Twiddle Dumb and Twiddle Dumber - Part Two!

By
Real Estate Broker/Owner with Home Point Real Estate DRE # 01492725

In Twiddle Dumb and Twiddle Dumber - Part One I talked about reading Michael Lewis's book The Big Short and some of my opinions about the Stock Market and Big Corporations.  Some of you that think you know me ought to really see what I have to say.

In these post I want to try and explain what they were doing in the Bond Market and why it was bad.  I do not claim an expert knowledge and I am really looking for your feedback and understanding too.

Basically I think we all understand that mortgages get bought and sold after the home loan is made.  Well they took it one step further with the bond market.

  • Mortgages were backed as a group and sold in bundles.  Basically you spread the risk around.  If you bundle a bunch of mortgages together and a few go bad it should not hurt too much.  Better yet small investors can buy a piece of this mortgage market. 

    To me this does not sound like a bad idea.

  • However, as we have all heard about the Lenders were under pressure to ease lending standards.  As we all know a lot of bad mortgages were being made because the Feds wanted them made and the lenders were making money selling them.

    This should have been red flag # 1.

  • When they package these loans into Bonds (and it may sound hard to believe) most people had no understanding of how bad they were.  Even if they knew there were some issues everyone just kind of had an attitude that mortgages had this history of performance that would dictate the future.

    Yes they all drove right by Red Flag # 1.

  • Once the Bonds were bundled they then sliced the bond into tiers with different levels of risk.  Those that took the more sure pay off got lower rates and those with the riskier tiers got a higher right.  Apparently this is very complex with many pieces; but they took a pile of crap cut it into pieces and called the bottom crap and the rest cream.

    This is why I find it hard to believe no one understood what was going on.  Someone planned these tiers in detail.

By Now You are Bored and not Reading in Detail - Well Guess what that is how this problem happened people stopped paying attention and were just happy to be making money!

Take a break and I will pick this up in Part 3.

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Ambassador
786,771
Charlie Ragonesi
AllMountainRealty.com - Big Canoe, GA
Homes - Big Canoe, Jasper, North Georgia Pros

Of course they understood. So enter AIg selling insurance on the crap. Execpt they could not call it insurance because then they would be regulated so they called it derivatives. So those who kind of understood were told don't worry your insured.

Oct 01, 2010 04:42 PM #1
Rainmaker
1,259,115
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

All Mountian - You are on the right track - but it is even worse than that!

Oct 01, 2010 04:46 PM #2
Ambassador
883,369
Lane Bailey
Century 21 Results Realty - Suwanee, GA
Realtor & Car Guy

One of the problems that would have been hard to notice, except by those VERY much on the inside was that the "ratings" were totally bogus.  Toxic poop was sold as golden... 

Oct 01, 2010 11:18 PM #3
Rainer
131,827
Paul Warkow
Paul Warkow-D.G. Weber Law Associates - Hauppauge, NY

In addition, investors were told that these were mortgages.  Nothing could be safer than having real property as collateral.  What could possibly go wrong?

Oct 01, 2010 11:37 PM #4
Rainmaker
437,367
JL Boney, III
Russell and Jeffcoat - Columbia, SC
Columbia, SC Real Estate

There were tons of signs out there that things could and would go wrong, but as long as everyone was making money, then no one cared.

Oct 03, 2010 10:52 AM #5
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Gene Riemenschneider

Turning Houses into Homes
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