Mortgage Crisis Spirals
(My comment: Belief in promises of “easy” money cause problems all over the world. Eventually, there is always a price to pay. Meanwhile, the current crisis presents buying opportunities to those who have saved and wisely invested.)
Mortgage Crisis Spirals, and Casualties Mount
from today’s New York Times
By JULIE CRESWELL and VIKAS BAJAJ
Published: March 5, 2007
Even in affluent Orange County, Calif., the growing wealth of executives and brokers in the booming mortgage industry was hard to miss.
For Kal Elsayed, a former executive at New Century Financial, a large lender based in Irvine, driving a red convertible Ferrari to work at a company that provided home loans to people with low incomes and weak credit might have appeared ostentatious, he now acknowledges. But, he says, that was nothing compared with the private jets that executives at other companies had.
“You just lost touch with reality after a while because that’s just how people were living,” said Mr. Elsayed, 42, who spent nine years at New Century before leaving to start his own mortgage firm in 2005. “We made so much money you couldn’t believe it. And you didn’t have to do anything. You just had to show up.”
Just as the technology boom of the late 1990s turned twenty-something programmers into dot-com billionaires, and leveraged buyouts a decade earlier turned Wall Street bankers into Masters of the Universe, the explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight.
Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.
Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure. Many investors are also likely to suffer: Wall Street firms made billions in fees, commissions and trading revenue from packaging and selling subprime mortgages to them as bonds.
New Century has emerged as a poster child for the lenders that rode that boom to the top and are now in free fall. The company disclosed on Friday that federal prosecutors and securities regulators were investigating stock sales and accounting errors. The latter could jeopardize billions of dollars in financing for the company, which issued $39.4 billion in subprime loans in the first nine months of last year.
Weakening home prices and rising default rates have rocked the subprime business. But for those who cashed out before the market turned, the ride up was particularly sweet. The three founders of New Century, for example, together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial. They collected millions of dollars more in dividends, salaries, bonuses and perks.
The company said in a statement yesterday that the founders were “still significant shareholders,” noting that they collectively owned about 7 percent of the company at the end of last year.
New Century’s stock price, which seemed to mirror the trajectory of the subprime business, peaked at nearly $66 a share in December of 2004 and traded in the $40s most of last year; on Friday, it was trading at $11 a share after the market closed. In a series of sales from August to November, two of the company’s founders sold shares for an average price of about $40 a share, for a total profit of $21.4 million.
It is not known whether the stock sales by the founders are among the sales being examined by federal investigators. Some of them had been part of scheduled stock sales that are often used by executives to diversify their portfolios. But some of the sales occurred on the same day that the executives entered the plans. A New Century spokeswoman, Laura Oberhelman, said that executives declined further comment.
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now those guys are what i call parasites.
i’m pretty sure that we’ll start seeing that here soon, as well as debt consolidators.
hopefully karma will come back around and bite them in the ass.
Mornin’ SKUNK. I knew you would get this. To me, the sad thing is that people were willing to kid themselves that there was easy money, and never thought twice about the consequences of over-borrowing. The opportunities this will create will be on the backs of the poor, who are losing what little they had. Yes, it is poor stewardship, and at the same time, it is heartbreaking. You should be a financial advisor, helping people make wise financial decisions, with your insights and self-discipline. Imagine . . . living UNDER your income!
i think i can see a nose dive into recession, hope the US economy bounces back cuz too many countries will be affected by this !!
it’s not only mortage rates going up, properties + houses going down, consumers are not spending as much, the government are struggling with medicare and the stock market is sinking …
The only people still making money are the big oil companies, arms companies and logistical companies (which are all sucking tax payers money from the US Government)
way to go Mr. Bush and fellow republicans !!
lol xpat, i dont think anyone would pay me to say:
“STOP SPENDING TOO MUCH YA IDIOT!”
cos it really only does come down to something as simple of living under your income.
and yeah part of it is the people going to the subprime brokers for a house cos after all no ones holding a gun to their heads. but the fact is that if you cant afford to own then you cant afford to own, especially not at the subprime mortgage rate terms and conditions.
its alot like dieting, if you wanna lose weight stop eating so much. its actually easier cos theres no such thing as a “glandular” or “genetic” problem in personal finance 😛
Hi Abdulaziz, I am glad to “see” you. I think that some of this had to be expected. In the United States, some of it is just demographics. There is a huge bulge of population getting ready to retire. Their kids are finishing college and starting their own jobs. Many haven’t saved a cent for retirement, haven’t got a hope of good health care and have been living over their heads – using credit cards, easy mortgages, equity loans. The really really bad news is that they haven’t been saving, they have no cushion against the kinds of financial reverses that hit everyone from time to time.
