Well, Bush can claim to be like Reagan in this situation

He's presiding over a real-estate crash worthy of the Gipper himself. with some interesting similarities.Shouldn't be all that surprising, seeing as King George the Lesser's brother was involved in that last one.

When the S&L scandal flowered in the 80's, I was in high school, and can't say I remember much about it other than the many condos that sat empty and rotting along Rat's Nest Road...I mean, Lakeshore Drive. We didn't get hit by it as hard, I believe, in part because we were still a bedroom community dependent on a different crashing economy--the domestic oil industry--and so few people were interested in trying to flip properties to make a quick buck.

But I read about it in my early 20s, back when I was trying to make a living (very unsuccessfully) selling insurance, and the common elements between the two are quite noticeable to me, the more I read about what's happening today. Some of them are pretty obvious--an overheated real-estate market causes both buyers and lenders to throw caution to the wind when it comes making decisions. Lenders make loans they shouldn't, tempted by the potential profits they'll reap if the loans come in, and buyers buy more house than they can afford, assuming they'll be able to sell at a profit if they get into trouble. The article I lined to above has a nice brief discussion on negative amortization, which is code for "sucker's bet" as far as I'm concerned.

But then there's this sort of stuff, which only sounds familiar because I read The Daisy Chain. It has to do with the way mortgage brokers today, and S&L owners back then, calculated profits. This is from the MSNBC article:

If many of those loans go bad, major option-ARM lenders will likely be forced to erase some of the profits that they have already booked from the exotic mortgages. Under an accrual accounting method allowed by regulators, option-ARM lenders routinely record the uncollected interest as income even though the money may never be paid.

This phantom income has swelled along with the use of option-ARMs. For instance, Washington Mutual recognized $706 million in uncollected interest from negative amortization loans during the first half of this year, a 61 percent increase from the same time last year.
Much the same thing happened in the 80s. S&L's made loans for developments, counted all the interest as profit even though it hadn't been collected yet (and in some cases, there was reason to believe it never would be), and gave their board members, etc. massive bonuses in real money based on phantom income.

What Washington Mutual and Countrywide and other lending institutions are doing here doesn't seem very different to me--perhaps there's no Don Dixon or Keating 5 to point a finger at and call criminal, but the underlying practice of counting uncollected money as profit and then boosting a stock price for greater capitalization seems just as flimsy to me now as it did then. I just don't see the upside to allowing this kind of accounting practice--it's far too open to abuse and gives us a false sense of how well a particular industry is doing. I have to think that if these mortgage companies hadn't been allowed to book this kind of profit, that the signs of the impending real estate crash might have been more visible to more people earlier, and we wouldn't be facing down a prediction of 1.1 million homes worth roughly $325 billion sinking into foreclosure in the very near future.

Newer Post Older Post Home