Business & Technology | WaMu loaned millions to California home flippers convicted in fraud scheme | Seattle Times Newspaper: "In July 2007, Vijay and Supriti Soni of Corona del Mar, Calif., paid $440,000 for a home at 2129 W. Civic Center Drive in Santa Ana. Five weeks later, they resold the house to Javier Hernandez, the family gardener and handyman, for $660,000. That's a 50 percent gain in 38 days — at a time when real-estate prices in Santa Ana were plunging. But the lender that financed both mortgages, Washington Mutual, took a bath. Last March, Hernandez's loan went into default and in July the bank foreclosed. On the trustee's deed, the bank listed the home's value at $377,137 — $220,000 less than the outstanding loan...The Soni family's transactions with WaMu indicate it continued making risky loans long after its underwriting standards were supposedly tightened in mid-2007, said James Barth, a senior finance fellow at the Milken Institute in Santa Monica."
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Ah, the good old days. Can I be excused for politely asking why WaMu should not bear the full financial consequences of making loans like this? In other words, why should a single penny of tax dollars go to absolve WaMu of whatever loss they suffer here? Why is it even a public policy question at all? People are free to do dumb things with their money. When I do dumb things with mine, I lose it. WaMu spent years aggressively advertising their willingness to lend money to just about anybody. It seems that they meant it, so give them points for honesty. But it is still dumb. I'm not saying the whole bailout package is a bad idea, because I don't know at this point. But I hope banks that just did incredibly stupid things don't get bailed out.
3 comments:
The problem however isn't about irresponsible behavior by just a few financial institutions but instead most of the mortgage banking system. When diligent underwriting is abandoned in favor of cash flow underwriting (granting credit to anyone who can fog a mirror) and most lenders engage in it in order to remain competitive, we end up with a major collapse.
The collapse was so pervasive that even private sector resources to mitigate against the default risk of securitized mortgage debt -- credit default swaps such as those sold by AIG -- weren't enough and had to be bailed out by the government.
As a result of this debacle, we could see the end of mortgage securitization and a return to the mortgage lending market of decades ago, with mortgages made and held on the books of locally owned and operated institutions employing traditional underwriting standards.
Good point. I think the secondary market is pretty much gutshot at this point. Is the bailout going to mean that from now on the whole mortgage market is directly backed up by the taxpayers? I hope that isn't the end game. Maybe as you say we go back to 1928 and hope the next year turns out better.
What's really accentuating this mess is the CDS (credit default swaps) and other derivative instruments Warren Buffet aptly termed financial weapons of mass destruction. They pile leverage upon leverage since their issuers are assuming huge amounts of underlying risk. That's a very volatile combination that can quickly go out of control as AIG discovered when the purchasers of the CDS's came to AIG asking it to make good on its contracts and AIG couldn't. Apparently Paulson and the Bush administration believed this could have led to a meltdown of credit markets practically overnight and they didn't want that happening on their watch in an election year.
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