This is in the beating a dead horse category, but even I am stunned by the monumental stupidity of the folks at General Motors. At least they’re consistent. They just couldn’t see the gas crunch coming, so they just built more and more SUVs. And who would ever have thought that they could go wrong diversifying into a business with this business plan:
That business was residential mortgages, and G.M. went into it in a big way. It bought one of the more aggressive lenders around, Ditech, and came to specialize in the kind of innovative mortgages that flourished in recent years.
By early 2006, most of the mortgage loans that it issued required that borrowers pay only the interest — no principal at all in early years — or allowed them to pay even less than that. Ditech was a pioneer in offering 125 percent loans, in which the borrower could get more than the property was worth. It specialized in low-documentation mortgages, which became known as “liars’ loans” because many borrowers falsified their income.
What could go wrong? Throughout history lending to people who were unable to repay has been a sure fire way to success, hasn’t it? Particularly when you take collateral worth less than the loan amount. And yet, mysteriously, something did go wrong:
The result has been a wave of defaults and foreclosures, bringing on big losses for both the company and for those who bought securities backed by those mortgages.
I am experiencing schadenfreude overload here, particularly because the good folks at Cerberus Partners are majority shareholders in Ditech (GM has a mere 49% stake). This all couldn’t happen to a more deserving bunch of people.
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