EppsNet Archive: Housing Market

Get Rich Making Dumb Decisions

31 Mar 2014 /

The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . . The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.

What are the odds that people will make smart decisions about money if they don’t need to make smart decisions — if they can get rich making dumb decisions?

— Michael Lewis, The Big Short

EppsNet Book Reviews: The Big Short by Michael Lewis

10 Nov 2013 /

I worked in the information technology department of a mortgage bank in the run-up to the 2007 implosion of the subprime mortgage market . . .

Given that it was fairly evident at the time that complicated financial instruments were being dreamed up for the sole purpose of lending money to people who could never repay it, it’s remarkable that very few people foresaw the catastrophe and that even fewer actually had the nerve to bet on it to happen.

Long story short, the major rating agencies — Standard and Poor’s and Moody’s — were incompetent in their rating of subprime mortgage bonds, giving investment-grade and, in some cases, triple-A ratings to high-risk instruments. A lot of people took the ratings — which implied that subprime mortgage derivatives were no riskier than U.S. Treasury bonds — at face value and acted accordingly.

But there were also some interesting psychological factors in play, not specific to the investment arena:

  1. Nothing really bad had ever happened in the subprime mortgage market. Every tiny panic was followed by a robust boom. Since nothing really bad had ever happened (albeit over a short and statistically insignificant period of time), nothing really bad ever would happen.
  2. The collapse of the subprime mortgage market would be a national catastrophe, and was unlikely precisely because it would be such a catastrophe. Nothing that bad could ever actually happen.

The Moreno Valley: Junkyard of OC Dreams

24 Aug 2009 /

The Moreno Valley is now the poster child for American housing gone wrong, and the New York Times weighed in with one of their stock magisterial pieces, the kinds that read purty but don’t say jack shit about reality. The Orange County connection is that two of the homeowners profiled in the piece moved to the MV because they couldn’t afford apartments in OC, which should clue the rest of the nation into how stupid they were to buy into Moreno Valley. Reporter Jennifer Steinhauer doesn’t note that even people in Colton ridicule Moreno Valley residents for living there. It’s not an area “filled with people priced out of Los Angeles and Orange Counties, or looking to escape louder, less-safe cities,” as the Times notes; it’s a place for fools who weren’t smart enough to buy a house in Calimesa. Shit, even Beaumont is better than Moreno Valley, and Beamount is sketchy.

— Gustavo Arellano, OC Weekly

[The New York Times piece is here.]

Now It’s Tomorrow

29 Apr 2009 /

Phoenix has achieved the unwelcome distinction of becoming the first major American city where home prices have fallen in half since the market peaked in the middle of the decade, according to data released Tuesday.

Money quote from Greg Swann, a Phoenix real estate agent: “We were living during the boom like there was no tomorrow. And guess what? Now it’s tomorrow.”

Signs of the Times

2 Apr 2009 /

The house two doors down from us is for sale. The house across the street is empty and for sale.

The woman behind us and the woman next door, who was recently laid off, have asked my wife if she knows anything about loan modification . . .

Thomas Jefferson on the Financial Meltdown

27 Mar 2009 /

ALBANY, N.Y. (AP) — If anyone could emerge from the AIG bonus debacle looking good, it could be New York Attorney General Andrew Cuomo.

Thomas Jefferson

Cuomo. KWOH-moh. Italian, I suppose.

I have no personal animosity toward Mr. Cuomo, but despite his favorable write-ups in the press, he is certainly no hero in these matters.

Americans have short memories. Even members of the press — or “the media,” as you now call them — who should provide context and perspective, have short memories.

Set the Wayback Machine to 1995. Bill Clinton is president and Henry Cisneros, the Housing and Urban Development (HUD) secretary, institutes a requirement that 42 percent of the mortgages financed by government-sponsored entities (GSEs) Fannie Mae and Freddie Mac serve low- and moderate-income families.

Things only got worse under Cisneros’ successor, Andrew Cuomo:

Cuomo raised that number to 50 percent and dramatically hiked GSE mandates to buy mortgages in underserved neighborhoods and for the “very-low-income.” Part of the pitch was racial, with Cuomo contending that Fannie and Freddie weren’t granting mortgages to minorities at the same rate as the private market. William Apgar, Cuomo’s top aide, told The Washington Post: “We believe that there are a lot of loans to black Americans that could be safely purchased by Fannie Mae and Freddie Mac if these companies were more flexible.”

Hey, I’ve got an idea! Let’s put half of the GSE money into mortgages for very low income black people! And let’s not trouble them for a down payment either:

Fannie also developed a “flexible” product line, providing up to 100 percent financing and requiring borrowers to make as little as a $500 contribution, and bought $13.7 billion of those loans in 2003.

And yet I often hear the ensuing financial meltdown being blamed on “greed” and “the evils of capitalism.”

That was not capitalism; that was government manipulation of the housing market.

Americans have very short memories . . .

Outside the Lines

1 Mar 2009 /

It’s the last high school roller hockey game of the regular season.

One of the kids’ dads shows up for the first time and asks questions like, “Do they win most of their games?”

Do they win most of their games?! Are you kidding?! You should know that. Even if you don’t come to the games, you could ask your kid when he gets home.

Another dad has a great answer. “Come over here,” he says. “I want to introduce you to your son.”

Over on the moms’ side of the bleachers, they’re talking about financial matters. One woman is sad because they bought their house at the peak of the market and they’re financially stuck in it for the foreseeable future.

Another woman almost cries describing how 14 years of contributions to her husband’s 401k have been totally wiped out.

Meanwhile on the rink, Northwood dominates Capo Valley pretty much as expected . . .

Good News, Bad News

8 Oct 2008 /


OK, now the good news: Hmmm . . . well . . . as long as I have a job, I can make enough to live on . . . I think . . .