“No Income-No Asset” Mortgage Programs Were Abused By Mortgage Brokers And Mortgage Lenders And Targeted Hispanics Borrowers

5 01 2009

Another problem was so-called NINA — no income, no assets — loans. They were originally intended for self-employed people of means. But Freddie Mac executives worried about abuse, according to documents obtained by Congress…

The program “appears to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed,” said a staff memo to Freddie Mac Chairman Richard Syron. “It appears they are disproportionately targeted toward Hispanics.”

 

http://online.wsj.com/article/SB123111072368352309.html?mod=googlenews_wsj

 

 

 

 

Mortgage brokers became a key portion of the lending pipeline. Phi Nguygn, a former broker, worked at two suburban Washington-area firms that employed hundreds of loan originators, most of them Latino. Countrywide and other subprime lenders sent account representatives to brokerage offices frequently, he says. Countrywide didn’t respond to calls requesting comment.

Representatives of subprime lenders passed on “little tricks of the trade” to get borrowers qualified, he says, such as adding a borrower’s name to a relative’s bank account, an illegal maneuver. Mr. Nguygn says he’s now volunteering time to help borrowers facing foreclosure negotiate with banks.

Many loans to Hispanic borrowers were based not on actual income histories but on a borrower’s “stated income.” These so-called no-doc loans yielded higher commissions and involved less paperwork.

Another problem was so-called NINA — no income, no assets — loans. They were originally intended for self-employed people of means. But Freddie Mac executives worried about abuse, according to documents obtained by Congress. The program “appears to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed,” said a staff memo to Freddie Mac Chairman Richard Syron. “It appears they are disproportionately targeted toward Hispanics.”

Freddie Mac says it tightened down-payment requirements in 2004 and stopped buying NINA loans altogether in 2007.

“It’s very hard to get in front of a train loaded with highly profitable activities and stop it,” says Ronald Rosenfeld, chairman of the Federal Housing Finance Board, a government agency that regulates home loan banks.

Regions of the country where the housing bubble grew biggest, such as California, Nevada and Florida, are heavily populated by Latinos, many of whom worked in the construction industry during the housing boom. When these markets began to weaken, bad loans depressed the value of neighboring properties, creating a downward spiral. Neighborhoods are now dotted with vacant homes.

By late 2008, one in every nine households in San Joaquin County, Calif., was in default or foreclosure — 24,049 of them, according to Federal Reserve data. Banks have already taken back 55 of every 1,000 homes. In Riverside, Calif., 66,838 houses are owned by banks or were headed in that direction as of October. In Prince William County, Va., a Washington suburb, 11,685 homes, or one in 11, was in default or foreclosure.

Gerardo Cadima, a Bolivian immigrant who works as an electrician, bought a home in suburban Virginia for $330,000, with no money down. “I said this is too good to be true,” he recalls. “I’m 23 years old, with a family, buying my own house.”

When work slowed last year, Mr. Cadima ran into trouble on his adjustable-rate mortgage. “The payments were increasing, and the price of the house was starting to drop,” he says. “I started to think, is this really worth it?” He stopped making payments and his home was sold at auction for $180,000.

In the wake of the housing slump, some participants in the Hispanic lending network are expressing second thoughts about the push. Mr. Sandos, head of Nahrep, says that some of his group’s past members, lured by big commissions, steered borrowers into expensive loans that they couldn’t afford.

Nahrep has filed complaints with state regulators against some of those brokers, he says. Their actions go against Nahrep’s mission of building “sustainable” Latino home ownership.

These days, James Scruggs of Northern Virginia Legal Services is swamped with Latino borrowers facing foreclosure. “We see loan applications that are complete fabrications,” he says. Typically, he says, everything was marketed to borrowers in Spanish, right up until the closing, which was conducted in English.

“We are not talking about people working for the World Bank or the IMF,” he says. “We are talking about day laborers, janitors, people who work in restaurants, people who do babysitting.”

Two such borrowers work in Mr. Scrugg’s office. Sandra Cardoza, a $28,000-a-year office manager, is now $30,000 in arrears on loans totaling $370,000. “Her loan documents say she makes more than me,” says Mr. Scruggs.

