Author Jim Jubak
Jubak’s Journal 6/26/2007

“Little hedge fund that couldn’t
So let me tell you a story.

Once upon a time — April 2007 to be exact — a little hedge fund called the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Fund got in trouble. The fund’s experienced managers had made big bets on the direction of prices in the market for securities backed by mortgages. And those bets turned out to be wrong. So wrong that the fund lost almost 7% of its value in April, according to the fund’s own accounting. Those losses got even bigger very quickly. By mid-May, the fund put them at 18%.

That made some of the investors in the fund and some of the banks that had lent money to the fund very nervous. The fund, you see, had started with just $600 million in actual capital and then borrowed some $6 billion (yes, that’s billion) more to make its bets on the market. The Wall Street Journal estimates that, at the high point, those bets were valued at $15.5 billion. But investors knew that if the lenders who had put up all that borrowed money started to demand their money back, the fund would be forced into a fire sale. The more nervous of these investors started to withdraw money from the fund, forcing the fund’s managers to sell some of its assets to raise cash. ”

-funny, we would never consider it “safe” if any individual leveraged their capital with a magnitude of 10x. However, many consider putting money with a top international investment bank like Bear Stearns a safe bet. Looks like shorts may come down here, and potentially someone is going to be exposed. Please feel free to post your comments on this here or in our Forum! JWest

“You may note a certain inherent conflict of interest here. The investment houses that were selling these products were also valuing these products. Their ability to sell more of these products was, to a great degree, dependent on those calculated prices behaving the way the models said they would. It wasn’t that those privately calculated prices couldn’t go down, but that they had to move in predictable fashion.

Were those calculated prices real? In the absence of actual buying and selling, those prices were as real as they could be. But in the absence of public buying and selling, the question was essentially meaningless. Those prices were the only prices.

Until someone conducts a public sale.

And that’s exactly where the hedge fund hit the fan. Like the other investment banks on the hook to the Bear Stearns hedge fund, Merrill Lynch wants its money back. Unlike other lenders such as Goldman Sachs and Bank of America (BAC, news, msgs), however, Merrill Lynch refused to unwind its loans through private deals with Bear Stearns (BSC, news, msgs). Those deals would avoid any public sales that might damage the prices of these assets as calculated by computer models. A plan worked out by Blackstone Group (BX, news, msgs), a private-equity buyout firm that went public June 22, would have required creditors to avoid any margin calls on their loans for 12 months in exchange for a $1.5 billion, fully collateralized, injection of new money from Bear Stearns itself.

Merrill Lynch instead seized the $850 million in collateral that backs its loans to the hedge fund and, on June 20, began to sell it at auction.

An auction, of all things. With lists of assets. Relatively public bids for those assets. Relatively public sale prices. My God, it almost sounds like a market. ”

-looks like acknowkledgement of “what is” or true value coming for these CDO’s. Should be very interesting to see the reprecussions of this to the lending environment and in turn real estate prices, the true asset values. JW

http://articles.moneycentral.msn.com/Investing/JubaksJournal/CanBondMarketStandToBeExposed.aspx?page=1&wa=wsignin1.0

S&P Downgrades 56 MBS Classes From 12 Issuers
Forty-five classes backed by closed-end second-lien collateral in 14 securitizations from nine issuers have been downgraded by Standard & Poor’s Ratings Services, as well as 11 subprime classes in nine deals from three issuers. Read on…

RALI MBS Classes Downgraded
Three classes from two Residential Accredit Loans Inc. mortgage pass-through certificates have been downgraded by Fitch Ratings. Read on…

SASCO MBS Classes Downgraded
Two classes of Structured Asset Securities Corp. mortgage pass-through certificates have been downgraded by Fitch Ratings. Read on…

CSMC MBS Classes Downgraded
Two classes of Credit Suisse’s CSMC series 2006-7 mortgage-backed deal have been downgraded by Fitch Ratings, and one has been placed on Rating Watch Negative. Read on…

-www.nationalmortgagenews.com

- this is very interesting folks. This may only be the beginning. If lenders must sell their paper for less going forward, it yet again means either tighter guidelines to increase the value of the securities, or higher interest rates to raise the yield. Thanks Jon

