First off, thanks to those people that keep commenting and e-mailing me their support even in periods of less than frequent postings.

I know it seems like a lot is happening, and it is, but now that everybody (including people hand-writing fortune cookies in China…which just happen to be holding a couple hundred billion of our mortgage debt) now knows that there were some ‘risk assessment’ issues the past few years in the mortgage market, I didn’t feel like I was adding as much value as when I was one of a few people warning about what was coming.

I was gearing up to get a new post done anyway…then I woke up to my TV the other morning a few minutes before CNBC’s Dylan Ratigan was going to interview Hillary Clinton.

Ohhh…where to start. I guess I will start with the mortgage ’solution’ as proposed by Hillary. First off she wants increased standards for mortgage brokers. OK, I will go along with that. Since there are NO standards for mortgage brokers right now, some standards might be a start.

“SoCal, what do you mean there are ‘NO’ standards for mortgage brokers?? …they have to be licensed…right??” Well, not exactly. A real estate license covers a person to be able to do real estate and mortgage transactions. That license focuses more on real estate than mortgages and finance. BUT the REAL PROBLEM is that anybody can be a loan officer!!! I had broker shops where 1-2 people had their ‘broker license (RE license)’ and there were 10-100 people selling loans ‘under’ that license. All of the paperwork would have the ‘licensed brokers’ name on the 1003 (the mortgage application form), but it was ‘Joe-the-loan-officer-that-cold-called-all-day-long-that-dealt-with-the-actual-borrower’ who did all the work. It was all of THESE people that were selling loans with no verifiable training or license and met NO standard to become a ‘loan officer’. The only standard they met was that the ‘licensed broker’ wanted another 100% commission person working for them. No skin off their back. If they sold loans…cool. If not, no worries. Didn’t cost the ‘broker’ anything more than maybe some time and phone bills.

Let me make it simple. I have a Series 7 or ’stockbroker’ license. I cannot open up a shop and have 20 people calling clients selling them investments under my license, BUT that is what happened in every city in California as you could have people sell loans under your ‘California Real Estate License’ as long as the licensed person’s name was on the paperwork.

Now here is where Hillary starts veering off course. This statement shows she does not totally understand the mortgage industry:

“A lot of buyers think the brokers are actually representing them, when we know the brokers get paid depending upon the size of the mortgage they are able to sell,” - Hillary Clinton on CNBC

That is NOT really true. Mortgage brokers do not really control the size of the mortgage. If you and your Real Estate agent find a property, and negotiate a price of $450,000, that is the size of the mortgage you will get (assuming you don’t put any money down, or get a 103% mortgage, etc.). Your mortgage broker can’t ’sell you’ a $550,000 mortgage for your $450,000 home. Mortgage brokers can commit fraud on refinance deals by working with an appraiser to inflate the value of the property so they can ‘help’ the borrower take out more money. The funny thing is, the borrowers were usually happy about this. Very few times did I ever hear of a borrower that wanted a specific amount of ‘cash-out’ on a refi. Usually I heard “as much as I can get”, or ‘max cash out’. They probably wouldn’t be complaining about the extra cash-out if property went up every year like the ‘experts’ said it would.

That said, don’t think the borrowers didn’t know what was going on. MANY of the borrowers out there knew, or learned how to take advantage of the ‘easy money’ available. They knew how to get inflated appraisals and work the brokers. They would call brokers until they found one that would help them. So don’t think that every borrower was ‘unsuspecting’ and just wanted a ‘home to LIVE in’.

Let’s move on…

Then things get really hairy as she proposes that the TAXPAYERS fund a ONE BILLION DOLLAR federal program that is supposed to help state and local governments help at-risk homeowners avoid foreclosure. She says these programs will go to help ‘unsuspecting families’ linked to unfair mortgages. I don’t want to know the ’standard’ for handing out this money…as I’m sure there isn’t one, just like handing out credit cards after Katrina. Another ‘feel good’ program that isn’t thought out and becomes nothing more than another billion dollar boondoggle. If you really keep looking, there is another BILLION dollar fund she wants to create as well. As much as I hate to send traffic to her site, you can read her mortgage proposal for yourself.

IF the government IS going to help people, here is THE STANDARD that needs to be used: Only people that put 10% or more down, got a full-doc loan, with a 15,20 or 30 year fixed-rate mortgage should be eligible for any sort of help…and that is IF the taxpayers should help at all. I know that ’sh!t happens’, but government shouldn’t be in the charity business with taxpayer dollars, and certainly not to help people that made poor real estate decisions.
While we are at it, I should just address a few things she has in her ‘plan’ to address the mortgage industry. Of course, it is always good to find a ‘victim’ that needs to be ’saved’ by government and politicians. I just scanned the US Constitution again…in case I missed something the first 100+ times, but it says nothing about government helping to make sure you can afford your home. Here you go…from Hillary’s site:

New Hampshire resident Kristi Schofield joined Senator Clinton in Derry today. On July 31st, Kristi and her husband Paul lost their home of eight years in East Hamstead, NH because it had been purchased by the bank at a foreclosure auction. Yesterday, their mortgage company asked them to be out of the house in 17 days. They had planned to raise their three children and spend the rest of their lives in their home, but their adjustable rate mortgage payments continued to climb from $2,400 to its current level of $6,000 a month.

