Irvine Housing Blog

Ignore Cassandra at Your Own Risk

Part of the reason that lax lending standards fueled the housing boom and created the subsequent bust was top managers ignoring the cassandras in their midst, according to a new report.

On the Developments blog our colleagues James R. Hagerty and Nick Timiraos take an in-depth look at the study prepared for the Mortgage Bankers Association by Clifford Rossi, a former banker who is now a finance professor at the University of Maryland. While the report focuses on problems with the risk models, one of the issues raised is risk managers being shouted down by business managers.

A strong economy made managers less risk averse, and the push for profits drowned out warnings. Part of the problem is that business managers came into the equation with hard data on profits and past performance, while risk managers were armed with fuzzy possibilities.

“An all too familiar theme regarding the experiences of risk managers during the period is echoed by a senior underwriter at New Century: ‘Risk managers at New Century were viewed as a roadblock rather than a resource in many instances,’” Rossi writes in the study. “Yet firms that had for many years enjoyed strong reputations as effective risk management organizations such as Fannie Mae and Freddie Mac during the pre-crisis years also appeared to increasingly turn a deaf ear toward risk management objections to higher risk products.”

To be sure, the flawed models that the risk managers were using further exacerbated the problems. When the bust hit, even some of the worst-case scenarios weren’t pessimistic enough.

During the good times, no one wants to listen to the dire warnings of cassandras. But business managers might want to remember that though the mythological Cassandra’s bleak predictions sounded crazy, they were accurate.

“You get married, and you borrow $1,000,000 and get your dream home.”

This post is far fetched.  It’s a great fantasy to think this is true in general for people residing in California.  In reality there was a very small percentage of people who did this and thought this way.

Now the cash is coming out of the coffers and the posers are kicked to the curb.

LOOKOUT for that ugly paint job in the 1.3 million kitchen.

IR, when you say “The following list of addresses are in default on mortgages over $1,000,000”, are you referring to mortgages with NODs, or 90 days late, or 30 days late, or ... ?

I lived thru the CA housing bust of the early 90s.  There was no squatting then, properties were foreclosed and put up for auction.  That’s how I got an amazing deal on a beach condo.  I never foresaw all this shadow inventory.  It really makes me angry.  Banks should be required to foreclose, dam the consequences.

I know a few families who are underwater and earning less than they did a couple of years ago; but I don’t know for certain if they’re part of the Shadow Inventory.  Unfortunately, it is taboo for most people to talk about the specifics of their finances.  So it’s not always easy to tell who has really reached (home 4x+ household income).

I do have a friend who’s lost quite a bit in a $1M+ Irvine home.  He parlayed the equity profit from the sale of two previous homes into a 2006 purchase of a $1M+ Irvine home.  I think his home is probably still worth more than the mortgage, since he put-down $300K+.  Who knows for how long…  The equity loss is painful.  It’s especially painful for guys like him who have econ undergrad degrees and MBAs, since he recognized the bubble, but chose to purchase anyway.  However, the equity loss is the least of his worries right now.  Like many, his household income is down from 2006.  It’s never fun servicing a jumbo mortgage.  It’s less fun as it eats into more of your diminishing income.

for those who haven’t heard of Gerald Celente, check out his website at..  Trends Research..

It is really confusing the way market going. Look at 55 Rising Sun, it sold at August 2005 price!

Debt = Wealth is 1984 speak or CA non-recourse speak when you can walkway from the debt with HEW cash in your pocket.

IrvineRenter,
What about a series looking into FL RE crash and Great Depression I vs. CA RE crash and Medium/Great Depression II?  Who were the inflater of the ballons and what market conditions (i.,e., finanical inovations) allow the boom bust cycle?  Who were the market makers in the 1915-1945 vs. 1990-2010?  Are they related?

“Our real estate market rests on a razor’s edge. On that edge lie high mortgage delinquencies, 12 million homeowners who have no equity or negative equity, high unemployment stuck at 10 percent, an unprecedented loss in house values following a bubble greater by far than any in the last 120 years, and a frightened Fed and Treasury who literally own the new mortgage market in the United States. Predicting that we are done with falling prices may end up landing the speaker north of reckless. Desperation hides behind a mask of confidence.” at http://seekingalpha.com/article/207014-housing-desperation-hides-behind-a-mask-of-confidence?source=feed by Michael David White

Actually, the FL land bubble and stock market crash of the 20s had the same root cause. People obsess about the stock market crash, but it did not cause anything, so much as it, and the land bubble were symptoms of the same disease, which was the manic credit expansion of the twenties.

The twenties were another credit bubble very similar to this one, and assets collapsed completely in ensuing years as the credit bubble deflated. The instruments were not quite so complex nor were there nearly so many layers of leverage, but there was enough asset inflation and loose credit to create a monster debacle when the bubble burst. It meant over 10 lost years for people of my grandparents’ generation in addition to the widespread deep poverty we have so many memorials of in photographs from the era.

The generation that reached early adulthood when things started unraveling rapidly in 1929, and suffered through over a decade of job losses, total lack of opportunity for advancement, and extremely tight credit, following. They were deeply imprinted by the misery of it and became the most frugal, cautious people ever, and as long as our financial system was in their hands, we were safe. But generations since, who grew up in ease and prosperity and had ample opportunity plus easy forgiveness for major mistakes, became very reckless. I expect the pendulum will swing sharply back the other direction with the generation just now reaching adulthood, and this generation will be very sober and careful, for they will be similarly traumatized as this disaster continues to play out over the next 10 years.

“Unfortunately, it is taboo for most people to talk about the specifics of their finances.”

During the boom no one had a problem talking about how brilliant they were for taking out a liar loan and financing a house they could never afford.

These HELOC abusing phonies are going to have a hard time adjusting to their pathetic little status seeking lives once the credit spigot has been cut off. Maybe the creditor law firms and collection agencies waiting in the wings to come after them will teach them a little bit of wisdom as to what is really important, but I doubt it.

The best case scenario for the bank is to let the Guy stay in the $1mil house for free because it will at least maintain the the property. If the guy is kicked out by bank no one else has the $1mil to buy that property. Happy bag holding suckers.