The $103,000 shack: a perfect explanation of why housing is a mess

If you are wondering why the U.S. housing market is a mess, watch this video about a $103,000 mortgage that was used to finance a shack –literally, a shack. Of course, the mortgage was packaged with a bunch of others into a mortgage backed security, which was rated AAA.

This scenario sums up the mess that was the U.S. housing market pretty nicely. Wait until you hear what this piece of property recently sold for.

UPDATE 5/6/2009: I just noticed a post “Meet Lady Subprime” by Richard Cohen of the Washington Post from January which referenced this situation. He said:

The French have the comely Marianne, the British have the fetching Britannia, and we have the welcoming Lady Liberty. May I now suggest, at least for the duration of the current recession, a new feminine emblem of our times: Marvene Halterman of Avondale, Ariz. At age 61, after 13 years of uninterrupted unemployment and at least as many years of living on welfare, she got a mortgage.

She got that mortgage less than two years ago. She got it even though at one time she had 23 people living in the house (576 square feet, one bath) and some ramshackle outbuildings. She got it for $103,000, an amount that far exceeded the value of the house. The place has since been condemned.

This tale, unfortunately as American as apple pie, was recounted recently in the Wall Street Journal. Since the story ran over a long, holiday weekend, it is possible that you, not to mention the occasional member of Congress or, God forbid, the various government regulatory agencies, missed it. It is the only possible explanation for why there have been no executions, never mind arrests.

Halterman’s house was never exactly a showcase — the city has since cited her for all the junk (clothes, tires, etc.) on her lawn. Nonetheless, a local financial institution with the cover-your-wallet name of Integrity Funding LLC gave her a mortgage, valuing the house at about twice what a nearby and comparable property sold for.

According to the Journal, Integrity Funding then sold the loan to Wells Fargo & Co., which sold it to HSBC Holdings PLC, which then packaged it with thousands of other risky mortgages and offered this indigestible porridge to investors. Standard & Poor’s and Moody’s Investors Service took a look at it all, as they are supposed to do, and pronounced it “triple-A.” “Double-A” must mean no running water.

At each step of this mortgage process, a moral crime was committed. Halterman’s interest rate would have ballooned to 15.25 percent, when in all likelihood 1 percent would have been a reach for her. (Her welfare and disability payments totaled about $3,000 a month.) After paying off all her debts and the usual fees, Halterman got $11,090 at the closing. After processing her mortgage, Integrity cleared nearly as much: $9,243.

Would You Pay $103,000 for This Arizona Fixer-Upper? – WSJ

  1. Wag the Dog says

    The bright side is the MBS owners now know the value of their toxic debt.

    Senior editor of Marketplace Radio, Paddy Hirsch, goes into more detail on how a rotting wooden shack can end up with a triple AAA rating, thanks to the "magic" of the capital structuring of the collateralised debt obligation:

    Brilliant, eh? … Not! Even more unbelievable is the CDO squared and CDO cubed derivative products that investors got conned into including in their portfolios, all thanks to the AAA rating. That's what you get when there's a healthy dose of free market competition amongst the rating agencies, who were incentived to grant the AAA rather than to be honest or accurate about it.

    No wonder people took out insurance (or more correctly, a CDS) against default.

    Thing is, the same securitization techniques (of slice, dice, tranch and tier) have been applied to credit card debt:

    I wonder how that's going to turn out.

    1. Edward Harrison says

      you read my mind on credit cards. Don't forget auto loans too. More writedowns will be coming as a result.

    2. Graphite says

      "That's what you get when there's a healthy dose of free market competition amongst the rating agencies"

      Actually, they were cartelized and explicitly granted government favor.

      1. Wag the Dog says

        Yet they still competed with each other for business, as Bill Ackman explains on Charlie Rose:“target=”_blank”>https://(8” target=”_blank”> in)

        See also this transcript for Raiter's take:“target=”_blank”>https://” target=”_blank”> didn't want to lose the transaction and told their analysts to make a guess even though the models didn't apply due to lack of historic data.

  2. John Creighton says

    @2162. Wag the Dog,

    That tipple AAA rating magic video didn’t make scene to me. Reading about CDOs on wikipedia: and securitzation:

    conforms somewhat what I thought. A debt product that is rated less then AAA cannot be rated more then AAA unless the the credit is enhanced somehow.

    Perhaps in the waterfall example given in the video the top tranches could be considered credit enhanced because they are structured so that the top traches will be paid out before the bottom ones. Of course for this credit enhancement to be well structured the risk of failure between assets in the CDO should be as independent as possible.

  3. George Gast says

    A classic case of greed from the buyer to CEO of the investor group.
    The buyer knew she couldn’t continue paying the note, the appraiser knew the house was not worth but half of loan (illegal I assume in AZ),
    the mortgage broker obviously made a predatory loan, Wellsfargo knew the loan was trash, HSBC Holdings knew it was crap, the investors (your pension fund probably, your money!!) was kicked in the groin (bottom line). The American dream,work hard, pay your bills, save your money, get screwed big-time.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More