SACO MBS Classes Downgraded
Sixteen certificates from deals issued by SACO I Trust in 2006 have been downgraded and maintained on review for possible further downgrade by Moody’s Investors Service. Read on…

CSFB MBS Classes Downgraded
Five certificates from two transactions issued by CSFB Home Equity Mortgage Trust in 2006 have been downgraded and placed on review for possible further downgrade by Moody’s Investors Service. Read on…

SASCO MBS Classes Downgraded
Three classes of Structured Asset Securities Corp. Trust series 2006-ARS1 have been downgraded by Moody’s Investors Service and maintained on review for possible further downgrade. Read on…

IndyMac ABS Classes Downgraded
Two classes from IndyMac Home Equity Mortgage Loan Asset-Backed Trust INDS 2006-A have been downgraded by Moody’s Investors Service and placed on review for possible further downgrade. Read on…

Moody’s Eyes Bear Stearns MBS Classes
Eight certificates from four transactions issued by Bear Stearns Mortgage Funding Trust have been placed on review for possible downgrade by Moody’s Investors Service. Read on…

Moody’s Eyes Merrill MBS Classes
Three classes of certificates from two transactions issued by Merrill Lynch Mortgage Investors Trust in 2006 have been placed on review for possible downgrade by Moody’s Investors Service. Read on…

- http://www.nationalmortgagenews.com/

More comments on this later.

CALL FOR HELP Contact your lender.Most want to avoid the costs and headaches connected with a house foreclosure and resale. If that fails, try a non-profit credit counseling agency or federally-certified non-profit housing organization.
KNOW YOUR OPTIONS They include:forebearance, a temporary postponement of payments;reinstatement, wiping out old debt with one lump sum:repayment plan, to catch up over time; modified mortgage, lowering payments with a longer loan term. A lender may agree to forgive your debt if you surrender the house, or hold off on foreclosure in anticipation of a quick private sale.
BEWARE OF QUICK FIXES Foreclosure filings may trigger a flurry of solicitations by operators of what are billed as foreclosure rescue services. Deals providing a way to keep or buy back your house by first selling it cheap commonly only profit the “rescuer” instead of you. You can negotiate new terms or arrange a pre-foreclosure sale with your bank for free.
DON’T SIGN Any papers that you don’t fully understand, or you could make bad matters worse.
Sources:NeighborWorks America,Bob Kokott

From U.S. News: The Spring of Home Sellers’ Discontent

… inventories of unsold homes in major metro areas rose another 5 percent in May, according to Zip Realty, nearly a one-third increase over the same time last year. And while home builders have cut back on construction by about as much, “they still have a lot of money in the ground,” Credit Suisse housing analyst Ivy Zelman says of the raw land still on builders’ books. “And the only way to get their cash back is to build more houses.”
If the NAR number follows Zip Realty for May, then the May existing home inventory levels will be over 4.4 million - another all time record - and total inventory, including new homes, will be approaching 5 million units.

Looks like our housing glut is nowhere near over. That being said, I have an offer in to buy a property short here in lovely Las Vegas. I really do love it here! JW

Buy-Backs: Keeping Lenders On The Hook
By Peter G. Miller
February 4, 2007

provided by

Did you ever wonder what happens to lenders when mortgages fail, when someone gets foreclosed? Lenders know, and for them there are lots of sleepless nights ahead.

“When loans go bad borrowers can be foreclosed. Meanwhile, investors such as pension funds, insurance companies and others who own loans can lose money,” said James J. Saccacio, Chairman and CEO at RealtyTrac, the largest marketplace for foreclosure properties. “But there’s another party that can also lose: the original lender who found the borrower, took the loan application and got fees and commissions at closing can often be forced to buy back the loan.”

In today’s mortgage world a large percentage of all loans are routinely sold and resold. The buyers include insurance companies, pensions as well as purchasers such as Fannie Mae and Freddie Mac.

To some extent selling a mortgage is a lot like selling a shirt. A purchaser has certain expectations and if the shirt is not up to par the buyer can bring it back for a refund.

With mortgages, the same arrangement applies with each mortgage sale. If a loan is not up to snuff, the seller — meaning the lender who originated the loan in the first place — can be forced to buy back the mortgage.