“We tried to do the right thing and continued to make the payments as long as we could with our savings and what earnings we had from unemployment, temporary and part time work. My husband had a good job, we had a great home. We were living our dream. Hillary Clinton is standing up today because she wants to help protect the American dream,” said Schofield.

I don’t get it, how are they losing the home NOW, after EIGHT years?? The ONLY way they could have a mortgage adjust from $2400 a month to $6000 a month is if it was a ‘neg-am’ or option-arm loan. There is NO way a basic ARM loan would have the payments go up that much. I am willing to bet they didn’t get an option-arm loan 8 years ago, so that means they refinanced and pulled some money out along the way. I don’t know the RE market in New Hampshire, but I would bet that property appreciated over the past 8 years…call me crazy. Either way, a $6000 a month payment would put their mortgage balance somewhere between $800,000 and $900,000 dollars (depends on too many unknown variables). What I want to know is what these ‘victims’ did the past 8 years. How many times did they refinance? How much cash did they pull out? Besides, since when was being able to live in an 800k house guaranteed as part of the ‘American Dream’? The complete and total lack of personal responsibility in this country makes me sick. But what do you expect? The politicians are all too eager to ‘help out’…but with OPM (other people’s money). Sad…

In response to another question regarding lenders ‘exploiting’ borrowers, here was her reply (sorry for the all caps…that is how it was on the CNBC site):

SENATOR CLINTON: I WILL GIVE YOU ONE EXAMPLE. THIS WHOLE IDEA OF PREPAYMENT PENALTIES WHICH ARE OFTEN BURIED ON PAGE 700 OF FINE PRINT. PUT HOMEOWNERS IN IMPOSSIBLE POSITION. LOT OF THEM WHO HAVE TRIED TO PAY OFF THEIR MORTGAGE, MORE MANY FIRST-TIME HOME OWNERS SEEMS LIKE THING TO DO HAVE BEEN HIT WITH THE PREPAYMENT PENALTIES YOU KNOW THE PAPER HAS BEEN SOLD AND PEOPLE ARE, BASICALLY, BANKING LITERALLY ON WHAT THE PROJECTED INCOME WOULD BE. I THINK WE’VE GOT TO, REALLY, REQUIRE THAT LENDERS TAKE, A DIFFERENT APPROACH IN DEALING WITH PEOPLE WHO MAY NOT HAVE THE CREDITWORTHINESS IN ORDER TO, HANDLE THE KINDS OF MORTGAGES THAT ARE BEING SOLD TO THEM.

First off, I have seen some big mortgages, but NEVER one with 700 pages, and certainly not that much fine print. There is a lot of paperwork, but there are some ‘key’ documents that are pretty much STAND OUT that you need to pay attention to. But even if there were 700 pages of fine print, TAKE SOME F%@#ING PERSONAL RESPONSIBILITY and don’t sign until you, or somebody you trust, or other hired expert tells you it is OK to sign. The ‘I didn’t know what I was signing defense’ is complete BS. If you didn’t know what you were signing…DON’T SIGN!! Funny how there were NO problems with these mortgages when everybody was ‘getting rich’.

Most prepayment penalties are only 1-3 years, usually the length of the ‘fixed rate’ part of the ARM loan. If you are buying the house to live in, you need to be there for at least 3+ years for it to make sense financially in a ‘normal’ RE market. So don’t buy property with short term mortgages if you don’t have a long-term plan and you can’t afford them once they adjust! I know, I know…the plan was to ‘flip’ the property and make 6-figures. I just don’t see how a 2 year pre-pay penalty puts a borrower in an ‘impossible position’. The borrowers KNOW this going in, and they know they will have to refi, sell, or deal with fluctuating payments in 2 years. Besides, nobody said the borrower HAD to take a 2-year loan, or a loan with a pre-payment penalty!! Guess what, the rate was LOWER with the prepayment penalty. You don’t know how many times I would hear the borrower tell the broker they didn’t want a pre-payment penalty…and then when they heard the new, higher rate, they would take the prepayment penalty. They didn’t have to have the penalty, they could have had a higher rate instead, it is just numbers. You either pay with a higher rate, or you pay with the prepayment penalty. If they ‘ban’ pre-payment penalties, then the investors won’t buy the loans. If they won’t buy them, the lenders won’t make them. If the lender doesn’t make the loan, then guess what, Joe-wanna-be-homeowner…won’t be.

