Can you spot the problem here?
…would you sell the rights to future appreciation to an investor who also is willing to absorb losses that might be incurred should prices go down?
A group of Rockville, Md., financial engineers is betting you will. They are developing an instrument called a home appreciation participation note that addresses the affordability issue facing many buyers and the risk that the house they are purchasing could fall in value…
in return for future house-price appreciation, the investor makes a sizable cash infusion so you can afford the house you want — or keep the one you’re in now.
Not too hard to see, huh? Doesn’t this sound a little uncomfortably like what we’ve just been through—investors helping people get houses they otherwise can’t afford?
But there is no skepticism at all in this syndicated piece in the Los Angeles Times (I don’t see the column in any other publication) by Lew Sichelman. Hey, maybe this is the answer to all our problems and will allow us all to buy better houses (or condos, for some of us), but if it sounds too good to be true…
First of all, the term “financial engineers” ought to be a red flag to any reporter or editor. These geniuses are a big part of why we are where we are now. When ever you hear “financial engineering” substitute “gaming the system” and you’ll be better served.
And re-read this—doesn’t it sound bubblicious (emphasis mine)?
The more the investor puts up, and the more affordable the house becomes.In other words, in return for future house-price appreciation, the investor makes a sizable cash infusion so you can afford the house you want — or keep the one you’re in now.
Nothing like incentivizing people to buy houses they may not be able to afford so you can profit if they’re able to somehow afford them. And the homeowner still could get socked:
Selling your home-buying risk, as well as your reward, is “still somewhat of a gamble,” because there’s no telling just how far values could fall in a particular market, Cassidy acknowledges. But in the examples above, values would have to fall by 20% to 30% before the decline affects your bottom line, depending on how large a roll of the dice you sold.
That could never happen! Seriously, where’s the context in this piece? Why print what’s effectively a press release for financial engineering in housing? I’m not saying there’s no value at all in this idea—especially for people who are under water—but come on.
This is a bad show by Sichelman and the LAT. This piece could have run in late 2005 or early 2006 at the height of the bubble and still been lousy journalism.
With all we know now, there’s just no excuse for it.
You suggest that there's "no excuse."
But there is: Local boomerism, shilling for the advertizers. In sports, it would pass unnoticed.
yeah, I know: there hasn't been a recent bubble burst in sports.
But in principle it's the same thing, innit?
#1 Posted by woody, CJR on Tue 10 Mar 2009 at 10:33 AM
You occasionally put "emphasis mine" before quotes, but I never see any italics or bold font in the quotes. I tried on both IE and Firefox.
I think you overdo it on this piece. Heaven forbid someone write a finance story that doesn't devote half its column space to rehashing the financial crisis and pointing out the similarities what people are doing today and what they did in 2007. This is extra important in cases where the story contains the words "financial engineering" "subprime" "loan" "bank" "hedge" "risk" "bonus" or "bridge tournament".
#2 Posted by Chris Corliss, CJR on Tue 10 Mar 2009 at 03:27 PM
Hey, Chris,
Thanks for pointing that out. I think there's a bug. When you read the posts on the Audit homepage, the bolds don't show up. If you click on the post I think they do. I'll forward this on to our Web folks.
As to the LAT piece, I don't need half of it to be a rehash. But give us some context, some skepticism, and point out the potential downsides, which aren't necessarily obvious to everyone.
#3 Posted by Ryan Chittum, CJR on Tue 10 Mar 2009 at 05:28 PM
No, Ryan. "Some skepticism" won't cut it here. What is required is mockery of only the most savage caliber. The reporter must begin by asking the financial engineer: "Let me get this straight. You are planning to make money by helping people buy houses they otherwise can't afford? And that's an excellent plan--and not at all illegal--why?
#4 Posted by Edward Ericson Jr., CJR on Tue 10 Mar 2009 at 05:59 PM
Ah, I see the emphasis now.
Well isn't financial innovation about helping people afford things they previously couldn't? That is the nature of a bank loan: you get to buy a house today that you would otherwise have to save 15, 20 or more years to afford to pay cash for. That is the nature of the public company: people can pool assets together so that society can create things that no one person could afford, like a Boeing factory or a team of thousands of computer programmers to develop an integrated software suite. That is the nature of advances in portfolio theory: allowing people to get greater expected returns without accepting more risk.
In fact, this is the nature of all innovation. Allowing people to do more with the finite resources that they have.
#5 Posted by Chris Corliss, CJR on Tue 10 Mar 2009 at 06:26 PM
Innovation? Hardly. This stuff has been around a long time, and is commonly referred to as an "equity kicker."
Now, there is nothing wrong with equity kickers, per se, just as there is nothing wrong with credit default swaps, PER SE. Understand?
There is simply no way a homeowner or prospective owner should be anywhere near these shysters. These contracts are far more financially complex than a home mortgage, and the potential for future problems (ESPECIALLY at termination) will certainly not be grasped by any but the MOST SOPHISTICATED buyers.
Considering that sophisticated buyers would almost never need to enter into one of these contracts, THEY SHOULD SIMPLY BE OUTLAWED. Before any more people get hurt.
#6 Posted by Benedict@Large, CJR on Sat 14 Mar 2009 at 11:14 PM