Monday, December 3, 2007

I'm Baaaack

Long time, no post.

Sorry about that. Life happens.

A lot has happened over the last month. I will attempt to add my point of view to the areas that I think are worthy of discussion. Please feel free to agree (or disagree) using the "Comments" link below.

I find the idea of a borrower bailout extremely interesting. I agree with Fed Vice Chairman Kohn's statement that the moral hazard related to acting is less of a problem than not acting and allowing innocent bystanders bear some portion of the cost.

What I find particularly interesting, however, is the part that fraud and sloppiness seems to have played in the sub-prime crisis.

Fitch put out a report entitled The Impact of Poor Underwriting Practices and Fraud in Subprime RMBS Performance (in case you were wondering, RMBS is an acronym for "Residential Mortgage Backed Securities)."

One source that they relied on in their analysis was a report put out by BasePoint Analytics, LLC. BasePoint's analysis found that up to 70% of mortgage early payment defaults can be linked to a significant misrepresentation on the original loan application.

Fitch conducted their own analysis using a very small sample of early defaults from 2006, many of which had what appeared to be strong credit characteristics. Fitch reviewed the loan files for the sample and found problems with more than half! Some of these problems were technical (borrower's balance sheet and income didn't support the level of stated income) and some of them were close to fraud (receiving credit for being "authorized" to use other people's credit - the credit agencies have stopped raising FICO scores for this method of "credit enhancement").

If fraud played such a large role in the current crisis, I don't think it's the borrowers that the government should be looking to bail out.

I suggest that you read the report if you find this subject at all interesting.

Given the potential cost to the US taxpayer, I would expect most US citizens to have some interest.

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