Housing bubble accomplices prepare for death
Just as terminally ill patients go through five stages of dying as described by the late psychiatrist Elisabeth Kubler-Ross in her 1969 book, On Death and Dying, so, too, do bubble participants experience denial, anger, bargaining, depression and ...
By Agencies |
NEW YORK: Each asset bubble has features and sponsors unique unto itself. Some folks went wild over tulip bulbs in 17th century Holland, while others flipped over not-as-yet-constructed Florida condominiums almost four centuries later. Yet they all share one thing in common, and it has to do with human nature.
Just as terminally ill patients go through five stages of dying as described by the late psychiatrist Elisabeth Kubler-Ross in her 1969 book, On Death and Dying, so, too, do bubble participants experience denial, anger, bargaining, depression and acceptance.
I first used this analogy in 1999 in writing about the bubble in internet and technology stocks. The paradigm seems equally applicable to today’s burst housing bubble. First came denial: It isn’t a bubble. Banks don’t have any exposure to mortgages. Housing is a small sector of the economy.
Subprime mortgages are a small segment of the home-loan market. Then came the February 7 double time-bomb from HSBC Holdings and New Century Financial that they were setting aside more money as a cushion against rising loan delinquencies. New Century filed for Chapter 11 bankruptcy protection on April 2, one of more than 40 lenders that have ceased operations or sought buyers since the start of 2006.
Soon the anger set in. Delinquency and foreclosure rates rose. Everyone was shocked to learn there was risk in risky loans. The press bombarded us daily with tales of shady lenders preying on victimised homeowners who would soon be out on the street for non-payment of mortgage interest. No one was more upset than our elected representatives. Congress wants blood. Whose is irrelevant.
“Members of Congress want someone to be accountable for sensible lending,” says Andy Laperriere, a managing director at the ISI Group in Washington. Let the bargaining begin. With the homeownership rate at 68.9% in the fourth quarter, just shy of the all-time high, the potential audience for congressional hearings and potential market for invasive action is huge.
Unfortunately, Congress comes up with some really loopy ideas. “Ideas that seemed out of the mainstream today may become mainstream in the future,” Laperriere says.
On Tuesday, agencies reported the top Democrat and Republican on the House Financial Services Committee, Barney Frank of Massachusetts and Spencer Bachus of Alabama, respectively, said that mortgage-bond investors should be liable for deceptive lending practices.
Congressman Bachus said there has been no specific agreement or decision on provisions in any subprime lending reform legislation. Frank’s office confirmed the no-agreement agreement on the phone. A hearing is scheduled for Tuesday, April 17.
Just as terminally ill patients go through five stages of dying as described by the late psychiatrist Elisabeth Kubler-Ross in her 1969 book, On Death and Dying, so, too, do bubble participants experience denial, anger, bargaining, depression and acceptance.
I first used this analogy in 1999 in writing about the bubble in internet and technology stocks. The paradigm seems equally applicable to today’s burst housing bubble. First came denial: It isn’t a bubble. Banks don’t have any exposure to mortgages. Housing is a small sector of the economy.
Subprime mortgages are a small segment of the home-loan market. Then came the February 7 double time-bomb from HSBC Holdings and New Century Financial that they were setting aside more money as a cushion against rising loan delinquencies. New Century filed for Chapter 11 bankruptcy protection on April 2, one of more than 40 lenders that have ceased operations or sought buyers since the start of 2006.
Soon the anger set in. Delinquency and foreclosure rates rose. Everyone was shocked to learn there was risk in risky loans. The press bombarded us daily with tales of shady lenders preying on victimised homeowners who would soon be out on the street for non-payment of mortgage interest. No one was more upset than our elected representatives. Congress wants blood. Whose is irrelevant.
“Members of Congress want someone to be accountable for sensible lending,” says Andy Laperriere, a managing director at the ISI Group in Washington. Let the bargaining begin. With the homeownership rate at 68.9% in the fourth quarter, just shy of the all-time high, the potential audience for congressional hearings and potential market for invasive action is huge.
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Unfortunately, Congress comes up with some really loopy ideas. “Ideas that seemed out of the mainstream today may become mainstream in the future,” Laperriere says.
On Tuesday, agencies reported the top Democrat and Republican on the House Financial Services Committee, Barney Frank of Massachusetts and Spencer Bachus of Alabama, respectively, said that mortgage-bond investors should be liable for deceptive lending practices.
Congressman Bachus said there has been no specific agreement or decision on provisions in any subprime lending reform legislation. Frank’s office confirmed the no-agreement agreement on the phone. A hearing is scheduled for Tuesday, April 17.
Let’s hope the committee calls some mortgage-bond investors to testify. If they can be sued for someone else’s actions, they aren’t going to buy any mortgage bonds. Period.
Higher yields may compensate an investor for increased risk, but they don’t offer protection against class-action lawsuits. Frank might want to call some folks from the state of Georgia, where the Fair Lending Act in 2002 rocked the mortgage industry.
The law assigned liability for predatory lending to everyone along the food chain, from lender to securitiser to investor. The reaction was predictable. Many lenders pulled out, the rating agencies refused to evaluate the pools of home loans and the secondary market dried up.
But hey, we still have two final stages of dying before the bubble is fully exorcised: depression and acceptance. If Congress follows through on its legislative reforms of the subprime market, the housing recession may turn into a depression. If that happens, can the rest of us find acceptance?
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