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Thread: the vise is tightening on mortgage lending ...

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    Banned Melonie's Avatar
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    Default the vise is tightening on mortgage lending ...

    ... or should I say the 'noose' ?



    (snip)"Besides the fraudulent appraisals that states are cracking down on, the other big wild card in the equation is the stated income or liar loan. If you really want to see first hand the ethical quicksand this practice sits on, just read through the tangled justifications in this mortgage broker discussion on the topic. In a climate where we are now seeing mortgages being quickly returned to the originators (who are collapsing) there is a high probability that the mortgage pool holders are going to play real hard ball, if they aren’t already. The Alt-A Pay Option Arm’s especially are going to get hit in this scenario. Look for holders to scrutinize these mortgages very closely, and then send back any that show income overstated by more than 20%.

    Let’s assume you’re all correct… that the bank is encouraging you to lie. I stand on the statement that the investor is not encouraging anyone to lie. What will you do when the investor pulls the 4506T and the deal blows up? Do you think the nice folks at the bank will step up and cover your back?

    You’re playing with fire… and the bank won’t be anywhere near the scene of the crime if it goes wrong. They’ll be pointing to all their wonderful QC procedures and handing over docs YOU signed to the investor… while scratching their heads and wondering out loud what ever caused you to do this. It’s fraud… plain and simple… and trying to justify it by saying the bank gave you a wink and a nod won’t lessen the incredible pain that will fall on you if (when) the deal blows up."(snip)




    (snip)"The chart is a graph of the value of BBB (subprime) mortgage-backed securities dated as of the second half of 2006. I've been following it for months, yet the latest move of just the past couple days still surprised me: it's almost going vertical... downward. Not good.

    If you go to MarkIt's ABX credit index home, you can pull up charts for other classes of mortgages (above BBB are A, AA, and AAA), and different date issues, and see how they're doing.

    It's a fascinating exercise. You can see that immediately when subprime (BBB) 2006-02 started to crash, there was a "flight to quality" into the As. But as BBB continued to collapse, A began to follow, and then AA, and then even AAA. The effect also began to spread to earlier and later issues; a veritable "shockwave" emanating out from the BBB-2006-02 subprime issues -- ground zero.

    I can't quite stress how much this is not good. That's because it gets more complex than just a bunch of holders of mortgage-backed bonds ending up with crappy returns: enter derivatives.

    In recent years, derivatives began to be used more heavily, to "buy insurance" on various investments and trades, in case of default or other unexpected moves. Derivatives such as these have skyrocketed to a notational value of somewhere around $400 trillion, by some reports. Why? Because they became so cheap... because nothing financially "bad" had happened in a while. Tremendous quantities of liquidity will do that... until one day exhaustion bursts the bubble. Well, the regular folks down in the "real economy" are seeming quite exhausted.

    The tie-in to MBS is as follows: banks and other holders of MBS (like hedge funds) wanted to book their gains immediately ("marking them to market"), so they bought insurance on their MBS in the form of derivatives ("credit default swaps" or "CDS"), and then were able to sell them with a slight markup or use them as "guilt-free" collateral for other speculative plays. Aside from some flogging of these securities to foreigners and the general public (e.g. pension funds), the major financial institutions just sold these things to each other: last I heard, US banks still hold well over 50% of their assets in the form of real estate-related securities.

    All this MBS trading and CDS insuring amongst the same pool of entities seems apt to be a setup for a disaster: if MBS returns widely suffer, then someone must pay up on the CDS "insurance". But since retail banks, mortgage banks, investment banks, hedge funds, and private equity have all been both buying selling these things amongst each other, you end up with an undifferentiated soup of liability with no distinct bearers of risk.

    And by the way, since derivatives encourage more spending and speculation, they in essence are liquidity (as outlined above), so they essentially beget more of themselves. The credit bubble becomes a self-fulfilling prophecy... for a time.

    In sum, the entire financial economy looks vulnerable to a rout here, as the baseline level of default is suddenly becoming much higher. This failure is already cascading through the various grades and vintages of MBS, but as returns fall and CDS obligations must be made good on, there will likely occur a credit crunch that will begin to drive down financial asset prices in general. This will, of course, further harm returns and trigger derivatives obligations, becoming a self-reinforcing, downward-accelerating feedback loop."(snip)

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    Featured Member scorpio's Avatar
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    Default Re: the vise is tightening on mortgage lending ...

    lenders get whacked all the time for poor underwriting. When the lender tries t sell questionable mortgages to the investors on the secondary market, they get rejected or the investor makes the lender buy it back.

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    Banned Melonie's Avatar
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    Default Re: the vise is tightening on mortgage lending ...

    ^^^ but the lenders often don't have the cash remaining to buy them back !!! What happens then ? The lender goes bankrupt !

    Which leads to the other new wrinkle, which seems to be the 'passing of the buck' re stated income loans from the lender being responsible for the loss to the borrower being prosecuted for fraud ?

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    Featured Member scorpio's Avatar
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    Default Re: the vise is tightening on mortgage lending ...

    first of all, not all lenders require the borrower to sign a 4506T. second, Underwriters use data bases that show average incomes for jobs, so the days of way over stating income are over. Stated deals are for people who really do make the money, but can't document it via tax forms. Business owners or investors who write off alot of income, etc. It's true though, that many brokers try to pass of non qualified borrowers via stated deals. Whenever I get a scenario that is stated, I ask "do they really make the money or not", 50% of the time the answer is no.

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