Model Citizenship

I am not usually one to delve into conspiracy theories especially without solid proof. However, I have a theory that could be likened to the one that would suggest smoking addiction was a product born of secretive big-tabacco board room meetings.

During the 1990’s the real estate market in So-Cal lost nearly 40% (inflation adjusted) over a 7-year stretch. This slow crash was seen by many as a stark warning not to discount the importance of asset diversification - Still, as my theory begins, there were some who saw this slump as a glaring opportunity.

So - what is it that typically brings prices down in a free market (econ 101 here) - that’s right, lack of demand. Now I realize that there are often many things that can influence demand, but simply put; when nobody is buying, prices are falling. In the mid-90’s housing prices in some California areas fell so hard, that many people just up and walked away - accepting bankruptcy over the continued decline in their investment (Remember, many of these were “A-paper” borrowers). Stuck with properties with auction values less than 50% of their original purchase price, lenders were getting hammered in this exodus.

Enter the mortage company executives (and the beginning of my conspiracy theory). Recognizing that the quickest way to turn the housing market around was to get more people to become buyers, these “entreprenuers” went to work. It is a short jump of the imagination to see these executves sitting in a war room trying to figure this one out. Just how were they going to increase demand in a market that was floundering? Let’s see…

1. Lower qualification standards
2. Create some new, creative financing options
3. Start the process of routinely over-appraising homes. this would result in the following:
   • Higher loan values (more interest)
   • Entice more buyers to the market (get ‘em before they climb too high)
   • Convince would-be walk-aways that the market is recovering
   • Fuel the speculation fire!

So, once this plan was put in place and these “creative” loans were becoming more main-stream, the market began a rapid recovery - and the sub-prime lending business grew like wild fire.  It is also easy to imagine that while they developed their strategy, this think tank also discussed their exit plan (as any good strategist should). This is when they realized there really was no sound exit plan…With creative coprorate structuring (a.k.a REIT), a large number of shares in their pocket and obviously unsustainable dividends, these war rooms accepted their 8 - 10 year money making fates.

Corporate investors, speculators, sub-prime borrowers, and even company employees should have known what was coming. While marketing campaigns were launched proclaiming higher corporate ethics (like the New Century’s “New Shade of Blue Chip” program - which you can see from the website content worked out very well) many mortgage company executives were selling off their shares before they reported astronomical losses.

Rest assured, these shares were sold at profits - leaving investors (both in company stock and the securitized loans) to hold the bag. The exit strategy was complete…forcing the Federal Government to step in and sort out the mess.

Now with hundreds of class-action lawsuits following closely behind, the sub-prime lenders are dropping like flies - taking their catchy slogans, false promises, shady practices, and ……. yeah, your money with them. Definately not qualified for Model Citizenship!

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