Calculated Risk: Great finance analysis, great writing

Or, Uncov for the mortgage industry ;-)

Silicon Valley is as much about finance as it is about technology, and I appreciate great finance writing as much as I love great technology analysis. Silicon Valley is also a real-estate-obsessed place, so when that finance writing is about the greatest financial calamity to ever beset the housing market, the enjoyment is multiplied.

I'd like to call out Calculated Risk, a superb blog on the mortgage and housing industry, with two pseudonymous authors (CR and Tanta) who write with enormous knowledge and great flair about the debacle in progress on Wall Street and in Middle America right now.

In particular the recent post, "The Un-re-dis-inter-mediation Blues," is a scathing indictment of the sort of business model foolishness -- in this case carried out by Merrill Lynch -- that you may have thought was only the province of Web 2.0 startups. Highly recommended, and a good mental tonic when too many thoughts of advertising-supported business models and viral marketing are getting you down:

Aside from the idea of loan officers having sufficient spelling skills to play Scrabble, which is new to me, here we have the two same old dumb ideas that emerge in any mortgage downturn, with a delicious twist that it's Wall Street getting it instead of Main Street.

First, there's the old "let's retrain a bunch of subprime loan officers to be prime GSE loan officers." You civilians might think this should be fairly easy, but the fact is that training a lot of these people to be prime loan officers basically means training them to be loan officers. If they had any basic depth of understanding of the business they're in, they could move to prime origination by just reading that other rate sheet. The reality is that they've been doing no-doc no-down no-sweat stuff for so long--some of them have never done anything but--that they're sitting around with the PlayStation waiting for someone to tell them how a 30-year fixed rate loan with a down payment and verified income actually works...

Item the second causes a deep belly laugh in anyone who ever worked for a depository in a mortgage downcycle: "Why can't we just put the loans on the balance sheet?" I know it makes me a bad person, but the thought of Merrill getting this one from its mortgage people is floating me heavenward on a warm tide of schadenfreude...

That is--or once was--an old strategy for depositories: when you can't sell your loans, hunker down, stuff 'em on the books and wait for the tide to turn. We are seeing depository after depository shutting down its wholesale and correspondent lending divisions, meaning it will, as always, only allocate those portfolio dollars to keeping an expensive but much safer retail operation alive...

But Merrill really really wanted to be a retail originator in its own right. Welcome to the other side of the mortgage world, Mother Merrill, and try turning in some tiles. Maybe you'll get a vowel.