I Was There When It All Began
I was there when it all started. It was the autumn of 2006. I was working as a subprime loan officer with the nation’s largest mortgage lender, Countrywide Home Loans. I was working on a deal to refinance multiple rental properties in California’s Central Valley that belonged to the personal friend of one of my referral sources. It was an important deal and could have netted me quite a bit of money.
Then, the appraisals came back. The values of these properties were not only less than we had expected them to be, but they were less than what even a conservative valuation would have assessed them at just a couple months prior.
The values of these properties had actually decreased. This was unheard of and shocking. It was also big news at my office. I remembered asking my boss a couple months before that as we looked at where our business was going in relation to potential levels of increase in property values. We were coming out of two consecutive years where values had increased by 25% per year; none of us really thought it would continue at that rate.
We were thinking values would increase at an annual 5 to 6% rate, as they had historically over the previous 30 years. “What happens if property values actually go down?” I asked my boss, a professional veteran of many years in the business.
“Well,” she responded stoically, “then we starve.”
If you didn’t catch last week’s episode of NOVA on PBS, it’s worth trying to catch the repeat. It was all about bubbles and the effects of emotions on markets, as opposed to the rational actor model that has been the underpinning of the science of economics for 200 years. In the times when the works of John Maynard Keynes, 
who posited 70 years ago that markets are NOT always rational, that their flaws can destroy an economy without being regulated for the public good, i.e., the government, are being attacked, let us not forget what just happened a couple years ago.
Standard and Poors gave high ratings to subprime mortgage derivatives as a safe investment, and when this turned out not the be true, the stock market lost 40% of its value in one day, our economy teetered on the edge of collapse and we fell into the Great Recession that we are still struggling to emerge from.
What happened? The bubble burst. Some saw it coming. Standard and Poors didn’t. This company made some assertions today about our nation’s creditworthiness. Keep in mind their recent failings when we consider the significance of this.
Back in the mid 2000’s, we in the mortgage business in California worked hard to try and help middle class families, say, making $100K per year as a household, qualify for the loans that would make it possible for them to fulfill the basic desire to buy a home. It was obvious to me anyways that when the average family cannot afford to buy the average home because that average home costs half a million dollars, that situation is not tenable.
There I was looking at these appraisals showing, for the first time in decades, a decreasing property value market, I didn’t realize I was holding the beginning of the financial mess we’ve found ourselves in for the last 4 years or so.
Over the next few weeks, more and more appraisals from the Central Valley started coming in short. This phenomenon had not yet migrated down into the SF Bay Area where most of our business was, but it was just a matter of time. Las Vegas. Florida. San Diego. These had been the fastest growing markets in the country, and they became in ‘06-07, the fastest decreasing. By the time I left the business in the Spring of ‘07, I was closing quite a few deals in Mississippi, because it was the last place in the country where property values were still increasing. Ooo… Your house went from being worth $50K to $55K… these weren’t huge deals.
Looking at these appraisals, I remember really feeling bad because the deals that I were working on were now going to be impossible. This meant I wasn;t going to get paid, but my referral source would for whatever reason, blame ME for these light appraisals. He was going to have to go to the property owner and tell him what no one wants to hear: “What you own isn’t worth as much as you thought”. We didn’t realize at the time that what these appraisals REALLY meant was “your property is now beginning a huge slide which will effect everyone in the country and cause major trauma in the global economy.”
I was there when it all started in California’s Central Valley. I saw the first slip in value that eventually became a landslide. I was holding the opening of the Gates Of Hell in my hands in that appraisal. I had no idea.
I was only a loan officer for a couple years, but they were the most important years, in the most important segment (subprime), in the history of US banking. What I occasionally think of as a weird sidestep in my career as an appliance salesman was actually an opportunity to witness history.
As I stated in my latest blog, economics is not an exact science. Just because we do x does not mean that y or z will happen.
And people blamed Bush…AND IT WAS ALL YOUR FAULT ALL ALONG….JOKO!!!!!!!!!!!!!! lol
We are so screwed…this is bad…very bad.
*2 Kudos*
I knew it was you, Joko, all along, and you never had me fooled. You, with your perceptible, {but ever so slightly always just beyond plain sight} knowledge of financial matters. All the while tricking us into thinking you were just some innocent, ordinary guy who played the ukelele. It was you, that set things in motion and eventually cost me the best job that I had ever had to date, with your diabolical plot. You purposefully sat back and watched poor Dubbya, and then poor Pres Obama take hits left and right for your actions, and then joined in the derisive laughter at their inability to counter the economic tragedy you spawned in your malevolence.
You sir, are evil incarnate. I knew it was you, Fredo… you broke my heart.
Hey Joko, I worked for a small commercial mortgage broker from 2001 to 2007. We didn’t do many home mortgages, mostly financing packages for commercial development deals, but I bet we could trade a few stories. As far as my experience, I blame the bubble and the melt down on the banks and the appraisers. They created a market that didn’t realistically exist, documented the overly inflated value, and then financed it at 125% with no documents or verifications. It was destined to fail, but I have to give it to them that they kept it going for far longer than I ever thought possible.
This is fascinating stuff from someone who saw some of the inside… Thanks. Learned some things about Standard and Poors too….
I remember those days well. Have a number of friends who have worked for Countrywide (now B of A). I worked on their business when I was in advertising and they were JUST getting started–in the 90’s. Had an opportunity to go to work for them right before the bubble burst in ’07, but thankfully I didn’t get the job.
This too shall pass. I hope.