Nahrep agents are networking on how to negotiate “short sales” to banks, where Hispanic homeowners sell their homes at a loss in order to escape onerous mortgages. The association has a new how-to guide: “The American Nightmare: Strategies for Preventing, Surviving and Overcoming Foreclosure.”

 
 

 

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Quick Loan Funding And Daniel Sadek Emerge As “Pirate Swashbucklers” Of Subprime Mortgage Reign Of Deceptive Mortgage Lending; CitiGroup Provided Much Of The Support For His Pillaging

3 01 2009

Quick Loan Funding, which Sadek founded in 2002, wrote about $4 billion in subprime mortgages before it collapsed in 2007. Sadek made, and eventually lost, a fortune through Quick Loan. He bought a Newport Coast mansion, a fleet of exotic cars and a condo in Las Vegas where he became a high roller at the blackjack tables.

Mark Goldman, a lecturer in real estate at San Diego State University, said lenders have nothing to gain by giving a break to borrowers who probably won’t repay their loans.

“It doesn’t serve the lender to do a loan modification that’ll result in a default,” he said. Which raises the question: Why did Citi give Sadek more time?

 

http://www.ocregister.com/articles/sadek-citi-loan-2270290-billion-quick

Daniel Sadek was one of the princes of subprime lending in Orange County whose high-risk mortgages helped bring Wall Street to its knees.

This summer, Citigroup, the Wall Street bank that has received this year’s biggest federal bailout, offered to modify its loan terms and help Sadek keep a home after he fell two months behind on his mortgage.

But on Dec. 18, Citi Residential Lending filed a notice of default after Sadek failed to make the new payments on the house at 65 Briar Lane in Irvine, one of at least four residential properties he owns in Orange County

That Sadek even got a second chance with Citi angered industry watchers who complain that banks have done too little, even with billions in federal assistance, to help borrowers facing foreclosure.

“There’s a big irony, when thousands of people are struggling to get affordable loan modification offers from servicers that aren’t responsive, that someone who has perpetrated harm would get a loan modification,” said Paul Leonard, of the Center for Responsible Lending. “It’s incredible.”

Reached by phone, Sadek said he “did not want to be rude,” but he did not want to talk. His attorney, Thomas Borchard, said he was unaware of the Citi loan modification.

“I know he and Quick Loan Funding have a long-standing history with Citi,” Borchard said. “I’d assure you there’s some logical explanation.”

The original mortgage isued by Sadek’s Quick Loan Funding in August 2006, was for $768,000. Under Citi’s loan modification, the principal rose to $800,000, records show. Zillow.com estimates the home is worth $632,500.

The original mortgage was an interest-only loan. Under the Citi loan modification, Sadek’s monthly payments increased almost 50 percent to $6,445 – the interest, principal, taxes and insurance on an $800,000 mortgage.

The latest notice of default said Sadek owed $34,888 as of Dec. 18, indicating he had not made a single payment since the loan modification. The notice says Sadek still has 90 days to catch up with his payments before he will lose the house.

The record is unclear how Citi got authority to modify Sadek’s original mortgage. Citi declined to discuss Sadek’s loan, citing client privacy rights.

Sadek’s original loan – No. 106087598 – was not part of the three Citi mortgage pools. Bank of America, Bear Stearns, Countrywide Home Loans, Lehman Brothers, Merrill Lynch and Morgan Stanley also securitized and sold Quick Loan mortgages.

Filings with the Securities and Exchange Commission show at least $2.3 billion of Quick Loan’s $4 billion mortgages were sold to investors after Wall Street firms packaged them as mortgage-backed securities, collateralized debt obligations and other complex financial instruments.

“In some cases, Citi purchases loans which may have been modified by another servicer,” Rodgers said. “If a loan is owned by an investor, the right to modify is subject to the agreement under which the loan is serviced.”

On the Citi loan modification, Sadek said 65 Briar Lane is “owner occupied” and that he “will suffer a hardship” if the terms of the loan are increased too much.

