More on Blind Freddy
26 February 2008 at 4:53 am stevphel 1 comment
| Steve Phelan |
Apologies to everyone for my lengthy absence. Since January 1, I have been working in a new administrative role in the College of Business at UNLV {shock, horror}. (Details can follow after a formal announcement is made).
Further to my argument several months ago that “blind freddy” could have seen the mortgage problems, here is a nice insider view from Calculated Risk:
But a whole lot of these loans that are failing right now were originated as 100% CLTV stated-income loans, because the guidelines agreed to by the issuer allowed that. I am scratching my head over the logic here: I spent most of the early years of this decade, just as a for instance, blowing my blood pressure to danger levels every time I looked at the underwriting guidelines published by ALS, the correspondent lending division of Lehman. ALS was a leader in the 100% stated income Alt-A junk. And I kept having to look at them because my own Account Executives keep shoving them under my nose and demanding to know how come we can’t do that if ALS does it. I’d try something like “because we’re not that stupid,” and what I’d get is this: “But if ALS can sell those loans, so can we. All we gotta do is rep and warrant that they meet guidelines that Wall Street is dumb enough to publish.” Every lender in the boom who sold to the street wrote loans it knew were absurd, but in fact they had been given absurd guidelines to write to. What on earth good did it do to have those originators represent and warrant that they followed underwriting guidelines to the letter, when those guidelines allowed stated income 100% financing on a toxic ARM with a prepayment penalty?
The argument is that mortgage originators were not so much committing massive fraud but rather that banks were following lax guidelines that those on ‘the Street’ did not view as problematic (or perhaps that the ultimate investor did not view as problematic).
Entry filed under: Former Guest Bloggers, Myths and Realities.
Organizations and Markets 
1.
Peter Klein | 26 February 2008 at 9:56 am
One of the most interesting things I’ve read about the mortgage mess recently is this piece by Stan Liebowitz suggesting that regulators explicitly required banks to make home loans to non-credit-worthy borrowers to meet diversity criteria. Liebowitz, you may remember, wrote a major debunking of the famous Boston Fed study purporting to show widespread discrimination in the mortgage market.