received e-mail regarding the subject under discussion ...
I suspect that this will end up very much like the S&L debacle.
The buyers probably 25% of the homes in 2004-2006 were speculators or people who bought more house than they could really afford but justified it because, "real estate always goes up."
I think the key is that while mortgage brokers made the loans, they didn't hold them. They quickly resold them on in a packaged pool of loans. Thus, they got the fees (and very high fees if they were subprime) and then passed them on to the buyers of the mortgage pool. Thus, they could keep very small balance sheets, yet write enormous amounts of loans. The problem now is that most mortgage pools have the right to put those loans back to the mortgage issuer if they default before the loans are seasoned (usually 6-12 months). Since many of these borrowers never even make the first payment, (because they were looking to "flip" the property before having to make monthly payments) these loans are put back to the mortgage brokers, who don't have the balance sheets to support buying back the loans and they consequently go bankrupt. It is a huge problem.
Some interesting stats:
Subprime borrowing accounted for 21% of all homes bought in 2004-2005.
Subprime borrowings in 2004-5 were US$1.2 Trillion.
Of those, 70% were financed by ARMs with 2-year resets.
50% of Subprime & 73% of Alt-A loans made in 2005 were no doc/ low doc loans (also known as liar loans – your lying about your income either to your mortgage broker or to Uncle Sam. Take your pick).
We're seeing about $25 billion in ARM resets each month for the first half of 2007.
That goes to about US$30-35 billion per month in the second half of 2007.
28% of 2004 loans and 30% of 2005 loans were interest –only or negative am.
(great candidates for being upside down with lower home prices).
48% of household income was spent on housing costs in 2005 in California.
(wait until all those ARMS reset later this year).
Largest Subprime Lender list – those scrambling at the moment…..
2. HSBC Household Finance [rumored to be up for sale]
6. Option One [H&R Block; up for sale]
7. Ameriquest [owned by ACC; in major lawsuits]
9. Washington Mutual [shuttered 80 branches in late 2006]
11. First Franklin [acquired by Merrill Lynch from National City for $1.3bln]
12. GMAC [Major layoffs in ResCap]
17. OwnIt – WENT BANKRUPT 2006-12-07
18. Aegis [recently closed two subprime operations centers]
19. MLN making no new loans 2006-12-29 [reportedly bought out by Lehman]
21. ResMae [in buyout talks with Credit Suisse (source: MortgageWire)]
23. Decision One [owned by HSBC; rumored to be up for sale]
24. Encore [being acquired by Bear-Stearns]
25. Fieldstone [closing 7 of 16 ops centers, debt renegotiated through 2007-01-31]
Great example of one neighborhood here:
bubbletracking.blogspot.com
Some examples of some people already upside down:
realestatehaircuts.blogspot.com
And lots of examples here:
flippersintrouble.blogspot.com
And plenty of people used this to basically "rob banks."
Why use a gun in a stickup to make $15,000 when you can just take out a few mortgages and take in hundreds of thousands of bucks?
SCAM IN CALIFORNIA
All told, the alleged scheme involved as many as 400 investors and an estimated $1.2 billion of property, Ackerman alleged in the complaint.
The district attorney's white-collar crime division began to
investigate the matter late last year, Kelly Hansen, a senior
supervisor in the office, said Friday. Hansen declined to comment on the specific case, but said it is one of 19 cases of alleged mortgage fraud the division is pursuing. Mortgage-fraud scams are particularly common when real estate values are already skyrocketing, as they were in Riverside County from 2003 through 2005, Hansen said.
The alleged scam worked like this, according to Ackerman and another attorney whose clients were involved: An investor would buy two, three or as many as eight houses within days of each other. Stonewood would apply for loans on behalf of the client, typically for two loans totalling 20 percent to 25 percent more than the appraised value of each house. The investor would pay the seller close to the asking price, typically $450,000 to $600,000. Jovane Investments would then
pocket the excess cash, often $100,000 to $120,000.
Part of that money would be used to make regular mortgage and tax payments on the houses, the attorneys said. It seemed to be a great deal for the investors, the suit alleges, so they would bring in friends and family members. Most were middle-class professionals with annual incomes of $40,000 to 70,000, and many of them were nurses at Rancho Springs Medical Center, Ackerman said.
The cash from each new round of loans was used to cover the regular mortgage and tax payments on the last round, giving the arrangement the form of a classic "pyramid" scam, Ackerman said.
and a followup e-mail by someone else ...
If you're correct of $1.2 trillion made in those sub primes, that is high, as a % of total residential mortgages out of about $10 trillion...
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