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Subprime, etc.

kidgas

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Does anyone here have a handle on why many of the mortgage banks, esp Countrywide, would be at risk for bankruptcy? My understanding of the business model is the corporation takes capital, loans it out and secures it with real estate, then sells the mortgages to investors, gets the capital back and repeats the process. If they stop making loans, they should still have the capital and can do other things with it. Obviously, it is not so simple, and I am missing something. Just wondering if anyone can tell me what it is. Thanks
 

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MJ DeMarco

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I think the issue is that investors on Wall Street are no longer buying the loans. If they can't sell em, they keep em on the books which ties up capital. When the loans on the books are non-performing they can't sell em, they can't get a return, and then, they're really in deep shit.
 

randallg99

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this is a great question!!! thanks for asking this, Kidgas... it is a subject that is way too intricate for the average joe 6 pack or even the moderately experienced investor and involves layers and layers of paper all the way from agency to junk not to mention some of the most leveraged instruments the basic consumer has been subjected to without even the consumer himself knowing it.

in very basic simple terms, the spread on mortgages over the past several years have basically been nonexistent - if you compared short term vs long term yields, ie the 2yr note vs 5 yrnote or even against the 10yr, you will find that the spread was so minimal... we RE investors all know this for fact when we got commercial loans that were less than 5% from a BANk, and not a mortgage company!! anyway, on a pool of held outstanding loans, a company like CFC -countrywide was only able to make a 1.5% spread on the servicing of the port or `only` 15mil and have to cover all overhead....

so, while the spreads were piss thin, the mortgage companies incentive was NOT to hold the loans, but rather MAKE the loans and then sell them off as fast as they can for a minimal discount and then using this newly founded liquidity to fund new loans... the money that funds new loans come from the sale of existing mortgages and also with the issuance of preferreds and bonds. Trouble began at this stage - when the issuing for new money was coming in, it was not covering the nut of the expenses due to low, low spreads... afterall, why would I buy a pool of mortgages for x% when I could get another instrument at same rate without the risk ie treasuries so then premiums were paid (by CFC and the like to make their paper look more attractive). So, the money is then made by the comapny when the offerings are done and then when the loan is made to the consumer and charging dumb fees... also, keep in mind, the vast majority of loans make the most money for the banks/mtg company in the first several years... ESPECIALLY IO loans or even a regular fixed amor. loan when interest is highest in the front half and keeping it for a year made their books look much better than they really were.

This style of making money is akin to a pyramid scheme... the last ones holding the bags are ones stuck as we have seen hedge funds implode literally overnight as well as private equity groups got nailed to a wall making good on margin calls to save the mortgage pool investment. Right now, a lot of mtg bankrupted already, but from what I am reading, we will see significant liquidity crunches... Fannie mae skipped their September offering because the number of buyers for their paper is virtually nil... they would have to sell at discounts... just like CFC already did last week when Bank of Amer came into the picture and had to basically bend over and beg for someone to stick it them. to me, CFC was a dead man walking last week. Now, they luckily have BAC fingers in the holes... but the water keeps rushing.

Alas, the recent euphoria in the markets reacting to fed cuts is very over-done and while the fed has an obligation to stabilizing inflation (and keeping the economy in check), they will inevitably dilute the US $ and this is when the blood will spill into the streets...

didnt proof read. hopefully it makes sense and hopefully the wifee is ready to go out now... or maybe I might continue ranting!
 

randallg99

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I thought about this thread while at bbq last night with friends/family and was astonished at how short term the memory is... the nasdaq has still much further to go to before touching its high... anyway, my friends/family, while successful in their own right, doctors, lawyers, business owners, etc are so far out of touch with the scope of the liquidity crisis that it almost scares me since lack of knowledge only allows history to repeat itself... a brother in law asks me if the market is going to get worse, but I reply that housing prices will collectively go down, varying in degree according to the region in the next several years and I was lashed at by another family member who overheard me and was in disbelief.... because he believes we will be out of this mess within only a few months but I replied that cycles in the marketplace take more than 3 months and this is an unusual circumstance the economy and economy is facing.

