country, great country
.
KUDLOW:
And we wish you all the best in the holidays and the new year
. 9
It became hard to miss the excesses, though. When Alberto and Rosa Ramirez began looking for a home in late 2005, they had realistic expectations. The couple, strawberry pickers who each made $300 a week in the fields around Watsonville, California, near Santa Cruz, pooled resources with another couple working as mushroom farmers and determined they could afford payments of $3,000 a month. When an agent showed them a four-bedroom, two-bath home in the city of Hollister for $720,000, they blanched. They had no assets, six children, and no money for a down payment.
But their agent assured them they could handle it, even though the initial monthly payment would be $4,800. The zero-down mortgage from New Century had a “teaser rate” that would put monthly payments at $5,378, but the agent said they could refinance and “get the payments down to $3,000 or less,” Rosa Ramirez recalls.
The refinancing never happened, though, and cutting back on expenses didn’t help much. About a year after buying the home, they could no longer make the payments. 10
A Washington Mutual loan representative made a loan to a borrower claiming a six-figure income from an unusual profession: mariachi singer. The representative couldn’t verify the income so he just had the singer photographed in front of his home dressed in his mariachi outfit. The loan was approved. 11
E VERYONE seemed to be drinking the housing Kool-Aid, right? Well, not exactly.
A number of traders saw a real estate bubble forming, but precious few bet that it would burst. There was little incentive for even skeptics to make a radical wager against housing. Traders bucking the bullish consensus risked squandering big profits and ruining their careers if they were wrong. They might make money in a downturn, but who knew how long it would take for any slowdown to materialize? Any profits they might generate with a bearish stance likely would be offset by losses elsewhere at their firms, limiting their paycheck. Radical moves didn’t lead to long careers on Wall Street. So even the bears sat on their hands, letting the bulls run wild.
For those utterly convinced a housing crash was in the offing, there was precious little they could do, anyway. Sure, you could sell a home and move into a rental, but that meant packing up the family and kids, and leaving behind neighbors and friends, never a fun task. A futures market on housing prices never took off. Shorting home builders and lenders was a possibility. Some bears favored a “derivative” investment called a credit-default swap, or CDS, that served as insurance protection for the debt of companies in the subprime-lending business. But these companies didn’t always suffer when housing fell, because some of them benefited in a weak market by grabbing business from rivals or by selling out to larger companies. Besides, there weren’t that many of these corporate bonds in the market; it was difficult to create CDS contracts to protect bonds that didn’t exist.
Shorting risky mortgage loans seemed like the most obvious move for financial traders, but it was even more difficult to get one’s hands on these “mortgage-backed bonds,” or claims on pools of hundreds ofdifferent risky loans, to short them or create a CDS contract to protect this debt. Sometimes a bullish investor would buy an entire issue of mortgage-backed securities and resist lending it out, making it impossible for investors to short.
As a result, a shocking few pros in the mortgage-bond world bothered to predict where home prices were going. The direction of interest rates and inflation seemed more crucial to these bonds than the health of housing, which never seemed to hit big problems, anyway. Most analysts didn’t even have basic data about things like the levels of foreclosures around the country, and how home-price appreciation differed,