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Minyan Op-Ed: Lax Loan Standards, Volcker's Message


Thoughts from the financial frontlines.


I thought I would pass along a few interesting pieces of information.

First, on a very irregular basis at my company, we get involved with financial counseling to employees of the plan sponsors we serve. Recently, I was working with a young woman who purchased a home in Florida in 2005. She was 21 years old, had a gross income of $17,580 for the entire year and yet managed to get financed on a no-doc loan through Countrywide (CFC) as primary and HSBC (HBC) as secondary for a total of $220,000.

Naturally, she's now in trouble with the notes, but what astounds me is that, given her age at the time (and obvious ignorance), any underwriter would approve the loans. She's managed to hang onto the place until now with the help of a boyfriend, but is now in arrears, and is seeking a remedy. Undoubtedly, HSBC is going to take a hit, and I suspect Countrywide will be on the hook for something too.

I know it's not terribly conclusive, but it demonstrates the lax underwriting standards of the time, and highlights what many would consider an earlier pool where you wouldn't expect as many problems.

Second, I attended a speech last night given by the Honorable Paul A. Volcker. His take on the current situation is that the Federal Reserve is doing an admirable job, but is between a rock and a hard place. He anticipates the next leg lower in the economy to commence with the consumer (probably already starting - my take), ultimately resulting in a very hard landing.

His advice to the current officials include strong-arming Fannie Mae (FNM) and Freddie Mac (FRE) to purchase mortgages in the open market for the public good and to help keep the banks solvent. He says they can't serve two masters and because they rely on implicit government backing, they should at this time dispense with protecting shareholders and do what their charters require them to do.

Ultimately he believes we're on the right course towards eliminating the current account deficit, at the expense of a lower standard of living, and feels that the acceleration in our export business will cushion the landing but that it's still going to be somewhere between a difficult recession and a very difficult one. He also hopes that Americans start to save more money with the awakening occurring currently.

All I can say is that if you thought he was tough to take the heat of killing inflation as chair of the Fed, at 80 years old, he's still tough and incredibly well-informed.

We live in interesting times, indeed.

Best regards,
Minyan Rodney
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