Other public records list his home address as 3 Longboat in Newport Coast, where Sadek was interviewed by the Register in April 2007. Borchard said he could not comment on the address discrepancy. Rodgers said borrowers can demonstrate their residence by producing a utility bill.

When a Register reporter visited the Briar Lane house, a woman living there said Sadek was “not here.” But she would not say if he lived there.

Lou Pacific, a real estate and mortgage consultant from Mission Viejo who was a vice president at Quick Loan Funding in 2004 and 2005, said he was surprised by the Citi loan modification, given Sadek’s financial resources and multiple residences.

“The usual way you qualify for a loan mod is if you live in the home and you have a valid hardship,” Pacific said.

Court judgments

Most borrowers would have a hard time getting a hearing from a bank if they were already in default on a million dollars in other debts.

Records on file with the Orange County Clerk-Recorder show that Sadek faces $1.5 million in debts, including:

•State Franchise Tax Board liens totaling $545,922 in taxes and penalties.

•Orange County tax collector liens totaling $8,998.

•Liens from the Newport Coast homeowners association, for $1,588, and The Marquee Park Place Homeowners Association in Irvine, for $7,517, both for monthly association fees.

•Court judgments from Wells Fargo Bank, for failure to make payments on leased

equipment ($603,289) and Wells Fargo ($294,341) for other debts.

No effort to hide

Wells Fargo has placed writs of attachments on Sadek’s Newport Coast home, an undeveloped Newport Coast lot, his condo in Irvine and 65 Briar Lane.

Dennis Fabrozzi, an attorney for Wells Fargo, said such writs would normally be a red flag for banks considering a loan modification. “I would think most banks would pull a preliminary title report,” Fabrozzi said. “Most of the information is online. It’s easy to pull. You could probably do it in about five minutes.”

Borchard said Sadek intends to make good on his debts.

“Mr. Sadek has not filed for bankruptcy. He has not made efforts to conceal, hide or transfer his assets,” he said. “For him, every day is another day of looking to try to resurrect a business interest to repay creditors,” Borchard said.

Sadek’s other troubles were documented before the Citi bailout.

In May 2007, The Orange County Register reported that Sadek took out a $1 million marker from the account of his escrow company, Platinum Escrow, to gamble in Las Vegas.

In June of this year, the state Department of Corporations revoked all of Sadek’s lending and escrow licenses for his failure to safeguard the money and records.

On Dec. 17, the Department of Corporations banned Sadek from the escrow industry for a year and seized accounts totaling $515,000.

Sadek and Citi

Citi’s business dealings with Sadek date to the founding of Quick Loan Funding in 2002.

Citi’s subsidiary, First Collateral Services, gave Sadek a line of credit – known as a warehouse line – to fund his mortgages. As Quick Loan grew – issuing a peak $218 million worth of mortgages in December 2005 – other warehouse lenders gave the company lines of credit. At its peak, the Citi warehouse line was $100 million, Pacific said.

When Quick Loan’s collapse accelerated in the spring of 2007, Citi was the last warehouse lender left, Sadek said during an April 2007 interview at his Newport Coast mansion.

During the interview, Sadek said Citigroup provided a $16 million line of credit to help him market his feature film, “Redline,” which starred his then-girlfriend, Nadia Bjorlin, and his fleet of Ferraris, Porsches and Saleen S7 exotic cars. Sadek said he spent $31 million to make, distribute and publicize “Redline.”

The film earned $8.2 million in ticket sales worldwide, according to Box Office Mojo. Sadek is being sued in federal court by the Cartoon Network for failing to pay $845,000 in advertising for the film.

 

 





Washington Mutual Mortgage Operation Encouraged Fraud And Misrepresentation As Part Of Push To Produce Profits

30 12 2008

 

If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

 

http://www.nytimes.com/2008/12/28/business/28wamu.html?_r=1&hp=&adxnnl=1&adxnnlx=1230591825-HlE0eyNm%20w8Xjj6qqNdoOg&pagewanted=print

As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes.

