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Bw8472 Posts: 6446 Incept: 2007-06-28 
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I own a mortgage shop, I myself stil orginate loans and have for over 10 years and so I thought I'd chime in here on what's really going on. First of all back in the early part of this year when the crap hit the fan I started reading all of this because well it's important to me and during that time I learned how these CDO's were done. I've been in lending for over 20 years and what they've effectively done is simply divided up these bonds into different LTV tranches and that makes sense, the lower the ltv the less risky a loan is etc. The fatal flaw in their thinking as everyone now knows is that in a down market all the loss assumptions are for crap. In a down market it's not at all unusual to eat upwards of 40% of the principal of a loan because of the term quick sale price, ie a house worth 100k in a down market might only command 60k if it's torn up and the market is weak and investors for various reasons have great incentives to clear these things off as fast as they can, they won't fix them up, they won't dress them up they just want them gone. That's bad enough but oh it gets much much worse. I see day to day about 4 applications for loans myself, and upwards of 70 company wide I can look at if I want, that's pretty small in the scheme of things but being I do it every day you get a feel for this stuff and I can tell you that never in my career have I seen anything like this in fact I'm scared out of my ever loving mind! My company is doing fine, we specialize in cleaning up other lenders mistakes and that's a booming business now, effectively I use my knowledge to replace these improperly placed loans in more correct products and it's a niche market but it's not near big enough to support our whole industry, not even close. I market to Subprime customers who have the 2/28's all the time and here's what I've found so far. About 20% or so are can be saved into a better product and made whole, they have income, they have equity and their credit while marginal is good enough to get them out of the death arms, but almost 80% are walking foreclosure zombies. Now this isn't a scientific sample, of course the bottom of the barrell call in, the more desperate call first etc but that dosen't matter, their loss models will gap WIDE!!!! Their percentages are for crap! This is depression sized stuff no doubt in my mind, not one shred of doubt we are headed off the cliff, no one can stop this their aint that much money, only a turn around in the market could save this and........ I've also never seen guidelines ratchet up this fast in my life, 80/20's are dead, gone annihilated and My Community, also gone for all intents and purposes because the risk premiums comming into the pricing makes buyers go.... WHAT!!! I thought rates were 6%, your saying 7% plus 1% more in PMI? Well I can't afford squat now...... which is the 2nd shoe dropping. I do FHA and that's it folks and FHA aint like these other things, too many dings forget it, you can't have a nice pretty collection of collections and get an FHA no money down loan, you can forget it. People with 2nd mortgages can forget refinancing them, people who bought the last 2 years might be toast with perfect credit if improperly placed in an exploding arm just due to being underwater from lack of appreciation, alt a toast, it's all freaking toast!!! I've got reps bothering me daily for loans, then they stop calling cause they are gone, suddenly lenders that wouldn't give me the time of day due to my less than impressive volume are kissing my butt, playing solitare when I call with a question. It's biblical in scope and if I read what they did with CDO's and derivatives OMG it's the end of life as we know it. You mark my words, this is going down in October in the market, the housing sector will lead down, not lead more like an anchor thrown off the boat that has a chain wrapped around the United States economy. The MEW's are done, people are actually paying money at close, those that can to refinance out of these abmoninations of evil, and they dance in to sign again those few that can, there is not cash out, no one has any equity, it's all baked out, arb'd out if you would. I have buddies that own bigger shops, one is out of business now due to buybacks, he used to give me a ration of crap for never stepping up to be a mortgage banker, I told him for years that they don't pay enough more to make it worth holding that bomb for them. I have another friend of years who just folded his company and then killed himself 2 days later. He was a banker too and the putbacks will destroy almost any banker type lender as this turns down, almost all have 1st payment default clauses built into their line agreements that means even if everything is great, no fraud no hanky panky if the borrower don't pay, toast. These guys play hard ball especially Merrill, they putback loans at the first whiff of trouble, the mortgage banking field is going to be a complete wasteland, utter devastation, brokers will probably be rounded up and shot by Congress and then we'll all be left with banks that would run screaming into the night if you asked them to do some of the loans we do. It's pretty much the rolling up of an entire industry one month at a time. Builders are in all out panic mode which dosen't bother me too much as I'm not fond of them except to say that it's never a pretty sight to see true fear in someones face, outright fear. Realtors, of course think the bottoms just around the corner which of course means it's the exact opposite, sorry for the brief amount of derision towards them I can't help myself. I'll just say that my industry did fail utterly to police itself, those of us not doing wildly fraudulent lending should have stood up and shouted about it more, done more to protect the industry but we didn't and it's done now, I suppose we deserve this but not all of us took adavantage, just not enough said anything to stop it, to be fair though we were vastly outnumbered, after they allowed net branches it was like a plauge of new loan officers piling in completely amazing and it ruined everything. In October the earnings will hit for 3Q, that's where all the music will stop IMO, the customers are charging charging charging now but that should tail off by then due to the horror show statements that will start comming through and the realization they can't pay it off again. It may last longer than October but we will not get through 2008 without the wall comming, October just is a guess of mine, lot's of crashes happen then, I think it's psychological with winter comming on and all. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln Last modified:
2007-07-13 02:02:05 by bw8472
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Zzt Posts: 901 Incept: 2007-06-26 
Glendale az
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Compared to your post the movie " The G****s of Wrath " was a feel good Disney flick. Jesus , man, you make me look like a wild eyed optimist.
