When 11 of 56 Leading Economists Agree, Something’s Wrong
A Mortgage Salesman’s Pitch
If you read one article in one newspaper all day, make it that one, by the excellent George Anders.
It’s hard to miss, being on the front page of the Wall Street Journal—although with all the earnings reports and the Yahoo-head-scratching going on, you might easily pass it up, thinking to yourself, “ho-hum, another real estate bubble story.” But this one is the real deal.
It details in startling, awe-inspiring detail the workload of one Ben Ray III, a Northern California mortgage lender whose bread-and-butter is supplying “alluring and controversial mortgages that require unusually slim payments for a few years, before bigger sums fall due.” And there is so much over-the-top stuff packed into this article it’ll make your head hurt.
It’s kind of like the dinner I had last night here in San Francisco with some old, special pals—everything was good.
And if you think the bottom of the available-pool-of-buyers has been scraped, wait til you get to the part about the latest twist in mortgage lending.
No, I’m not talking about adjustable-rate mortgages—everybody, including my dog Lucy, knows about all the ARMs being sold. And I’m not talking about interest-only mortgages—the commotion over which has probably reached my cat Marvin, it’s so overblown. I’m not even talking about the so-called “Freedom Loan” ol’ Ben pushes—called the “Prison Loan” by his competitors.
I’m talking about “low documentation” loans:
“…including ones where lenders simply take borrowers’ word about their income and don’t ask for pay stubs.”
Now, the reason this “low documentation” idea rings a bell with me is because of a story I heard a few weeks ago from the straight-laced guys at Northern Trust, which handles a lot of family trust accounts.
Business is off-the-charts good at “The Northern” thanks to the bank consolidations in which faceless behemoths try to generate “synergies” by replacing “human beings” with “call centers” and “1-800 Numbers” and “ATM Machines,” causing old-line families who want to talk to a “human being” about a minor issue like, say, their inheritance—and can’t get past the recorded message—to pack up their money and move it to a bank stocked with “human beings.”
And one of the stories they told was of a family with several hundred million in assets that had done business with a bank for over 200 years—and couldn’t get a $4 million loan from the bank. So the family took their several hundred million to The Northern where they could actually discuss things without pressing “1” on the touch-tone keypad.
Thus, it has come to this: a family with several hundred million in assets and a 200-year credit history has a hard time borrowing from their family bank—but thanks to folks like Ben Ray III, Billy Bob can now get hisself a house without even digging out his Stuckey’s pay stub from beneath the cushions of the couch he is paying through the nose for from the local Rent-A-Center.
No, I am not dumping on the Billy Bobs of the word. I do not think housing should be restricted to wealthy white families that bank at The Northern, and I particularly despise the inequities in lending costs between those wealthy white families that bank at The Northern and the Billy Bobs who get their pockets picked clean at the Rent-A-Center, a stock I would never own, placing it as I do on a par with tobacco companies.
But this is what it’s come to: low documentation lending. And there is much, much more in this excellent George Anders article. You really ought to read it start to finish.
The question this article raises, however—at least in my mind—is not how widespread these practices have become and whether low documentation loans signal The Top in the real estate mania. The question it raises is this: what is wrong with the real-estate-bubble-must-crash scenario?
I ask that question because of the following throwaway line in the story:
In a recent Wall Street Journal survey of 56 leading economists, 11 named a possible housing bust as their biggest worry for the economy. We all know that anything widely anticipated—especially by 11 leading economists—will not happen the way those 11 leading economists expect.
Back in 1987, for example, it was generally accepted that stocks in Japan were highly overvalued—much like the dot-coms in 1999, and very much like real estate here today—and that if there was going to be a stock market crash it would start in Japan.
But the crash of 1987 did not start in Japan: it started in America, and it was triggered by a little-remembered device called “portfolio insurance.” I will deal with this device another day, but the gist of “portfolio insurance” was this: you sell when stocks are going down. Which is exactly what happened.
Thus, the Crash-That-Didn’t-Start-In-Japan came to mind when reading about Ben Ray III and the “low documentation” loans and all the other rotten loans that will surely come to grief.
And it causes me to wonder: what’s going to make those 11 leading economists wrong about the real estate bubble?
Jeff Matthews I Am Not Making This Up