Lending history repeats itself: Warren Buffett

Warren Buffett’s ruminations on the battered economy grabbed most of the financial headlines to start the week, but in his annual letter to Berkshire Hathaway shareholders, the folksy investor also offered some thoughts on the public-policy debate raging over how to fix the housing and mortgage markets. Buffett devoted a section of his highly anticipated missive to the experience and lessons of Clayton Homes -- the family-run, manufactured home builder that Berkshire Hathaway acquired in 2003 -- during a mortgage crisis that shook the industry in the late 1990s. The debacle ‘should have served as a canary-in-the-coal-mine warning for the far-larger conventional housing market,’ he said.

‘To begin with, the need for meaningful down payments was frequently ignored. Sometimes fakery was involved,’ he said, pointing to lucrative commissions for salespersons if the loans were approved. ‘Moreover, impossible-to-meet monthly payments were being agreed to by borrowers who signed up because they had nothing to lose.’

Investors, the government and rating agencies ‘learned exactly nothing from the manufactured-home debacle,’ wrote Buffett, who often uses narratives when dispensing his wisdom. ‘Instead, in an eerie rerun of that disaster, the same mistakes were repeated with conventional homes in the 2004-07 period: Lenders happily made loans that borrowers couldn’t repay out of their incomes, and borrowers just as happily signed up to meet those payments,’ he said. ‘Both parties counted on ‘house-price appreciation’ to make this otherwise impossible arrangement work.’ He said the consequences are now making their way ‘through every corner of our economy.’

Buffett still lives in the house in Omaha he paid $31,500 for in the late 1950s.