The bottom line - people wanted more than they could afford and the banks allowed it. As long as housing prices inched up, for whatever reasons, banks felt secure.

Fraud on the appraisal side, income side, rate side made little difference if the value kept creeping up. When the creeping stopped the ballon burst. Pretty simple really.

We are a country of get it now fools with a damn the future outlook. Did we not learn anything from the dot com ballon?

I have seen mortgage brokers take blank applications and get them signed. Telling me, as the builder they would fill it out. The buyers did so without question. I am not saying it is right, I am saying that is what happened.

So the falsifiying of income was not always the people doing the buying. More often than not it was the brokers doing the selling of the notes to make them look good to potential investors. Again, I am not saying it is right, but it happened.

Does that mean I think the people that bought these homes without reading the contracts or without making sure they knew what they were signing, need to be bailed out... No sir, it does not.

Sometimes you beat your head against the wall telling people they need to read what they sign, they still surge forward undaunted. This is the result. We as Americans, I am not saying "all", but an over whelming majority have become comfortable with others telling us what we can afford.

It is time for a market correction, and we are getting exactly what we asked for, in not so many words.

Actually, yes, some banks were involved, but 95% of the mortgages granted bypassed the banking industry with Hedge Funds and other market entities the lender of record. Banking regulators do not allow banks to lend money to people with bad credit, no credit, no income, unemployed and flippers. Subprime lending is driven by yield whores on Wall Street, so it's Wall Street that is looking for a bailout, specifically Hedge Funds.

And that's the problem, if these were bank loans, banks could step in a make deals with homeowners, but the loans are in the 'secondary market' with the holders, lenders virtually unable or unwilling to make deals. You will not see any bank go down as part of this fiasco, it's the Mortgage Companies that are going down with those companies dealing with Wall Street directly, specifically hedge funds.

Well I wonder what is next??

Even of the fed does lower rates I do not think the mortgage companies will follow. They could keep the rate increases down now and won't do it, so why should we give them more money?

I heard on the news some interesting information. I just got the tail end of the story but the someone (????? I don't know who ????) had predicted the US would fall into a serious recession in the next twelve months.

That reminds me of the clown a few years ago that said if the line at Krispy Cream was long the state of the economy was good. If the line was short the state of the economy was stressed. This was from a Washington economist. These are the clowns we have in "WISH" Washington calling the shots.

Hey where is Jamo when we need him, anyway? Jamo should go to Washington and straighten this mess out. ;)

Here is a good article on this mess.


'Neutron' loans fiasco

September 13, 2007

Arnaud de Borchgrave - PARIS. -- Several "once in 100,000 years" events "cost billions and point to flaws in the design of quantitative trading strategies" was how one learned analysis explained the subprime mortgage fiasco this summer. This was highbrow talk for lowbrow greed that piled one sleight-of-hand scam upon another in an international Ponzi scheme that began unraveling in June.

Prominent international bankers, speaking not for attribution in Paris, said prestigious credit rating companies kept kicking the can down the road that said "subprime mortgage meltdown." They arbitrarily decreed that borrowers who take out a second loan for the down payment on the first weren't more of a risk than a standard mortgage. This defied common sense but still triggered a boom in subprime mortgages.

These universally trusted outfits eventually revised their opinions. But by then there was a $1.1 trillion subprime mortgage market. West Europeans owned 57 percent of subprime loans. Throughout 2006, those who knew and were in a position to blow an authoritative whistle didn't. Ignored were precursory warnings about subprime delinquencies, homes repossessed, or refinanced to avoid foreclosures.

A symbiotic relationship between banks and mortgage companies erected beautiful monetary sand castles on the world's financial beaches, just out of range of high tide. They hadn't reckoned on a subprime mortgage rip tide that flattened them. Investment banks and bond rating agencies failed at the same time.