Yet even by WaMu’s relaxed standards, one mortgage four years ago raised eyebrows. The borrower was claiming a six-figure income and an unusual profession: mariachi singer. Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

“I’d lie if I said every piece of documentation was properly signed and dated,” said Mr. Parsons, speaking through wire-reinforced glass at a California prison near here, where he is serving 16 months for theft after his fourth arrest — all involving drugs.

While Mr. Parsons, whose incarceration is not related to his work for WaMu, oversaw a team screening mortgage applications, he was snorting methamphetamine daily, he said.

“In our world, it was tolerated,” said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. “Everybody said, ‘He gets the job done.’ ”

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas.

According to these accounts, pressure to keep lending emanated from the top, where executives profited from the swift expansion — not least, Kerry K. Killinger, who was WaMu’s chief executive from 1990 until he was forced out in September.

 

Between 2001 and 2007, Mr. Killinger received compensation of $88 million, according to the Corporate Library, a research firm. He declined to respond to a list of questions, and his spokesman said he was unavailable for an interview.

During Mr. Killinger’s tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers’ incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients.

WaMu gave mortgage brokers handsome commissions for selling the riskiest loans, which carried higher fees, bolstering profits and ultimately the compensation of the bank’s executives. WaMu pressured appraisers to provide inflated property values that made loans appear less risky, enabling Wall Street to bundle them more easily for sale to investors.

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

‘If Ms. Zweibel doubted whether customers could pay, supervisors directed her to keep selling, she said.

“We were told from up above that that’s not our concern,” she said. “Our concern is just to write the loan.”

The ultimate supervisor at WaMu was Mr. Killinger, who joined the company in 1983 and became chief executive in 1990. He inherited a bank that was founded in 1889 and had survived the Depression and the

savings and loan

scandal of the 1980s.





“Rogue Builder” Duped JP Morgan Chase Into Making Mortgage Loans In Mortgage Fraud Scheme

27 12 2008

“…the suit alleges that Percudani, Chase Manhattan Mortgage, Stroudsburg appraiser Dominick Stranieri and several others engaged in widespread fraud by selling homes in Monroe County at inflated prices through several of Percudani’s companies, including Raintree Homes, Why Rent? and Chapel Creek Mortgage…”

 

 

“…Chase Manhattan Mortgage, a division of JP Morgan Chase, denied the allegations, claiming that Percudani was a rogue builder who duped Chase into making the loans. Chase also argued that after being alerted to the alleged scam, it reduced the principal on more than 200 mortgages in 2002 after appraisers hired by Chase determined many of the homes were sold for as much as $50,000 more than their true value…”

http://www.mcall.com/news/local/all-b3_5chase.6720064dec26,0,5613229,print.story

 

A U.S. District judge has called for an attempt at a negotiated settlement and delayed the trial related to the federal lawsuit that alleges more than 100 home buyers were defrauded by JP Morgan Chase Bank and a Poconos developer.

Originally scheduled for February, Judge Christopher Connor rescheduled the trial to June 1, 2009, after a mediation session with retired Judge Diane M. Welsh was scheduled for Jan. 28.

The mediation was ordered by Connor after he delivered a strongly worded opinion filed in October saying the ”record supports the conclusion that the Chase defendants” aided the alleged scheme by Tannersville builder Gene Percudani to sell homes at inflated prices.

Filed in 2002, the suit alleges that Percudani, Chase Manhattan Mortgage, Stroudsburg appraiser Dominick Stranieri and several others engaged in widespread fraud by selling homes in Monroe County at inflated prices through several of Percudani’s companies, including Raintree Homes, Why Rent? and Chapel Creek Mortgage.

The suit claims that Chase took part in the alleged scam by ignoring its usual underwriting guidelines in approving mortgages for Percudani’s customers, many of whom were people with poor credit from the New York area drawn to the Poconos by an advertising campaign that asked ”Why Rent?” and which offered new homes for as little as $1,000 down and mortgage payments of $685 per month.

But the actual payments were much higher and mortgages far more than the real value of the homes. Unable to sell or refinance their mortgages, many of the plaintiffs were forced into bankruptcy and foreclosure while others suffered financial hardships, according to the suit.

