Lots of people quoting snippets from Wells Fargo CEO Stumpf’s subprime comments today at the Merrill financial services conference, so here is the entirety of the insightful part that caught my attention:
Question: Some guy
You mentioned in your opening remarks that the residential market is the worse since the Great Depression. What got us there so rapidly and what do you think is necessary to get us out of this environment?
Answer: John Stumpf, Wells Fargo – CEO, President:
Yes, that’s a terrific question. The question is, this is the third — I got in the business in 1975. I know you’re thinking how can he be that young, but no — and this is the worst I’ve seen. And I think … if you look back, I think it all started in 2000 … April or May of 2000, NASDAQ goes from 5000 some points to loses two-thirds or three-fourths of its value. People say, I don’t think I’m going to do that again.
And then 2001 happened, 9/11, and because of the concern about the economy and so forth, interest rates come down to a 1% Fed funds, which banks lend money back and forth. Mortgage rates respond and get down to the 3% something range. So you had a situation where borrowers who might have qualified for a loan in 2003, ’04, ’05, ’06, ’07, ’08, because of low rates all came into the market immediately. So you had this big imbalance between demand and supply.
And borrowing was cheap. Real estate started to go up. Stock market was considered an attractive place to be. And people said, I can’t believe you will pay me $100,000 more on my starter home than I paid for it, and they bought the next home. I’d rather have appreciation on a big home than a small home. And it started to take off.
What happened then, a whole bunch of nontraditional folks who were not in the mortgage business came into the mortgage business. And we had all kinds of new mortgage companies coming around. And they started lending money. And as … and they started to develop and invent new exotic products to have more people qualify. Once all the ones that could qualify, then they started doing teaser loans and negative ARMs and option ARMs and no doc and pretend doc.
And I mean … remember the days when I used to get a loan, I’d go to the bank and say, you know, here’s what I make, what can I afford? And I’d come home and say to Ruth, only a $40,000 home. Now you can go to a broker at a local bar and they’ll say what would like? I’ll do the paperwork for you.
And it got … and today, as you might know, over half of the loans are originated by people who are not regulated. And I’m not saying all of them are crooked, but I’m saying that there’s a lot of fraud that has been allowed to be introduced in the process.
So that is what happened. Way too much demand, fraud, unscrupulous lenders, borrowers who got greedy, a whole bunch of other things. And then 2006, the music stopped and now we’re unwinding that.
I would say this though. I don’t think we’re in the ninth inning of unwinding this. If we are, it’s an extra-inning game. I think — and it’s hard to say which inning we’re in because there is probably 350 ball games going on. There’s 350 different MSAs that we look at, and some are in ninth innings and some are in the sixth inning.