents be written in plain English and spell out the risks.

“You think that is hard to do? Ask my old mutual fund buddies. Years ago, when I was still in the business and before the market-timing scandals that hit the industry, we were forced to come up with simpler prospectuses that spelled out as plainly as possible the impact of expenses on shareholders. Regulators also insisted that past performance be laid out for all periods (and adjusted for applicable sales charges), not just the hottest ones.

“So it can be done. It doesn’t mean the government is interfering in the ability of Mr. and Mrs. Jones to buy their first home, but at least some of the homebuyers may have realized that when their mortgage resets, the payment goes up $500. It’s been shown time and time again that in many instances this wasn’t explained to them. No doubt, there is the principle of individual responsibility, but there is also accountability.

“I don’t feel in the least bit sorry for speculators who were flipping Miami or Las Vegas condos and finally got burned. They should have known the risks and if they didn’t, tough.

“But it makes me sick how some of the ‘little people,’ and I use the term affectionately, were burned when all they thought they were doing was pursuing the American dream.

“So, no, we haven’t hit bottom and while I’m at it, let me tell you what is really on my mind, something that Barron’s Randall Forsyth and countless others in the financial press want to write but can’t because they have editors standing behind them. Alan Greenspan was not a great Fed chairman. He was a fraud, as history is increasingly revealing.”

“ ‘House prices across much of Western Europe have stalled or begun to fall as spiraling borrowing costs and fears of over-supply take their toll on markets from Ireland to Spain, an industry survey has revealed.

“ ‘The German housing market has been hit hardest. A glut of property for sale in former East Germany dragged down price inflation countrywide, leaving the national average down 6.9 percent over the 12 months to the end of June.’

“Ben Bernanke may not really know what the heck is going on, but while the focus this week was to some extent on the dollar, gold and oil, when it comes to the Big Picture, globally, it’s still about real estate by my way of thinking, linked with massive debt loads….

“For now, I agree with Yale Professor Robert Shiller’s statement to a Senate committee.

“ ‘The decline in house prices stands to create future dislocations, like the credit crisis we have just seen.’”

“Believe it or not, each week I try to avoid bringing up real estate, but for the archives I do have to note that housing starts for April were up 2.5%, a mild positive, but building permits (future starts) were down 9%, the worst such figure in 17 years. The median price across the country was also down, 1.8%, in the Jan.-Mar. period, the third such quarterly decline in a row. And an index of homebuilder confidence hit a new low.

“But fear not, for Federal Reserve Chairman Ben Bernanke said ‘the financial system will absorb the losses from the subprime mortgage problems without serious problems.’

“Of course just a little while ago he was acting as if subprime would create zero problems, but who am I to argue with a man whose intelligence dwarfs all mortals’?”

So that’s just a sampling of what I and others were writing as the housing bubble peaked, and then popped. Too bad Alan Greenspan and Ben Bernanke didn’t get it until it was too late. The damage has proved in many instances to be irreparable and tens of millions of lives (including globally) were ruined.

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