Another Perspective on the Mortgage Crisis

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During my work yesterday at the wine competition, I learned an interesting bit of information about a trend in their industry that sounded similar to a recent trend in the mortgage industry.  Let me explain.

Twenty plus years ago, the percentage of alcohol in red wines was around 12%.  Today, many red wines are 15% or higher.  According to seasoned judges, wine with higher alcohol can mask the actual characteristics of the fruit, leaving little differentiation among wines.  Not only does it compromise the taste of wines, wine enthusiasts can get intoxicated quicker.  So why did this happen?

Wine sales are driven by the ratings of 3-4 wine publications such as Wine Spectator.  A higher rating from these publications boosts the sales and profits of wineries.  Over the years, the higher alcohol wines have seen higher scores, driving more and more wineries to produce higher alcohol content wines. 

So what’s the similarity with the wine industry and our industry?

For years the mortgage industry had basically two products:  30 and 15 year fully amortized fix rate loans.  Banks, savings & loans, and the GSEs provided the liquidity for these products.  In addition, borrowers had to qualify for these loan products by documenting their ability to repay the loans. 

As competition increased and margins declined for these two products, a few large mortgage bankers created exotic loan programs with compromising credit guidelines to helped increase production and margins.  These companies saw an increase in production and profits.  Like sheep, other mortgage participants followed and began originating these products as well.

Many owners, executives and shareholders probably knew the exotic loan product trend was not appropriate.  However, market share and profits helped compromise good business sense.    There is no need to explain the outcome.

I’m not an expert in the art of wine making, but I have found many wine enthusiasts frustrated that some wines taste more like a martini than a glass of wine.  Is the higher alcohol wines really higher quality or is it the influence of a couple publications that just like high octane wine? 

Let’s hope wineries don’t make the same mistake participants made in the mortgage industry.