Happy Birthday, Mortgage Meltdown!

by John Glynn on August 9, 2011

note to RSS and email readers: please forgive a prior send of this well before it’s final completion/edit…

It’s rather amazing what is going on in the markets four years after the events that catalyzed the Mortgage Meltdown, which seemed to reach it’s critical point on or around August 9, 2007. That’s four years ago today.

When people talk about things coming ‘full circle’, it’s usually suggestive of a journey that begins in a state of equilibrium – or at least normalcy – then confronts a challenge, then overcomes the challenge. Back to equilibrium. Full circle.

In 2005, deceleration in the housing market was beginning to undermine the financial world of homeowners at the fringe of mortgage qualification. Subprime lending was an unsustainable model without aggressive price appreciation, and as year over year housing gains turned from manic toward flat, capital flocked clumsily to the market, delivered on absurd terms to individual buyers. The subprime borrower, also clumsy if not careless – or at best, naive  to rely on the capitalist machine to govern for them in consumerism – didn’t stand a chance.

It wasn’t until 2006 when the subprime mortgage market started to falter. Like an inflated balloon let loose into the room, subprime lending was moving faster and faster right until it sputtered into lifelessness. Despite warnings, banks were throwing money after more and more aggressive terms. A frustrated drunk at the blackjack table, on a cold streak, abandoning strategy and desperately pushing his remaining chips into a final bet.

Even as a few institutions began to fall out, those that remained just cranked it up, anxious to deploy capital and quickly sell the paper. Nowhere in history have so many grown adults joined together to play a game of hot potato.

Four years ago. August 2007. Federal Reserve Chairman Ben Bernanke was served on a plate with knife and fork the words uttered in preceding months, on numerous occasions, by various Fed members – and others – when describing the undulating caldera that subprime had become.

  • “Largely contained” (Secretary of Treasury Paulson 3/17/2007)
  • “Mostly contained” (Dallas Fed President Fisher 4/4/2007)
  • “Severe but contained” (Freddie Mac Treasurer Bitsberger 6/26/2007)
  • “Likely to be contained” (Federal Reserve Chairman Bernanke 3/28/2007)

Yeah ok.

Contained like Lardass Logan at a pie-eating contest. Get it? Seriously, don’t watch that; it’s disgusting.

Yesterday we had the 6th largest single day point decline on the Dow Jones Industrial Average. A credit downgrade by Standard and Poors, who (by the way thanks for nothing!) rated toxic waste mortgage debt like it was solid gold right up to and into the Mortgage Meltdown. It couldn’t be more confusing.

This mess has been going on for 4 years. We had brief moment of mild optimism, economically. Now we’ve come full circle. Back into panic and uncertainty, and most of us never had the chance to dust ourselves off.

The Chain Reaction

On August 6, 2007, a Friday, the subprime meltdown jumped the firebreak and defied containment when American Home Mortgage filed for bankruptcy. Earlier that week they failed to move a significant chunk of Alt-A mortgage paper, and in turn ran out of capital to make new loans. In the span of the week, they failed one sale, locked up, and went under. That’s how thin the ice was.

This was not subprime; it was Alt-A. A lot closer to prime than to subprime. There were no buyers at any price. The Wall Street backed mortgage market seized up, and everybody put their hands in their pockets and waited for somebody else to make a bid.

The very next Monday, August 9, 2007, BNP Paribas threw their hands in the air admitting that they couldn’t figure out how to value mortgage investments in the absence of market activity.

Just like that, it ceased being “contained to subprime”. By the next day, we had contagion. It spilled over into Alt-A, into other continents, began to infect Wall Street in and out, exposing and bringing to the public awareness the dizzying hierarchy of three letter acronym investment derivatives: CDOs, CLOs, CBOs, CMOs etc. There were bailouts and panics and takeovers, and the subprime problem turned Liquidity Crisis was now a Mortgage Meltdown. And on its way to becoming the Financial Crisis, and the Great Recession.

Reflecting From The Front Lines

That sequence of events ruined my business. Or put more objectively, my business was exposed to risk I didn’t see coming, and suffered. I chose to put my head down and plow through it, and for the most part had to restart and rebuild my business from day one. I consider this to be the completion of my fourth year in business, second tour of duty.

There was a good solid year, from the day American Home Mortgage shut their doors onward, where I was in a state of utter delusion. I can only see it looking back. Frantically trying to make sense of the markets. Trying to help clients make sense of how it affected them. There was a flurry of failed initiatives and bailout related programs for the mortgage industry, concocted by the White House, and that banks refused to participate in. Each one offered promise, and each one lead to false starts. Raised hopes for homeowners struggling to get out from under bad mortgages, and then nothing. Wasted energy. I was wrapped up in the panic as a homeowner, and as a business practitioner. Nothing to show for it. It took nearly a year of swimming upstream, before some life reemerged.

But at the same time, like so many who experience great tests, I can look back and appreciate the lessons. I’ve been forced into disciplines I never knew I needed. I’ve gained confidence in my ability to survive. And rather than give up on the trade, I’ve affirmed an interest in it. Despite the anxiety levels reached a few times, the frustration of constantly shifting regulations and guidelines, the drama, the strife, the windows into some distressful places people are in, despite all of that, I’ve enjoyed this time. There’s no question, I am stronger because of it.

So happy birthday, mortgage meltdown. I appreciate you and wish you good riddance all at once today.

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