Chief
08-19-2007, 07:02 AM
http://www.theolympian.com/news/story/194057.html
John Stark
The Bellingham Herald
BELLINGHAM — In 2002, Washington's then-Attorney General Chris Gregoire came to Bellingham to announce what was billed as a historic legal settlement with mortgage giant Household International that would curb nationwide abuses in subprime mortgage lending.
Today, subprime mortgage defaults have set off a chain reaction of financial losses that are roiling stock markets around the world. Families in default could lose their homes, and others who had once expected to get a loan might find they can no longer qualify.
After the Household International episode and several similar cases gave clear evidence of the risks, many are wondering why subprime lending excesses were allowed to go on unchecked until the mortgage system went into a tailspin.
Kathleen Keest, a former Iowa assistant attorney general involved in the Household International case, said today's financial mess could have been avoided if regulators and major financial institutions had heeded the lessons of that case.
"It's not that it wasn't foreseen, because it was foreseen," Keest said. "In this era of 'the market is god,' people just didn't want to listen."
Joseph Mason, associate professor of finance at Drexel University, has done extensive research into the financial underpinnings of the subprime mortgage industry. As he sees it, the potential for disaster in the subprime lending arena should have been obvious before, during and after the Household International affair. "Household was among a number of aggressive players," Mason said. "It was not unique in its business model. By not cracking down after seeing this kind of behavior, regulators allowed it to grow and become standard industry practice."
Gregoire announced the 2002 settlement in Bellingham because about 400 Whatcom County homeowners were among those who said they had been misled into refinancing their mortgage loans on ruinous terms with Household International. A private lawsuit filed on behalf of those local homeowners was one of the factors that led Gregoire and other state attorneys general to negotiate a nationwide settlement in which Household agreed to make $484 million in restitution payments to homeowners.
At the time, Gregoire acknowledged that even $484 million would not come close to undoing the estimated billions in damages done to hundreds of thousands of homeowners struggling to keep their homes. But she said the settlement also forced Household to adopt a sweeping consumer protection system. "They can be a model for how this industry ought to do business," Gregoire said.
Since then, many firms in the mortgage industry developed different models.
Mortgage companies discovered that they could tap into the many billions of dollars in the hands of investors and hedge funds around the world who wanted safe investments but investments with a higher return than a bank CD or a U.S. Treasury bill.
The lending firms made loans to homeowners, and then converted those loans into bonds that investors could buy. Those investors, not the lending companies, wound up assuming the risk. Investors thought that risk was low, because after all, the loans were secured by homes.
The availability of all that investment money enticed mortgage companies to concentrate on making as many loans as possible, without worrying about borrowers' ability to repay. Brokers collected commissions, their employers collected fees, and if the loans never got paid back, it was some unknown investor's problem.
"Mortgage brokers and their employers were making the most money selling the most complicated and opaque mortgage products to the least sophisticated borrowers in order to generate maximum fees," said Stijn Van Nieuwerburgh, assistant professor of finance at New York University, in an e-mail. "The mortgage lenders did not care. They passed on all the risk to Wall Street."
Chuck Cross, vice president of mortgage regulatory policy for the Conference of State Bank Supervi-sors, agreed. Cross was the Washington Department of Financial Institutions' lead investigator in the Household International case. "We had all these dollars coming off Wall Street, looking for these high-return investments," Cross said. "Sound underwriting was just thrown out the window. Wall Street wasn't asking the questions. Nobody was doing due diligence. You had greed meeting up with naivete."
Washington Attorney General Rob McKenna said the burgeoning subprime mortgage business fed on itself. "Credit was too easy," McKenna said. "The sale and resale of mortgages accelerated."
**SCHNIPP**
None of this has slowed down the reassessments by the Counties though, because that's where the State's money comes from, in the form of ever-rising property taxes. I still say a lot of the problem you see today in the sub-prime markets was caused by assessments that partially drove the market.
Even today, look over in Portland, at the controversy surrounding putting the streetcar over on the East bank of the Willamette. People are talking about how the streetcar will drive UP the property values, without any discussion about what it will do to their property taxes. All people are thinking about is how they can refinance that property, for more cash.
Problem is the credit scores required to refinance anything just jumped from 620 to 720, and the market is going to be slowing considerably for some time to come, and folks are going to be eating the increased taxes along with the higher mortgage payments.
Same goes over here. Look at some of the projects that the City has proposed for Downtown, that are always talked about in the vaguest of financial terms; while real projects not under their perview (like the old Evergreen airport development) have tanked because of the real pressures from the housing markets. How can a 3,000 unit Condo project at the Boise Cascade site even be feasable under these kind of market conditions??
