January 28, 2007

Liars Loans and Leverage: Fulfilling the "abundance of credit" prophesy of a great financial mania (and crash)

Manias, Panics and Crashes (the HP bible):

The mania part of the story is familiar: a new invention will revolutionize the economic landscape and bring forth unimaginable profits.

The abundance of credit, coupled with leverage (buying with borrowed money), accelerates this process and buying leads to more buying.

Then comes the panic: some event shakes confidence and wakes up investors to the mania that has clouded their judgment. This panic leads to a crash: borrowed money needs to be repaid and investors will sell anything at any price to meet the bankers' needs.

Skip forward to the Late Great Housing Ponzi Scheme:

In 1998, liars' loans — those with little or no documentation — amounted to 24% of all mortgage originations. So far this year, the association notes, liars' loans have shot up to an estimated 62% of mortgage originations.

Interestingly, a recent sampling of 100 stated-income loans by an auditing firm in Virginia (based on IRS records) found that 90% of the income statements were exaggerated by 5% or more, while almost 60% of the stated amounts were exaggerated by more than 50%.


Anonymous said...

What a coincidence! Bush and Amenjawad both are beset with low poll numbers at home, so they ratchet up the rhetoric and seem destined to wag the dog. Sure would push a housing collapse & faltering economy off page 1. If ever there's a pair who need each other more than ever, it's them.

sk said...

I'm sure this book is excellent - The book that alerted me to this phenomenon was the other classic - "Extraordinary Popular Delusions and Madness of Crowds" - Charles Mackay 1841. Its old-style Victorian English and because the book includes non-financial "madness of crowds" really brought home to me the innate nature of such behavior. A "free" copy of this book, by the Gutenberg project is at:
(Vols 2 and 3 are etexts 713 and 884).

I like looking at those older bubbles because it shows how ancient this bubble phenomenon is and that all the current rationalisations and modern innovations of managed fiat currencies, derivatives and the management of risk, credit scores, hedge funds, carry trade are simply masks for tried and trusted cons; things done again and again - credit expansion, Ponzi scheme, and "barkers" to whom social discourse assigns special knowledge.


Anonymous said...

Amen Brother,
The numbers don't add up.


bozonian said...

Yeah, instead of guys on the street yelling, "Step right up! Get the deal of a lifetime!" we have the corner sign spinners, bopping to Britney Spears, pointing you in the direction where you can get your excess credit filled to the brim and more.

FlyingMonkeyWarrior said...

Very Good post Amen Brother.

Anonymous said...

What did you expect the banks directed by the federal reserve, nor more federal than federal express to do? Their goal was to print money,lower interest rates; get as many borrows as possible to buy on credit and pass new bankruptcy law to legally enforce their rights to collect this printed money for large profits. It was that simple. They won! No new laws etc. can help now except warn the few left who have't bought yet. It's over.Live with it.

lost cause said...

Housing was more affordable in the Soviet Union. That proves socialism is the way to go. Nancy Pelosi and Hillary will take us to the promised land of a utopian socialism where everybody shares

Anonymous said...

These lenders are there to lend money. If the competition comes out with a stupid loan, eberyone else follows or they might as well close their doors. the lenders don't care anyway - they sell it off in bulk on the secondary market. Its the average Joe who gets hurt in the end when his pension is gone.

Anonymous said...

You are right Anon 7:07.

The gamble's been won. The banks, etc. will be collecting a LOT of interest from a LOT of folks for decades to come that was set in just the past few years.

Next step, housing prices fall so far that it introduces true stabilty into the market, for both new buyers and the lenders.

The only losers will be the people who bought what they couldn't afford in the last several years.

Those who COULD afford the payments will feed the banks with hundreds of thousands of dollars in interest payments on just one home loan.

And after the crash, new buyers will be solvent and regular mortgage int. payers to the bank just because well, after the crash, they'll be able to trully afford their home and payments.