Thursday, April 12, 2007

Downey Anecdote Illustrates Endemic Underwriting Laxity

I had lunch today with a real estate broker I used to sell a house two years ago.

I remember him buying about a dozen houses in the Phoenix metro, using Option ARMs. He would just hold them, not rent them out. I mean, why bother when the rent is so much less than even the negatively amortizing payment?

Back in 2005, he would call me to see whether I wanted to buy houses in newly opened communities sight unseen, with just hours to make a decision.

He was the inspiration for this paragraph from an August 2006 research report on New Century:

"Mr. Levered-long is playing a different game. He got all the fliers in the mail offering to refinance his house and let him take cash-out, but instead of spending the $50K a year he was “earning” by living in his house on something he didn’t need, he asked himself why only one house? Wouldn’t he make more if he owned more houses? So he cashes out his equity and uses the money for a down payment on another house. He doesn’t care that the mortgage payment is $500 dollars more than the rent he gets from the house. It’s more than paid for by the money “earned” from the appreciation. Because he is a savvy real estate investor he does that every six months for four years."

I asked him what mortgage lender he had used when buying houses. "Downey Financial."

Downey never looked closely enough at the apps to wonder how a moderately successful real estate broker could afford a dozen houses. He also used Downey to finance his clients.

I asked, "Did you ever have any garbage paper you couldn't push through Downey?" He just laughed.

It is amazing that we both set out, for different reasons and at different times, to find the loosest mortgage lender and independently found Downey.


Anonymous said...

check out the ARM trends compiled by credit suise. look at all the ARMS reseting in the bext 11 months.


Anonymous said...

Like your coverage on DSL, I run a small hedge fund that is short DSL as well. You can go to Seeking Alpha and compare notes.