Reality is that now there are several less mortgage originators, warehouses ceased funding and big houses like Lehman decided to shut down their lending... (which is no big deal, so dont cry for any of the big houses who make money hands over fists and bought the mortgage biz for pennies on the dollar... .closing those operations wont even cause a flicker on their year end reporting)

so onto my point- the average person, no matter how intelligent, is not attuned to the severity of the situation and does not comprehend the `why` of the downfall in the housing market except that the ``subprime` companies blew up!`` which is nothing more than the headline.

Now, lets take it back a step and understand why it is more severe than most people realize... you all remember these guys who originated and securitized loans using exotic mortgages, teaser rates, funky ARMs, Interest Onlys, Negative Amorizations, etc... these are the names you heard in the news that folded up, or are like Country Wide Mortgage...

btw, figuratively speaking, CFC reminds me of a good western movie where the cowboy in the corral standing with 4 bullet holes in his chest barely limping while 25 snipers are ready to finish him off in one huge shoot out... CFC (if it wasnt for Bank of America) was a dead man walking just waiting to get clipped.

now who was making these loans a reality in the first place? yes, they were the mortgage companies, but who and where did they get the money from? ... this is the part that most people dont realize- Governments (among many other avenues ie private equity, banks, etc...) China, France, Germany, Japan....etc... .they werent getting enough yield from the treasuries so they went to what they thought to be the next good, safe bet, mortgages! now they have been burned and cant trust the mortgage and are looking at the US debt scratching their chins asking how the hell can the USA lose so much value in the real estate arena be expected to maintain fiscal strength to support credit worthiness in the treasury market? they are getting burned with the RE market and they will probably be savvy enough to come in and buy their pieces soon enough, but they wont supply the liquidity anymore...

and all of the recent huge discount lending the fed did (4 banks for 500 mil each) was nothing but to put on a show for the governments to see that America is still healthy and there is still faith in the system, but this system (or monster) really went waaay ahead of itself...

back to street level, the bridge loans are no longer as readily available or cheap (for reasons mentioned above) so people who are selling are highly dependent on the buyers finding buyers for their properties... the domino effect has just begun... and it will take a few years for the markets to adjust to the lack of easy financing we all experienced... not to mention the lack of liquidity the government may face as a result of losing faith in the system.
 

andviv

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so, sellers should start exploring seller-financing alternatives? maybe lease-to-own?
Any other ways to profit from current market conditions?
Can I just stop by the closest CFC office to buy their loans for pennies on the dollar? --I know it does not work that way, I just want to see ways to profit from this situation.
 

randallg99

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so, sellers should start exploring seller-financing alternatives? maybe lease-to-own?
Any other ways to profit from current market conditions?
Can I just stop by the closest CFC office to buy their loans for pennies on the dollar? --I know it does not work that way, I just want to see ways to profit from this situation.
Bank of Am already indirectly bought those loans for pennies on the dollar, but CFC still holds brunt of performance... so maybe walking into their office and buying a pool for pennies can be a reality... cant hurt to try, or at least they can direct you.

The only pools I have seen for sale are available for 5 mil each. Bankruptcy lawyers, banks, and mortgage investors are probably good places to start. Problem is that unless you are savvy and have brass balls, it is an easy biz to get slaughtered in... you have to be extremely well versed in risk analysis on loan performance and analyze the risk ratio yourself without taking anyone elses word for it.

on a local scale, people with mortgages on their own properties might want to call the loss mitigation department for their own mortgage companies and offer to pay off the mortgage at a reduced price.... cant hurt if you try... and some companies are still scrambling for cash.
 

Russ H

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Diane Kennedy

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Hi Andviv:

I have to comment on your question regarding sellers taking advantage of this market. My first thought was that the "rent to own" (lease-option) market was back - hooray! BUT be careful. There are 2 or 3 states that have all basically made the lease-option illegal! For example - be careful in Texas and Colorado. I think there might be a problem in New Hampshire as well, but am not positive. I know California was looking seriously at adopting the TX law.