It’s still an incredibly wealthy country – people ARE making money. It’s that they haven’t learned to live UNDER the money they earn, and to save for a rainy day. That’s my opinion anyway. And you may be right, we may be in for quite a ride.
SKUNK: No, no Skunk, you have to use bigger words. You have to say “Mr. and Mrs. Overspender, I have these graphs of your income and expenses (have a handful of them, preferably in color) and an assessment of how we can make you wealthy in a matter of twenty years, by making some minor adjustments in financial approaches.”
I love the diet analogy. it’s true – wanna lose weight, eat less.
Wow!!! “You just lost touch with reality after a while because that’s just how people were living,” The executives say . . . Wow !!! When are we going to deal with the Reality of the homeowners now in default??? Because these executives said yes to loans that they should have said no to, knowing that they were setting people up to fail while they “made money for just showing up!!!”
The headlines read:
“Lenders have been battered by rising defaults and demands from their own lenders to take back soured loans at a loss.”
Are we supposed to feel bad for them?? After they made millions and millions selling loans, setting people up to fail, not thinking about the future impact on these borrowers?? Hit and run, that is what they did, never stopping to think . . . about anything except themselves and how much money they could make . . . their new car, or their new home, their fancy clothes, parties, vacations, the good life . . . and now they are in trouble . . . Boo Hoo . . . What about me?? And people like me?? Do they even remember our names??
“ . . . Assistant Treasury Secretary Anthony Ryan told Reuters that subprime problems appear “fairly well contained.” What does that mean??? It means this is not happening to him or his family.
So, when the headlines read: “Lenders have been battered by rising defaults . . .” how much sympathy can we have for them. They created this and real, living, breathing American families are paying the price.
Headlines read: “On Tuesday, the Mortgage Bankers Association said lenders began foreclosure against more than one of every 200 U.S. mortgage borrowers in the fourth quarter, a record.”
Shall I quote that again . . . ??? “ . . . lenders began foreclosure against more than one of every 200 U.S. mortgage borrowers in the fourth quarter . . . “ “Well contained . . . ???” WOW!!!
Again “ . . . more than one of every 200 U.S. mortgage borrowers . . .” are being foreclosed on.
So, my question continues to be . . . What happens to these borrowers now?? These one in 200 borrowers who just wanted “The American Dream” of homeownership . . . who were told they could afford “The Dream.” What happens to them/me? Is anyone going to address our tragedy? Has anyone thought about the lives of people being evicted from their “Dream?” Bankrupt in many cases . . . foreclosure . . . property values declining . . . no equity . . . no money . . . savings gone . . . credit trashed . . . facing homelessness because the reality is who is going to rent to us??? We are not good credit risks??? Some of us will never recover from this heartbreaking and humiliating event. What do we do now?? Where do we go??
Personally, I will never recover from this. I am over 50. This was my first home, my dream, perfect in every way . . . I was a renter my whole life and all I ever wanted was a home. What do I do now??
I am weeks, maybe days away from foreclosure and eviction. I filed for bankruptcy to erase my debt so that I can attempt to pay rent (that is, of course, if someone will even consider renting to me and if I can find an apartment that I can afford that will take me and my two little dogs).
Many of the companies that are now bailing out of the industry are all players in my story. My purchase money was funded by Fremont Investment & Loans. My refinance was funded by ResMae and I am being foreclosed on by Saxon . . .
I have no doubt that the banks, mortgage brokers and loan brokers will rebound and recover.
from this . . .???
So, I will restate the question that I want an answer to and that is: What happens to me and the more than one of every 200 U.S. mortgage borrowers whose lives are in shambles? How do we recover from this???? What happens to us?? Does anyone have the answer to this looming question? Have any of the fat cats who participated in and allowed this to happen thought about the fallout of their decisions to line their pockets?? We are NOT statistics, numbers to be reported. We are real people, real families, with real lives with a real, serious, HUGE problem . . . Who is stepping up to help us??? WHAT HAPPENS TO US NOW . . . ???