December 06, 2007

HP'ers you need to know what's REALLY happening with the mortgage meltdown. Not what Wall Street, Bush and the MSM would have you believe today.

I would imagine in 1929 - 1933 there was some serious day-to-day confusion and cheerleading too.

But at HP, we knew what was happening. We knew what would happen. And we know what's going to happen next.

I'm going to break my own rules and publish this full piece from mortgage insider Mark Hanson, care of Herb Greenberg at MarketWatch and Richard for the link.

Read it. Take the 60 seconds of your life. Every word. And then figure out how you're going to get through this mess the next few years.

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime
. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again?
Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen?
In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.


Edgar said...


No problem, go here:

The real bailout of CFC and the other mafioso already happened, with FHLB. Smoke and mirrors.

gt said...

very insighful, but his remark that

:I sold BILLIONs of these very loans over the past five years.:

gives the whole piece less credibility

Anonymous said...

Mark D Hanson

Divisional Vice President at
Freddie Mac
McLean, Virginia
Officer since December 1999 Financial data from Hemscott
track this person
Track This Person

n/a years old

Mark D. Hanson was named vice president of Mortgage Funding in December 1999. In this role, he manages Freddie Mac's funding purchases through securitization, including structured finance, marketing and modeling, and has oversight of the performance of Freddie Mac's Gold Participation Certificates (PCs). He is also responsible for Freddie Mac's relationships with institutional investors and securities information vendors, and developing and implementing new security products and services to meet customer needs. Hanson was previously a vice president at Lazard Asset Management, where he managed mortgage and asset-backed positions for institutional clients since 1997. Since 1986, Hanson has held a number of positions, including a research/sales position in Donaldson, Lufkin & Jenrette's Taxable Fixed-Income Division, a director of Research for Freddie Mac's Securities Sales & Trading Group, and a security analyst at Metropolitan Life Insurance Company's Mortgage Securities and Portfolio Strategies Departments. Hanson has a BS from Allegheny College and an MBA from the University of Rochester.

Anonymous said...


FredE said...

Is it the lenders' fault that we are where we are? Housing prices have become absolutely ridiculous in some parts of the country. In 2002 and 2003, unemployment was all over the place, with many skilled jobs being dumped and offshored. Purchasing power was down. In order to continue to sell mortgages, lenders had to look at broader swaths of the credit plane, as well as larger loans in general to be useful for elevated home prices.

Maybe those people figured that jobs and salaries would bounce back, and didn't expect that home heating and transportation costs wouldn't go completely fuckin' nuts.

I suppose though that you could argue that expanding the eligibility sphere only drove up demand and helped explode housing prices, creating a vicious cycle.

As for buyers, apartments have in fact gone up in price and down in value and don't show signs of slowing; apartments are converted to or knocked down to build condos everywhere. They must have figured that a stable (though higher) price and personal freedom over one's residence was well worth it.

Roccman said...

Yeah - anyone who still thinks the US government is the beacon for the world is delusional.

They will default on every cent owed.

Start WWIV

then blame OBL.

We deserve everthing we have coming.

Best buy food, guns, ammo, sutures, boots, sleeping bags, etc.

Enjoy the dieoff.

Anonymous said...

Frightening. I bet many people still don't understand how their "exotic" loans work. They just send in the minimum payment like a credit card.

Edgar said...

I'm going to make this very simple to understand, even for the FBs:

Bushco does not care about you, he doesn't care about the Chinese either. The only thing Bushco cares about is Goldman Sachs, and Citi, and Morgan Stanley, and Lehman Brothers. That is the only thing Hillary cares about too. The banks give presidents money, you don't. If you believe a word they say then you are exactly as stupid as they hope you are. Case closed.

Anonymous said...

Freddie, Fannie and Countrywide are going down - BIG TIME!!

Edgar said...

Bribe money is the reason Roland Arnall, founder of Ameriquest, and subject of dozens of predatory lending lawsuits is named ambassador to the Netherlands by Bush, and the FBs are left to fend for themselves.

Anonymous said...

debt speculators are slaughtered and i am happy. so what's the big deal?

next time, do't lend money to deadbeats and losers. that's about 50% of the usa

Anonymous said...

Beautiful credit! The foundation of modern society. Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises? That is a peculiar condition of society which…puts into the mouth of a distinguished speculator in lands and mines this remark: "I wasn't worth a cent two years ago, and now I owe two millions of dollars."
The Gilded Age, Mark Twain

Peter said...

Amen, Edgar!!!