We do NOT need government telling the lenders what they can and can’t do…the FREE MARKET is already doing that!!! The lenders are not making those loans anymore because there is NO MONEY IN IT!!! Just ask Bear Stearns! I spoke with some people in Capital Markets this week, they told me that NOBODY is buying MBS (mortgage backed securities). This was further confirmed by Cramer ranting tonight on his show (I usually don’t watch his entire show, but the first 10 minutes were all mortgage talk, so I had to watch). The lenders NEVER would have made those loans if there weren’t people buying the paper. Now, there are NO people buying the paper, and guess what, NO loans are being made! Funny how that works. The free market has it’s issues, but none of them are as bad as guvment ’solutions’.

A few more points. There is NOTHING guvment, or the financial industry can do right now to ‘fix’ this. It just has to run it’s course. People need to go BK. Hedge funds that got too aggressive with mortgages need to reap the consequences. People need to be fiscally smarter, think for themselves, and not run with the herd. There is nothing that can be done to support property values where they are in many areas, and borrowers do NOT need to be rewarded with taxpayer money for over-extending themselves.

I hate to say it, but this thing is going to be ugly, and we are a good 2-3 years from even thinking about the bottom. We finally started reaching critical mass with ’subprime’ foreclosures, but we haven’t even begun to hit the alt-a and a-paper sham loans. They are starting to pop up, but they will take longer. Most alt-a and a-paper borrowers were doing 5, 7, and even 10 year ARM loans. 5 years seemed like an eternity when things were good. Appreciation was guaranteed! Well, I know several people with 5 year ARMs and all of a sudden 2-3 years doesn’t seem so far away…especially the way things are headed. Sadly, I think many people are going to be in for a nasty surprise when their 5 year interest-only ARM starts to adjust, and they realize that their property is worth the same or less than it was 5 years ago, and their mortgage balance hasn’t changed one bit! Tell me how it felt to RENT from the bank and the guvment (you do have to pay property taxes when you own)…instead of a landlord.

On a quick side note, it looks like Europe now has a pretty good idea how bad our debt is. I will try and post more frequently now that major companies are going under, hedge funds are going under, markets are halting trading, and things ARE finally starting to happen.

Here are my ’solutions’ to stem this from happening again. Have a private company establish a set of standards to become a Licensed Mortgage Specialist. This person needs to meet certain educational requirements and take an extensive test that covers math, mortgages, and situational based integrity questions. The license would have some sort of continuing education and a certain number of mortgage complaints would impact maintaining the license. It would be like a Series 7, in that you must have one to call, pitch, market, sell, talk mortgage products with potential clients. This license would be completely separate from a RE license, and the RE license would not allow people to do mortgages. Secondly, in addition to all the other pages that are already there, I would make a simple ONE-PAGE disclosure statement with all the pertinent loan information. It would be spelled out in simple ENGLISH (not spanish) and cover things like rate, payment, high adjusting rate and payment, broker commission, prepayment penalty, and other important terms. Of all the other pieces of paperwork, this piece would have the ‘main’ parts of the mortgage all spelled out so ‘anybody’ could understand it.

In closing, as bad as it was waking up to Hillary Clinton on my tv…I would rather be forced to see pictures of her cleavage (don’t ask me why that was nationwide ‘news’) than have to see the results of her proposed guvment programs.

Stay tuned…

SoCalMtgGuy

Well, well, well…I hate to say “I told you so”, but imagine my surprise (or lack thereof) one morning last week when I saw the following headlines on the Drudgereport.

COUNTRYWIDE: Rise in mortgage defaults among most creditworthy borrowers…

California defaults hit 10-year high…

Wisconsin foreclosures up 23%…

MOODY’S: Housing difficulties cause for concern but no systemic threat…

The one that grabbed my attention the most was the ‘rise in mortgage defaults among most creditworthy borrowers’. I knew this would happen, but I had not seen any hard data yet to prove it. I have contacts in capital markets that have told me lots of ALT-A loan pools are in double digit delinquency, but I had not heard much about the ‘A-paper’ loans that go to the ‘most creditworthy borrowers’.

I know this info is about a week old, but from my standpoint, it isn’t really surprising or news to me. That said, I am working on a new post that deals that should help discuss this situation in detail. I have had the little picture-in-picture window on my computer tuned to CNBC the past few months, so I am very familiar with what the financial pundits are saying about the subprime mortgage mess. I have some feedback of my own, so stay tuned for that.
Thanks for stopping by and for understanding that this blog is not a real source of revenue for me, and that is why I have not been posting as frequently lately.

