Thursday, August 16, 2007

Buffett to Lenders: "It's Their Problem"

"If lenders lent money that they are not going to get paid back, that's their problem, frankly", said Berkshire Hathaway's (BRK.A)Warren Buffett yesterday. Finally, somebody gets it and is not calling for the Fed to bail lenders out.

Last week I said "The Fed will not bail out lenders that made dumb loans and now are in trouble. Bernanke is going to let the market work (as he should) and it is already taking care of things. Bad credit is harder to get, and hopefully credit standards return to what they should be. Both of these are good things long term."

Back in March I posted abut the loose lending practices that have gotten lender in the mess they are in today. In it I detailed the "No Documentation" loan types that had proliferated the past few years and said:

"What is shocking is the justifications they give for those who these loans "may be right for". You are buying a house, you are borrowing money from a bank to do so. The expectation is that you will need to have money to put down on it and actually be able to demonstrate an ability to pay the bank back. The phrase "take my word for it" should never enter the conversation. It did though and that is the genesis of the current situation. When buying a $500,000 house involved less paperwork than buying a Ford Escort, red flags ought to have been going up.

In 2005 and 2006 the number of both mortgage brokers and real estate agents hit historic highs. A mortgage is a commodity, give me a price and a rate and I will choose a broker. There is very little a broker can do to distinguish themselves from each other. With so many brokers and a limited number of qualified mortgage applicants, brokers had to find new applicants. The only place for them to go was the pool of people who under the current rules not only did not qualify for a mortgage would not receive credit from a bookie were they to ask. The new motto was "If they don't fit under the current set of rules, change the rules". So they did. What they failed to realize was, the rules were there for a reason, they worked. We are now realizing that people who do not want to provide proof of what they do for a living, how they earn income, what that income actually is or where their down payment is coming from are not doing so out of some symbolic "privacy concern", but because what they are saying is quite frankly, bull. Who has trouble "verifying income"? Crack dealers? Illegal immigrants working under the table and not paying taxes? Contractors who cheat on their taxes? If you want my money, prove you can pay it back or take a walk and let the next person in line step up, unless of course the line is small, the others are just like you and we really need to give you the money... thus the mortgage industry dilemma the past few years. Like I have said more than a few times before, the surprise here is not that this happened, it is that it did not happen sooner."

Maybe additional calmer heads will come out and stop calling on the Fed to bail out idiots and drown out the Jim Cramers of the world who are running around screeching like an 18 year old girl who got ketchup on their prom dress. Yes things may get worse but as Buffett also said yesterday "there will be real opportunities then"...

Translation? Get ready to buy


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