Princess Mononoke said...


Princess Mononoke said...

Roccman said...
>>Start WWIV
then blame OBL.
December 06, 2007 11:48 PM

What happend to WWIII??? LOL Have we started something that I'm not aware of? JK! No really have we?

Anonymous said...

Anyone with a piggyback or HELOC should call their lender and tell them to cut the payments in half. Take it or leave it. If the second lienholder forecloses, they get nothing.

Anonymous said...

Bushco does not care about you, he doesn't care about the Chinese either.

Hmmm, not entirely true. Neil, Bush's brother, has a business that represents Chinese interests in the US. And yes, foreign governments always find a way to give lots of money.

Anonymous said...

I've been telling you guys here for many months that the Alt-A was the big sh!t to hit the fan, not subprimes. I even told you all to put the feet up, grab some popcorn and enjoy the upcoming REAL mess. Remember? So I'm taking credit for this crap...haha

happy homeowner in the stix said...

Keith, thanks for posting this. California's more effed than I thought possible if you have that many neg am loans out there.

It doesn't surprise me that WaMu was a big player in the interest only loan market. When I was shopping for my mortgage, I talked to one of their mortgage people. The dumb broad kept trying to steer the conversation away from what I was asking for (30 yr fixed), and kept pimping a 10/1. She probably was going to get an extra bonus or a trip to Hawaii for it if she sold it to me. After the third time of trying to get her to give me the info I wanted on the fixed rate, I finally gave up and yelled, "You don't listen very well, do you?" and hung up.

Thirty seconds later, I kid you not, she called me back still trying to sell that piece of crap. She was sure we got disconnected by accident, because "nobody could possibly turn down such a great deal!"

I just put the phone down and let her talk to my houseplants until I got the off the hook signal.

Anonymous said...

WaMu is a $2 stock waiting to happen! said...

seriously, bumping up home prices and home loans benefits only the government and the banks. The average consumer is always screwed.

Barbara Ann Jackson said...

re: Foreclosure Fraud, Wall Street, FREDDIE MAC, Judicial Corruption

Any representation to Wall Street Investors by FREDDIE MAC that FREDDIE’S reported $$$ billion dollar losses are due to people defaulting on their mortgages must be weighed against the fact that (in states such as Louisiana), Freddie Mac is paying DEBT COLLECTION firms needless, outrageous litigation costs for corporate lawyers to outmaneuver –and even persecute people who file court proceedings in opposition to fraudulent foreclosures. In Louisiana, long before Hurricane Katrina, the entrenched real estate and mortgage fraud racketeering scheme has been in operation. But thanks to federal authorities such as U.S. Attorney Jim Letten and U.S. Attorney David Dugas, real estate racketeers in Louisiana have nothing to worry about. Verification of what I have written is posted on my website.
*Also, posted on NEWSBLAZE.COM, see this article: "Mortgage Mess, Foreclosure Fraud and Impediments to Justice:"

Most critical to the Foreclosure Crisis is FORECLOSURE FRAUD, which enables MORTGAGE LENDERS to ILLEGALLY FLIP properties. In Louisiana, 2 particular mortgage companies which benefit from fraudulent foreclosures are Wells Fargo and FREDDIE MAC! It is HIGHLY COMMON for a DEBT COLLECTOR attorney to file a foreclosure: (i) in the name of a DEFUNCT mortgage company;(ii) in the name of a mortgage company which is NO LONGER holder of the security interest (the promissory note); or (iii) file a foreclosure and AFFIX a "ransom" amount (the collector's fee) far exceeding what the promissory note "Acceleration Clause" authorizes.

Despite a property owner's entitlement to Challenge CONTRARY-TO-LAW loss of his / her home, most property owners LACK consumer and legal knowledge; the Court System is REFRACTORY; and there are limited attorneys with acumen to pursue Consumer Law. Also, when borrowers sue for "Unfair Debt Collection Practices," damages, the collector gets to make more $$ through prolonged litigation, as co-conspirators enjoy the foreclosure pie.

Investors need to become more astute about how mortgage servicers' misdeeds hurts borrowers as well as siphons incalculable amounts of money from what Investors should reap. (See "Limiting Abuse and Opportunism By Mortgage Servicers," AND "Private Property Rights Deferred: Has Predatory Mortgage Servicing Destroyed The American Dream" by Rawle Andrews, Jr., Esq.,and Leroy Jones, Jr., J.D. Visit:
**also see:

Barbara Ann Jackson
Law & Grace, Inc.