Banks sold leaky mortgage vessels to hedge funds hungry for high interest payments. Securities markets and their high-rollers took over from bank managers. Those who took on risk on the verge of default always expected to find someone willing to take on a bigger risk ad infinitum. Risks were even carved up, sliced and diced, repackaged as CDOs — collateralized debt obligations — and passed on good as bonds to make then look less risky. CDOs insured $3.3 trillion worth of paper in 2006.

All this was gerrymandered on millions of individual borrowers who were led to believe the value of their homes would keep appreciating and therefore could afford to go into deeper debt. Thus millions took mortgages to buy homes beyond their means.

Now millions stand to lose the homes they could not afford. Irresponsible, reckless driving has played into the hands of those who advocate more regulation in underregulated financial markets, along with a new right to sue everyone, from brokers that sold the repackaged loans to banks that originated them, to investors who picked them in secondary markets. Those gulled by the American dream of a modest dwelling can no longer get a mortgage because of earlier default. For many, it's back to trailer parks.

The insiders called these subprime mortgages neutron (bomb) loans after the Cold War weapon of mass destruction that killed people but left buildings intact. Get-rich-quick schemes spawned the unacceptable face of democratic capitalism. From 350 billionaires at the turn of the 21st century seven years ago, the club has just gone over 1,000 members, many of them in tax free shelters with exotic names of countries the size of a dot on a map of the world that seldom make the news.

Even Bill Gates was upstaged last month by Mexico's Carlos Slim Helu (of Lebanese descent), the world's richest man at $59 billion (Mr. Gates gave over $30 billion to his foundation that is focused on the world's most critical health problems). Mr. Slim got Mexico's nationwide cell phone license after backing then President Carlos Salinas (1988-94). Privatization of state-owned companies was the vehicle for rewarding political supporters.

Hedge funds and derivatives, instruments usually reserved for the wealthy to move up the ladder to mega-rich status, were heavily leveraged by shaky subprime mortgage-backed bonds. A fortune was made by the few who bet these bonds would tank. But several secretive hedge funds went out of business as the stock market fell 7 percent. For the last 10 years, good hedge funds had been averaging plus 20 percent to 30 percent a year. And rare was the hedge fund that would take on a new client for less than $5 million.

Renaissance Technologies' flagship Medallion Fund averaged an annual return of 30 percent since 1988. From Goldman Sachs' year-end bonus pool of $16.9 billion for the brokerage giant's best performers, Mark McGoldrick, 48, was awarded $70 million. He thought he was entitled to more, or a cool $100 million. So he quit. To start another hedge fund.

Mr. McGoldrick co-founded GS' "Special Situations Group," the heart of the Wall Street giant's money-making machine. Since Mr. McGoldrick's departure, GS' shares dropped 23 percent. Three of GS' hedge funds lost several billion dollars in 2007.

One hedge fund manager in Connecticut made $1 billion for himself last year. Several others had each averaged about $300 million a year for the last three years through the end of 2006. A yearly before taxes income of $100 million was considered normal for the better hedge fund managers.

Hedge funds seem to be a law unto themselves. Germany's suggestion for an international code of conduct for hedge funds was turned down by Washington and London. In the United States, both political parties regard them as potential cash cows come election fund-raising time.

Leading European bankers are warning privately of the worst crisis in the money markets in 20 years that is yet to come. Huge amounts of commercial paper — market IOUs — come up for refinancing, mainly through London. According to the London Sunday Times, the amounts due this week exceed the $100 billion that came due in mid-August, an offshoot of the subprime debacle. Many of the off-balance-sheet structured investment vehicles (SIVs) that were set up by the banks were "borrowed in the form of asset-backed commercial paper," explained one bank executive.

"It is both a liquidity and a capital crisis," said Paul Mortimer-Lee, a global head of market economics at BNP Paribas. "Banks are taking more and more of this paper into their balance sheets, which uses up capital." This week the Bank of England dropped its resistance to following the U.S. Fed and the European Central Bank in pumping hundreds of billions of euros and dollars into the system. But it only committed to $10 billion a week for three weeks.