2007-07-13 01:50:10
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Etz3l Posts: 8658 Incept: 2007-06-26
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Thanks for sharing. It confirms what many on this forum believe. Will it take time too unfold? yes. Will goldielocks go on more wild session sprees? probably, until she crashes the beemer into the gutter DUI while wearing no panties... ---------- I could slit my wrists and people would cheer - L. Blankfein.  http://www.youtube.com/watch?v=p8jm61vk2.... 2007-07-13 02:06:47
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Architect Posts: 770 Incept: 2007-07-11
london UK
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Are you in a boom area e.g. california? I'm curious because I live in what could be the last place on earth where house prices are still (supposedly) rising
2007-07-13 02:48:06
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Stormsailor1981 Posts: 8447 Incept: 2007-06-26
charlotte nc
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my best friend from college went to work at national city bank about 10 years ago. within about 4 years they made him president of a spin-off company they called first franklin. he didn't say much about it. he seemed rather embarassed to tell me that the company did high risk loans for people with terrible credit.i know he did well while president of first franklin, he lived just down the block from jerome bettis. about 2 years ago he left the company to open his own mortgage office somewhere in texas. within a year, he didn't tell me why, he left there told me it didn't work out. and now works for national city in ohio.
---------- "one man with courage makes a majority" andrew jackson 2007-07-13 07:20:34
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Mvo Posts: 493 Incept: 2007-06-27
NYC
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bw8472, question for you... Let's say a couple bought a house two years ago, 20% down, 5.25% fixed 30 years. Both are owners and are on the mortgage. Now they want one of them to be taken out of that mortgage - i.e to get a new mortgage for just one of them. Given that they have 5.25% rate which is no longer available, and current rates are closer to 7% - is it technically possible to renegotiate the old mortgage with the original lender (Citi) to get this transaction done for a reasonable fee, but without resetting the interest rate higher? 2007-07-13 08:43:23
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Fourredfish Posts: 3311 Incept: 2007-06-26
Seattle - Where Spencer Elden's penis became famous.
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NO! 2007-07-13 08:53:53
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Genesis Posts: 66463 Incept: 2007-06-26 
Royal Flush!
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Double No. The problem with that is that there's no reason for the people who securitized it to allow that. They lose if the loan comes off the bond. ---------- I used to play flute; I wonder if I can play a fife? I incite prosecutors to create "Bubba Sausage Parking Lot" projects Darrell Issa has a middle finger and knows how to use it - Me 2007-07-13 08:59:33
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Fourredfish Posts: 3311 Incept: 2007-06-26
Seattle - Where Spencer Elden's penis became famous.
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BW8472 I have been LO for 6 years now. I have done EVERY loan out there for people. I get the most scared/depressed when dealing with subprime borrowers. But then I take a deep breath and look at my other clients. I have a lot of responsible clients that have been getting out of 5/1's and 7/1's that are pretty good. But I will say right now I walk away or can't help 2/3's. The scariest thing I see are the self employed contractors whose biz is DEAD DEAD DEAD. "It 'll turn around in a year or two." Oh boy. What I have been seeing an UNBELIEVABLE amount of activity with is this. WAMU, CW, WORLD (WB) are AGRESSIVELY getting their clients out of option arms and into 30 yr fixed or 5/1's. DIRECT. 2007-07-13 09:18:41
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Genesis Posts: 66463 Incept: 2007-06-26
Royal Flush!
