Subprime CC debt, auto loans, & student loans

Fed Takes Steps to Add Liquidity

Excerpt:

The Federal Reserve announced new steps on Friday to help ease tight global credit markets by increasing the size of its cash auctions to banks and allowing financial institutions to put up credit card debt, student loans and car loans as collateral for Fed loans.

The Fed also acted in coordination with central banks in Europe to make it easier for European banks to obtain dollars in currency swaps.

In a terse statement Friday morning, announced just before the government reported that 20,000 jobs were lost in April, the Fed said that it was acting to counter “persistent liquidity pressures” in credit markets in Europe and the United States.

The Fed’s action came as some analysts are saying that a measure of stability has returned to American financial markets after months of turbulence. Nevertheless, the Fed has made clear that it remains concerned about the risk from credit markets seizing up because of losses from bad loans, particularly in the housing sector.



Comment: More federal guarantees of risky loans. See my previous post about risk management!

"when the tide goes out, you see who is not wearing their bathing suit"

Citigroup, Wells Fargo May Loan Less After Downgrades

Excerpt:

Bank holding companies including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. have the thinnest safety cushion against losses in seven years.

The margin may erode further in coming weeks. Credit ratings on $704 billion of bonds have been cut this year following the collapse of the U.S. housing market. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said last week that the downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized.

Falling below a regulatory benchmark that is intended to maintain a minimum level of capital to protect depositors against losses would subject banks to more scrutiny from regulators than they have ever experienced.

``This is a nightmare for the country,'' said William Isaac, who was chairman of the FDIC from 1981 to 1985. Banks will ``raise what capital they can, then they'll slow down their growth and stop lending, and what should be a mild recession becomes a much more serious one.''

The biggest danger to the economy is that to preserve their ratios, banks will cut off the flow of credit, causing a decline in loans to companies and consumers. Banks have already raised $136 billion in capital, based on data compiled by Bloomberg, and cut dividends. More stock sales and payout reductions are likely to follow, says analyst Meredith Whitney at Oppenheimer & Co.


Comment: Bank accounting is murky to me ... but this article is about capital ratios.

The economy: How bad is it?

Beware the Bailout: In rushing to fix one problem, has the Fed created others?


Excerpts:

It's said that we're in the worst financial crisis since the Great Depression. Maybe. But remember the S&L crisis of the early 1980s? Or the commercial banking crisis of the late 1980s (from 1988 to 1992, 905 banks failed). Or the 1997-98 Asian financial crisis, which sent South Korea, Indonesia and other countries on a boom-bust roller coaster? All were frightening. But what distinguishes this crisis—which brought down Bear Stearns over the weekend—is that it involves the entire financial system, not just depository institutions, and it's more mystifying than any of its predecessors.

...
At the epicenter of the crisis are the now-notorious "subprime" mortgages made to weaker borrowers and subsequently "securitized." On paper the financial system seems to have ample resources to absorb losses. Commercial banks have $1.3 trillion in capital; U.S. investment banks in 2006 had an estimated $280 billion in capital—and other investors, including foreigners, may hold half or more of subprime loans. But no one knows who or how much. Recent estimates of subprime losses range from $285 billion to $400 billion or even higher. Such guesstimates, and outright ignorance, breed caution and fear.


Comment: How bad is it? Seems that no one knows. See underlined sections above.

Pat Buchanan: Subprime Nation

Subprime Nation

Excerpts:

Since it began to give credit ratings to nations in 1917, Moody's has rated the United States triple-A. U.S. Treasury bonds have been seen as the most secure investment on earth. When crises erupt, nervous money seeks out the world's great safe harbor, the United States. That reputation is now in peril.

Last week, Moody's warned that if the United States fails to rein in the soaring cost of Social Security, Medicare and Medicaid, the nation's credit rating will be down-graded within a decade.

Our political parties seem oblivious. Republicans, save Ron Paul, are all promising to expand the U.S. military and maintain all of our worldwide commitments to defend and subsidize scores of nations.

Democrats, with entitlement costs drowning the federal budget in red ink, are proposing a new entitlement – universal health coverage for the near 50 million who do not have it – another magnet for illegal aliens. Moody's is telling America it needs a time of austerity, while the U.S. government is behaving like the governments we used to bail out.

