I’m watching a movie called “The Big Short” – a quasi-documentary style exaggerated factual film about the subprime housing bubble that took place in between 2005 to 2008.
Back in 1997, I bought a house in Gilbert, Arizona for $235,000.00. 588 Gary Court – here’s the house as it stands right now: http://www.trulia.com/homes/Arizona/Gilbert/sold/217100-588-W-Gary-Ct-Gilbert-AZ-85233
The house is a large four bedroom place – 2443 square feet – and had a custom pool I had built with a waterfall and beachfront style entry with pebble tec (a more natural rocky surface) which I worked with designers to custom build, and was just a wonderful place I enjoyed.
I went through a divorce in 2002, and while I’d have had no problem affording the house on my own with my salary – the mortgage was $1546 a month, I’d just been stressed the fuck out with the divorce that I crumbled and sold it – losing the $20 grand I’d put into it in addition to the sale.
It was painful seeing the house go.
At the time though – I had two friends – Ron Ostreim and Bill Stoke – who’d purchased houses for $1 million and $750,000, respectively, despite these two men making roughly what I was making. Now Ron had always been GREAT with his money, and had a sizable chunk of change stored away in the bank, but Bill and I were roughly similar – similar credit scores, similar history with money.
I’d purchased ‘enough house’ for me, a place I could relax at that wasn’t too huge, was in a relaxed area of town and close to the freeway and close to movie theatres and places to eat which I enjoyed.
Bill and Ron and purchased their places on the outskirts of town, at a premium in ritzy areas.
But what confused me was… How.
If banks were doing their work, while I could certainly afford a little more house, maybe $400,000, how could Bill AND Ron afford what they were getting? It just didn’t make logical sense. How could the banks approve them on their incomes for 2, 3, 4x the cost of a house I was getting…
So I asked Ron one day. We were always frank and open about financial discussions.
That’s when he informed me of ‘stated income loans’
Stated income loans are based on one thing: How much income you claim to have, and how much you claim to have in the bank. So people who claimed to make a couple hundred thousand a year did not have their income verified, nor were the asked for bank account records.
So way back in 1997, I knew the situation was toxic for loans and for banking in general, if this was the type of loans that were being offered.
What wound up happening is the housing market continued a rapid incline, where two years after I sold my property for $235,000 it had inflated to $500,000.00, literally doubling the money for the home owner who purchased my house.
For investors with big money seeking to profit off this appreciation, banks started combining these mortgages into pools of mortgages, where fifty, a hundred, a thousand houses were all pooled together in something bankers referred to as CDO’s – or Collateralized Debt Obligations – all based on sketchy loans.
And some investors, getting a whiff of the same scent I did back in 1997 realizing the great potential these sketchy loans had for default, started betting – note the keyword here – BETTING – that these CDOs would start to fail.
The math was pretty straightforward. The CDOs made money when the debt was paid, and made even more money when adjustable rate mortgages matured and the interest for these ‘subprime loans’ increased 100, 200%.
One of the things Michael Baum says in the movie is
“Americans with dreams of owning their own home are no longer going to be able to realize this dream”
Spencer Anglin, a
jackass former friend of mine would get into discussions of how someone else giving you money to live in a house that you then pay them recurring payments does not make the house yours. Personally, I just thought it was retarded. Sure, the tax benefits might be there for a housing loan, but are you really owning your own home?
Let’s be real. For that house I ‘bought’, I spent $20,000.00 to move into it. In the five years I lived there, I spent $1546 for my mortgage + insurance which totaled an additional $92,760.00. Household costs for maintenance totaled about $4000. And when I sold that house that I thought I owned, I lost my initial investment and was out all the expenses and costs of living there.
Grand total, I paid $116,760.00 for the ‘privilege’ of calling a house my own when the simple fact of the matter was, I was taking care of the bank’s property. Now someone made a shit ton of money on that house shortly after I left it when it appreciated. But it was me who had put the effort into securing and building this property, and me who had put my own hard earned time and money into it which I never saw a return.
So no, I didn’t own this home, the bank owned the home and I was paying the bank for the privilege of CHOICE to customize the property as I saw fit.
Spencer’s in the business of Mortgages, and I think he confuses choice with ownership. You can ‘spin’ the debt any way you want to, but the fact of the matter is, a collateralized obligation is just that – a collateralized obligation.
To put this in easy to understand – a collateralized debt obligation is something which ties physical property to the money that’s owed. So if you don’t pay the money that’s owed, the bank (or holder of the debt) is legally within their rights to seize the property. With houses. this is through foreclosure, but there are other types of collateral based debts such as cars, jewelry, and more.
