Who the players are? Stakeholders?
Technical and ethical issues are?
What was the relationship about prices and personal incomes?
People started to buy houses that they couldn’t afford and then they were left behind leaving. The economy is falling and so are the communities. Insects, graffiti, dirty pools are left behind since people are evicted and people don’t have were to go.
The lenders are not responsive to customers who want to cooperate to pay for their debts. Wall street only cares about the money they can generate from this foreclosure. During the crisis thousands of people were relieved from their jobs
Housing prices were rising faster than incomes making it impossible to keep with payments. The demand for the houses went down and prices SHOULD HAVE been that prices went down but they went up. People will not be able to pay making prices to fall but they didn’t fell.
“Keep going until someone tells you no” (uniformed and uneducated in finance?) the person didn’t know what he was able to pay right now and in the future, and he asked until someone tell him that he couldn’t do so.
BUT people keep buying houses.
CHAPTER 2 – MORTGAGE MARKET ON FIRE
Subprime mortgage –mortgage for the credit challenged
Freddie and Fannie – the leaders in mortgage lending
Quick Loan – for people who couldn’t afford a down payment You didn’t need to prove how much you made, no verifying incomes or assets
After 2001 things got crazy. Before 2001 it was difficult to get a loan because more verification was needed such as tax returns, how much you make, and down payment. They had good loans until 2001.
**GSE’s accounting scandal (executives could make more bonuses) In 1999 GLB the banks became deregulated causing banks to become commercial banks and mortgage brokers.
Fannie and Freddie buyed loans from mortgages firms. They stated the rules. Until this point they were dominant because they only bought loans in which their investments would pay off. Then came the accounting scandals and they are in the penalty box.
After 9/11 interest rates were lowered by the government and now houses are more appealing (or just buying was more appealing).
Countries that were once stated as poor become wealthy countries and after all this happened (9/11 and Fannie and Freddie).
Moral hazard what Dallas say about the wires crossing.
CHAPTER 3 – DREAM HOUSES
In 2002 government pushed Wall Street and lenders to facilitate mortgages. Adjusting interest rate – low interest rates the first two years and later higher interest rates. He claimed that he made almost four times than what he actually did.
Lots of refinancing and lots of spending by the population
Irresponsibility by the black lady, she could afford it because the mortgage broker gave her the company’s money * but it reality she couldn’t afford it
She should have done a down payment, she didn’t do it
Its an adjustable rate instead of a fixed rate
CHAPTER 4 – LEGIONS OF LENDERS
20-30 minutes to provide a loan
Loan officers with no experience on the industry had the job to provide as much loans as they could, their job was to close the loans.
Health problems by the dirty pools left behind
CHAPTER 5 – STAMPS OF APPROVAL
In 2004 home ownership rates were higher than ever and construction in over 20 years, but they were not sustainable. But we ran out of people who could afford mortgages and even we throw subprime loans. Greater mortgage alternatives rather than the fixed rate loans. Allen came up with the Pay Option Negative Amortization Adjustable Rate Mortgage. Traditional loans had full amortization, fixed rates, and a fixed payment. Instead of having a fixed rate then an adjustable rate was used making possible people to make their payments. The problem was that if it went up, then the borrowers will not be able to afford the payments anymore unless their incomes went up fast. Pay options were also available allowing the borrowers to choose lower payments and the balance of what you should pay and what you actually paid was added to the loan to have a negative amortization. The introductory low rates were called Teaser Rates.
The goal was to make home ownership more affordable for more people. Michael Francis and other brokers in Wall Street knew that some of these loans are bad loans but they didn’t cared because they transferred all these loans to whoever wanted to buy them such as pension funds. They are just the intermediary or the pipeline. These pension funds could only buy AAA mortgage loan. The investors wanted to sell their loans to the pension funds but they needed to be rated AAA by these agencies. Their job was to evaluate the risk of the securities. What was the ethical issue here with the agencies? The riskier BBB looked as good as the triple AAA and they looked much safer than they used to be and they started to look more like a AAA security. So AAA requirement got lower as the market got smart.
Moodies, S&P, and Fitch are the three rating agencies. They didn’t give price but based on their ratings they got priced. The suggestion is that these agencies would come with the investment bankers. The business was getting more competitive so you just wanted to get more business or more business than the other agencies. When Anne Arundel was asked if standards lower she replied, The problem is that if you are the only person to know how these standards work, if investors are not paying attention and banks are only comparing what they will get from you instead of the other agency, then no one is paying attention.
