Six Phases of the Housing Bubble
The popping of the housing bubble is much like the six phases of the typical project:
- Search for the guilty
- Punishment of the innocent
- Praise and honors for the non-participants
Right now, we seem to be in an overlapping state centered around panic (this phase can last a long time) with lingering pockets of “disillusionment” and the beginnings of the “search for the guilty” now under way.
As anecdotal evidence as to where we are in the cycle, I point to “Foreclosure Crisis Sparks Investigation” :
“Amid Wisconsin’s deepening mortgage foreclosure crisis, Legal Aid Society of Milwaukee on Tuesday announced an inquiry into what went wrong.
“‘We need to find out who are the people being foreclosed, who are their servicers and original lenders, and what kinds of loans did they get,’ said Catey Doyle, the organization’s chief staff attorney. ‘There are a lot of questions about who bears responsibility for this situation, [and] the only way to find out who the players are is to manually go through court files’…
“Volunteers working under the group’s supervision recently launched a review of all Milwaukee County Circuit Court cases filed since June 2006, Doyle said. She said the group will report its findings this fall by lender, ZIP code, loan type, and other factors…
“‘Loans made in the last year got progressively more and more outrageous,’ Doyle said. ‘It was like a feeding frenzy. Now we’re seeing 20 foreclosures a day on average in Milwaukee County, and sometimes 30. It’s really depressing.’
“All year, her office has been awash in complaints of deceptive lending practices — ‘dozens of them,’ Doyle said.
As part of the “search for the guilty” phase, there is an ongoing denial and coverup by some of those who are guilty but are trying very hard to stop any fingers from pointing in their direction. This “One on One With David Wyss, Chief Economist of S&P” shows what I mean:
“SUSIE GHARIB, NIGHTLY BUSINESS REPORT: More analysis now on that subprime credit watch by Standard & Poor’s. Joining us, David Wyss, chief economist of S&P. Hi, David.
“DAVID WYSS, CHIEF ECONOMIST, STANDARD & POOR’S: Good evening.
“GHARIB: Let’s begin by getting your reasons of why S&P put these mortgage- backed securities on negative credit watch.
“WYSS: Well, the basic reasoning is they’re simply not performing as well as we expected. The housing market is not turning around in a hurry. We didn’t really expect it to. Home prices still have a ways to drop. And we’re already seeing substantially higher default rates on these securities than we had anticipated at this point. So it was time to move them.
“GHARIB: But why now? All of these factors that you’ve mentioned have been going on and the housing sector has been struggling for some time — why now?
“WYSS: Well, largely because we need to get enough record on these securities to see how they’re performing. We knew the housing sector was underperforming. We knew that when we rated these securities. But what surprised us is that even given the poor performance for the housing sector, the default rates are running higher than we would have expected given the FICO scores here, given the loan-to-value ratios in these mortgages.
“GHARIB: Now, I understand that there are 612 mortgage securities on your credit watch list. And you’re reviewing them and some of them will be downgraded. How many of them will be downgraded, do you think?
“WYSS: Well, if we knew that, we wouldn’t have to put them on credit watch. But I would say, you know, the great majority. My personal guess would be at least 90%. Let’s keep this in perspective. We’re looking at $12 billion. That sounds like a lot of money — it is a lot of money to most of us. It’s only 2% of the subprime securities we rated during that period. And it’s 0.01% of the U.S. mortgage market.
“GHARIB: All right. So if it’s 2%, then how serious is this announcement that you made today? How worried should investors be?
“WYSS: I don’t think you should be worried generally, but obviously, what we do worry about, is there a concentration of this risk that has built up in some of the hedge funds, for example, that could cause problems?”
David Wyss is trying like mad (as are numerous others in the state of denial) to contain the damage by containing the negative sentiment. It’s galling to see shills saying with a straight face the problem is only with 2% of subprime when a full 65% of the bonds in indexes that track subprime mortgage debt don’t meet the S&P ratings criteria that were in place when they were sold.
The 2.1% downgrade of debt by the S&P is a joke. I talked about this at length in “Stress Test.” The ploy by David Wyss at the S&P is doomed to fail. Sorry, David, no matter how hard you try, you can’t put air back into a popped bubble.
July 12, 2007