Chase Manhattan Mortgage, a division of JP Morgan Chase, denied the allegations, claiming that Percudani was a rogue builder who duped Chase into making the loans. Chase also argued that after being alerted to the alleged scam, it reduced the principal on more than 200 mortgages in 2002 after appraisers hired by Chase determined many of the homes were sold for as much as $50,000 more than their true value.

After six years of depositions, Connor said testimony from current and former Chase employees indicates that Chase officials knew about the scam, and even established unusual underwriting guidelines to approve the mortgages, many of which didn’t go into default until after they were sold by Chase to the secondary market, chiefly Fannie Mae and Freddie Mac.

A Chase spokesperson could not be reached for comment.

Percudani has denied the allegations. He closed his homebuilding businesses and now operates the Cherry Valley Golf Course near Stroudsburg.





Mortgage Brokers And Mortgage Bankers Pushed Subprime Loans To Borrowers Because There Was No Risk To Lenders As Loans Were Sliced Up And Sold Off Quickly

26 12 2008

Subprime depended basically on brokers who did not care whether the borrower could pay his loan because they got paid their commission at closing, on banks that also did not care much whether the borrower could pay since the loan was being sold off, on packagers of loans who cut and sliced the packages of loans so that some could be called AAA rated loans (generally called CMO’s).

http://seekingalpha.com/article/112297-was-subprime-lending-just-as-dishonest-as-madoff?source=email

 

 

Subprime is a specific type of transaction more generally called CMO’s (Collateralized Mortgage Obligations) and CDS (Credit Default Swaps). Subprime depended basically on brokers who did not care whether the borrower could pay his loan because they got paid their commission at closing, on banks that also did not care much whether the borrower could pay since the loan was being sold off, on packagers of loans who cut and sliced the packages of loans so that some could be called AAA rated loans (generally called CMO’s). They paid credit rating companies to put triple A ratings which could not possibly be justified with any analysis of the underlying package of loans. Finally, they paid credit insurance companies to give guarantees (Credit Default Swaps) that they would cover any default when the credit insurance companies did not have the financial ability to pay if called on to pay. To make it even better, everyone seems to have had the idea that real estate prices would always go up. Finally, we even had President Bush saying all this was good because we were increasing housing without looking at the inevitable results.

 

1.     Financial Results: There was never a history of the returns. Financial institutions and their sales representatives told everyone that this was an exceptional investment. They talked about a piece of paper that is “triple A rated “and “guaranteed by insurance through Credit Default Swaps.” While Madoff peddled dishonest results, here banks peddled a dishonest idea without any results.

2.     Public Explanation of the process: Salesmen only explained these were triple AAA rated investments “structured so that they could not fail.” Furthermore, there was an insurance guarantee just in case. When it all fell apart, we naturally got the obvious truth that the so called protection never existed in reality. When the problem was obvious, Merrill Lynch (MER) sold these triple A rated bonds with insurance guarantees for 22 cents on the dollar and most people said the real value for Merrill was only 5 cents on the dollar. Madoff’s explanation was no phonier than the banks explanation of the value of Subprime triple A rated with CDS guarantees.

3.     What kept the fraud going? While Madoff had to pay out early investors, this fraud did not even depend on really paying investors off. The only ones who really collected on this were the bankers who earned bonuses or a percent of the profits (which can be 40% of the transactions’ profits) when these subprime loan packages were sold. The finance community had never made so much money on an idea like this. Who was going to say that it would not work? Here is a clear case that the personal greed of the bankers led to their own demise and that of their investors. Probably anyone that wanted to cut back on the system was probably told to shut up. As a former banker, I know the pressures put on people. “X bank is making all that money. What is wrong with you?” If you try to say it is a bad idea, most people get run over by the system. Years ago, former Fed Chairman Greenspan said that he trusted the bankers to protect their own interests. He recently said in congress that he made a terrible mistake in this assumption. And in this simple mistaken assumption, we see a root cause of the problem.

4.     Professional Opinion: The personal interest of bankers led them to tell all their investors that this is a splendid investment. In this case, the professional bankers did a 20 times greater disservice to themselves and their customers than all of the Madoff salesmen.