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That's because they know those are ticking nuclear bombs and they are holding the equity parts of the tranches on their balance sheets! If they explode the lender dies, not necessarily the bondholders! ---------- I used to play flute; I wonder if I can play a fife? I incite prosecutors to create "Bubba Sausage Parking Lot" projects Darrell Issa has a middle finger and knows how to use it - Me 2007-07-13 09:21:51
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Fourredfish Posts: 3311 Incept: 2007-06-26
Seattle - Where Spencer Elden's penis became famous.
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Agreed. I had this conversation last week. "Easier" to sell 30's and fixed arms than option arms in the market.
2007-07-13 09:25:39
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Sandra Posts: 3556 Incept: 2007-06-27
New York, NY Online
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I have a friend who is moving from CA to AZ. She had a subprime loan, couldn't sell her house, so figured she might as well stop paying the mortgage, let it get foreclosed and save that money for a rental in AZ. We suggested talking to the servicer/lender about a short sale, but she didn't even want to face the issue. Better to just stop paying and let it be someone else's problem. I'm sure she's not alone. It makes sense what fouredfish said about some banks agressively getting their clients into fixed. It is a lot less risk in the long run and maybe they can make a fee or two along the way.
2007-07-13 09:29:36
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Genesis Posts: 66463 Incept: 2007-06-26
Royal Flush!
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The other thing is that in some cases refis are recourse loans (they can come after you) while purchase originations are NOT (if you default their recourse is limited to seizing the property - if its not worth as much, they're hosed!)
---------- I used to play flute; I wonder if I can play a fife? I incite prosecutors to create "Bubba Sausage Parking Lot" projects Darrell Issa has a middle finger and knows how to use it - Me 2007-07-13 09:33:24
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Guydaley Posts: 10361 Incept: 2007-07-10
Missouri & Wyoming
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In response to fourredfish who says some of the big banks are working feverishly to convert there customers to fixed rate mortgages. This looks eerily reminiscent of Y2K where companies worked feverishly, spent BILLIONS to update there hardware and software. As a result the doom of Y2K fizzled. It was a non-event. There are two states that already have started programs, MA and OH 250 and 100M to help out delinquent borrowers plus the ongoing efforts with SOME big banks to refinance into non-toxic loans. I think the big difference between now and Y2K is that everybody was working ahead of the curve on Y2K and for the toxic loan mess, everybody is working hard after the horses have left the barn. Cowboys are running around trying to lasso and herd all the wild mustangs. Point of fact, the way the ratings companies have finally decided its an issue after over 90 mortgage lenders have gone **** up. That's the big difference between this catastrophe and Y2K. Y2K had a definite deadline. Get it done by this date or you could be shut down. But its true if big banks are working furiously to refinance the toxics, then maybe their bottom lines won't suffer too bad. Of course if its anything like my brother, he throws away all the refinance stuff that shows up in his mail. It takes two willing parties to refinance and going through that paperwork is worse than a root canal. ---------- 2/17/09 = Hogzilla bill was signed = THE POINT OF NO RETURN = Cheers to the Reset, LONG LIVE THE UNDERGROUND ECONOMY! STARVE the BEAST! Adopt a J6P. 2007-07-13 09:49:48
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Bw8472 Posts: 6446 Incept: 2007-06-28
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I work in Kansas City in the midwest, if you look at our price appreciation charts we're one of the areas that really didn't bubble. MVO, you can't generally take someone off a note, that's almost never allowed under any circumstances unless you rewrite the loan and then you already spelled out why you wouldn't want to do that. Guydaley, I'm sure they are working on the problem but they won't violate their guidelines to do it, we are currently trying to refi a guy that has a Citi note on a fixed income with a 676 score, they wont' budge and stop his death arm they'll just let him die. We were working through thier wholesale, their best offer was an 8.6 2 year arm again that saves the guy 22$ a month and in two years he'll be right back where he was but that's a guy with a good score relatively. What about the people I see over and over again with a 400 score? No one is going to do anything for those people. Again just in eyeballing it I can tell you they haven't even sniffed the true extent of the losses yet and they are panicing now, when the real horror show is finally on the stage you'll all see what I mean. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-07-13 11:26:18
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Genesis Posts: 66463 Incept: 2007-06-26
Royal Flush!
