Make builders, lenders fix the housing mess

By Jim Jubak

Remember Enron? The company claimed revenues of $111 billion in 2000 only to file for bankruptcy in 2001 when it turned out that revenues, profits and asset holdings were either wildly overinflated or didn't exist at all.

Losses to shareholders were variously estimated at $60 billion to $80 billion. Those are huge numbers. But when you add up all the fines and settlements paid by the parties the courts decided were responsible for at least part of the fraud, it comes to less than $10 billion.

So now we're in the midst of the mortgage and housing mess, and it's reminding me more and more of the Enron scandal every day.

• Inflated revenues? Check.

• Accounting fraud? Check.

• CEO selling stock just before the company's fortunes tank? Maybe. The Securities & Exchange Commission has opened an investigation into stock sales by Angelo Mozilo, CEO of Countrywide Financial (CFC, news, msgs). More on that later.

Before we go down the same unsatisfying road once again, I'd like to propose a different approach to dealing with this latest disaster: Let the punishment fit the crime. Make the companies, the CEOs, the managers and the employees who violated regulations and laws pay off their fines not with cash, but by working out new terms to save the loans they made that are about to go bad.

Hey, who better to fix these mortgages than the companies that made these loans in the first place?

No one left to repair loans

We sure can't leave the industry to fix itself. Because so many mortgage lenders have laid off staff, they don't have enough people to handle all the requests for refinancings and workouts that are flooding their offices. According to Moody's (MCO, news, msgs), lenders have eased terms on just 1% of the subprime-mortgage loans that have reset in January, April and July of this year.

If a subprime borrower can't get someone in the mortgage industry to pay attention, the odds of that borrower going into default go up with every passing month. With more than $350 billion of adjustable-rate mortgages due to reset at higher interest rates in the next 18 months, the problem is only getting bigger.

So this time around we have home builders admitting that employees regularly lied or broke federal lending rules in order to sell houses to unqualified buyers. That, of course, inflated revenues.

For example, Beazer Homes (BZH, news, msgs) has admitted that it violated federal housing rules by arranging for nonprofit organizations to lend potential buyers their down payments -- and then repaid the nonprofit by rolling the "down payment" into the buyer's mortgage. On Oct. 11, the company told Wall Street that it expects to pay about $15 million in fines. The stock actually rallied on that news because Wall Street analysts had been projecting the company would face much steeper financial penalties.

Why did Beazer break the rules? Just as with Enron, the point of all these games was to inflate revenue. And just as with Enron, when the referees put an end to the games, revenue vanished. Beazer, which is fighting to hold off creditors, saw 68% of its prospective home buyers cancel their orders in the quarter that ended on Sept. 30.

Optimistic lending

Beazer and other home builders faced a huge problem as the housing boom began to age and as the supply of traditional buyers began to flag.

To keep sales growing in 2006 and into 2007 at the same rate as in earlier parts of the boom, they had to create a new supply of buyers. To do that, home builders -- who went into the home-mortgage business themselves to an unprecedented degree -- and home-mortgage lenders had to find ways to get potential buyers with less money for a down payment, with less income as a percentage of their carrying costs, and with lower credit scores into houses.

Some of the games were merely "aggressive," like giving buyers the option of a nonincome verification loan. The mortgage company or the home builder's mortgage arm didn't actually tell folks to lie but, hey, who would know if the prospective buyer got a little optimistic about family income?

But some of the games went well over the line from imprudent lending to outright fraud. For example, in one case reported by BusinessWeek involving Beazer, a family in suburban Maryland wasn't simply offered a chance to inflate its income on a no-verification loan, but actually received loan documents from Beazer with inflated income figures from nonexistent rental income written in.

Continued: No down payment? Don't worry!

 1 | 2 | 3 | next >