 

 

 

 





Investment Bankers And Predatory Lenders Combined To Make Risky, Deceptive Mortgage Loans To Naïve Home Buyers Who Purchased Homes They Couldn’t Afford

17 12 2008

“…The widespread securitization of mortgages prompted lenders to give virtually anyone a loan that they could resell at a profit while offloading the risk. It also gave them incentive to mislead borrowers about what they could afford, what risks they were undertaking and, in some cases, the terms of the mortgage they were signing. The public face of this racket could well be Angelo Mozilo, co-founder of mortgage giant Countrywide Financial…”

“…though the poster child of mismanagement has to be Richard Fuld, former CEO of the former company known as Lehman Bros. Fuld, who received as much as $480 million in compensation from 2000 to this year, took risks that drove the storied investment house straight into the ground…”

 

http://blogs.usatoday.com/oped/2008/12/whos-to-blame-f.html

 

Investment bankers

In the war on drugs, the top target is always the traffickers. The same principle is true with the massive implosion of credit markets and corporate ethics. In this case, the traffickers were the Wall Street firms that created bundles of subprime mortgages and other toxic financial instruments, then peddled them as low-risk, high-return investments. These securities, and enormous side bets on them, fueled the housing bubble and infected the global financial system.

Nearly all the big investment banks were culpable, though the poster child of mismanagement has to be Richard Fuld, former CEO of the former company known as Lehman Bros. Fuld, who received as much as $480 million in compensation from 2000 to this year, took risks that drove the storied investment house straight into the ground. But he had lots of co-conspirators.

Predatory lenders

Lending is easy when it is someone else’s money. The widespread securitization of mortgages prompted lenders to give virtually anyone a loan that they could resell at a profit while offloading the risk. It also gave them incentive to mislead borrowers about what they could afford, what risks they were undertaking and, in some cases, the terms of the mortgage they were signing. The public face of this racket could well be Angelo Mozilo, co-founder of mortgage giant Countrywide Financial. But many others got into this game, as well. Subprime lending shot up from $130 billion in 2000 to $625 billion in 2005.

Clueless borrowers

It might seem cruel to put blame on people who have lost their homes, or are in jeopardy of it. But hundreds of thousands of homebuyers bought more house than they could afford, or financed investment properties with no clue about what they were doing. It takes two parties to sign a mortgage contract, so some borrowers share responsibility for the housing mess.

 

 





Mortgage Brokers And Lenders Pushed OptionARM Mortgages To Good Credit Alt-A Borrowers Who Are Now Defaulting In Record Numbers

16 12 2008

“The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall,” Tilson explains.

 

http://www.wwj.com/A-Second-Mortgage-Disaster-On-The-Horizon-/3494300

 

The trouble now is that the insanity didn’t end with sub-primes. There were two other kinds of exotic mortgages that became popular, called “Alt-A” and “option ARM.” The option ARMs, in particular, lured borrowers in with low initial interest rates – so-called teaser rates – sometimes as low as one percent. But after two, three or five years those rates “reset.” They went up. And so did the monthly payment. A mortgage of $800 dollars a month could easily jump to $1,500.

Now the Alt-A and option ARM loans made back in the heyday are starting to reset, causing the mortgage payments to go up and homeowners to default.

“The defaults right now are incredibly high. At unprecedented levels. And there’s no evidence that the default rate is tapering off. Those defaults almost inevitably are leading to foreclosures, and homes being auctioned, and home prices continuing to fall,” Tilson explains.

“What you seem to be saying is that there is a very predictable time bomb effect here?” Pelley asks.

“Exactly. I mean, you can look back at what was written in ’05 and ’07. You can look at the reset dates. You can look at the current default rates, and it’s really very clear and predictable what’s gonna happen here,” Tilson says.

Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn’t hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We’re at the beginning of a second wave.

“How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?” Pelley asks.

“Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That’s probably another $500 billion to $600 billion on top of that,” Tilson says.

Asked how many of these option ARMs he imagines are going to fail, Tilson says, “Well north of 50 percent. My gut would be 70 percent of these option ARMs will default.”