Subprime mess, blame, winners, losers?

http://www.blbglaw.com/cases/newcentury_securities.html

How dumb are these guys. After Sorbannes Oxley, it is a crime to sign a false earnings statement. Seems like some more good ol boys will be spending time in the big house, I hope.

So Ma and Paw lost 1.6 billion in the US on the stock. That's really sad. Glad I didn't have and NEW.

 

I worked in the subprime industry for a few years in the 90s. Let's just say that it's nothing more than a legal scam. We put high risk consumers into crazy mortgage products that we knew they couldn't repay, and more importantly, didn't care. By the time they defaulted on the loan, we had already sold it to Wall Street. We weren't stuck with the default and made money on the high fees. The industry took a major hit in 1998 when we had a global credit crunch and some when bankrupt, including my former employer. Fast forward 10 years and we're having a similar problem, except it's worse this time around.

As for Wall Street, many of these loans are packaged to investors in the form of hedge funds. Unlike mutual funds, these funds are largely unregulated by anyone and much secrecy surrounds these funds. The only good news is that the average investor can't get into these hedge funds since you have to be an accredited investor, i.e., rich. I think the two Goldman Sachs funds in question are hedge funds.

Consumers also share the blame for getting into these mortgage products without knowing what the hell they are. All too many just look at the initial low monthly payment without understanding what will happen down the road. It's reckless money management.

I don't want the government to dictate what kind of mortgage loans we can have, but I do think we need better disclosure so consumers know exactly what they are getting into. And I certainly don't want the government to bail out those in trouble. Unfortunately, that is ultimately on the consumer. We do need to regulate hedge funds like we do mutual funds.

The winners? People scooping up cheap foreclosures.

 

The stock market took the gas this week, down about 7%. The Fed cut the discount rate .5%, kissed the beaux beaux, and now everything is ok, and worldwide markets steadied.

BS.

There are $40 Billion of subprime ARMs scheduled to reset per month, until Dec. 2007. Then it steps up to about $80 - 100 Billion per month for five months in early 2008, then back down to 40 billion per month through the rest of 08.

And the defaults will keep on coming. And the problems will keep on coming, I think. The fed easing has nothing to do with the realities to play out over the next year.

I heard an interesting comment on the radio today, that the fed didn't ease to save the subprime mortgage industry, they eased to save all the innocent industries that were being pulled down, that had nothing to do with creating the problem. Fair enough.

I just don't see this one getting over with quickly. It looks like were are still in the first quarter to me.

 

What do you want done to solve this subprime mess?

You can't turn the clock back on loans that have been made. People will either pay their loan, refinance it or default on it. And yes, it will take several more months for it all to play out.

I heard some numbers on CNBC this week. We have about $10 trillion in mortgages in the U.S. and the subprime market makes up about 10% of that, or $1 trillion. Of that, defaults will run between 5 and 10 percent. So the potential default number is between $50 and $100 billion. Huge numbers, but not enough to cripple the economy.

 

That's the key question. The horse is outa the barn, I'm not sure we can do anything with this other than see it to its end.

What's important is fixing it so we don't get back in this spot again. We went through this in the 1980's, with the Savings and Loan crisis. We had rings of people selling a house to each other, at inflated prices, based on bogus appraisal, with the ring of crooks taking money out of the bank, until the bank held a loan for $1 million on a 100K house, and the S&L failed. The peoples deposits were insured, but the FSLIC fund didn't have enough money to make the accounts good, so there was the S&L bailout, where our tax bill went up to make the deposits good, but it costs each of us money when we do that.

We need improved oversight so this stops. Now 20 years later, we've got the subprime mess. Why don't we learn?

Perhaps appraisers need to be regulated, or it should be a crime to give an appraisal that is fraudulent.

The bond rating agencies (Moody's and S&P, Fitch's) played a role. Why did they put AAA ratings on these bundles of junk mortgages, and now the hedge funds that bought them say they are worthless? What good is a AAA bond rating? If you can't trust Moody's etc., who can you trust to say one bond is safer than another?

What I think should happen is that we should look to the future and take actions to keep this magnitude of mess from occurring again. And where there is fraud, make the crooks pay.