Clothing stores know that relatively few shirts will be returned and they also know something else: Paying for a few shirts will not bankrupt the company.

The situation with mortgage loans is different because mortgages are big-ticket items. A conventional, everyday loan today can easily be worth more than $400,000. Return a few of these and you’re out big money — perhaps more than $1 million.

That’s a problem because many of the businesses most people see as “lenders” do not actually fund mortgages with their own dollars. They’re middlemen who obtain loans from the wholesale marketplace and then resell those loans at retail to borrowers. If there’s an unacceptable loan default, our “lender” may not have enough capital to buy back one mortgage much less three or four. Rack up enough problem loans and lenders facing buy-backs — even big lenders — can quickly go broke.

According to David Reed, with the Austin, Texas, firm of CD Reed Mortgage Bankers, there are three general kinds of loan defaults.

With a “universal” default the borrower never makes a payment. Not one. If the loan was sold to an investor the original lender will usually be required to take back the loan — but not always. Reed, author of the just-published book, Mortgage Confidential, says he had one borrower who died before the first payment was due. The loan was in default but there was no issue with fraud, there was nothing wrong with the loan, so there was no demand by the investor to buy back the loan.
Original lenders are usually required to buy back loans if borrowers quickly default, say within 120 days of closing. After 120 days the original lender — the lender who took the loan application — is typically no longer responsible for the debt, except in one situation: if the loan involves fraud.
If the original loan application involves fraud then the clock never stops. The original lender is on the hook until the entire debt is repaid.
Looking at the marketplace it’s clear that most loans are not a problem to lenders because more than 120 days have passed. But what about fraudulent loans, loans where borrowers (or lenders) inflated income, downsized debts or claimed employment that did not exist?

“If there are a lot of fraudulent loans out there then large numbers of lenders may ultimately be forced to buy back loans,” Saccacio said. “But how many fraudulent loans are there? No one knows for sure, but recent studies suggest the problem may be far larger than imagined.”

First, figures from the FBI show that mortgage fraud topped $1 billion 2005 — more than four times the 2003 level. However, says the FBI, “the actual amount of money lost to mortgage fraud each year is unknown largely because no central organization collects mortgage fraud loss data.”

Second, the Financial Crimes Enforcement Network reported in November that “suspicious activity reports” regarding possible mortgage fraud had “increased by 1,411 percent between 1997 and 2005.”

Third, lenders have access to tax records through the IRS Form 4506 provided by borrowers, a form that allows lenders to review past tax records. In testimony before the Federal Reserve, Steven Krystofiak, President of the Mortgage Brokers Association for Responsible Lending, says his group compared the income figures for 100 stated-income loans with IRS records. What did they find?

Ninety percent of the stated-income loan applications showed earnings that were exaggerated by at least 5 percent.
Almost 60 percent of the stated amounts were exaggerated by more than 50 percent.

“We usually think of foreclosures in terms of people who lose their homes,” Saccacio said. “But we also have an unknown number of fraudulent loans which will need to be bought back. These loans will keep lenders on the hook for years to come — and bankrupt more than a few.”
_____________________
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 90 newspapers.
ADVERTISEMENT

Recent Foreclosure Articles
Foreclosure Homes for $1,000? - Wed, Feb 7, 2007
Do Mortgage Re-Sets Impact Foreclosure Rates? - Thu, Feb 1, 2007
How Big Is The Foreclosure Discount? - Mon, Dec 18, 2006
The Hidden Cost of Foreclosures - Tue, Nov 28, 2006

——————————————————————————–

Latest Real Estate Headlines
In the news:

Sellers view contingent-sale offers with caution
Jun 04, 2007, Inman News
SLQuery: The next “Google” of Second Life?
Jun 04, 2007, Realty Times
Who Needs a Computer? Getting Home Values Via Cell Phone
May 30, 2007, RealEstateJournal.com
Subprime lender Accredited Home in $400 mln buyout (Reuters)
Jun 04, 2007, Yahoo! News
Home Staging May Help You Sell Your Home
Jun 01, 2007, Quicken Loans
Subprime lender Accredited Home in $400 mln buyout
Jun 04, 2007, Yahoo! Finance
see all Real Estate and
Mortgage news

Information by State
Esta página en español
Print version
Email this to a friend

Related Information
Help Save My Home
Relief options for FHA homeowners
HUD National Servicing Center has more information on avoiding foreclosure
Read the PDF version of the How To Avoid Foreclosure brochure

The guidance below (and in the “How to Avoid Foreclosure” pamphlet) is applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency.

