Well, if you haven’t already heard about it this, I wanted to share a great book I received from my Mother-in-law: The Big Short by Michael Lewis. You may remember Michael from his slightly more famous book, The Blind Side, which was made into a movie starring Sandra Bullock.
As a former lender and current Title Company owner, this book provided tremendous insight into the events that have put us into the current housing situation we face today. It was amazing to read the tactics and strategies that big companies such as Household Finance, New Century Mortgage, Long Beach Mortgage, et al. were doing each day.
What was more surprising was the blind faith that the credit reporting agencies played in this meltdown. Reporting agencies, such as S&P and Moody’s, just took these portfolios and graded them as any other portfolio, without consideration of credit condition, income documentation, or loan to value.
What I found more surprising was the willingness of the “To Big To Fail” companies to sell credit default swaps (the practice of selling essentially default insurance) to individual investors. In fact, they even allowed them to hand select the portfolios to insure.
At one point, our Hero of the story “Mike Burry”, was able to purchase default swaps on no income, non-owner occupied, no asset, from sub-prime lenders. Keep in mind, he was betting against these pools to perform. In order for Mike to be “in the money”, they only needed to suffer 10% losses. These portfolio’s would eventually default at a 50% and higher clip.
The book does a very good job explaining topics like credit default swaps, bond ratings, and other industry terms that I had no idea about prior to reading the book. It also helps explain why the credit markets froze and why lending almost came to a complete standstill. Most importantly, it shows how close we came to a complete collapse of our financial system as it we know it today.
I would consider The Big Short a must read for Loan Officer, Realtors, or anyone that is looking to understand how we arrived in the Real Estate mess we are in today.