Stay tuned….

SoCalMtgGuy

I know I haven’t posted much lately…hasn’t been much to say. Sure, I could analyze the way things are falling out, but a million other people are doing that. I gave my input as to what I thought was going to happen, and for the most part, things are progressing as I said it would.

That said, I have been busy lately starting a new company. When I have been working, I have a little picture-in-picture window on my monitor where I can watch TV. I usually keep it tuned to CNBC as it is ‘business’ related news. They have been all over the subprime mortgage mess, with lots of attention on Bear Stearns and their hedge fund issues with the subprime market.
Then today they went somewhere new. This is something I have also said: this goes WAY deeper than just subprime mortgages. Alt-A and A-paper loans are next. That was the ‘big’ story CNBC was just talking about. The huge jump in alt-a loan delinquency, and how soon it was happening.

Here are the ALT-A delinquency numbers from CNBC:

2004 - 0.9%

2005 - 1.59%

2006 - 4.21%

To compare, subprime used to be in the 2-4% range, but is now over 14%. That said, I was talking to a contact who deals with capital markets and they were telling me about some pools of ‘recent’ alt-a loans where the delinquency rate had 18-20% of the loans 60 days late or more.

Alt-a loans were famous for the low and no-doc loans, stated income, stated assets, etc. Just because these people had ‘good credit’ doesn’t mean they made the money to afford the homes they were buying. These borrowers are probably a bit smarter, and will be able to ‘hang-on’ a bit longer than the typical subprime borrower, but don’t think there isn’t going to be double digit delinquencies in the ALT-A markets in the near future.

Investors and speculators made up a large part of the alt-a market. As these ‘investments’ become huge financial burdens, watch them cut their losses by cutting prices to sell, or just foreclosing. These properties will add even more downward pressure on the market.

Let’s not even think about the financial impact all this easy money is going to have on the bond market. Bear Stearns is doing ‘corporate’ damage control by firing some senior execs who were ‘responsible’ for their subprime mortgage mess. Lots of hedge funds, mutual funds, and retirement funds have exposure to mortgage backed securities in one form or another.

So watch the ALT-A loans next and look for eventual increasing delinquencies with even A-paper loans.

Now for a quick story…. I was in Las Vegas this past weekend. Ran into a guy I used to know who worked mortgages there. He and his wife were both in the industry. They had 4000+ sqft house, and both were driving nice Cadillac Escalades. I ran into the guy when he got out of the limo to open the door for our party. He said they took a bath on the house when they sold it, and both of the Escalades are now gone. He drives nice limos and she works at one of the local casinos. They are still making ‘good’ money, but nowhere near enough to afford the lifestyle they were living when the Vegas mortgage market was on fire. $700k houses and $1000 a month car payments need lots of income to maintain.

Well, there you go. I know it has been a while, but I have been busy. Like I have said before…this is going to take YEARS to pan out, so don’t worry if I go a little while between posts. I’ll be here watching the entire thing, so don’t worry about that. Thanks for your patience.

Stay tuned….

SoCalMtgGuy

Yes, I know….it has been quite a while since the last post.

I apologize.  I have been out of town quite a bit, and I have been working on starting a new company.

That said, this thing is going to take YEARS to pan out.  I could write commentary everyday about what is going on, but I have other things occupying my time.  Unfortunately, this blog doesn’t ‘pay the bills’ for me.  I enjoy doing it, but it can no longer be the priority it once was.  There are a thousand people ‘covering’ this now.  I gave you (the readers) information on what I thought was going to happen and why, BEFORE it was ‘popular’.  I presented information and let you make decisions based upon that information.  Right now, I don’t have as much to add.  As you have seen, we are in the early stages of how I thought things would pan out.  That said,  I will keep posting, but you will have to bear with me right now.

I am working on a company that I think is going to be able to add a lot of value to people.  I will give more information as the time comes.   

Like one of the posters said, I have helped many people save hundreds of thousands of dollars.  The comments and e-mails I receive from people really make me feel good and are a testament that I did help people.  Too bad I didn’t get a portion of the money I ’saved’ people  

I am out of town again this week, but look for a new post coming when I get back into town.

That said, couple of quick things…..

- Did anybody see the 60 Minutes segment on the Real Estate industry?  It focused primarily on RE agent commissions, and how the NAR and other RE lobby groups are using their power to lobby governments to make legislation that makes it much harder, if not impossible for ‘discount’ brokerages to take hold.  They will do anything to protect their 6% commission.