Q: What Happens When I Miss My Mortgage Payments?
Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount.

Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

Q: What Should I Do?
DO NOT IGNORE THE LETTERS FROM YOUR LENDER. If you are having problems making your payments, call or write to your lender’s Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
Stay in your home for now. You may not qualify for assistance if you abandon your property.
Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.
Q: What Are My Alternatives?
You may be considered for the following:

Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.

Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.

Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.

You may qualify if:
your loan is at least 4 months delinquent but no more than 12 months delinquent;
you are able to begin making full mortgage payments.

When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full.

The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.

Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.

You may qualify if:
the loan is at least 2 months delinquent;
you are able to sell your house within 3 to 5 months; and
a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.

Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily “give back” your property to the lender. This won’t save your house, but it is not as damaging to your credit rating as a foreclosure.

You may qualify if:
you are in default and don’t qualify for any of the other options;
your attempts at selling the house before foreclosure were unsuccessful; and
you don’t have another FHA mortgage in default.
Q: How Do I Know if I Qualify for Any of These Alternatives?
Your lender will determine if you qualify for any of the alternatives. A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender. Call (800) 569-4287 or TDD (800) 877-8339.

Q: Should I Be Aware of Anything Else?
Yes. Beware of scams! Solutions that sound too simple or too good to be true usually are. If you’re selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:

Equity skimming. In this type of scam, a “buyer” approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The “buyer” may suggest that you move out quickly and deed the property to him or her. The “buyer” then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember, signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.

Phony counseling agencies. Some groups calling themselves “counseling agencies” may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything.
Q: Are There Any Precautions I Can Take?
Here are several precautions that should help you avoid being “taken” by a scam artist:

Don’t sign any papers you don’t fully understand.
Make sure you get all “promises” in writing.
Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
Check with a lawyer or your mortgage company before entering into any deal involving your home.
If you’re selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state’s Attorney General, the State Real Estate Commission, or the local District Attorney’s Consumer Fraud Unit for this type of information.
Q: What Are the Main Points I Should Remember?
Don’t lose your home and damage your credit history.
Call or write your mortgage lender immediately and be honest about your financial situation.
Stay in your home to make sure you qualify for assistance.
Arrange an appointment with a HUD-approved housing counselor to explore your options at (800) 569-4287 or TDD (800) 877-8339.

Cooperate with the counselor or lender trying to help you.
Explore every alternative to keep your home.
Beware of scams.
Do not sign anything you don’t understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.
Act now. Delaying can’t help. If you do nothing, YOU WILL LOSE YOUR HOME and your good credit rating.

Content updated April 28, 2006 Back to Top

FOIA Privacy Web Policies and Important Links Home
U.S. Department of Housing and Urban Development
451 7th Street S.W., Washington, DC 20410
Telephone: (202) 708-1112 TTY: (202) 708-1455
Find the address of a HUD office near you

John Mauldin- Stud Economist based in texas-
www.2000wave.com

Mr. Mauldin puts out a free newsletter/economic forecast 2x weekly. He is excellent and very much common sense. One of the articles he authors, the 2nd he will distribute someone who he respects. I HAVE FOUND no better economist out there, he is phenomenal and enjoyable!

Contrary Investor-
www.contraryinvestor.com

Excellent economic articles! LOADS of charts, graphs and data to back up all concepts presented. There is both a free and a premium section. This site is worth reading at least once a month for the new articles!!!!

Silicon Investor- The Residential Real Estate Crash Index Threadhttp://www.siliconinvestor.com/subject.aspx?subjectid=51347

A busy yet quaility message board focused on the housing market. Regular contributors have added valuable thoughts and articles to the tune of almost 80k posts. A great smorgasboard of info and opinions!

Disclaimer- I do not plug these people for any other reason than that I have created great value for myself in reading their opinions! They are excellent, and please, don’t take my word for granted, let me know what you think! Thanks, Jon