This means that the investors are not concerned about the standards but how much AAA securities they could get from each agency. Then no one is paying attention? They are the ones that came up with the ratings, so this is not a fair statement. The investment banks were the ones who hired the rating agencies and they controlled the “repeating game”. It doesn’t make sense because the investors are the ones who should have made these appraisals instead of the investment bankers. It was advantageous for the investment banks to get as many AAA as possible to sell them as fast as possible since they only accepted AAA securities. They are not responsible for pricing the securities but only to rate them.
Your payment goes down and the interest rates went up and the difference was added to the principal. The three rating agencies provided which loans are risky and which ones are not. Investment rate goes from AAA to BBB and this were the ones acceptable. BBB sounded more safe than their used to be and the requirements for AAA were lowered. Rating agencies helped lenders to achieve these requirements but they reject these accusations. So mispricing of risk occurred because they wanted more business than the other agencies. CDO worked really well around the country and around the world.
CHAPTER 6 – ARCTIC INVESTORS
Takes place in Narvik Norway. The major of Narvik says that the town was getting fewer taxes so the town council took and loan to place the money in CDOs. They bought the securities from Terra. They didn’t know what they were buying but they knew they were AAA rating CDOs. Citigroup was selling CDOs to Terra who knew a little about them and sold them to municipalities like Narvik that didn’t knew anything about them.
Narvik taxes levels were going down. The problem was that their inflow was too low, do they decide to take action and increase this inflow. Knowing the risk rating was more important than knowing what it was. CDOs you take lower rated securities and bundle them up and create AAA securities. Why there were CDOS because the AAA are easy to sell but the BBB higher risk are tougher to sell and if you don’t sell them all you don’t make profit. Wall Street investment bankers created these new products.
Bill Dallas said it was like a frat party were people didn’t go home, we could have stop it but we didn’t stop it because if we had we are just one company we would have gone out of business and another company would have taken his business. This was not his strategy but these products were doing big money.
They talked about greed, a lot.
CHAPTER 7 INSIGHT INTO OUTSIGHT
The banks were never contacted by the SEC of the FED according to Michael Francis. But don’t use this in the paper because we don’t know if its true. The FED said that they could have done something but unemployment would have gone to 10%. The lack of oversight … allen grenspan (Federal Reserve) there are a number of things, that there is a little thragh in this business. It could have done it buy it would have been politically suicide. The SEC didn’t intervene because they assumed the banks would police themselves.
CHAPTER 8 THE BIG WINNER
Kyle Bass discovered that bad loans were being made by Quick Loan Funding and decided to bet that at some point they would go bad. He invested $1 billion.
CHAPTER 9 A WORLD OF HURT
Bill Dallas discovered in 2006 when most of the loans were going bad. Wall Street decided to stop buying these bad loans and no cash was going into the lenders so many lending companies started to close. Quick fund Lending and Own it by Bill Dallas closed. People were not able to make the payment son their loans so they decided to default the loans and the house of cards started to fall. Simmons blames herself and the industry because they made her the unpayable loan. Arturo Trevilla lost his home along with his dream to own a business. Some California neighborhoods became ghost towns filled with empty homes. Then homes prices began to fall and the global credit crisis began. In Norway people began to realize that their investment came to nothing or loses. The losses accounted a quarter of their budget. Narwik didn’t bought home CDOs but municipal bonds. The only winner was Kyle Bass by betting against the market. He made 600% in 18 months.
Retail sales went down after the attacks of 9/11 and the country was still recovering from the .com bust and the economy needed money to be invested and money to be spent. The lower the interest rates the cheaper it is to loan. The cost of borrowing became cheaper than the past generation. Prime interest rates were cut down along with mortgage rates. But at the same time prices were rising faster than people’s incomes. The problem was that if prices were going up and people’s incomes at a slower rate, then less people will be able to buy a house and therefore the demand for houses will fall and causing prices to fall. But the reality was that the price and demand didn’t go down. You swing for the fences until someone tells you to stop.
Subprime mortgage is a mortgage for the credit challenged and was created in California. Back then getting a mortgage was not easy because a lot of information was needed, such a visit, bank statements, and wait 90 days. You check two years tax returns fully documented. Bill Dallas was 30 years in the business. Fannie Mae and Freddie Mac were created by Congress to increase home ownership. They bought mortgage loans from mortgage lenders. They get cash in return and make more loans. They received constant flow from home owners and create the Mortgaged backed security. They dominated the market of mortgage backed security. They dictated the rules for lending. They only accepted loans from people that were able to make the monthly payments but the smaller morgages instutions wanted to change that.