- I was watching CNBC and a there was a discussion that the ‘fog a mirror’ credit standards were NOT isolated to just the subprime mortgage market.  It has also infected the private equity and corporate markets as well.  They were saying that the money is ’so easy’ that people have forgotten to look at credit worthiness and the ‘ability to pay’.  I didn’t catch the whole segment, but I would have to agree with them.  Leverage can be a great tool when the times are good, but it will crush you when things turn.

- Anybody know of a friend of acquaintance that is ‘treading water’ right now hoping the market goes back up in the next 2 to 3 years so they will be able to refinance?  That is why this thing is going to take years to pan out.  A lot of people are NOT in a pinch yet…because they still ‘have a few years’ until they need to refi. 

Anyway, thank you for reading my blog and understanding my situation.  Your continued support is much appreciated.

Stay tuned…

SoCalMtgGuy

I know many of you are waiting for the next dose of subprime mortgage madness…don’t worry…it is coming. I have been out of town quite a bit lately, and I am going to be gone a bit more. Don’t worry though, you aren’t going to miss anything as this mess is going to take years to pan out. This post should hold you over for a little while until I can get the next big post up.

That said, I wanted to post the following e-mail that I received. Some of you might remember this person from an earlier post. Well, here is the update from this individual. Here is the link to the earlier post so you can ‘refresh’ your memory to the situation: Confession from a reader “I was in denial…I might be an FB myself”

Here is the latest e-mail to me:
 
————————————————————–
Dear Mr. AFB-blogman,
 
My name is xxxxxx xxxxxx. You might remember me from January 22, 2006. http://anotherfuckedborrower.blogspot.com/2006/01/confession-from-reader-i-was-in.html

I should tell you what happened to me in the last year. I give you free permission to post this e-mail on yor site, if you like.
 
After your post, and the ensuing comments, we tried real hard to sell the house FSBO for $639K. Didn’t happen. We had our baby, and, with four mouths to feed now, I got another title rep job, but it only lasted for three months. Got one realtor to list at $639K, just to cover the $601K in debt, commissions, etc. Didn’t get a bite for 90 days. We let him go after the contract, and hired a “hitter.” She listed at $599K. We spoke to her assistant for the ensuing months. Not much really happened. We stopped paying the mortgage after April 2006’s payment. We received the notice of default in September. I had already moved the family to a rental in Garden Grove in June. After three short sales fell out of escrow, we closed on a short sale to a landscaping contractor for $550K. He went no money down. The bank had to eat, among other things, a new septic tank, a tenting for termites, and $30,000 in agent commissions. We bought the house for $605K, paid $3K of principal, and stuck the bank with a $122K loss. The short sale closed on the day of filing for Notice of Trustee Sale in November. The bank, in their deduction schedule, showed the entire period of January through September 2006, as mortgage interest paid, making our write-off 4 times larger than I expected. [Maybe I’m ignorant: is this supposed to happen, and I just didn’t know?] Also, the bank didn’t 1099 us! I talked to the supervisor in the collections department eight weeks ago, and he said our file was noted as “do not issue 1099.” The super interpreted this to mean that the bank must have thought it wasn’t worth it. I was planning on claiming insolvency to the IRS through my job loss, anyway, but they didn’t even give us a 1099!
 
I continue to follow the national real estate scene on the Internet; now, through, with a great deal of schadenfreude, because I’m no longer an FB.

Incidentally, the wife and I opened a transcription business from home, and are doing excellent in the first quarter of 2007. Ironically, I produced the podcast transcript for Casey Serin these last couple days.
 
Yours,
xxxxxx xxxxxx
NobleTranscription.com
————————————————————–
As you might remember, this individual was a title rep in the industry. If you haven’t done so already, I suggest you read the earlier post from about 14 months ago. It will shead some light on why I see things getting worse.
 
This individual was ‘in’ the industry making good money for a relatively short period of time (less than 3 years). I call this a short period of time, because most mortgages require 30-50 years of payments these days.
 
You are going to see even more ‘industy’ people foreclose on homes as that 10-20k+ a month isn’t coming as easily, or at all. Not to mention that most people in the industy were caught up in the madness just as much, if not more than the ‘average joe’.
 
Anyway, keep the feedback on topic and constructive. I know there are going to be some people that don’t agree with the way things pan out, and that is fine. All I will say is that a few hundred thousand here, a few hundred thousand there, and pretty soon you are talking about ‘real money’. There will be consequences when tens of thousands of people start walking from homes and leaving ’somebody else’ to hold the bag. You had just better hope that ‘guvment’ doesn’t step in and use taxpayer money to bail people out. Remember: government does ONE thing well…perpetuate itself.
 
Stay tuned…
 
SoCalMtgGuy

Over the next week or so, I am going to show you…literally, why the subprime mortgage industry is imploding. I have known this was coming for a good 2+ years now. Those that have read this blog, and read my posts on Ben’s blog, know that I have been saying these things for a long time. NOW, I am going to show you rate sheets and loan programs from various lenders. Some have already gone under, some are on their way, and others are still plugging along. You will be able to see what I was seeing on a daily basis in 2004, 2005, and 2006.