The problem is that some unscrupulous sellers put people in lease-options, took their option payment, didn't pay the underlying mortgage and then BK'd on the deal. Crisp & Cole in Bakersfield, CA is probably the most infamous right now.

This has become dinnertime conversation at our house - what do you do with a house that you've got to move quickly? We don't have one, but what if you did and you couldn't do a lease-option?
 

Russ H

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What do you do with a house that you've got to move quickly? What if you did and you couldn't do a lease-option?

Hakrjak on the RD forums has this problem right now-- it's his personal residence, he's getting married and moving elsewhere, and got a short-term ARM on his place that's adjusting upwards in the next few weeks. (D'oh!)

Suggestions have run all over the place-- the best I thought was him re-fing to a 30 yr fixed (w/his good credit), then selling the house outright (*not* Lease-Option) and carrying the paper.

If you sell at a good price, w/10% down, but at a higher rate of interest w/a stiff 5 year prepayment penalty, you've got yourself covered for the short term (next 3-5 years).

If the buyer refis and pays you off next year, you get the prepay penalty.

If they buyer re-negs, you've got their downpayment (and a steady fixed rate mortgage)-- Rinse, and repeat.

And if the buyer pays you off after, say, 5 years, you're out of the danger zone (hopefully), and the value of the property is now high enough for the buyer to get a decent loan, since they have a greater equity stake in the house.

Seems to work on paper . . . but I'm glad I'm not in this situation! :rolleyes:

Other ideas?

-Russ H.
 

SteveO

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The attached article is from Marcus & Millichap that discusses the capital markets. I have seen change in pricing but the money has not disappeared. As the article explains, it is just coming from different sources. Pricing has fluctuated a bit though.
 

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JesseO

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With graphs titled "Commercial Mortgage Delinquency Rate Remains Near Historic Lows" and median home prices nearly doubled in 10 years, it's no wonder why the commercial real estate market isn't following the current housing market. Looks like employment is up, and on the rise, too. They also say "There is an estimated $40-plus billion overhang of commercial loans in the CMBS pipeline, which may take a few months to clear." Thanks for sharing that file.
 

randallg99

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Hey randallg99,

Does this have any bearing on outstanding HELOC balances?

I posted this as a new thread here:

http://thefastlanetomillions.com/showthread.php?t=476

Interested in your opinion.

BTW, what is your background in REI? :)

Thanks,

-Russ H.
hey
to answer your first question- Yes. the pools are heavily affected by the secondary market... these pools are the hot potatoes that nobody, and I mean nobody wants to get caught holding and you can practically buy these for a dime, but the risk is magnified even more so than the 1st exotic subprime lien... remember, these HELOCS and other Home Eq loans are the loans that are easy to discount at foreclosure proceedings and any downward pricing pressure on the property forcing an upside down position on the 1st lien will force the 2nd lien holder to take whatever they can to save their skin - even at severe losses...

I will check out the link later

to answer your other question regarding my experience

1. I own and operate several pieces of commerical, we lease one property with a purchase option. 18k sq ft bldg on 5.5 acres of premium highway visibility with a locked in price. Another property is 18k sq ft and is adjacent to a proposed wal-mart (we just hit a home run here). Also have a 20k sq foot distribution center with an office rented out. Also own a building that rents out to realtors.

2. I own and operate a business with 2 retail brick and mortar locations (which are housed by a couple of the above)

3. I own and operate over 20 apartment units. My philosophy has been buy and hold, but line of thinking has recently changed in the past 6 months after speaking with SteveO

4. Part time investor - I invest in foreign real estate (been to Panama several times and am one of senior investors on an amazing project... if it comes to fruition only a fraction of expectations, then my retirement will be fully funded) Also involved in stock market.

But to answer the question earlier in the thread about the future... nobody has a crystal ball, but the historical data shows times of economic stress are relieved temporarily during presidential election years only to resume prior economic activity/downturn ... hint, hint...
 

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