The United Kingdom's foreclosures are suddenly at an eight-year high with 14,000 properties repossessed and 125,000 in default. At the other end of the scale, big private boat owners in the Med, were keeping their 200- to 500-footers in harbor — to save on 300-gallons-an-hour fuel bills.

Arnaud de Borchgrave is editor at large of The Washington Times and of United Press International.

Great article Fred.

I could use some of that $100 million a year blood money. Or better yet the $70 million bonus or even better yet the $BILLION a year salary.

If some twit signed up for for something insane like a LIBOR + 18% ARM with a increase of 3% for adjustment period then, why would the greedy bank not bump up the interest rate at each adjustment period until it eventually reached LIBOR + 18%. That is what the contract for the loan is. Who in the right mind would sign up for such an crazy loan. And that has pretty much nothing to do with the feds lowering the overnight rate.

More than likely a reasonable ARM might be something like Prime + 1% with hopefully something more reasonable maximum jump than 3% per period. But still, what is prime + 1? I'll guess it is something like 6 or 7%. Are they crying because their loan rate is approaching a rate similar to a fixed rate loan? I don't feel sorry for them.

And when the fed lowers rates, it is typically doing it for extremely short terms rates. Like overnight. Mortages are based based on longer term rates. Typically banks make mortgages based on the average length of a mortgage which is 7 years, thus a 7 year rate.

The 7 year rate did go down, but not as quickly as the overnight rate. It is possible that under different economic conditions, the 7 year rate could have gone really low, but it did not. Long term interest rates are dictated by market conditions.

And any smart bank making a mortgage is going to need to get the mortgage rate on either a fixed or adjustable to approach the 7 year rate assuming the average mortgage lasts 7 years. If they don't they will lose money. And a bank business plan clearly does not have that in mind. You seem to be complaining that LIBOR is not going up much. Do you think a bank would make a mortgage for LIBOR + 0%? I think not! There is going to be a spread higher than 0% and hopefully it is not going to take the borrower much above the 7 year rate. However, if it does go way, way, way higher than the 7 year rate then, yes I agree the bank is greedy and should be expecting that mortgage to eventually default. Somehow, I don't see banks business plans including mortgages that are definitely going to default.

Where I think the real problem is here, is mortgages that were interest only or even worse not even covering the entire interest. These mortgages assumed that the housing market would continue to boom, with the equity going up faster than the principal increasing (well the principal only increases for partial interest, not interest only). However, the banks, did do something reasonable in those mortgages. They put in an option to change the payment if the mortgage holder appeared to being going upside down (owing more than 100%), the mortgage would switch from partial interest or interest only to a normal interest + principal. Wouldn't you do that if you were a bank. You don't want to keep the payment low, and then have the mortgage holder owing say 150% of the house's worth in 7 years, do you? Unfortuately, you mix that with an ARM, even an ARM with a reasonable prime + 1%, and you give the mortgage holder an unexpectedly big payment increase. And guess what when the housing market goes soft, and prices start falling, the bank is going to exercise the option to make the payment go to interest and principal, no suprise there.

OK
One thing at a time.
Yes they did sign up for these types of loans. Yes it happened in droves of millions of people. Yes they did buy more than they could afford. They were lead down the path of destruction buy the Realtors and mortgage brokers telling them they could sell in a few years and make a bundle because of appreciation. I have already said they should have read the contracts better. Some did not read them at all, they just signed them. They will get a lesson in economics for that blunder.

Reasonable arms like Prime + 1 did not exist on a large scale when this was going on. Yes they did exist but were not marketed heavily because they were not as profitable. The people aren't crying because the rates are approaching the rates of a fixed loan they are three times the rate of a fixed loan in some cases. They are crying because they are loosing their homes. I still think they have to share the burden of not reading the contracts. This was a comedy of errors that caused this. I am not defending anyone involved. I do have compassion for the elderly folks that WERE NOT flippers that got caught in this mess, simply because they were mislead. However I still do not think they should be bailed out. NO BAIL OUTS!

