2007 August 04 Saturday
Builder Originated Loans Contributed To Housing Bubble

Home builders used access to Wall Street bankers to originate loans with faked out income and home valuations.

Now that the boom has fizzled and foreclosure rates are rising, the important role of large homebuilders as lenders is also coming into sharper focus.

In addition to spitting out subdivisions, many of which now stand half-empty, builders jumped into the mortgage business to a degree they never had. Wall Street provided the same encouragement it offered other lenders. Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans. In some cases they attracted clientele who couldn't afford conventional mortgages. In others, builders allegedly violated federal lending standards to get customers to sign on the dotted line. KB Home (KBH) paid a record $3.2 million settlement in July, 2005, to resolve allegations by the Housing & Urban Development Dept. that the builder's mortgage unit overstated borrowers' income, among other practices, to obtain loan approvals. KB, which denied wrongdoing, sold its loan business before settling.

"Homebuilders really started to push these more aggressive mortgages down the throats of potential buyers to boost sales," says G. Hunter Haas IV, who as head of mortgage research and trading for Opteum Financial Services (OPX) had an insider's perspective on the proceedings. Opteum has served as a middleman between Wall Street and builders. The Paramus (N.J.) firm provided developers with financing for their mortgage operations, then resold the loans to investment banks, which packaged them as securities and hawked them to hedge funds and insurance companies. The whole process added liquidity to the market and made it easier for developers to build and sell expansively.

I checked Opteum's ticker page and it was trading at its 52 week high of $8.94 a year ago and just closed yesterday at its 52 week low of $1.13. Yet another lender reeling from the big burst of the housing bubble. Opteum decided to get out of home loan brokering. Wall Street has seen such high default rates from builder-originated loans that Wall Street has decided builders who originate loans can't be trusted.

The article says the growth of big publically traded builders made the builder-originated loan craze possible. Wall Street sees publically traded hefty companies as big enough to do business with them.

Some home buyers are suing at least one large builder for falsifying so much loan data that the resulting foreclosures drove down the values on the homes of the people who were not foreclosed on. By this logic the whole country should sue the builders and the Wall Street financiers who provided the financing that created the loan bubble. As this bubble bursting plays out lots of people will lose jobs and the economy might go into recession. Surely that damages the interests of a substantial portion of the populace.

Share |      By Randall Parker at 2007 August 04 05:12 PM  Economics Housing


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