Just one more update for this evening - I can't resist doing this now.
A few days ago
right here I opined that
there was no way in hell that Countrywide was going to be sold to Merrill.Why? Because
every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.And by the way, this is
not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and
every other lender in the ALT-A space.Let me restate that again so that everyone gets it -
every single ALT-A lender is at risk of having every defaulted loan - no matter how long it has been since it was securitized and sold off - PUT back on them if there is any material misstatement in the paperwork!To those of you who are claiming that this is a "Subprime" problem, that it is "contained", that it is limited to "poor people who can't pay their bills" or anything like that, let me point out that you are
one hundred percent full of crap.The last two years - 2005 and 2006 - these lenders
all made their numbers by issuing loans to virtually anyone with a pulse and a FICO they liked.
Sorry guys, but that's not good enough!A "1003", which is the loan origination document on which you state your income and assets, is the key item here. It is a
federal offense to lie on one. As an applicant you have to
sign it.Now here's the problem for the lenders -
they have the right to verify the statements you make on these papers. They've not been doing it
because they know that it would take too much time and further, I believe they know that they'd uncover massive fraud! Further, taking application is a cost. Lenders only get paid if they fund loans! So it is to their distinct advantage not to verify - and thus have to turn down - these loans.You want to know how subtle the misstatements can be? Here's an allegedly
real example:
"Meanwhile, we continue to hear buyback horror stories from funders that are getting raked over the coals by Wall Street. Here's the latest via a source: "The loan was good for two years and then did not pay." The source said the Street firm cited a $1,000 discrepancy on the verification of deposit as a reason for the buyback..."
Cite
and....
"Fannie Mae issues a monthly mortgage fraud update. The December 2006 update had the following observation: "Loans with misrepresentation tend to have multiple misrepresentation findings. Thus far for 2001-2005 originations, each loan with isrepresentation averages 1.5 misrepresentation findings."The most recent available, for January 2007, found income misrepresentation, in 24% of the files reviewed of loans originated in 2004 and 2005, was the common single misrepresentation found."
Cite
You have not even
begun to see the impact of this problem yet.
Let me make this
CRYSTAL CLEAR for anyone who doesn't get it yet - there is going to be a
massive shizstorm of
Biblical Proportions when this unwinds. And unwind it will, as our nation's housing market is in the tank, home prices are
decreasing, and that is putting increasing numbers of these loans underwater - where it is impossible for the owners to refinance out of impending disaster. As a consequence they will increasingly fall behind and as soon as their loan gets flagged as an "NPA" (Non-performing asset) whoever holds the bond sausage that was made out of that "mystery meat" is going to do their damndest to not be the bagholder.
That means they
will demand the original paperwork be produced and they
will do everything they can to "PUT" these loans back on the originator!
Once it starts every single one of these loans is going to be checked because the people holding the paper KNOW that these lenders cannot eat even 1% of this paper and remain solvent! They therefore will rush the ticket window to make damn sure THEIR paper gets "PUT" before all the money is gone!To you who think the economy and stock market are "roaring" and that we should all think this is "The Greatest Story Never Told" (Goldilocks Economy) - consider that little ditty above and then think long and hard about what happens when 1, 2 or 5% of those mortgages get PUT back on the lenders.
Go pull any of these guy's balance sheets.
ANY OF THEM. Now take 1% of the origination value for the previous year - not what they have retained "for investment", but 1% of the
total loans they originated. By the way, I believe this is a
conservative figure - if home prices really decline 10-20% nationally (and more in overheated areas) we could see 5% of these loans blow up.
Compare that number with the
cash on that balance sheet (the CDO bagholders won't be taking it in stock certificates!) and tell me what you think happens when that amount of money gets
vaporized.Do you still think this stays "contained"?
Now answer me this - if Merrill is "one of the toughest Street firms" on buybacks,
why are they not issuing an investment opinion on this matter, and getting it out there so that all these nice retail investors can be fairly warned before these stocks implode? And oh by the way, what's with Merrill remaining silent when Cramer goes pounding the table with this crap?You have to wonder - is Merrill trying like hell to unload the bad - defined as "unverified 1003s and suspected as potentially no good" - CDO paper
they hold before this snowball starts coming down the hill - and buries
them?