This is where Spencer and I differ.
A collateralized debt, no matter how much incentive there is to promote the assumption of those debts, is still a debt and the asset is still technically owned by the title holder until that debt has been paid in full. So if my house depreciated from $250,000 to $125,000 a decade later, and I’ve only paid down $100,000 in principle, then I still owe the bank $150,000 should I sell it, $25,000 which would come out of my pocket.
SURE I might ‘save some’ in taxes and other incentives.
But going to my example, I spent an average of $1946 a month for 5 years to live in my place THE BANK OWNED. I created my own corporation to shift the burden of taxes to the corporation from personal expenses, and paid myself $40,000 a year while my corporation was making around $150,000.00 a year (or so) through my consulting. There was no way I could itemize my expenses at any salary to benefit from the mortgage, which made owning the company and shifting income through it far more beneficial financially to me.
So what I’d effectively done was rented a home I’d customized for nearly $2000 a month.
Which was fair market value. Most homes in the area of that size were renting for that same amount.
So I’d neither gained nor lost money on the exchange. It was as if I was renting a nice place I’d customized, and nothing more.
And I have some amazing memories there too 😉
Now going back to the movie though. There’s something these film makers miss.
They call attention to the ‘fraud’ of those involved with these transactions.
But never, not once, do they make the statement or allude to this as being ignorant behavior.
I myself predicted the banks acting like this way back in 1997. I had shifted my assets accordingly – I had about a million in liquid assets at this point and with the exception of my house, I stayed away from mortgages, investment banks, hedge funds, and all that because of what I was seeing – this weird house of cards.
But being real.
I’d bought onto the concept of a mortgage backed property because I had faith in THE ASSET, not the debt itself if that makes sense.
I DID buy a property in Costa Rica – but I’d paid for it in my own cash while on vacation with my third and final ex wife – Amy Newton DURING the bubble. Another property I had owned for a long time before, a three bedroom luxury condo in Rocky Point, Mexico, was also on my list of property assets – but none were US based properties. I wasn’t afraid of the US housing market. I just knew it was overvalued and invested accordingly.
So here’s the thing about CDOs these swap investors didn’t take into account.
The success of the CDOs prior to this showed tremendous FAITH in the US economy.
The movie depicts the activity as fraudulent, and the stupidity (or ignorance) as detrimental to the homeowners.
But that’s just plain and simply weird.
And here’s why:
When a homeowner quits paying on a mortgage, the bank has an obligation to itself – to maintain the value of the homes they have invested in.
While most banks will undergo a foreclosure expeditiously to maintain home value, when there’s a LOT of these happening, the bank can’t keep up. So the banks have to take other – more beneficial to the American public – methods to maintain their investment.
IE: Actually working with the homeowners as if they were home owners, rather than numbers.
Statistically – it’s a well known fact that things which drop the value of a home – include lack of occupancy and lack of upkeep (typically associated with lack of occupancy).
Other factors contribute to this – such as length of time a property’s been listed, and external factors such as crime, unemployment, etc.
The BEAUTY of the mass failing of CDOs is the house didn’t cease to exist. The asset was still there.
And for the first time, the banks had to face their obligation to work with their customers to maintain their property’s value.
EVEN if it meant living in that property for free.
Contrary to what this film posits, there was no fraud that occurred.
People were choosing to believe in the US Economy as a whole.
People were choosing to believe that one sector of an economy failing wouldn’t collapse the entire thing.
People were just choosing to believe, period.
In 2011, I bet $2500 on the dollar on the foreign exchange market, in a 400 to 1 highly leveraged bet that the US Dollar would rise, dramatically, against the Euro. Between Germany’s manipulation of the Euro to extract wealth from the surrounding countries and Spain and Greece’s recognizing of this and their economic tribulations, I knew the Euro was in trouble.
In order to participate, I had to present myself as financially being capable of paying off any debt accrued if I was dramatically wrong.
Sometimes, I wonder…
Did I exceed my wildest expectations, is that what nearly drove me insane, and was everything I owned taken from me in a concerted effort by this country and world to force me to understand poverty and homelessness before I was given my earnings?
Money and the financial markets no longer confuse me like they once did.
But you can bet your ass I won’t be putting all my money on double zero again and will be investing according to what I want to see happen, and trying to avoid predicting the failure of others to make my money.
But then again.
Maybe I’m just broke and out the $3 million I had taken from me for reasons I’ll never fathom.
The movie’s a lesson in ‘be careful what you wish for’.
And I truly respect it for that.
But sometimes there’s more to failure that failure.
That banking failure alone decoupled the dollar from the property.
And may have singlehandedly made real materialism possible in this universe.