This is far from over....
John Stark
The Bellingham Herald
BELLINGHAM — In 2002, Washington's then-Attorney General Chris Gregoire came to Bellingham to announce what was billed as a historic legal settlement with mortgage giant Household International that would curb nationwide abuses in subprime mortgage lending.
Today, subprime mortgage defaults have set off a chain reaction of financial losses that are roiling stock markets around the world. Families in default could lose their homes, and others who had once expected to get a loan might find they can no longer qualify.
After the Household International episode and several similar cases gave clear evidence of the risks, many are wondering why subprime lending excesses were allowed to go on unchecked until the mortgage system went into a tailspin.
Kathleen Keest, a former Iowa assistant attorney general involved in the Household International case, said today's financial mess could have been avoided if regulators and major financial institutions had heeded the lessons of that case.
"It's not that it wasn't foreseen, because it was foreseen," Keest said. "In this era of 'the market is god,' people just didn't want to listen."
Joseph Mason, associate professor of finance at Drexel University, has done extensive research into the financial underpinnings of the subprime mortgage industry. As he sees it, the potential for disaster in the subprime lending arena should have been obvious before, during and after the Household International affair. "Household was among a number of aggressive players," Mason said. "It was not unique in its business model. By not cracking down after seeing this kind of behavior, regulators allowed it to grow and become standard industry practice."
Gregoire announced the 2002 settlement in Bellingham because about 400 Whatcom County homeowners were among those who said they had been misled into refinancing their mortgage loans on ruinous terms with Household International. A private lawsuit filed on behalf of those local homeowners was one of the factors that led Gregoire and other state attorneys general to negotiate a nationwide settlement in which Household agreed to make $484 million in restitution payments to homeowners.
At the time, Gregoire acknowledged that even $484 million would not come close to undoing the estimated billions in damages done to hundreds of thousands of homeowners struggling to keep their homes. But she said the settlement also forced Household to adopt a sweeping consumer protection system. "They can be a model for how this industry ought to do business," Gregoire said.
Since then, many firms in the mortgage industry developed different models.
Mortgage companies discovered that they could tap into the many billions of dollars in the hands of investors and hedge funds around the world who wanted safe investments but investments with a higher return than a bank CD or a U.S. Treasury bill.
The lending firms made loans to homeowners, and then converted those loans into bonds that investors could buy. Those investors, not the lending companies, wound up assuming the risk. Investors thought that risk was low, because after all, the loans were secured by homes.
The availability of all that investment money enticed mortgage companies to concentrate on making as many loans as possible, without worrying about borrowers' ability to repay. Brokers collected commissions, their employers collected fees, and if the loans never got paid back, it was some unknown investor's problem.
"Mortgage brokers and their employers were making the most money selling the most complicated and opaque mortgage products to the least sophisticated borrowers in order to generate maximum fees," said Stijn Van Nieuwerburgh, assistant professor of finance at New York University, in an e-mail. "The mortgage lenders did not care. They passed on all the risk to Wall Street."
Chuck Cross, vice president of mortgage regulatory policy for the Conference of State Bank Supervi-sors, agreed. Cross was the Washington Department of Financial Institutions' lead investigator in the Household International case. "We had all these dollars coming off Wall Street, looking for these high-return investments," Cross said. "Sound underwriting was just thrown out the window. Wall Street wasn't asking the questions. Nobody was doing due diligence. You had greed meeting up with naivete."
Washington Attorney General Rob McKenna said the burgeoning subprime mortgage business fed on itself. "Credit was too easy," McKenna said. "The sale and resale of mortgages accelerated."
**SCHNIPP**
None of this has slowed down the reassessments by the Counties though, because that's where the State's money comes from, in the form of ever-rising property taxes. I still say a lot of the problem you see today in the sub-prime markets was caused by assessments that partially drove the market.
Even today, look over in Portland, at the controversy surrounding putting the streetcar over on the East bank of the Willamette. People are talking about how the streetcar will drive UP the property values, without any discussion about what it will do to their property taxes. All people are thinking about is how they can refinance that property, for more cash.
Problem is the credit scores required to refinance anything just jumped from 620 to 720, and the market is going to be slowing considerably for some time to come, and folks are going to be eating the increased taxes along with the higher mortgage payments.
Same goes over here. Look at some of the projects that the City has proposed for Downtown, that are always talked about in the vaguest of financial terms; while real projects not under their perview (like the old Evergreen airport development) have tanked because of the real pressures from the housing markets. How can a 3,000 unit Condo project at the Boise Cascade site even be feasable under these kind of market conditions??
This is far from over....