Banking is a simple business; you take deposits, and you extend loans. So long as your loans are good, and your interest rates competitive, people are generally happy depositing money in your bank. However, competitive interest rates often means that profitability in the banking sector is quite low. Banks can only increase profitability by increasing volumes, which means taking on riskier loans. It is a strategy that has the potential to send a bank into bankruptcy. When a bank increases its lending volumes, it does so by reducing lending standards. It spends less time checking on the credit worthiness of its borrowers.
Now the New Century Financial is bankrupt, the true story of its extraordinary growth is coming to light. Guess what; it is a textbook case of a bank gone bad. Management focused on volumes and not on asset quality. Loan appraisers were told to ignore the risks from clients with dubious credit histories, and issue the loans. Inevitably, New Century Financial ended up with a loan portfolio riddled with defaults and foreclosures. Once this fact became public knowledge, the companies' financiers pulled the plug, and took away their deposits.
In today's Washington Post, a loan appraiser tells the hair raising story of what went on inside the company. The lesson is a simple one, if the lender doesn't allow it appraiser is to assess risks, the lender will end up with a lending book full of bad loans, and it will go bust.
The New Century saga raises very difficult questions for the Financial Sector Regulator, who was supposed to oversee and prevent lenders from behaving like this. After all, it is not the first time that the US has suffered from failed banks. So what exactly were they doing when New Century middle management were walking around with baseball bats intimidating loan appraisers?
(Washington Post) Maggie Hardiman cringed as she heard the salesmen knocking the sides of desks with a baseball bat as they walked through her office. Bang! Bang! " 'You cut my [expletive] deal!' " she recalls one man yelling at her. " 'You can't do that.' “Bang! The bat whacked the top of her desk. As an appraiser for a company called New Century Financial, Hardiman was supposed to weed out bad mortgage applications. Most of the mortgage applications Hardiman reviewed had problems, she said.
But "you didn't want to turn away a loan because all hell would break loose," she recounted in interviews. When she did, her bosses often overruled her and found another appraiser to sign off on it. Hardiman's account is one of several from former employees of New Century that shed fresh light on an unfolding disaster in the mortgage industry, one that could cost as many as 2 million American families their homes and threatens to spill over into the broader economy. New Century has become the premier example of a group of companies that grew rapidly during the housing boom, selling working-class Americans with questionable credit huge numbers of "subprime" loans with "teaser" rates that typically rose after the first two years. This business transformed the once-tiny New Century into a lending powerhouse that was held up as a model of the mortgage industry's success.
In the city after city, the story is the same. The story starts back in 2002, with a massive cut in interest rates prompt an undeserved rise in house prices. With increased housing demand comes a construction boom, and speculators taking a bet on house prices rising further.
It is now spring 2007 and the story is reaching a sorry conclusion; interest rates are up , speculators have long ago disappeared, the construction boom is replaced with recession, and prices are crashing. Everywhere, there is oversupply in the housing market.
However, it is dangerous to think that it is safe to return to the housing market, as this story from Tucson Arizona warns:
(Arizona Daily Star) Tempted by a generous price cut, Cynthia Saenz couldn't resist buying a new house in Vail about eight months ago. But after reaping benefits on the buyers' side of the market, Saenz is languishing on the sellers' side. She put her Southeast Side house up for sale five months ago and has reduced the 1,800-square-foot home's price from $230,000 to $200,000. Still, it hasn't sold. Saenz's house is among a record number of properties on the market in the Tucson area.
An explosion of home-building and numerous condo conversions during the boom of a few years ago have led to an unprecedented glut of homes now that the market has cooled, according to real estate executives and industry analysts. Investors who helped propel the boom are dumping properties and going elsewhere, they said. Many homes are being sold only with the help of price reductions and incentives.
Several industry observers predict the market will pick up within a year. But their hopes all hinge on whether the overabundance of homes can be reduced.
The delivery of this video clip is definitely wierd. However, the commentary is compelling.
In this particular video, Strange Gordon slams London as being the international center for money laundering. Of course, the London housing market is in on the scam. The message is clear; if you have the cash, London loves ya.
Gordon finishes the video with a bombshell factiod. Although London has some very tough anti-money laundering legislation, there has not been a single prosecution of a UK banker for handling dodgy money. Given that one in five house purchases over $1 million is bought by a Russian, this beggers belief.
So there you have it. London isn't just the most bubblicious city in the world. It is the money laundering center of choice for the world's criminals.
Hey! You've won a ride back to the top
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