I’ve restrained myself from commenting on the mortgage mess for some time now, but today is the day, so if you come here to read about the farm, skip this entry and hook back up with us tomorrow.
I work for a large mortgage company 30 hours week in addition to the farm and have some thoughts on the meltdown.
Does anybody really believe that prices of commodity products have any real link to the supply and demand of those products? I look at the cost of a barrel of oil and cost of a bushel of corn over the past few months and shake my head in disbelief.
On the corn side, Chicago corn futures rose to an all-time high on Monday June 9th, 2008. The new-crop July 2009 corn contract scaled an all-time peak of $7.20 per bushel. This week when I went to the local co-op to pick up some turkey feed, the price was $3.50 bushel.
Earlier this summer, crude oil prices topped out at $145 per barrel and last week dropped to $61 per barrel.
So what’s the real price of these items, and what/who is really controlling the market price? Supply and demand have not swung a factor of 100% less for corn and oil in the last few months, but yet the price for each is less than half of what it was in June. So supply and demand are no longer the leading factor in determining a good’s price?
The stock market is a similar story – in some ways the prices are all just make-believe, not cemented in any concrete factors other than what people believe will happen. As an employee of one of the nation’s largest mortgage companies and banks, I’ve had a front row seat to the housing and mortgage crisis. This isn’t a crisis that is unforeseen as Alan Greenspan tried to explain. Maybe my simple co-workers and I aren’t sophisticated enough to understand what has happened.
But I clearly remember 2-3 years ago sitting around the office with my co-workers and for months marveling at the make-believe in the mortgage industry. Our company was a leading mortgage provider and as other companies passed us up in the rankings, we skipped further and further down the charts and saw profits climb not nearly as fast as our competitors who were offering loans that defied common sense and historical measures – for example loans valued at 125% of the appraised value and loans granted on “stated income” where a maid at a motel 6 could say she earned $250,000 a year and the mortgage company would not require verification of income.
Our company faced a near revolt among the loan officers when a number of years ago the company changed the way appraisals were ordered from a system where the loan agent ordered an appraisal from a buddy, to a “blind” appraisal where appraisers were not assigned by a loan officer, but by a “blind” central assignment system so loan agents couldn’t get cozy with appraisers and inflate values. The loan reps saw their competitors doing this and they were losing market share. We knew that these exotic loans were building a house of cards that would only last as long as house values rapidly appreciated.
The simple-minded people in our cube farm knew that it was not possible for housing prices to increase 20% a year (sometimes a month in some markets) forever and when something happened that reversed house prices increases, the whole house of cards would tumble down.
What we didn’t anticipate in the housing melt-down was the impacts it would have on the rest of the economy. So far, the crash has been relatively good for our company – the two companies that practiced these exotic loans (Countrywide and Washington Mutual) are now both essentially gone, so in the long run, the conservative lending practices will reward my employer. I’m a little disappointed that the so-called free-market politicians did not let the prices of financial companies drop to their real bottom, so well-run and managed companies could be rewarded for their discipline and buy the failed companies, but instead the government has come in and “rescued” these failed companies – thus preventing the prudent companies from being rewarded for their approach by buying ex-competitors on the cheap who gambled, won big, then failed.
One of the most amusing stories I’ve heard is people who appear at foreclosure hearings and ask one simple question: “Show me that you have custody of the mortgage note that is the legal document that shows I owe you the money. Otherwise I won’t pay, because any bank could come in and say they own the loan – you must produce the note that you have when you purchased my mortgage note from the loan origination company.” The loans have been sold so many times, some up to 7-8 times, sometimes split into 3-4 different mortgage pools or securities and the original note was lost in the rush to securitize and repackage the loans. Many judges have thrown the foreclosures out of court, because the legal status of the foreclosing entity could not be proven.
At some point, we will once again need to make things or provide services that have a tangible value – trading imaginary prices of goods to other people who think they can make a living based on the value of the imaginary price of a good doesn’t really provide a service any more. When futures traders try to justify their service – it is to provide a guide and guarantee of a price of good for some time in the future that helps those producing it today plan and invest – but when it comes to the wild prices swinging 100% in a few short months, it has the opposite effect and injects great uncertainty into the system. So my thought is we need an economy based on real goods and services – much of the making of real goods has been moved off of US soil. So with every time of change comes opportunity – we have the choice of scaling up entire new industries or chasing the same old jobs. It is a great time to be an innovator once again, as we look for new pathways to work that produces something of value.