...
Meanwhile, Washington drifts mindlessly toward the maelstrom. With the dollar sinking, oil surging to $100 a barrel, the Dow having its worst January in memory, foreclosures mounting, credit card debt going rotten, and consumers and businesses unable or unwilling to borrow, we appear headed into recession.

...
America, to pay her bills, has begun to sell herself to the world.

...
This self-indulgent generation has borrowed itself into unpayable debt. Now the folks from whom we borrowed to buy all that oil and all those cars, electronics and clothes are coming to buy the country we inherited. We are prodigal sons, and the day of reckoning approaches.

---

Comment: I don't often find myself agreeing with Pat Buchanan, but his concerns about the long term credit-worthiness of our government are valid!

“predatory borrowing”

HARRY S TRUMAN once said he wanted to talk to a one-armed economist, “so that the guy could never make a statement and then say: ‘on the other hand.’ ” Yet economic knowledge continues to progress in unexpected ways. Here are a few of the things we learned in the last 12 months:

So We Thought. But Then Again . . . IT’S NOT JUST THE LENDERS

Excerpt:

IT’S NOT JUST THE LENDERS There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.

In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application.

Comment: Hence the need for Lenders to perform due diligence on borrowers!

Baltimore Is Suing Wells Fargo

Baltimore Is Suing Bank Over Foreclosure Crisis

Excerpt:

In the suit, Mayor Sheila Dixon joined with the City Council to ask that the court bar Wells Fargo from charging higher fees to black borrowers. Many of these borrowers paid more under the bank’s subprime lending program, designed for less creditworthy consumers, and are more likely to default on their loans.

In 2006, Wells Fargo made high-cost loans, with an interest rate at least three percentage points above a federal benchmark, to 65 percent of its black customers in Baltimore and to only 15 percent of its white customers in the area, according to the lawsuit. Similarly, refinancings to black borrowers were more likely to be higher cost than to white ones and to carry prepayment penalties.

Comment: It's not racism to charge higher rates to borrowers with risker borrowing profiles. Baltimore will lose!

No simple solution for housing "excesses"

Paulson: No simple solution to housing crisis

Excerpt:

Paulson, in remarks prepared for a New York speech, said that the country was facing an unprecedented wave of 1.8 million subprime mortgages which are scheduled to reset to sharply higher rates over the next two years. He said this raised the possibility of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Paulson said in excerpts of his speech released by Treasury. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.


Comment: The market will correct itself but it will be painful for home sellers!

'Subprime' named Word of the Year

'Subprime' named Word of the Year

Excerpt:

The group of wordsmiths chose "subprime" as 2007's Word of the Year at its annual convention Friday.

"'Subprime' has been around with bankers for awhile, but now everyone is talking about 'subprime,"' said Wayne Glowka, a spokesman for the group and a dean at Reinhardt College in Waleska, Georgia. "It's affecting all kinds of people in all kinds of places."

About 80 members of the organization spent two days debating the merits of runners-up "Facebook," "green," "Googleganger" and "waterboarding" before voting for an adjective that means "a risky or less than ideal loan, mortgage or investment."

The choice signifies the public's concern for a "deepening mortgage crisis," the society said in a statement.

Comment: A year ago I barely knew of the word!

Wells Fargo listed as firm that may benefit from crisis

Goldman among firms that may benefit from crisis

Excerpt:

"The tide is beginning to turn," according to Todd Bault, Brad Hintz and colleagues. "Even if the economic impact of the credit crisis lingers into the future and economists debate its full impact, the market is already starting to get its arms around the problem.

Comment: Wells announces earnings on January 16th. Will be interesting to see. Meanwhile the stock dropped a full buck today!

Economic butterfly effect

From the sub-prime to the ridiculous: how $100bn vanished

Excerpt:

It began with low-income Americans being encouraged to borrow mortgages they couldn't afford.

The economic butterfly effect would eventually cause deals worth billions of dollars to fall apart; the first run on a British bank in 140 years; some of the most powerful figures on Wall Street losing their jobs; wild gyrations on the markets; and dire warnings that the world is on the brink of recession.

