Was The Subprime Bubble Built On Borrower Speculation?

Posted by John Carney, Feb 06, 2008, 2:10pm

In the official version of the subprime mortgage mess, the villians “thousands of mortgage brokers who banked big bucks steering customers into subprime loans and the hundreds of mortgage traders and bankers at investment firms” who recklessly securitized the loans and sold them off to investors. Borrowers are typically portrayed as naïve victims of the mortgage bubble—save for a few actual fraudsters.

But what if the fraud was a lot more widespread than we've been lead to believe? According to a story in today’s Wall Street Journal—hidden from sight way back on page B 8—subprime speculation seems to have been fairly common.

Roughly 20% of mortgage fraud involved "occupancy fraud," or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in.

Some home builders have come to similar conclusions: They now believe that as many as one in four home buyers in some markets were investors during the boom, up from their earlier estimates of one in 10 buyers.

This of course does not bode well for the default rate. If default projectionss are built on faulty assumptions about owner occupancy, they will tend to underestimate the number of defaults. Non-resident speculators are far more likely to default than occupying owners, especially if the value of their home has fallen below the amount they owe on the mortgage. This looks like it is going to get worse before it gets better.

Speculators May Have Accelerated Housing Downturn [Wall Street Journal]

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Posted in: Subprime Mortgages

Comments

Posted by JJ, Feb 06, 2008 2:15PM

No, on Black people:

http://consumerist.com/352587/countrywide-made-racist-sub+prime-loans

Posted by Anal_yst, Feb 06, 2008 2:20PM

Clearly the voice of one employee whose tenure was admittedly "short-lived" is reason enough to get all up in arms over such an accusation...

Posted by , Feb 06, 2008 2:30PM

umm, duh. what was the point of that sotory

Posted by , Feb 06, 2008 2:40PM

This story reminds me of last year after NEW went under and the clowns on CNBC such as pissonme were droning on about what a small % of the economy 'subprime' was.

Posted by Ramblin' Wreck, Feb 06, 2008 2:46PM

How about some damn personal responsibility in this country? If you thought you could be clever and use some kind of mortgage with terms that you couldn't even understand to finance your ventures in trying to do what they do on Flip That House, you get what you deserve. Social Darwinism at its finest.

Posted by s75, Feb 06, 2008 2:49PM

This reminds of a just over a year ago when all the liberal nuts were up in arms (no pun intended) over how the banks are unfairly discriminating against minority borrowers making it too hard for them to get credit and whatnot.

I even recall listening in to a congressional hearing on the subject. Maybe that was 2005 though. Either way, ludicrous.

Posted by anon anon anon, Feb 06, 2008 2:54PM

This is new information???? We will be laughing about who was hog greedy for a couple of years. I remember foreclosing on a doctor and his wife, a nurse, who became "developers" in the Savings and Loan bubble. They were so dumb they tried to fight the foreclosure on one of their properties. Talk about dumb as dogshit. And there are millions of other smart people just like them out there. Thank the lord.

Posted by Anal_yst, Feb 06, 2008 3:01PM

Proving (because sometimes otherwise smart people need to be reminded of this), that Doctors are no more Developers, than Developers are Doctors...

Posted by , Feb 06, 2008 3:06PM

Wait. There was speculation in housing?

Posted by Silly Me, Feb 06, 2008 3:18PM

OK, lets give the WSJ a Pulitzer for this story. Who would have thought that an "asset class" such as houses would not be attractive to speculators where the prices kept going up like there's no tomorrow? A real find, if you ask silly me.

Also, even for those who were not speculating, but wanted a home to live in, there situation might not be better than speculators if their negative equity continues to bite them in the ass. As any good businessman would do, they will cut their loses, hand in the keys and go rent somewhere.

Posted by Anon a, Feb 06, 2008 3:19PM

Ritholtz's response to the same article:

"I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:

- Do you presently own your primary residence?
- Is your home currently listed for sale? Or, are you in contract ?
- What is the asking price? Who is your real estate agency?
- RE Agent name? What's their phone number?

Of course, none of these questions were asked, and no due diligence was performed, as these lenders were whoring clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."

If there was any genuine interest in not lending to speculators, its easy enough to verify . . .

Posted by Quantster, Feb 06, 2008 3:23PM

I watch HGTV a lot as I love house hunters.

Often there are other shows which promote home flipping, etc. I felt shows like that showing people making easy money in just 3-4 weeks along with easy credit from fed and homebuilders tempted people to gamble and most people lost when they gamble.

Posted by Ron, Feb 06, 2008 3:33PM

This is why we should've voted Ron Paul last night. Now there will be no personal responsibilty.

