Runt Rants - The Sub Prime Mortgage Crisis In A "Nutshell"
The Sub Prime and Alt-A Crisis is a crisis and we all have to deal with it. It will continue to be in the news. Every special interest group will have a solution, one that benefits their objectives. Appraisers should be one of those groups, but as yet they appear not to be.
In these next two Runt Rants I’ll try to make the case that the special interests of the Appraisal Profession is at the root of the solution for the current crisis, and would be one of the foundation blocks for preventing it’s re-occurrence.
Let's Define The Problem
A couple of weeks ago Ben Bernanke, Chairman of the Federal Reserve testified before the Joint Economic Committee and said in part;
“At one time, most mortgages were originated and held by depository institutions. Today, however, mortgages are commonly bundled together into mortgage-backed securities or structured credit products, rated by credit-rating agencies, and then sold to investors. As mortgage losses have mounted, investors have questioned the reliability of credit ratings, especially those of structured products. Because many investors had not developed the capacity to perform independent evaluations of these often-complex instruments, the loss of confidence in the credit ratings, together with uncertainty about developments in the housing market, led to a sharp decline in demand for these products. Since July, few securities backed by sub prime mortgages have been issued.”
A few weeks earlier on August 31st Mr. Bernake delivered a speech saying;
“Investor uncertainty has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs has become more evident. Also, as in many episodes of financial stress, uncertainty about possible forced sales by leveraged participants and a higher cost of risk capital seem to have made investors hesitant to take advantage of possible buying opportunities. More generally, investors may have become less willing to assume risk”
But the very best quote by Ben Bernake is this one….October 16, 2007;
"According to the New York Times, at a speech in New York last night Bernanke said, "I'd like to know what those damn things are worth. Until investors are confident in their evaluations, they are not going to be willing to fund these vehicles."
That’s it in a nutshell Uncle Ben! You don’t know, I don’t know, investors don’t know “what those damn things” are worth!
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