They wanted to make sure that everyone could afford a loan or a home and they saw the right opportunity when these two companies got into an accounting scandal and received a penalty. They lost their dominance in the mortgage industry. With no leaders lenders could bend the rules. Who took over? Wall Street. Michael Francis worked with a company that wanted to take over Freddie and Fannie’s place. After 2001 and 2002 the mortgage market got in fire because cash was abundant.
Countries that were once poor now had money and they wanted to invest in something and Wall Street had what they were looking; securities backed by American homes and American borrowers. More revenue through more loans. There were no money down for people with good credit. Quick loan funding target people who couldn’t afford a down payment and had a bad credit; these are called subprime loans. You didn’t need to prove how much money you generated and it was called stated income. You didn’t need to look at assets either. The problem was that Wall Street said ok and they decided to buy them.
In 2002 the Bush administration pushed people to have a home. Arturo Trevilla dreamed to have an own business and a home. He bought a home with an adjustable interest rates. The first two years with low interest rates and then with higher interest rates. His broker told him that his home’s price will go up and that he could make a cash loan to start his own business. The paperwork was tricky and he didn’t read the contract and couldn’t understand it. He knowingling signed that he generated four times his salary and that he could afford to pay his $584,000. Cynthia Simmons also craved a better life. She lived in a bad neighborhood in California and decided to get out of there.
Compton was infested with gang warfare. For her own and her family’s safety she had to get away from Compton. An agent got her a house in New Belinda California, own of the best neighborhoods. Simmons said that her mortgage broker lied on her income and without her knowledge he signed to loans. More of these loans were made and Wall Street was loaded with cash as long with homeowners that had more cash. Retail sales were going up. With the value of their homes rising they were able to refinance their loans and put cash in their pockets to spend. Lots of refinancing and cash occurred.
Home values were rising and the equity on their houses was also rising. With this people refinanced their loans and made restorations and improvements. It took a week to close the loan and the conversation was wrapped up in 20 to 30 minutes. The loan officers had incentives to close more loans to generate more fees. Loan officers had no training; including pizza deliverymen. Their training was to close the loan and no license was required. Daniel Sadek was the owner of Quick Loan Funding in 2002 and became a wealthy man. Daniel sold Mercedes to young kids who were loan officers and he realized he wanted in that business. The subprime business was booming.
Frank Medina and wife refinanced their loan to finished the back yard and pay their credit cards. Kelly and Mark Gifford refinanced their loan again because the value of their homes were rising. People turned their homes into cash machines. Daniel was financed by many of the industries largest investors (citigroup, Wells Fargo, ben Bernsatein) and he didn’t had a degree and they secured his loans so that he could finance your loans. Wall street created a market for the worst mortgages. He never made a loan that WS will never buy. Almost always they found someone in WS to sell that loan. Bankers became intoxicated with the amount of loans they could sell to WS. (38:00 min)
What did banks did? They made this mortgages and used the warehouse line of credit and made a lot of these funds and pooled them.
The economic and political environment when it started?
What is the long term for the product? Product that came out of Allen … Explain all the parts
Why was people taking loans? To achieve the American dream, to pull cash put to do anything such as pay debts, to buy a house, to refinance their mortgage and get a better rate
What where the rating agencies job? To assign risk to the securities. One of the problems or moral hazard? Investment banks hired them to rate their securities (you cant say they did it to have more business).
Prices were increasing higher that people’s incomes. The issue was that people were using the house as an investment and they were counting on them. Prices rising in the entire economy, and income at a lower pace, so fewer people can afford to buy houses. It can remain that way and Kyle Bass said that income should rise or houses should come down.
GSC – Fannie Mae and Freddie Mac had two roles – they set the rules to what a good mortgage was and they stated the requirements for making a loan. They established what a good loan was. When they came back they bought subprime mortgages. They were regulated agencies and when they were taken out other unregulated agencies took their place.
As long as there is someone that will buy something from you, it will continue to supply it.
Liar loans? CDOs? Teaser rate? – The initial rate people pay because it is substantially lower before it adjusts. People were not concern that it will adjust because they were going to refinance the loan anyways.