True.

I agree with the size of the market, but I don't think anyone knows what the default rate will be. Not even CNBC. These are some of the dumbest structured loans in history given to people whose credit was not even checked one iota in many cases. Where does the 5-10% default rate come from? Is that just a gut feel number picked out of the air? Probably. CNBC and all the retail stock brokerages and the fed govenors all want people calm and buying stocks. It's the only way they make money. Scared people dont' buy stocks and stock mutual funds, or bond funds with mortgage backed bonds at present. It's bad for business. So they have to come out and tell us what they have to in order to soften us up to buy what they are selling.

CNBC is a subsidiary of NBC which is owned by General Electic, which also owns GE Capital Corporation.

http://www.gecapital.com/

I hardly think CNBC could be viewed as "unbiased" in the midst of a collateralized debt obligation bond crisis. They, through their parent, have a vested interest in minimizing the publics perception of the problem.

Don't worry, be happy!

What do you think we should do about the subprime mess?

 

It's not difficult for people in the business to look at existing default rates and delinquency rates and make an educated guess. Those numbers are included in financial statements that are available to anyone and some people crunch the numbers. It's up to you if you want to believe it or not. I'm certainly no expert.

I'm certainly aware of who owns CNBC. I've been watching them for years, along with Bloomberg, for my business news. I don't see any grand conspiracy to skew the news one way or the other. They have guests on their shows who offer an opinion and some are better than others. They interview people like Warren Buffet and many CEOs of top publicly traded companies. I certainly don't see any bias from Cramer and the Fast Money guys. But, that's just my opinion.

Difficult question. We may need better disclosures so the consumers fully understand what they are getting into. We certainly need some regulations over these hedge funds. We regulate other investment vehicles, so I'm unclear how hedge funds managed to be largely unregulated. Anything unregulated usually leads to fraud and abuse.

 

I just bought a house right before this crashed.

Thank God my wife and i took a professional homebuying class and did our homework before buying.

We have excellent credit and got the best rate out there at 6.1 without buying points. We are on a fixed rate and even though we have only made 4 payments i have paid extra every time.

We have targeted 2 extra payments a year.


The thing that really pisses me off is every loan in the San Fran bay area for a decent house is a jumbo loan. So we have to pay a higher rate automaticly because we borrow more than 417000 . Try buying a home that isnt infested and on the verge of falling down that isnt worth at what a jumbo loan cost.

I feel sorry for the fools that didnt do their homework and got suckered into bad loans here in the bay area. They will not be able to make it.

 

Congratulations on doing it right! As for the California fools, they had a strategy to win. They knew they couldn't afford the house after the rate went up, so they only planned to stay in it a couple of years, and since houses were going up 15% a year, in two years, sell it, capture the profit and go make a down payment on something you could afford with a legitimate loan. Unfortunately, the houses quit going up, and started going down a little, and now they can't make out.

 

I'm loving it. I do mortgage loans for one of the largest banks in the world. We did things right during the boom, and even though we didn't see the record numbers like some other lenders, we are extremely profitable now. Business has never been better...I guess it helps that most of my competitors are either bankrupt, or out of business. People call my office everyday wanting to know if I can help them. They say their current lender called them and could not complete the loan. I'm doing 100% refi's with affordable fixed rates. I haven't booked an adjustable rate loan in over three years. Two of my employees used to work with competitors. Now they're seeing how to do things right.

This crunch will fix itself by the end of the third quarter '08. Until then, lenders like my company will profit while others spiral out of business. I am so glad that I work with an ethical lender.

I don't want to see the government get too involved here. The more they do, the longer it will take to get things straight. These things have to fix themselves. Don't believe half the crap you hear on TV. There are a lot of people out there trying to build this up to be more than it really is. There is only a very small percentage of loans in default or foreclosure. They'll have you believe that half of everyone living in this country is about to loose their homes...BS. Also, the problems that exist are mostly contained into certain metropolitan areas. The overwhelming majority of our country is very stable. There may be some balancing off, but not the huge deescalation of value like the talking heads preach.