Posted by N, Feb 06, 2008 3:34PM

in my opinion those "naive victims" should be referred to as "dumb-as-shit-retards," whether they're speculators or not. every one of those borrowers walked into a bank and applied for a home loan, and then signed a contract in which they promised to pay the money back. all of a sudden they're victims just because they were too ignorant to understand the terms of the contract? the politicians and other poorpeoplesympathizers are basically telling the borrowers, "it's ok to take money you can't pay back, and it's ok to remain stupid as to your own personal finances because if you can't take care of yourself, we'll just blame the banks and financial firms. you have no personal responsibility for your financial decisions."

Posted by Anal_yst, Feb 06, 2008 6:04PM

brings to mind the ol P.T. Barnum (attr) quote, "no man has ever gone broke (man, not mortgage broker, sic) underestimating the intelligence of the american people"

The brokers were playing a game that was snowballing, and they were riding the wave until it hit the bottom (mix metaphors, I know, so sue me). In that, they are at fault, and it likely would have been in the firms best long-term interest to chill out on such aggressive practices, butt hindsight is 20/20.

Alot of fault lies on, as 3:34 says, "dumb-as-shit-retards" who got sold on the dream, hook, line, and sinker. History seldom rewards the stupid, and certaintly congress shoudln't be going OUT OF THEIR WAY to do so. fin

Posted by Lord, Feb 06, 2008 6:52PM

The not-so-dumb ones refi-ed all the cash out before letting the lender have it back.

Posted by George, Feb 06, 2008 8:44PM

Is it any surprise that speculators idiotic enough to commit fraud -- because they assumed they would "flip" their investments and be gone before anyone noticed -- have a giant role in all this? Small-time speculation, at the peak of the economy, was a national obsession for the many idiots who would watch basic cable and begin to get distorted notions of the level of difficulty, not to say skill, involved in the invest/rehab/sell for profit real estate game.

Posted by Crob, Feb 06, 2008 9:32PM

Who's down with OPM? It's all about Other People's Money, baby. For the borrowers it was the bank's money so why not take as much of it as they'll lend you and if we can't pay it back then fuck it, we'll abandon the house since we're not losing any money. For the banks, they were selling the mortgages and again it was OPM, passing it on. The mortgages buyers were securitizing the mortgages and selling the bonds to investors. The investors, hedge funds, pension funds, foreigners are all chasing higher yields with OPM.

Posted by Crob, Feb 06, 2008 9:32PM

Who's down with OPM? It's all about Other People's Money, baby.

Posted by Crob, Feb 06, 2008 9:33PM

Who's down with OPM? It's all about Other People's Money, baby.

Posted by , Feb 06, 2008 10:47PM

And exactly how many geniuses here have a crap load of worthless CDO's or CDS on their desk at the moment? How far from Par are they? Why did you buy them again? Who held a gun to your head to have a desk load of this shit? Why didn't you sell them before the crisis?

Musical chairs stopped and your the bag holder... get used to it. When the Machine lays you off... you can join the masses worried about where their next gig is coming from.

Your the brilliant one who made this bed. Time you realized it, and started to act like a bunch of adults. Oh wait, its to late for that now. Your the Bag Holder of Triple AAA steaming brown paper. Ding Dong... The door bell just rang... and the bag is burning at your door... now what?

WS threw a massive party, got naked and wallowed in shit, and thought it was cool... and when you woke up covered in crap... its not the your fault... Its the majority of America who screwed you...

Classic...

World might be a better place with out a crap load of cry baby bankers who wrote the rules (contracts) and still woke up with a pile of shitty paper and a P/L that sucks...

Leverage Kills... When your not as smart as you think you are... So, who all is net short here? Come on... someone here has to have actually had a brain and used it...

Posted by , Feb 07, 2008 1:49AM

@10:47 - last paragraph. Think you meant "...you're not as smart..." not "your."

Go back to retail dickwad and show some compassion for the 98% of Wall Street that actually did not play a major role in this.

Posted by , Feb 07, 2008 11:51AM

"we're taking a great deal of care to get the answer right," Moody's Chief Credit Officer Andrew Kimball said on Thursday. Kimball added that there is "hysteria" in the markets over the expected cumulative losses from subprime residential mortgages, but at the end of the day no-one really knows how large they will be, saying "it's a crapshoot," he told a conference organized by the New York Society of Security Analysts.

Posted by Ted Gibson, Feb 07, 2008 12:10PM

What amazes me is that this "news" is just now reaching national attention. It has been common knowledge locally (in CA, NV, AZ) that upwards of 25% of home purchases were by investors--widely reported in local newspapers in this region. Local real estate agents were reporting this, as well as DataQuick, who simply compared property address with the tax bill mailing address. That lenders didn't know this, or deny knowing it, is just another indication of the incompetence and stupidity rampant in this whole real estate scam.

Posted by Anon a, Feb 09, 2008 8:27PM

@1:49AM "show some compassion for ... Wall Street"

LOL! Funniest thing I've ready all day... Good luck with that.

Posted by Anon a, Feb 09, 2008 8:29PM

crap... read, not ready. Now who's laughing, dammit!

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