Mortgage Industry Trends

The WSJ dusted off an old mortgage story- the implosion and lawsuits surrounding American Business Financial Services (ABFS). 

I supose the news driving this particular story is the efforts of the bankruptacy trustee to recover monies from the Wall Street partners of ABFS. Their logic is that these Wall Street shops--Bear Sterns, JP Morgan Chase, and Morgan Stanley facilitated ABFS in their efforts to defraud investors, based, it appears, solely on the estimates of prepayments which the investment banks provided, and as a consquence, the inflated value of ABFS residuals. 

(There is a great story over on Housing Wire that discusses some of the failures of the modeling used of pre pays by the rating agencies. Hurray Fitch for being labeled most conservative!!!).

Mortgage companies are an easy target these days. Of course, they are wrong. If some poor person has been duped, defrauded or dumped on, yea, it was the mortgage person.

While ABFS clearly operated in a dubious fashion at some level, the real story I take is that statistically speaking, investors are just as stupid as the average person: 

1. "But when ABFS went under, Mr. Magnon, who is 81, says he was out $761,000, or 80% of his liquid assets.
   "Small investors like me are not very savvy," says the retired aerospace contract administrator."
2. ""We are absolutely penniless now because all of our savings are gone,"
   says R.L. Siddiqui, a retired accountant in London. He says he lost
   $101,000 and his family is living on his $300-a-week state pension.
   "We're just barely existing," he says."
3. "In Palatine, Ill., Dayna Prochaska says her father, Eugene Haug, who
   died at 83 last year, lost $175,000 -- "everything [he] earned" from an
   insurance agency he ran for 50 years."
4. "Ms. Deravedisian in suburban Philadelphia survives mostly on $465
   monthly Social Security checks, now that her savings have vanished with
   ABFS's bankruptcy."

Despite what these investors say about not knowing the risks, my question is they all have job titles that seem to lend themselves to numbers, contracts and risks.

Eugeng Haug ran/owned an in insurance agency.  R.L. Siddiqui is a retired accountant from London.  And finanlly, Mr. Magnon, was a contract administrator.

They all lost almost everything, but what accountant, what contract administrator, what person would lock up the majority of their retirement money into one single asset?

First, its unfortunate that the WSJ has used this story to slam the mortgage industry. I read two facts in this story: Lawyers will go find someone to sue and investors that are stupid lose their money.

Rather than offer up the lesson of diversification, or investor education, lets play up the 'subprime' headline.

After all, the WSJ is against 'bail outs' and moral hazard and class action lawyers - here we have all three in one story, and the mortgage person (here the investment banks) are the victims, albeit, not so innocent.