At the start of the year, stockmarkets were at six-year highs and £40bn worth of mergers and takeovers were awaiting completion. Private equity firms and hedge funds were gorging themselves on cheap money and a handful of secretive, hugely wealthy individuals were becoming increasingly influential. But it was the millions on more modest incomes who would ultimately shape the events of 2007.

As the US housing market cooled and interest rates rose, many on the bottom rungs of the economic ladder found it difficult to meet their monthly mortgage repayments.

The first real concerns about sub-prime mortgages emerged at the end of February, when Wall Street suffered its worst day since the terrorist attacks of 2001. By April one of the biggest sub-prime mortgage lenders in the US had gone bankrupt and there was talk of a full-blown crisis. Credit more broadly began to dry up as lenders became nervous.

Fear also spread as it became clear that much of the bad debt had been packaged up and sold on around the world's financial system. Nobody, not even the banks themselves, knew who owned the toxic debt.

Some otherwise arcane practices of the financial world such as collateralised debt obligations and structured investment vehicles suddenly became everybody's concern.

Comment: The scary part: "Nobody, not even the banks themselves, knew who owned the toxic debt". 2008 could be very interesting for the US Economy, the dollar, and interest rates. My own take ... all will sort out fine! Just be glad if you are not trying to sell a house!

Another view: Top economist says America could plunge into recession

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

Comment: I checked the market value on my house on zillow.com about six months ago and then again last week. Per Zillow, my house value has dropped nearly $ 40K!

Subprime macroeconomic risk

Subprime's Hidden Cost Is Shrinking Leverage

Excerpt:

... leveraged investors, particularly banks and brokers, seek to maintain constant capital ratios. As such, when they lose money, they scale back lending to keep their capital ratios -- assets divided by equity or risk-free capital, such as cash -- from falling.

U.S. commercial banks on average have capital ratios of 10 percent, which means that for every $1 of capital lost, they reduce lending by $10. Thus, assuming that $200 billion of the projected $400 billion mortgage-credit loss is borne by leveraged institutions, the supply of credit will decline by $2 trillion, Hatzius said. ``The likely mortgage-credit losses pose a significantly bigger macroeconomic risk than is generally recognized.''

Pulling Back

Meanwhile, Independent Strategy figures that banks will have to shrink lending by 15 percent to 20 percent to return their capital ratios to pre-crisis levels, and hedge funds and brokers by $18 to $25 for every $1 lost. ``A 10 percent reduction in global bank lending would damage corporate investment and consumer-spending growth, adding significantly to the risk of economic recession,'' the firm said in a Nov. 15 report.

Apart from a decision to supply wads of money to relieve the logjam in global credit markets, the performance of central banks has been anything but sterling. They woke up late to the subprime mortgage mess, and some people still doubt that they fully grasp the risks involved -- especially following the Federal Reserves' decision to cut its federal funds rate by 25 basis points to 4.25 percent on Dec. 11, when the market was looking for more.

``The timid move by the Fed was very disappointing and even appalling in the wake of intense financial-market turmoil,'' Chen Zhao, Montreal-based head of global strategy at BCA Research Ltd., wrote to clients on Dec. 12. ``The most troubling aspect of yesterday's decision is that it reveals a lack of coherent strategy and focus at the Fed.''



Comment: See earlier CFG post: Subprime Economic Shock

Buffett buying WFC

Buffett's Subprime Bets

Excerpt:

In fact, Berkshire Hathaway has been buying. For years, Berkshire has been sitting on a huge mound of cash, but it's now starting to deploy that money. Berkshire's purchases have been consistent with Buffett's statements that he doesn't expect a depression. For example, the company bought Burlington Northern Santa Fe (NYSE: BNI) -- a cyclical railroad that would definitely be affected by a slowing economy.

Berkshire is also looking for bargains among the lenders. It's been purchasing Wells Fargo (NYSE: WFC) and US Bancorp (NYSE: USB), two companies with excellent balance sheets and conservative management. While these firms did do some subprime lending, their balance-sheet strength should take them through this crisis.

Reasonable mortgage rules

When Mortgages Made Sense: Should we go back to using the old-fashioned rules for lending?

