FLASH: American Home Mortgage crashes 35% before trading halted, mortgage meltdown and liquidity crisis spreading

The ratings agencies totally blew it, and now investors in subprime, alt-a liar's loans, jumbo loans and even prime mortgages are getting destroyed.

Why?

Because the system got gamed by corrupt mortgage brokers, appraisers, realtors and builders, and the debt holders got left holding the bag.

Oh, what will IndyMac have to say tomorrow? Should be interesting (yes, short IMB)...

American Home Mortgage Investment Corp (AHM.N: Quote, Profile , Research) shares fell sharply on Monday after the company delayed its quarterly dividend, announced "major" write-downs, and said lenders were demanding it put up more cash.

Shares of American Home were down 39 percent, falling in premarket trading to $6.39 from Friday's close of $10.47. Trading was halted for news pending prior to the market open. The shares on Friday hit their lowest level since April 2003.

Late Friday, Melville, New York-based American Home said it was struggling from "unprecedented" disruption in credit markets. The announcement fed investor worries that bad loans are extending beyond "subprime" lenders to providers of home loans to borrowers considered to be good credit risks.

American Home specializes in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation of income or assets.

"Bankruptcy is not out of the question," said Matt Howlett, an analyst at Fox-Pitt Kelton. "It's clear now we're in a liquidity crisis. Any loans that aren't pure prime are falling in value."

Why is the Dow up even after the CDO blowup? Here's some ideas, add yours

First and foremost, stocks prices do not equal house prices. Why trolls don't get this I'll never understand - the two are mutually exclusive. iPhone prices don't equal home prices either, FYI.

Here's a few reasons I see for stocks going up recently:

1) Investors frantically getting out of depreciating dollars and into stocks. One share of IBM going up while dollar is tanking means it takes more dollars to buy that one share of IBM, so IBM shareholders may feel "richer" when indeed they may be poorer. And meanwhile I paid $18.00 for 12 chicken wings here in London the other day... Get it?

2) Bond investors, especially mortgage-backed CDOs and US treasuries, selling their bonds and moving funds into stocks

3) Overleveraged hedge funds, on the verge of blowing up and shutting down, rushing into stocks short term, trying to get the sheeple excited before they get the F out of Dodge

4) Venture cap money is sloshing around in a big way buying up public companies. Buy-outs and rumors of buy-outs driving stocks higher and higher

5) Dead real estate money still looking for a place to go and stocks are a natural

6) Classic flight to safety after the CDO S&P Bear Stearns news with the multinational mega-caps leading the way

7) Hank Paulson and the PPT working overtime

Yes, this will all end and end badly. But enjoy the ride until it does. One BIG fallacy is the view of most that they can ride the wave and get out at the first sign of trouble. What happens when everyone wants to get out at the exact same time? Anyone remember September 12th? Anyone remember Black Friday? Anyone alive in 1929?

My COP, EWJ, EWZ, EWG and my miners are doing fine, I covered my homebuilders last week (pigs get fat hogs get slaughtered, gotta love 100% - 200% gains), I enjoy 5.5% to 6% CD's and savings, and I'm short IndyMac, Countrywide and Retail Holders today. And I wish I had picked up gold at $640, was waiting for my $630 target that never came.

With oil coming up on $80 again, CDOs and hedge funds blowing up, consumer confidence plummeting, housing prices in freefall, and wars and rumors of war all over the place, it feels dangerous out there.

How 'bout you? Where's your money? Are you on offense or defense? And do you understand how the dollar collapse affects you?

Baby Boomers in Trouble? Pension funds among the bagholders of subprime toxic waste

Got popcorn?

Blown Mortgage and Calculated Risk also did nice commentary on this disaster-in-waiting. Here's the Bloomberg piece on what we've known all along - it's not the homedebtors that are holding the bag - it's the hedge funds, pension funds and foreigners.

And you.

Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund

June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.

At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.

``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''

Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.

They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.

Fleischhacker, 45, says she doesn't associate toxic waste with the equity tranches she's selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.

Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.

The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.

``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.

``That's obviously a very risky play,'' he says. ``If there's a meltdown, which I expect, it will hit those tranches first.''

Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.

``It's grossly inappropriate to take this level of risk,'' he says. ``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''

Toxic Mortgage Companies

Do your own research and make your own plans.

FED
BKUNA
CFC
IMB (formerly NDE)
DSL
WM

Judgement day could be a ways off. Or not.

Mortgage guru: ""This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Why doesn't everyone see the obvious, and see what's obviously coming?

The subprime disaster doesn't start and stop there. It starts there. Alt-A, or "liars loans", are obviously next. I would actually suggest that liars loans (think Casey Serin) are actually in worse shape than subprime, since investors mistakenly trusted these higher-rated debt holdings more than subprime.

Head to the bunker HP'ers. Calm may have settled in again, but it would appear to just be the eye of the storm passing over. Get ready for the wall of wind to resume.

