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FRED
09-22-06, 06:39 PM
Bad Blood Over Bad Loans (http://www.businessweek.com/magazine/content/06_40/b4003063.htm?chan=top+news_top+news+index_business week+exclusives)
September 23, 2006 (BusinessWeek)

Mortgage defaults are rising. Wall Street thinks banks should mop up the mess

Everyone involved in the mortgage business got rich during the housing boom, including Wall Street. The biggest firms bought all the loans they could get their hands on, repackaged them, and sold them for a fee to hedge funds and other investors. Mortgage-backed securities issuance soared from $184.5 billion in 2000 to nearly $1 trillion in 2005, generating more than $1 billion in fees last year.

But now that the real estate tide is ebbing, trash is starting to wash up on shore. Mortgage delinquencies are zooming -- bad news for the banks, Wall Street firms, and investors holding loans.

AntiSpin: Just as in the case of the stock market bubble of the late 1990's, in spite of numerous warnings, and evidence of abuses was everywhere, the regulators didn't show up until after the bubble was over and bubble generated capital gains tax revenue is in the government coffers. Now that the housing bubble is over–right on cue–the regulators are starting to ask questions. To wit:

Regulators hit backloaded mortgages (http://www.washingtontimes.com/business/20060921-121351-5492r.htm)
September 21, 2006 (THE WASHINGTON TIMES)
Federal regulators found serious problems with backloaded mortgages that enabled buyers to buy high-priced homes in Washington and other booming markets, after examining the portfolios of six huge banks that make half the mortgage loans in the United States.

Sandra Thompson, a director at the Federal Deposit Insurance Corp., testified yesterday that some borrowers were not qualified to make escalating payments required under the loans, and the banks loosened their standards considerably to enable buyers to qualify, including "layering on" risks such as requiring no down payment or proof of income.

The problems raise the risk of defaults and foreclosures as the housing market stagnates, she told the Senate Banking, Housing and Urban Affairs Committee in Congress' first hearing on the new breed of mortgages, sometimes called "exotic" or "alternative" loans because they do not offer standard, fixed payments like those on 30-year mortgages.

Ms. Thompson said the bank insurance agency and other federal regulators soon will be issuing rules that prohibit banks from offering loans to consumers who cannot handle future payment increases and require more rigorous disclosures about the risks of the mortgages.
Ms. Thomson, what rock have you been living under for the past three years? Finally going to put a skull and crossbones warning label on suicide loans? Good idea! Question is, now what are the banks going to sell? They ran out of credit-worthy borrowers years ago.

jk
09-22-06, 07:02 PM
the Senate Banking, Housing and Urban Affairs Committee in Congress' first hearing on the new breed of mortgages, sometimes called "exotic" or "alternative" loans because they do not offer standard, fixed payments like those on 30-year mortgages.


Ms. Thomson, what rock have you been living under for the past three years?

answer: the same rock that the senate has been under, the one funded by financial industry campaign contributions i imagine. my guess is that a director of the fdic, such as ms. thomson, doesn't raise issues the senators don't want to hear.

jeffolie
09-25-06, 07:06 PM
A major portion of my belief in a collapse of the financial system starts with defaulting mortgage backed securities (bonds). It moves on the the $570 TRILLION in derivatives.

jk
09-25-06, 10:27 PM
A major portion of my belief in a collapse of the financial system starts with defaulting mortgage backed securities (bonds). It moves on the the $570 TRILLION in derivatives.

don't most of the mbs have a guarantee via the gse's?

Jeff
09-27-06, 06:36 PM
This could do a number on lots of folks. But as Eric says, they'll throw the kitchen sink at the economy to keep it liquid, so it might not be yet. Jeffollie- TRILLION?

Jim Nickerson
09-28-06, 11:50 AM
This could do a number on lots of folks. But as Eric says, they'll throw the kitchen sink at the economy to keep it liquid, so it might not be yet. Jeffollie- TRILLION?

Bill Bonner wrote http://www.freemarketnews.com/Analysis/28/6053/hummer.asp?wid=28&nid=6053



Says the Economist:

"Finance has been convulsed by a computer-enhanced frenzy of creativity. In today's caffeine-fuelled dealing rooms, a barely regulated private equity group could very well borrow money from syndicates of private lenders, including hedge funds, to spend on taking public companies private. At each step, risks can be converted into securities [like mortgage-backed securities], sliced up...re-packaged, sold on and sliced up again. The endless opportunities to write contracts on underlying debt instruments explains why the outstanding value of credit-derivatives contracts has rocked to $265 trillion $9 trillion more than six months ago, and seven times as much as in 2003."


Trillion is correct, just the number of them is in question.