Excerpts:

Before the 1930s, many home loans lasted only five years, with borrowers required to make a large "balloon" payment at the end of the term. Homeowners with these loans faced big trouble during the Great Depression, so lending practices changed. Longer-term mortgages (usually 20, 25 or 30 years) became standard, and balloon payments became the exception rather than the norm.

...

During the 1950s and 1960s, Greenstein put borrowers almost exclusively into these FHA and VA loans. They carried a fixed-rate of interest—usually 4 or 4.5 percent. Every borrower underwent a thorough credit check (a laborious process in the days before computers and lightning-fast online approvals). Like all lenders, Greenstein relied on strict ratios to determine how much money someone could afford to borrow. A person's mortgage payment (including taxes and property insurance) couldn't exceed 28 percent of his monthly income. When you added together the family's car loan and the mortgage payment, the total should be below 36 percent of income. "It wasn't set in stone at 28/36; you could make judgment calls," he says, but most borrowers were held to those limits. What about credit card payments? That was rarely an issue, since credit cards didn't start catching on until the late 1950s.

Wikipedia: Debt-to-income ratio

Comment: The crazy increases in home prices are a result of cheap credit and loose lending standards! The housing market is reaping what the mortgage industry sowed!

Fed endorses rules to curb shady lending

Summary:

The Fed, which has regulatory powers over the nation’s banking system, is proposing:

1. Restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
   
2. Forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
   
3. Barring lenders from making loans when they don’t have proof of a borrower’s income.
   
4. Prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.
   

...
When the housing market went bust, subprime loans were most heavily affected.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loan balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

Paulson's gambit

Wells Fargo Can Hack Its Writedowns - Can Citi and JPMorgan?

Comment: There is some foul language in this link!

Excerpts:

On the Paulson agreement:

If the banks agree to Paulson's gambit, bank shareholders and loan investors will take a bath, credit available for housing will disappear, and a least one in three subprime borrowers will eventually default anyway. The editorial yesterday in the New York Times supporting the Paulson proposal is dead wrong: Loan modification does not help struggling subprime borrowers, only the politicians of both parties who prey upon them. Loan modification a la Paulson hurts investors, financial institutions and the US economy.

On Wells Fargo:


WFC ended the third quarter of this year with an ROA of 1.58% and ROE of over 15%, both figures are annualized and both a full standard deviation above peer. Run rate defaults were 80bp (annualized) through September 30, 2007, but WFC announced last week that it will write off 300bp or 3% of total loans which the bank considers problematic. That will take gross loan and lease defaults for the full year up to about 400bp or 4%, more than 2x the maximum probable loss from lending estimated by the IRA Bank Monitor or just inside the upper range for a "B" bond equivalent rating for the bank's portfolio.

The decision by WFC to immediately write down loans equal to 3x the expected defaults for all of 2007 may seem like bad news, but we view it as a sign of strength. Unlike the the big players in structured finance such as C, JPMorgan Chase (NYSE:JPM) and Merrill Lynch (NYSE:MER), WFC does not have much of a trading or capital markets operation.

The majority of WFC's Economic Capital needs stems from the investment book, followed by trading and then lending activities. The 0.8:1 ratio of Economic Capital to Tier One Risk Based Capital for the bank at the end of Q3 compared with just 0.5:1 for Q2, a more than 50% change in a single quarter. The increase comes from a big jump in WFC's securities portfolio.

Unlike many of its larger peers, WFC seems to have the capital and the earnings power to navigate its way through the coming credit risk storm.

The Hopeless Mortgage Freeze Plan

Bush Subprime Plan: Too Much or Too Little?

Excerpts:

What would the plan accomplish? The plan is limited and tries to help homeowners, not speculators. It specifically targets borrowers who have teaser rates that eventually reset to much higher rates. Typically the rates are low for the first two or three years and are known as 2-28s or 3-27s.

For these borrowers, a rate freeze would only prevent foreclosure in the short term. The freeze is voluntary for mortgage lenders, who have no real incentive to participate.

...
A mortgage happens to be a contract between a borrower and a lender. Do we really want to be in a position where the government changes the playing field and makes legislative changes to modify those contracts? Would it even be legal to do so? The implications of any government deal are far-reaching and need to be better understood.

Given that mortgages are a contract, there's a larger problem here. How do we get the two parties together to agree to these modifications? Mortgages are often repackaged and then sold off to investors. How would the government get all of these investors into a room to make this decision?
....