BusinessWeek: The Mortgage Mess Spreads - The subprime lending industry is getting hammered, and hedge funds and investment banks are feeling the pain

The canaries in the coal mine are keeling over fast. After years of easy profits, the $1.3 trillion subprime mortgage industry has taken a violent turn: At least 25 subprime lenders, which issue mortgages to borrowers with poor credit histories, have exited the business, declared bankruptcy, announced significant losses, or put themselves up for sale. And that's just in the past few months.

Now there's evidence that the pain is spreading to a broad swath of hedge funds, commercial banks, and investment banks that buy, sell, repackage, and invest in risky subprime loans.

According to Jim Grant of Grant's Interest Rate Observer, the market is starting to wake up to the magnitude of the problem, entering what he calls the "recognition stage." Says Terry Wakefield, head of the Wakefield Co., a mortgage industry consulting firm: "This is going to be a meltdown of unparalleled proportions. Billions will be lost."

Hedge funds, those freewheeling, lightly regulated investment pools, seem particularly vulnerable. BusinessWeek has learned that $700 million Carrington Capital and $3 billion Greenlight Capital may have gotten badly burned because of their intricate dealings with New Century Financial, a major subprime lender whose stock has plunged 84% in four weeks amid a Justice Dept. investigations into its accounting. Magnetar Capital, a $4 billion fund formed two years ago, may be on shaky ground, too. The question is, how many others may be suffering?

"This is a very opaque industry, so no one really knows," says Mark M. Zandi, chief economist and co-founder of Moody's Economy.com (MCO) "My guess is that if you look at the top hedge funds, they're bearing most of the risk."

Other hedge funds that have feasted on mortgage-backed securities will be hit hard if rating agencies start downgrading them, as is widely expected. That would be likely to send their values plummeting. "This is indeed a stress scenario," says Glenn T. Costello, co-head of the residential MBS Group at Fitch Ratings. Kevin J. Kanouff, who heads bond surveillance for Clayton Holdings (CLAY), a consulting firm for institutional investors, adds that "hedge funds are getting very nervous about their investments."

There's also growing talk that many firms, in particular Goldman Sachs, incurred steep losses in trades based on the ABX subprime index. As market makers, the big banks were forced to take the other side of clients' short trades, or bets that the index would fall. When the index plunged 34% in the first 10 weeks of the year, the banks lost. Goldman, which reports first-quarter earnings on Mar. 13 and is a big player in the ABX market, declined to comment.

While subprime loans accounted for 20% of mortgages originated last year, David Liu of UBS estimates that fully 40% of last year's loans are "showing a lot of signs of stress." Says Nouriel Roubini, economics professor at New York University's Stern School of Business: "The risk that prime borrowers will start to feel financial stress in 2007 cannot be underestimated."

Your basic Housing Ponzi Scheme thinking

Here's how it goes down. Doesn't matter if it's land in Tokyo, tulip bulbs in Holland, or pre-construction condos in Phoenix.

* My cousin Joey just made some money selling his home

* Hey, my neighbor is putting his house up for sale for way more than we both paid

* Oh, man, I'm rich! My home just went up in value 20%!

* Maybe I should buy some investment property

* Another house just sold down the block for 100% more than the guy paid

* Hello, Cheap Mortgages with No Money Down? I'd like to take out a loan on an investment condo

* Everyone is getting rich buying and selling homes! It's so easy! Why work for a living

* Yes, you're right Mr. New Home Sales Guy, why buy one when I can buy two! Let's do it

* You're right, Mr. Cheap Mortgages with No Money Down, I should take advantage of that no-doc, no-down, option-ARM thing you're recommending. Are you sure I can lie about my income? Cool! I'll buy five of those new condos, not two!

* Grandma, you gotta buy another condo in Florida! We're all getting rich rich rich rich!!!!!

* Hmmm.. I wonder if being $4 million in debt is OK, after all I only make $40,000 a year. But it must be if the bank would lend me that kind of money

* OK, I've closed on all my new condos, time to flip them for massive profits!

* Hmmm... it's been 30 days and no offers. And it is strange that nobody actually LIVES here in this new condo building. I wonder why that is.

* It's the damn realtor's fault, why can't they sell my units. I'm gonna fire 'em and get a new one! One that knows the market!

* OK, it's been six months, and still no buyers, and I'm out $30,000 in carrying costs so far. Hmmm... That's more than I bring home in a year. My credit cards are getting closed to maxed out. Oh well, it's OK, I'll just drop the price a bit and still be rich rich rich rich!

* OK, it's been a year. I can't make the payments anymore, still no offers, I'm on my tenth realtor, still nobody lives in this damn condo building and what happened? My realtor and mortgage broker and appraiser and David Lereah and everyone said I was going to be rich! It's their fault.

* I can't believe I just got foreclosed on. I've lost everything. Oh well, it wasn't my money after all and in a few years my record will be clean and I'll try again! I do wonder though who did take the loss on all my condos, since it wasn't me? Hmmm...