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Exactly. This is why I am so bearish overall on the economy and the markets. I just can't see how we get out of this without a major - and deep - recession. Maybe not tomorrow, maybe not next week, but it is INEVITABLE and if you're not in ahead of it you miss the opportunity. This is IMHO a 95% probability event. My belief is founded on past history - we have NEVER had a housing downturn that did not lead to a recession in the history of the United States. Never. We got a "mini recession" from a "mini downturn" once, but all the REAL downturns produced REAL recessions. Why? Because 30% of GDP is in some way connected to housing. THe rest of the economy can be ON FIRE yet if this part isn't you can't prop the greater whole up. It is just too big of a piece of the pie. ---------- I used to play flute; I wonder if I can play a fife? I incite prosecutors to create "Bubba Sausage Parking Lot" projects Darrell Issa has a middle finger and knows how to use it - Me 2007-07-13 11:29:42
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Rmonical Posts: 2114 Incept: 2007-07-04
Omaha Online
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"AGRESSIVELY getting their clients out of option arms and into 30 yr fixed or 5/1's. DIRECT. " I assume that these efforts are directed at their prime borrowers who are in bad products (maybe alt-A). The idea is to prevent the cantagion from spreading to prime. Can anybody confirm? ---------- The truth is out there 2007-07-13 11:32:57
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Sandra Posts: 3556 Incept: 2007-06-27
New York, NY Online
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rmonical, can't confirm, but that was my assumption too. Many people were put into Alt-A products because the fees and margins were higher. Even though they may have qualified for prime, they were steered to Alt-A by those who stood to benefit. Now, getting them to refi into fixed is a good game. Hey, the new loan might even end up being conforming and it will be easier to sell albeit at lower margins than the original loan. And, what do they care if they are cannibalizing the deals that the old loan was in, they already sold to investors.
2007-07-13 11:37:08
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Genesis Posts: 66463 Incept: 2007-06-26
Royal Flush!
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Yep. Problem is that if you're not prime you can't get into agency paper and you're ****ed. ---------- I used to play flute; I wonder if I can play a fife? I incite prosecutors to create "Bubba Sausage Parking Lot" projects Darrell Issa has a middle finger and knows how to use it - Me 2007-07-13 11:37:24
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Fourredfish Posts: 3311 Incept: 2007-06-26
Seattle - Where Spencer Elden's penis became famous.
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Well, World (WB) is a little bit of different animal. They are a pure portfolio lender - they do not sell any of their loans. They have a very good option arm history. (Until recently they did their own appraisals - generally 10% lower than independent appraisals. So they have no fraud in that area.) They have a fixed rate conversion option after year 3 BUT they are converting anyone to a fixed who wants to right now 60 day fnm avg +.55. Doesn't amtter again - because they don't sell their loans (except ELOCS) WM and CFC I have only seen prime borrowers being converted. 2007-07-13 11:39:43
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Fourredfish Posts: 3311 Incept: 2007-06-26
Seattle - Where Spencer Elden's penis became famous.
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"Many people were put into Alt-A products because the fees and margins were higher. Even though they may have qualified for prime, they were steered to Alt-A by those who stood to benefit. Now, getting them to refi into fixed is a good game. Hey, the new loan might even end up being conforming and it will be easier to sell albeit at lower margins than the original loan. And, what do they care if they are cannibalizing the deals that the old loan was in, they already sold to investors." EXACTLY. KD we touched on this a month ago. The question we had is: Are these loans counting in the ORIGINATION #'s we see. I say yes. 2007-07-13 11:41:51
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Rmonical Posts: 2114 Incept: 2007-07-04
Omaha Online
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IIRC, I read a very good review/profile about WB in the last few months.
---------- The truth is out there 2007-07-13 11:45:39
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Bw8472 Posts: 6446 Incept: 2007-06-28
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I'm glad someone touched on the cannibalization issue, IMO that serves to make things worse at the margin for the CDO holders. The CDO get's distilled down a bit to shade more the the crap side, you lose the good interest that's keeping you afloat to some degree. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-07-13 12:43:13
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Vegasradar Posts: 3530 Incept: 2007-07-11
CA
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Thanx for sharing your story bw8472 Its refreshing to get an honest view of what is truly going on from someone who is in the industry. 2007-07-13 12:45:37
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Bw8472 Posts: 6446 Incept: 2007-06-28
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Genesis, That's why I think the projections are so far off base on this, they keep thinking in terms of the size of the market and don't realize that at least 15% or so of it is now gone. Sure 85% might be just dandy but you can't remove even 10% of a market if that's what the real forward damage is and not expect all heck to break loose, that's incrementally a disaster. ---------- At what point then is the approach of danger to be expected? I answer, if it ever reach us, it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide. ~Abraham Lincoln 2007-07-13 12:45:59
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