According to Countrywide, 58.3% of people face trouble because of lost income, another 13.2% have illness/medical problems, and divorce causes problems for 8.4%. Can a government plan really stop these problems? I think not.


Comment: 5 pages ... read it all. The key question (in my mind): "Do we really want to be in a position where the government changes the playing field and makes legislative changes to modify those contracts?". The answer is NO!

More below:

S&P Says Mortgage Freeze Plan May Cause Downgrades

Paulson's Plan to Punish the Public

Excerpt:

Remember, the only reason those teaser-rate loans were made in the first place was because lenders (and thus the investors buying the mortgages from the lenders) could count on a much larger, contractually guaranteed payoff in the future, when those interest rates were due to reset. Take away that payoff, and you take away any incentive to loan to borrowers of marginal credit quality. Usher in an era when government and banks reset loan rates at their whim, and you can be sure that investors will never again buy securities based on adjustable-rate mortgages.

If you think credit is tight now, just wait until you yank away potential returns from the people putting up the capital for all those loans.

And let's not forget that Paulson's plan introduces an incredible moral hazard. By rescuing greedy and naive borrowers from their mistakes, our government encourages others to take big, stupid, bankruptcy-inducing risks, secure in the knowledge that the government will bail them out when times get rough. That means trillions of dollars in capital will be ill-invested yet again, something that's much less likely to happen when speculators are made to suffer the consequences of their behavior.



Paulson Subprime Plan Offers Little Aid, Analysts Say

Excerpt:

The extent of home price declines and economic conditions will have a ``far greater impact'' on the rates of loan modifications and foreclosures, wrote UBS's Zimmerman, who is also based in New York.

``I think it's lip service and essentially not meaningful,'' said Michael Burry, president of Cupertino, California-based hedge-fund firm Scion Capital LLC, which manages about $1 billion. ``It will only help those who don't need to be helped.''

Mortgage Mess: Is Relief in Sight? Why Bush's bailout will leave many borrowers out in the cold.

Excerpt:

Under the terms of the deal, lenders are offering to freeze the interest rates and monthly payments for five years for subprime borrowers who fit a limited set of conditions. Borrowers must be current on the loan, the loan's interest rate may not yet have reset, and the lender must determine that the borrower lacks the capacity to afford the higher payment if the interest rate adjusted upward. According to a study cited by today's New York Times, Barclay's Capital estimates that just 12 percent of subprime borrowers will benefit from the interest-rate freeze.
...
By definition, someone who has taken out a subprime mortgage has either shown a history of having trouble managing his credit or did a less than stellar job of shopping for a mortgage. (On Tuesday the Wall Street Journal reported that many subprime borrowers could have obtained a regular mortgage but were steered into a higher-cost loan.) So it's not surprising if many of these borrowers have also made other poor financial decisions. The government's bailout plan is trying to deal with the mortgage mess in isolation. Helping people with more complicated financial problems is trickier, not unlike the challenge facing doctors treating patients who suffer from two or more diseases simultaneously.




Final comment: We need less government interference in the markets not more!

Will the credit crisis impact state governments?

Fund Crisis in Florida Worrisome to States

Business
Fund Crisis in Florida Worrisome to States
By MICHAEL M. GRYNBAUM
Published: December 5, 2007
The sudden flight from a Florida investment pool points to a broader uncertainty among officials in other states over how far the credit and mortgage crisis might spread.

Excerpt:

Many state governments pool money from towns, schools, and other state agencies into funds in an attempt to earn higher returns. Several of these pools have invested in highly rated vehicles that have since been downgraded by ratings agencies.

“These have been legitimate investments for some time, and some pension funds have made very good money investing in these kinds of vehicles,” said Keith Brainard, research director for the National Association of State Retirement Administrators. “It would not be fair to focus solely on the losses.”

Still, the troubles in Florida have raised concerns about similar funds elsewhere in the country. Montana’s short-term investment pool, which invests money for state agencies and municipalities, has about 23 percent of its $2.25 billion in total assets invested in commercial paper issued by structured investment vehicles, which have been at the center of the recent problems in the credit market.

