A year ago, Justin Owings and his partner Aaron Krowne, both in their late 20s, were a couple of degree-toting residents of Atlanta, Ga., who were pursuing careers in corporate America.
They were also, in Owings' words, "financial hobbyists" who developed a website called Implode-Explode (www.ml-implode.com) to track America's unfolding sub-prime mortgage crisis.
They launched the site on Jan. 1, 2007. To their surprise, it has become the go-to source for information about the housing meltdown that has cost banks around the world an estimated $100 billion in writedowns, upset stocks markets and may tip the U.S., Canada and other countries into a recession.
As of Jan. 31 this year, Implode-Explode had attracted 21 million hits, or an average of 100,000 per weekday. As well, Owings and Krowne have quit their corporate jobs and are turning the site into a profit-making enterprise by selling ads.
Its central feature is the Implode-O-Meter, which keeps count of the casualties among mortgage lenders. As we enter the month of February, 223 of the largest such companies had ended up on the list because they had either filed for bankruptcy protection, temporarily ceased making loans, went out of business or were in the process of being taken over by healthier institutions.
The casualty count included Countrywide Financial Corp. of Calabasas, Calif., a publicly traded company founded in 1969 and the largest mortgage lender in the U.S. Countrywide, with nearly 800 offices nationwide and 50,000 employees, enjoyed spectacular growth and eye-popping profits over the past decade largely on the strength of sub-prime mortgages, issued to borrowers with questionable credit ratings or incomes that were insufficient to meet the requirements for conventional mortgages.
Sub-prime loans came with all sorts of bells and whistles designed to entice people of limited means and a poor understanding of what they were getting into. There were teaser rates - interest payments that were discounted for the first two or three years before the homeowner began to pay the real rates, which were considerably higher than those on conventional mortgages.
There were interest-only mortgages. There were even pay-option loans that allowed homeowners to make monthly payments, for a limited period of time, that didn't cover the interest owed, which was merely added to the principle, a practice known as negative amortization.
All of this was fine and dandy as long as interest rates remained low and housing prices kept rising annually. Countrywide's loan portfolio, for example, grew five-fold between 2000 and 2005. Profits exceeded $2.2 billion a year. Founder and CEO Angelo Mozilo, the son of a Bronx, N.Y., butcher, was earning $100 million a year. At the height of the mania, Countrywide was issuing nearly $500 billion in new mortgages annually.
Countrywide was just one of hundreds of companies riding a bandwagon that came to a slow, horrible halt when interest rates began to rise and housing prices stagnated or even fell. Sub-prime mortgagees suddenly had trouble meeting their obligations, or no incentive to do so if falling prices wiped out the equity in their homes.
They began to default and banks began to foreclose. In 2007, nearly 1.3 million properties were in some stage of foreclosure, a 75-per-cent increase over 2006, according to RealtyTrac, an Irvine, Calif., company that specializes in selling such real estate online. The company also reports that more than one per cent of all U.S. households were in foreclosure at year end, nearly double the rate in 2006.
Because of the numbers involved, delinquent homeowners are taking their lenders down with them. Countrywide reported a loss of $704 million for 2007. Its stock peaked last year at $45.19 a share, but Bank of America is now trying to take over a weakened Countrywide for a little over $6 a share. Owings and Krowne have placed Countrywide on their Implode-O-Meter. All of this should rightly be a domestic American problem, but it's not. "To protect themselves from the risk of these loans defaulting, the lenders packaged them and sold them on Wall Street," says Owings. "Wall Street investment houses sold them to pension funds, banks and other investors all over the world. They don't know how to value their paper and they can't sell it."
All they can do is write off their investments in sub-prime mortgages and swallow the losses. Some of the Canadian banks are now holding this worthless paper, but their portfolios are only a small part of writedowns worldwide.
It makes you wonder where the regulators were when the mortgage lenders of America went to Wall Street to peddle this junk.
It also makes you wonder what possessed our bankers to buy such securities when they routinely impose the most rigid loan requirements on honest, hard-working small businesses, and send them packing when they don't measure up.
(D'Arcy Jenish can be reached at jenish@businessedge.ca)
