Friday, October 10, 2008

Did World Savings Save the World? Nope

I gotta make a note to myself that the next time Yom Kippur falls on a Thursday, I should not wait till Thursday night to write a Friday column! I am actually a good faster on YK,.... I'm a bad fast breaker! I have some dehydration issues, so even though I'm not particularly hungry or thirsty or headachey like many of my fellow Hebrews and Shebrews, I do run into some problems after the fast is over.

My YK fasting activities are also quite consistent. Every year except for 1999 and 2003 I always spent the Day of Atonement in either one of 2 synagogues.. Anshe Chesed in Linden from age 1 to 1996, and then The Highland Park Conservative Temple since '97 after my mom sold her Roselle house and moved to Edison. The one year I made an exception was '03 when I went with Trophy Wife (who back then was Trophy Girlfriend almost Trophy Fiance) to services with a bunch of her graduate student friends at Rutgers University... The services were terrific but during the break in the afternoon we trekked over to musical Genius Neil Fein's house to hang out... and I grossly underestimated the walking distance from his house to Rutgers. The walk to his house was ok.... but the walk back that day was sheer torture, and thankfully Highland Park has a lot of benches for me to sit... but in retrospect, that was not my smartest moment. I actually was home on YK in 1999 because I had a badly sprained ankle (that I sprained on the 2nd day of Rosh Hashana while walking to services!) and I couldn't walk to services on Yom Kippur. And yes, on that 2nd day in '99, I amazingly did the 3 mile walk from the synagogue to my mom's condo on that badly sprained and swollen ankle and by the way just to put it in perspective, that was NOT worse than the 2003 walk back to Rutgers!

Speaking of Rosh Hashana... I really have lost almost all respect for Ben Stein. While Congress was voting on the bailout last week, its first go round fell through and the 2nd attempt was scheduled for after Rosh Hashana out of respect to the Jewish House Members who planned to spend the day at services. Stein went on Larry King and said that those Jewish members should be at work instead! The actual rules for those who observe The High Holy Days, are that one is not permitted to perform work activities and while many people do not observe those rules, it's absurd that one Jew would make a comment insulting the beliefs of others who are observing the holiday.

I am also surprised by the amout of people who blow off the 2nd day to go to work, although I understand why certain business owners feel an obligation. Maybe they should move the 2nd day of Rosh Hashanah to Thanksgiving Friday.... how many of those people would give their boss a "Whatcha talking about Willis?" look of shock if they are asked to work that Friday, yet were willing to work the 2nd day of 5769?

Now that Saturday Night Live is relevant again... and you wonder if Sara Palin was purposely chosen because of her resemblance to Tina Fey.. I see that SNL had to re-edit a skit from last weekend before NBC allowed it to be posted on their website. The skit parodied the post bill signing press conference with those 2 wacky liberals Nancy Pelosi and Barney Frank. Incidentally, I think most Democrats are more like me, moving away from the liberal ideas of Ms. Pelosi and Mr. Frank, and I find it odd that those 2 are at the forefront at such a momentous occasion.

The skit was of C-Span's coverage of that press conference showing other subprime "victims" including a borrower who got a loan even though he was jobless and a yuppy couple, that reminded me of that goofy dog training couple from "Best In Show". The skit also featured Herb and Marion Sandler. They are the couple that sold World Savings to Wachovia in 2006.. and now Wachovia has shut its doors just like Yankee Stadium! When the Sandlers appeared on the screen the C-Span graphics introduced them as "people that deserve to be shot". The subsequent online posting of that skit deleted that graphic.

I dont know that they deserve to be shot, but the whole World Savings situation has played quite a role in this mortgage debacle. The Sandlers walked away with a bundle of money after they sold their "portfolio" to Wachovia. That portfolio was actually not subprime loans which were loans that were given to people with shaky credit, but actually consisted of those infamous negative amortization loans that were advertised as loans with 1 or 2 percent rates.

Here is how they worked: World Savings would send its borrowers a coupon each month with a choice of 4 payments. Among those choices were an absurdly low 1 or 2 percent payment, an interest only payment at a rate approx 1-2% higher than a regular interest only loan, and a 15 or 30 year fixed option, which was also at a rate of 1 or 2% higher than a typical rate. The rationale for the higher rate actually makes sense... since that is the price these borrowers paid for being allowed the so-called "privilege" of having the low payment option.

But if your rate on the interest only option was 7% and your payment on that coupon was $1000, and your 1% rate payment was $400... guess what happens. The difference between those 2 payments would "negatively amortize"... For example... cars historically lose value - the moment you drive a new car off the lot, its value goes down... and thus it negatively amortizes. In a typical housing market, values are supposed to go up.. so a house would positively amortize over time... but lately home values have been going down. This creates a situation where even interest only loans are negatively amortizing, and these "payment option" loans were negatively amortizing at a much higher rate.

Now let's say a home owner makes that $400 dollar payment... he negatively amortizes $600. He has to pay at least the interest only payment to avoid negative amortization... the 1% option was just a carrot dangled in front of them... But that $600 which is now deferred interest is tacked on to the loan. So math students get your pencils... if a person made 10 months of minimum payments on a $150,000 dollar loan.... that loan now carries a balance of $156,000. And if that balance shoots up to the $160s and $170s as the value drops to the $150s and $140s, everybody involved is in a tight spot... since the home owner is paying on a house he owes more than its own value. Multiply that loan scenario by thousands and now you see the portfolio of loans that the Sandlers eagerly sold to Wachovia as truckloads of cash were delivered to the Sandlers.

World Savings also imposed tough pre payment penalties so many people who didn't quite grasp the way loan works, wanted out... and they were stuck. And, they also bypassed laws such as the ones in NJ that ban prepays since their federal charter allows them to charge those prepayment penalties. Those loans were priced in such a way that created an incentive for the borrower to agree to take the pre pay. The loans were also structured that only a certain amount of minimum payments would be allowed, until the borrower would be required to make the payments on the higher rate.

Are Herb and Marion Sandler responsible for this crisis? No. Did they bring down Wachovia? Probably Not. But they did carve their niche by offering a gimmicky loan that has caused a lot of aggravation. But there is one key factor here that one should keep in mind and that is many people who took these loans did not fully grasp how the loan worked, and really thought they had a "1% interest rate". Many of these borrowers took a 1 or 2% because that was all they could really afford. Once the ability to pay the low payment was taken away - they were screwed. And the fact that so many World Savings customers took out loans that they did not understand, is extremely unfortunate.


Pumpy was right again last week improving to 4-1. This week we go to the Bay Area in CA... the home of mortgage villians Herb and Marion Sandler. This week the San Fransisco 49ers host the Philadelphia Eagles. Sayeth the Pump: "I hear the Eagles have a player named Trent Cole...and since we chanted Kol Nidre on Wednesday Night... I gotta take the Eagles"


For the 2nd straight week we went 3-0! Now we are at 9-6. This week it's all about the doggies.

CLEVELAND 8 doggies over Giants - It's a Monday Night game and you know the old saying about home dogs on Monday Night. The Giants will win but won't cover.

ARIZONA 4 1/2 doggies over Dallas - Could this really be Arizona's year? Dallas almost blew it last week against the Bengals if Cincy had not gone for that ill advised 2 point conversion after that late TD.

St. Louis 13 doggies over WASHINGTON - A hot team against a winless team with a 2 td spread? The Skins could be ripe for an upset.


Here is that SNL clip which many say explain the mortgage crisis better than the news media!

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