The WSJ on the continuing mortgage crisis

Linking borrowers and a toxic security, and leading the Lehman look-back work

We tend to think of the Lehman crash as a bad thing. And, well, it was.

But, on the bright side, its fifth anniversary did at least inspire some excellent journalistic retrospectives.

Hey, it’s something, so let’s have a look:

A must, if maddening, read, for instance, is the Center for Public Integrity’s where-are-they-now series that finds the usual suspects—Fuld, Cayne, O’Neal, Prince—living large and usefully runs down some of the forgotten linchpins of the crisis among the regulators, including Christopher Cox, ex-Securities and Exchange Commission chairman who could have qualified as Hoover’s SEC chairman if there had been an SEC at the time. Cox, whose round-heeled tenure was stripped bare by Kara Scannell and Susanne Craig, then both with The Wall Street Journal back in June 2008, is now, predictably, in the consulting business, helping defend financial firms against regulation.

One of the merits of the series is that it reruns the classic 2003 photo from the Bush regulatory era: then-Office of Thrift Supervision head John Reich, and his predecessor, James Gilleran, posing over a stack of regulations holding, respectively, a pair of giant pruning shears and a chain saw:

Overall, it’s a handsome, well put-together series. Give it a read.

Joshua Green had the deepest look I’ve come across on Dick Fuld’s current life, a piece that is balanced to the point of being needlessly sympathetic.

William D. Cohan is appropriately disgusted by the signs of how little has changed after the crash, riffing off Jim Rutenberg’s piece from late August on the culture of staggering excess evident in the Hampton’s mansion market. Quote of the day might go to mansion builder Joe Farrell:

Where Mr. Farrell built speculative homes that sold for as much as $20 million before the recession, he now specializes in properties that sell for between $3 million and $10 million. “Mostly, though, $3 million to $6,” he said. “I love that market — there are probably 10 times as many people in that market than to buy an eight- or nine-million-dollar house, right?”

Hey, if you say so.

Finally, I find Michael Lewis to be wise in an interview with Bloomberg Businessweek:

Q: What surprised you most while reporting on the crisis?

A: The realization that it had actually paid for everyone to behave the way they behaved. Working on The Big Short, I first thought of it as this bet, and there were winners and losers on both sides of the bet. In one sense there was—but on Wall Street, even the losers got rich. So that was the thing I couldn’t get out of my head: that failure was so well-rewarded. It wasn’t that they’d been foolish and idiotic. They’d been incentivized to do disastrous things.

Read the whole thing there, too.

[ADDING: And by all means, do yourself a favor and read this fantastic Bloomberg piece on Wall Street’s shock and awe lobbying campaign of Gary Gensler and the Commodity Futures Trading Commission to water down derivatives regulations. The number of Goldman Sachs meetings with the CFTC in the last three years, to name just one firm: 152. Consider it a primer on the state of American democracy.]

But The Wall Street Journal’s Michael Corkery and Al Yoon come up with, for me, the most useful piece of them all, “A Toxic Subprime Mortgage Bond’s Legacy Lives On,” which links the performance of a mortgage-backed security made up entirely of Countrywide loans and the fates of mortgagees, many in Florida.

This is not an original idea, and in fact is becoming something of a genre in itself. One of the very earliest to link subprime bonds to individual borrowers was Richard Lord in his remarkable and now-forgotten American Nightmare: Predatory Lending and the Foreclosure of the American Dream, published in October 2004 (!). Mark Whitehouse did it in a celebrated piece, also in The Wall Street Journal, in 2006, though the borrower in that case was, oddly in retrospect, a young mortgage broker, so not entirely sympathetic. Alyssa Katz detailed the interwoven relationship between borrowers and bond buyers in her under-appreciated Our Lot in 2010. And Whitehouse, Carrick Mollenkamp and Anton Troianovski did it again for the WSJ, also in 2010. [ADDING: Mollenkamp uncorked another nice one last May for Reuters on how QE3 propelled returns for subprime bond investors even if it did precious little for an individual subprime borrower.]

But all the stories took different angles on this multidimensional question. And if it’s been done before, so what?

One of the benefits of this kind of work is that, like Laura Gottesdiener’s new book, it shows that these “look-back” stories are not, in the end, retrospective at all. These stories are still going on. They’re news. Gottesdiener, for instance, told of an ongoing migration of foreclosees, disproportionately black, that is at this point, only a little more than half over.

The latest WSJ pieces shows a vintage 2006 MBS as a Venus flytrap of trouble from which borrowers are still, in 2013, trying to extricate themselves.

Amanda Gavini and her husband, for instance, are doggedly trying to paying two loans totaling $398,000 of 11 and seven percent even as their house’s loan value has sunk to roughly half that amount. The story reminds us that the Treasury Department, to put a floor under the then-crashed market, created a taxpayer-funded initiative called the Public-Private Investment Program, or PPIP, through which the US provided debt and equity investments to nine bond buyers, totaling $18.6 billion. The program added a whopping five percentage points to returns, the story says.

The borrowers, however, are left to twist. The Gavinis, even with their good credit, can’t refinance because their home value is so low. But, what’s bad for them is good for bond holders:

In its current form, Mrs. Gavini’s mortgage is valuable to the investors in CWABS 2006-7, given its interest rate and steady repayment.

In the lingo of the mortgage-bond industry, her high-rate loan is “trapped” in the CWABS 2006-7 bond.

Among other things, the story, which includes a nifty graphic, helps to explain why bond prices have recovered to more than 90 cents on the dollar: most of borrowers in the bond had either refinanced, sold their homes or defaulted, leaving mostly only current borrowers, like the Gavinis, in the bond.

Another borrower profiled is a water-filtration system salesman who got a loan after emerging from a medical-related personal bankruptcy. The details of his story aside—an upward rate adjustment comes as a surprise to him, as it did to so many people—I was struck mostly by the video, where the stress of this outwardly calm borrower is made visible, at about the 3:50 mark, in a shot focusing on him absent-mindedly and anxiously rubbing his hands together.

There’s room to quibble with some of the editorial choices. The choice of focusing on white families (at least in the photos and video) doesn’t jibe with the fact that blacks, even controlling for income and credit scores, were far more likely to get a subprime loan than whites. And the focus on Florida is fine, but as the Center for Responsible Lending has pointed out, different markets had different problems during the mortgage frenzy. Weaker markets, like say, Ohio, were flooded mostly with subprime, high-rate products aimed at low-income borrowers while in boom markets, like Florida, the products were more likely to be option ARMS and the like, targeted to a surprising degree at higher-income borrowers (p. 26, fig 8).

Still, great work, which has the added benefit of showing the financial crisis may be over, but the mortgage crisis certainly isn’t.

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.