Comment: Note the term "structured investment vehicles" in the last sentence. See searly CFG post with definitions.

Caveat emptor in the financial markets

Innovating Our Way to Financial Crisis

Op-Ed Columnist
Innovating Our Way to Financial Crisis
By PAUL KRUGMAN
Published: December 3, 2007
The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.

Excerpt:

Credit — lending between market players — is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.

But liquidity has been drying up. Some credit markets have effectively closed up shop. Interest rates in other markets — like the London market, in which banks lend to each other — have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged.

“What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction — and that will mean a recession, possibly a nasty one.

Behind the disappearance of liquidity lies a collapse of trust: market players don’t want to lend to each other, because they’re not sure they’ll be repaid.

In a direct sense, this collapse of trust has been caused by the bursting of the housing bubble. The run-up of home prices made even less sense than the dot-com bubble — I mean, there wasn’t even a glamorous new technology to justify claims that old rules no longer applied — but somehow financial markets accepted crazy home prices as the new normal. And when the bubble burst, a lot of investments that were labeled AAA turned out to be junk.
....
... the innovations of recent years — the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. — were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead — aside from making their creators a lot of money, which they didn’t have to repay when it all went bust — was to spread confusion, luring investors into taking on more risk than they realized.


Definitions:

1. C.D.O.: Collateralized Debt Obligation
   
2. S.I.V.: Structured Investment Vehicle
   
3. R.M.B.S.: Residential Mortgage Backed Security
   
4. A.B.C.P.: Asset Backed Commercial Paper
   

Comments: Confused? What's tragic is that it sounds like the experts are confused! More below:

Denver Post: Easy loans mean painful losses

Excerpts:

As a speculative buyer, Campbell, like many others, repeatedly took advantage of the easy-loan era that collapsed this year into the subprime-lending crisis. From 2000 to 2006, the percentage of home loans to investors doubled nationally, and the number of mortgage-fraud cases leapt 700 percent, from about 3,500 to about 28,000.

Legal documents describe Campbell as a man afflicted with debilitating diseases, including hepatitis and kidney failure. In a lawsuit last year, he asserted his sole source of income was a Social Security disability program and that his only assets were houses with defaulted mortgages.

Yet in Colorado, Campbell managed to secure new home loans from subprime lenders despite a history of foreclosures on his old loans.

From 2004 to 2006, he purchased at least 12 houses in Colorado in his name for a total of $8.2 million. He had two houses in Cherry Hills Village, the swank suburb south of Denver. He had a Denver house four blocks east of the governor's mansion and another across from City Park. He had a house in the mountains and a house on a Broomfield golf course.

Campbell signed deeds promising that at least nine of these houses would serve as his principal residence, enabling him to qualify for lower interest rates than an investor.

He also had a knack for taking cash from the closing table instead of putting money down by inflating sale prices to boost loan amounts.

Real-estate listing records show he bought one house for $350,000 above the original asking price and another for $251,000 above the original asking price. Nine of the 12 houses were soon foreclosed. Two others were foreclosed after he sold them to another investor.

... he had his hands in the $3 million purchase of the mansion at 801 Race St.

The house had sold for $1.3 million in December 2005 to Jeffrey Hammerberg, a licensed real- estate agent who remodeled it and tried to resell it four months later for $2.25 million.

When it didn't sell, Hammerberg lowered the price by $100,000. It still didn't sell. Yet in August 2006, real-estate listing records show, Hammerberg raised the price to $3.1 million.

The house sold for a reported $3 million in November 2006. The listed buyer: Jill Rodriguez. Her husband, Florencio Rodriguez, owns Mile High Realty and Mortgage, the mortgage broker Campbell had used to try to buy other houses in 2006.

Raising the price from $2.15 million to $3 million made it possible to borrow more money. Eighty percent of a purchase price is a typical loan amount. New Century Mortgage, a leading subprime lender that went bankrupt this year, provided $2.4 million, which was 80 percent of the reported sale price.

Ronald Low, a spokesman for New Century, said the company uses various measures to guard against mortgage fraud, including examining borrower qualifications and verifying appraisal values on a representative sample of its loans.

Comment: Caveat emptor is Latin for "Let the buyer beware".

