Current Market: March 2007 Archives

This is really more of an investment related article than mortgage or real estate.



Class-action lawyers pounce in US subprime crisis

"We are considering litigation, no question," he said. "We have already had numerous discussions with some very, very large pension systems throughout the country on this."

I would look into investor lawsuits aimed at the managers who invested in these bonds. There wasn't any shortage of people warning that these were not solid investments. I was one of them. But I guess these managers dominant philosophy was out of, "How to Look Like a Financial Genius for Six Months (and an Idiot Forever)."



On the other side, Bear Stearns profits up, calms subprime jitters



But even that article has a warning:

But in that turmoil is a big opportunity for Bear Stearns and other Wall Street investment banks. Molinaro said he expected to see large, bulk sales of distressed mortgages over the next several months.

Subprime mortgage troubles could still spread pain but probably not recession

"We're seeing a lot of pain. We're not seeing carnage," Costello says.

Subprime alone won't sink Wall Street bankers

Subprime loan business accounts for just 3% of Lehman's revenue, and the current troubles translate into a potential hit to earnings of just 4%, according to an estimate published by Bank of America analyst Michael Hecht. Bear Stearns, which reports its results today, has the largest earnings risk at 5%. But most of the others have an even more trivial 2% earnings exposure, Hecht found.

One editorial I largely agree with:

Mortgage lenders can't claim that no one told them so



And one with it's head largely you-know-where:

Opposing view: The market is working



Spin, spin, spin. Whip the rats faster, we must not be spinning enough.



One thing I fervently hope: This mess results in some industrial strength disclosure requirements for negative amortization and stated income loans. I personally would like to see increased disclosure requirements for ARMs in general, as well as interest only loans. And I'm talking about plain language explanations right up front when people apply for the loans. If you can't sell the loan and the property with a frank discussion of what's going on, you shouldn't be selling either the loan or the property.

Agencies issue subprime guidance: sources

At issue is whether regulators will force lenders to qualify subprime borrowers based on their ability to make the highest possible monthly payments during the life of the loan, instead of the initial lower rate, according to banking experts.

I have more than once likened the current subprime underwriting guidelines to a mutual financial suicide pact. But it's more similar to a game of "russian roulette" in which you keep making money as long as you're in the game, but if that revolver hits the loaded chamber they'll be picking your financial remains out of the wall for decades.



an email I got March 1 from a wholesaler: (identifying information redacted)

Wall Street does not want Subprime loans. As you may already know the subprime market is being hammered and many subprime lenders have gone out of business. Wall Street investors have either stopped buying subprime loans or have substantially increased the yields they require on the loans they purchase. Some of the reluctance to purchase higher risk loans has also effected the Alternative loan market.



Today, I received notices from two investors that they were suspending their purchases of Alt. loans.



Subprime and Alt loans - Watch for these industry changes:



Elimination or, much stricter underwriting guidelines on Stated Income loans for W2 employees.



Raising the FICO and underwriting requirements for all 100% financing. Currently, borrowers with as low as 580 FICOs can find 100% financing; that is likely to be eliminated very soon.



Stricter underwriting requirements for First-Time borrowers. Elimination of underwriting guideline exceptions for Subprime and Alt loans.



If you are working with pre-approved borrowers that require 100% financing or have marginal credit (below 620) those borrowers should be re-qualified to make sure that financing is still available.

Now Alt loans means Alt-A. Specifically, negative amortization loans, the only thing from that market that has a significant share of the loan market. This has got to be one of the most telegraphed financial changes of the last century. This site got at least two hits yesterday from people looking for employment selling these repossessions waiting to happen.



The coming meltdown of the loan industry has got to be the most telegraphed happening in the history of finance. And they could have gotten out by accepting less profit and tightening their underwriting standards, thereby drastically limiting their losses. But the ability to shift the risks to others by selling the loans got them too greedy, and they're getting caught by it as the investors turn around and want to know why this excrement was misrepresented as more worthy than it was.



Subprime is in a world of hurt as well, with the feds wanting them to underwrite the loan according to the payments that the people are going to end up paying, not just the first few payments.



Long and the short is look for a large smoking hole where the lenders who have popularized the shaky lending practices of the last few years used to be.