I saved a lot of mortgage hand-outs and flyers from my dealings in the mortgage industry. And now, I am going to share them with you. Some of you knew this stuff was crazy, some thought you knew, some of you had no clue. I am going to show you the ‘paperwork’ that was floating around every broker shop in the country. I am going to let you look at actual rate sheets and see if you think the ‘risk’ is priced into the loan. I am going to show you loan programs that were being marketed all day long by multiple lenders.

I will show you how competition drove standards into the toilet and how easy it was to get a loan the past few years. I am going to show you how mortgage lates, reserve funds, verifications of rent/mortgage, and other ’standards’ were eliminated by the lenders to carve out their ‘niche’. Unfortunately, about 30 companies have carved out their graves instead. Put a big ‘W’ next to the fundamentals…and a big ‘L’ (and some flowers) next to the companies that lost.

Before I get going, I will say this: Alt-A and the A-paper markets are next. Do not think for one second that the lax underwriting was only for the subprime borrowers. The booming market made ‘everybody’ feel good and risk assessment was no longer a priority or focus. Why would it be? That said, just because somebody has a high FICO score does NOT mean they have the income needed to afford their option-arm loan when it resets. You will see the alt-a and prime markets falter in the future. Probably not as bad as the subprime market, but you will see record defaults in alt-a and a-paper loans over the next 12-48 months. I will go into this more in depth at another time. Lets start by taking a look at a ‘leading loser’ in the subprime sector.

Of all the lenders out there, I will say that New Century was NOT one of the ones that was completely out of control, but they are in the news big-time right now, so I will start with them. Sure, they were doing the typical ’subprime’ mortgage loans, but they were not doing some of the crazy stuff that I will show you over the next week or so. They might have had some funny accounting, but my point is, they are pretty representative of one of the top companies in the industry. Since we know where New Century is headed today, lets look at where they were a mere 27 months ago in December 2004: note that their stock price hit $65 a share in December of 2004 (closed at $3.87 on March 8, 2007…please pause while the ’shorts’ cheer).

I know, I know….some familiar names on that list. Some of which are already gone. Look at the triple digit growth of some of those companies…and look where they are now. I have data from many of these companies which I will be sharing with you…just be patient. It actually takes quite a bit of work and time to put together good posts…that are informative and entertaining.

Now, lets take a look at a ‘risk sheet’…I mean a ‘rate sheet’ from June 2005 and see how much of a risk premium most of these ’subprime’ and alt-a borrowers were paying. Remember how the media always says that subprime loans have high rates in the 8’s and 9’s and are priced much higher than ‘prime’ loans. Well, now you can see and decide for yourself. There is nothing really shocking (for the subprime industry of the past 5 years) about this rate sheet, but I will point out a few things.

I suggest clicking on the rate sheet below, and following along as best you can. The best way to read this rate sheet is as follows: you have full doc on the left, and stated income on the right. Then you have different levels of credit quality that make up the far left hand side. This looks at mortgage lates, as well at BK and foreclosures (NOD). Notice the ‘Max D/R’ or max debt ratio that is across the top. 50-55% debt ratios for most of these loans. That means that 50-55% of your pre-tax income is going to DEBT. Not just mortgage debt, all of your debt (car payment, credit card, etc). Don’t forget that many people are in the 25-33% tax brackets as well. So you can easily ‘qualify’ to spend 70-85% of your gross income on taxes and debt…doesn’t leave much to eat on, put gas in the car, and heaven forbid…’save’. Oh, and don’t forget that if you don’t meet these debt ratios, you can always ’state’ your income so that you qualify. And you wonder why people are up to their eyeballs in debt!?!?!?

Be sure to look at the adjustments on the right hand side. Please note that a quarter point (.25) was SUBTRACTED from all loans in the $250k to $600k range. Look at the difference between full doc and stated income rates. I don’t expect most people to be able to understand all of it, but post your questions and myself and others will try and help explain things.

I don’t want to overwhelm everybody with a bunch of rate sheets and information on this first ‘look’ at the subprime industry. Every company has slight differences in their rate sheet. I am sure there will be questions on how to read a rate sheet and what things mean. Hopefully we can get a lot of questions answered early on, and focus on the fundamentals and have more discussion more on the coming posts. This post is just to give you a taste of what is to come. I have many more rate sheets and flyers to show you…look at these mortgage flyers as just a sample of what I have picked up along the way.

