"The Great Unwinding" is here - "Home-loan house of cards ready to fall"

Grab some popcorn HP'ers and a good easy chair, and just sit back and watch the carnage now. We're in the second inning, the game is just starting.

Oh, man, this is going to end badly. "The Great Unwinding" is here. Here's Fleckenstein with some excellent insider stuff:

Home-loan house of cards ready to fall - The collapse of the subprime credit market may come this year, with a major subprime lender going broke. The repercussions will haunt us for years.

This week brings an update on the deterioration, via comments from two very knowledgeable friends. One of them, a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial, Accredited Home Lenders and NovaStar Financial will, in his words, "hit the wall" very soon. He writes:

"We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built . . . in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.

"The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.

"It is really getting serious. We had a borrower in So Cal who cut and pasted bank-statement copies of Washington Mutual to make it look like he had $400,000 average balances in his account to buy a $1.7 million home. Something did not seem right. Lo and behold, we checked very closely with the bank. The borrower had only $500 in his account. This is also just one of many examples happening daily.

"I am truly worried about the aftermath once it is resolved. It truly becomes a vicious cycle. Each time guidelines are pulled back, fewer buyers can buy homes. Thus, lower property values, and more people underwater. The debt piles up on homeowners' balance sheets, and people consume less.

"This will, and should, take years to play out. (Federal Reserve Chairman Ben) Bernanke will yield to the Lobby and the Street, trying once again to lower rates and allow people to bail themselves out, while in turn allowing the buyout firms of the world to overpay for the companies they buy with easy money. The game is so rigged against honesty, it boggles the mind. I worry about our children having a chance to have a future, at this point."