You are correct on the seven year rate. Woulda coulda shoulda but didn't.

I am NOT COMPLAINING at all about anything here. You misunderstood a comment, I suppose. I am not complaining about what LIBOR did last week or historically. No sir, I do not expect a bank to loan money at LIBOR +0 or prime +0, I do realize that the banks are needing profits to survive as well as any other business. If the bank does not make a reasonable spread they cannot pay employees and would go out of business. I know that ;)

The banks are taking a much higher rate than they should though, in my opinion. If the rate is based on LIBOR +1 then it should stay at the index plus the margin. I do not expect them to loose money at all. No one expected them to continue to raise the rates just for additional profit when the LIBOR stayed reasonably low all during this time. The margin however increased at adjustment dates over and above what the rate people were told they would. Yes I know it was in the contracts but I have already stated most did not read the contracts. They are paying the price now for that.

Most people do not realize the rates are overnight rates and not long term rates. Most people do not know what overnight rates are or what they are used for. There is a major difference between overnight rates and long term rates. I know, you know, but most do not.

I agree with everything in your last paragraph. The banks however raised the rates more than the amounts to just cover the negative amortization plus the spread.

I do understand that "if" is a big word and a lot of people knew this would happen. I think the hedge fund managers knew it was coming and swept it under the rug for an additional bonus period. Wouldn't you if your bonus was in the hundreds of millions? Sure you would, just like most of them did. They hid the problem and got huge bonuses based on false projections and assumptions.

Like I have said NO bailouts for any of these people. I do think that even lowering the overnight rate would be considered a bailout. The market is in a very bad need for a correction and we are getting it right now. Our construction cost went up 45-60% during this time frame. Why in the world in a reasonable controlled growth market would builder cost go up 45-60%?

Supply and Demand

The supply was limited due to the flippers buying the homes ten at a time and the demand was limited because of lack of skilled labor.

Steve,

I think you have pretty well covered this snafu. As far as I am concerned:
No bailouts. How these people could sign these contracts without reading them is their problem - I think the basic ingrediant is greed (whatever
happened to the old saying "if it sounds too good to be true...") and ignorance, which I have a hard time accepting in this day and age.
Granted, I'm sure a lot of these lenders were good at painting rosey pictures
but I truly don't think the rest of the taxpayers who did exercise due diligance should have to foot the bill. I have made my share of mistakes but I never asked or expected anyone to bail me out, I took my lumps and didn't
repeat the mistake: lesson learned. It's the school of life and classes are
in session for these people. May they do well.

Flip,
I agree completely, and thanks .

I have taken some very hard lumps myself.

Actually that is where my signature line come from.

I got that from a farmer, Tom Larson who had a hell of time figuring out a major problem he had on the farm. I forget the year but it was from an article in the New Holland tractor monthly magazine.

I hope everyone also realizes that this scenario applies to any coastal resident/downstream from a dam/high fire hazard zones.... etc. bailout.

Rate change coming.....
Can you say bailout?

Per CNN
13% of all the mortgage loans in the US are sub prime ....ONLY 13%
15% of those 13% of sub prime loans are in default .... ONLY 15% OF the 13%
Of those 13% 1.4% are either in foreclosure of will be in the next 30 days
94.6% of all Americans pay their mortgage on time or own their home outright


Considering how big the US is and all the mortgage loans out there this is a relatively SMALL NUMBER

This BAILOUT is so the hedge fund managers, the banks, the mortgage companies can make more profit. A short term lowering of overnight rates (FED) will not help the people. We are being fleeced people

Wake up!


I think Cheney needs to take Bush hunting!

Bailout coming to a mortgage company near you!