This first one is a CLASSIC!!! Don’t just look at the loan program…look at the picture…and see if you notice anything else…

YUP! The company that is going to give you $750k can’t spell the item you will be sticking in the master bedroom. But wait, got your eye on a 1.5 million dollar house, but don’t have money for the downpayment?? No problem!

Yes, I know. They are a ‘no name’ lender that most people haven’t heard about…and their stock price is about the same as a can of soda. But I will leave you with this flyer from a company you MIGHT have heard of:

Yup, you read that right….”1 day out of bankruptcy” you can get to 95% LTV with a 560 FICO score. But, at least it isn’t a ’stated loan’. See, the lenders know what they are doing! I would be willing to bet this loan program probably isn’t around anymore…but I have been wrong before.

Let me know what you think of this type of post. I have LOTS of rate sheets and flyers from a good 15+ lenders. Think Encore, Long Beach, Countrywide, Argent, First Street, Acoustic, Peoples Choice, Fremont, WMC, Meritage, Harbor Capital, Residential Capital, First NLC, BNC…and more!

I look forward to the comments and feedback.

Stay tuned…

SoCalMtgGuy

I know, I know….it has been too long since my last post. I have been busy with other business interests yet still keeping an eye on the industry and what is going on.

NOTHING that is happening should come as a surprise, especially to regular readers of this blog. I pretty much called how this was going to play out. Lets refresh and see where we are today.

We have had rising inventories for quite some time now…but people whined and whined that prices were not coming down. No, prices did not come down immediately, that takes time. But I think it is safe to say that most areas are definitely having a softening of prices. There is a great website that tracks this information: www.thebubblebuster.com

As we have seen the inventories increase and sales volume drop 20-40% in many areas, we have seen foreclosures skyrocket to all time highs. I received an e-mail last week from foreclosure.com that said they are tracking a record 155,671 foreclosures nationwide! That might not sound like much, but if you look at the increased foreclosure activity in many areas, and the fact that it is only going to get worse, you will see that this is only going to exacerbate the supply/demand imbalance that already exists.

Do not forget there there is still a good trillion dollars or so of loans left to adjust in 2007. Falling values is going to make refinancing many of these loans very hard if not impossible. This will lead to more people walking away from homes because they can’t make the payment, or they don’t want to pay on a decreasing ‘asset’.

To make matters worse, the lenders that used to make these great ‘you can afford the American dream’ loans are either out of business or headed that way. I heard some intel that New Century is going to file for Chapter 11 here in the near future. Not only that, but like most of these other ’subprime’ lenders, has some pretty major accounting issues to ‘account’ for. BUT, even if the companies were still around to make the loans, nobody is buying them!

I have discussed the MBS (mortgage backed securities) market many times before. I have a friend that is now in the corporate offices of a major lender. He told me that the secondary market is basically paying ‘par’ for most ’subprime’ loan pools now. What does that mean?? It means that if a lender has a 500 million dollar pool of loans and they go to sell them, the secondary market will pay them 500 million for the loans. Dare I say it is hard to make money selling widgets that cost you $10…for $10. I am not including the expenses involved in making the loans either.

The way it should work is that the lender sells the $500 million of loans for say $520 million. Then goes back and lends that money…repeat cycle. Making money each time they sell the loans, which in turn gives them more money to lend out, and in turn sell for more money. Very simplified I know…but I’m not teaching an MBA class at Harvard, just trying to get people to understand the basics of what is going on here.

The main reason the lenders have been making these loans to begin with is because the secondary market would buy them and assume the risk! Remember the reference I have made several times about ‘driving forward while looking in the rear view mirror’? Everything looks good when looking backwards, but you don’t see the curve in the road ahead and the cliff to one side. That is how the mortgage market and the secondary markets have operated. The secondary markets kept buying debt and taking more and more risk, because they were not seeing the defaults yet (looking in rearview mirror). So they ‘put the pedal to the metal’ and would buy debt that was even lower quality and higher risk…but hey, all is well! The lenders will make ’stupid loans’ if they are not assuming the risk AND can make money while doing it. BUT, now that the secondary market is seeing defaults and foreclosure activity rise higher than projected, they scale way back, and stop buying the debt.

Lets not even get into the fact that China used to be one of the largest purchasers of our mortgage debt, and that if the consumption/production relationship between the USA and China falters, we could see some tough economic times ahead. Here is a good article from the China Daily from back in October 2005. Then you have this article from a bloomberg.com analysis of the Chinese market taking a dip. I like this part the best:

China’s slide affected markets around the globe for the simple reason that it reintroduced the long-forgotten concept of risk into the collective consciousness. Emerging markets don’t go up forever. Junk bonds are called junk for a reason. Subprime mortgage loans are made to those with less-than-first-rate credit histories.