Subprime artic ripple effects

U.S. Credit Crisis Adds to Gloom in Arctic Norway

U.S. Credit Crisis Adds to Gloom in Arctic Norway
By MARK LANDLER
Published: December 2, 2007
Norwegian towns that lost millions in bad investments fear that they will have to cut local services.

Excerpt:

Narvik has $34.5 million in a second Citigroup-devised investment, known as a collateralized debt obligation, which has also lost value as a result of the broader market turmoil. The town stands to lose at least some of that money, too.

Comments: I was surprised by the far reaching negative impact of the subprime crisis!

Fixing a mess ... or more of a mess?

Banks may agree to plan to freeze ARM rates

Excerpt:

Federal authorities and major U.S. banks are close to an agreement under which interest rates on adjustable-rate loans will be frozen, a plan that would allow stretched homeowners to potentially avoid foreclosure, The Wall Street Journal reported Friday.

The newspaper said such an accord could reassure both investors and homeowners, helping to support home prices and provide liquidity for lenders. Moreover, the plan could help ease criticism aimed at the Bush administration over its handling of the mortgage crisis heading into an election year, according to the report.

While details still are being worked out, the heart of the plan is an agreement to extend so-called "teaser" introductory rates on loans for people who would default if their mortgage rates "reset" at much higher levels.


Freezing Mortgage Rates Is Not the Answer

Excerpt:

The problem with the bailout, and the reason I oppose it, is that there are no lessons learned when buyers (and the mortgage companies) are saved from bad decisions. Thus when the next boom arises, there will be little hesitation to do the same thing again. Do we want to encourage that sort of moral hazard? I don't think so. As my mom would tell me, though, the burned hand learns best.

I'm certain that there are a bunch of folks a-wishin' and a-hopin' for the deal to go through soon. And sure, it's terrible if someone's forced to go into foreclosure because they can't afford the home they bought. But the fact is, many people bought homes they had no business buying. Bailing them out is a temporary fix that does nothing to prevent it from recurring.

Sure, we're supposed to be charitable during the holidays. But charity can take many forms. Ensuring that understanding why this crisis happened so that we don't have to live through it again may be the best gift for future homebuyers.

Comments: The rationale for this is the old "Half a loaf is better than none"! The danger is that it really might make the mess worse than it is! Additionally any lending institution can already unilaterally offer a better rate to a homeowner to help them stay in their home.

Wells Fargo write down - not as bad as it could be!

Wells Fargo to Absorb $1.4 Billion Provision in Fourth Quarter for Losses on Loans

Excerpt:

Until Wells Fargo disclosed its projected losses late Tuesday, the San Francisco-based bank had suffered relatively little damage in a mortgage meltdown that had already battered other major U.S. lenders.

"Clearly, this is a disappointment because (Wells) had been seen as better managers of credit than many other big banks," said RBC Capital Markets analyst Joseph Morford. "But now they have a big blemish on them, too."

After gaining 34 cents to finish at $29.83 in Tuesday's regular session, Wells Fargo shares plunged $1.40, or 4.7 percent, in the extended trading that followed a Securities and Exchange Commission filing outlining the bank's home equity loan losses.

"Maybe people are going to be freaked out about Wells Fargo's losses, but they shouldn't be," said Punk, Ziegel & Co. analyst Richard Bove. "Wells Fargo isn't superhuman and they made some bad loans just like everyone else."

Like several of its peers, Wells Fargo will take its lumps in the fourth quarter by recognizing $1.4 billion in pre-tax losses, with most of the trouble concentrated in a bundle of high-risk home equity loans that the bank intends to purge from its books.

The fifth-largest U.S. bank also is retroactively registering $265 million in expenses tied to its share of the costs for a $2.25 billion settlement that credit and debit card network Visa Inc. reached with American Express Co. earlier this month. Wells Fargo owns a 5 percent stake in Visa.

The legal expenses will trim Wells Fargo's previously reported earnings for the second quarter of 2006 by 2 cents per share and lop off 4 cents per share from its earnings for its most recent quarter ended in September.

Well Fargo intends to liquidate $11.9 billion in home equity loans that have been flagged as major problems. The nettlesome loans represent about 14 percent of the bank's total home equity portfolio of $83.4 billion.

Comment: Compared to others, not as bad!