You have news coming out that 60% of Countrywide’s ARM customers wouldn’t qualify for the loan if new proposed measures were put in place that made sure the borrower had to quality on what the payment could be, not the beginning teaser rate. Countrywide rationailizes that only 25% of people refi at the end of the period into another ARM loan, but from my experience and the people I am talking to today, the rate is much higher than that. Either way, if you remove 25-60% of the potential borrowers from the market, guess what, 400-500K is no longer ’starter home’ pricing.

I am going to be politically incorrect here for a minute. As a general rule, who do you think are ‘financially smarter’ people: people with good credit (700+), or people with bad credit (500’s)?? The reason I ask, is that people with good credit for the most part make good financial decisions. And people with bad credit make bad financial decisions. So, wouldn’t making loans that require some financial knowledge, to people that generally don’t posess this knowledge, be a recipe for disaster?? You are making high risk loans to high risk borrowers, and NOT making them pay the risk premium anywhere close to the risk being assumed.

But don’t think that ‘prime’ borrowers are exempt. Remember me saying that there was a distinct lack of good underwriting across the board? Well, it doesn’t mean much when I say it, but apparently it does when Lehman Bros does. Here is the quote:

Lehman Brothers Holdings Inc. announced yesterday it is cutting the ratings of Countrywide Financial Corp., the largest mortgage lender, and other prime lenders as defaults surge.

“Prime loans will see rising default rates as subprime has, due to increasingly weak underwriting in recent vintages,” analyst Bruce Harting said. “The rapidity, breadth and depth of the subprime sector meltdown has been extraordinary, even in the context of an environment in which most industry observers felt that major problems in the subprime space were inevitable and overdue.”

If you think the nonsense in the lending arena was concentrated only in the subprime markets, you are mistaken. It has permeated all aspects of lending. Risk assessment has been shoved aside for the past few years…be it mortgages, car loans, credit cards, etc. With the massive consumption by most Americans being done on credit, look for trouble up ahead…but it will require you to stop looking in your rear-view mirror to see it.

Stay tuned…

SoCalMtgGuy

******JUST GOT SOME FRESH INFO  (March 8th)*******

Don’t take it as gospel, but…

Word has it that New Century will be back to ‘business as usual’ early next week. Apparently they are in the process of being acquired by a big name institution. Morgan Stanley was mentioned as a front runner. No new apps until the deal is finalized. Could be as early as Monday/Tuesday.

All you options traders…have fun with this one. There is going to be volatility with this, one way or another.

*****UPDATE - Monday 12 March *****

Guess Morgan Stanley backed out….I thought it was a long-shot myself, but you never know what goes on behind closed doors, or what ‘off book’ assets companies can have.
From Marketwatch: ” New Century said it’s been informed by Morgan Stanley of problems with a $265 million financing agreement. ‘The company received a letter from Morgan Stanley notifying the company of certain purported defaults, accelerating certain obligations under the Morgan Stanley Agreement and stating that Morgan Stanley was discontinuing financing,’ New Century said in a filing.”

From CNN Mondy: “Embattled mortgage lender New Century Financial Corp. announced early Monday that all of its lenders are cutting off its financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations under current circumstances.”

“The company’s filings said that several of its lenders were now demanding New Century and its subsidiaries repurchase all outstanding mortgage loans, and that its other lenders now all have the right to make that demand. It said if each of the company’s lenders make that demand, the aggregate repayment obligations would be approximately $8.4 billion.”

What?!?!?  …you ask.

Maybe some of you have heard them already, but I just heard my first commercial on the radio that goes something like this (not exact by any means…waiting for it to come on again):

“Do you have one of those ‘hard to understand’ mortgages that gives you several options to pay at the end of each month? Are your payments increasing and you were not aware of it. These ‘option ARM’ mortgages are very complex and things might not have been explained to you properly. If you have one of these mortgages you could be eligible for compensation! If this sounds like you, then give us a call for a free consultation. We might be able to help you get all your money back! So call Uraviktom & Playaviktom…attorneys at law.”

I don’t guess I should hold my breath for ONE of the ‘get-rich-quick-in-a-no-money-down-real-estate-late-night-infomercial’ students to take personal responsibility for their ’sure-thing’ real estate transaction going south. Why do that when there are lawyers just waiting to paint you as a victim…and financially illiterate judges and juries just waiting to hand you ‘free money’.

Don’t get me wrong, there are some people that did get screwed, but many more knew EXACTLY what they were doing. And if they had made those ‘easy riches’ they sure as heck wouldn’t be getting a lawyer to make sure they ‘paid back’ the person who they ‘got rich off of’.

The unfolding of this real estate bubble is going to be nasty…and this is ONLY the beginning. Just don’t expect to hear that from any ‘professional organization’ in the industry.

Stay tuned…

SoCalMtgGuy