Thursday, August 7, 2008

From the comments:

Paul left a comment on my “what if it was fraud” post:

I live in California and work in finance. I took on a pro-bono "client" recently who was up against the wall thanks to mortgage/housing costs that were extremely large: 90% of his gross wages - before the ARM reset. His poor decision to buy near the peak was based on speculation, but the surprising thing I discovered when I looked at the paperwork is that he did not have to commit fraud to obtain the mortgage. Countrywide originated the 0% down ARM loan with full knowledge of my client's financial status.

My client is an immigrant, and Countrywide had reps fluent in spanish who penetrated this community.

I have a retired friend who works full time with a non-profit group focusing on individuals with high debt loads. He has had over 200 "clients" in recent years who got themselves into a very similar situation to my client. Zero money down mortgages, rising house prices, and financially unsophisticated clients all contributed to the situation.

I hear variants on this story regularly. There was a fraud committed. It may not have been by the borrower – it was probably committed by Countrywide (and my guess is that Countrywide offered representations when they securitised the loan and so Countrywide will need to make good). That could be unpleasant for Bank of America.

But the issue I have is about working out what is going on in the market as a whole. Losses like the one you describe are (a) not redeemable by forbearance, (b) large and rapid. They fit the “pig through the python”.

I wish I knew how much of the market was “pig through the python” and how much was ordinary mortgage stress. If it is pig through the python there are plenty of stocks to buy right now. If the “fraud” cases are the first wave of a much broader mortgage stress then there are stocks to short right now.

The thing about the case Paul describes is that there will be no more losses from such cases in a few years. They will have all been incurred.

I would love a way to quantify this. It’s the trillion dollar question.


PS. Paul – thanks – can you send me an email. Much appreciated.


MattJ said...

Given that BOA has not agreed to back Countrywide bonds, and rather appears to be buying the parts of Countrywide that it wants from the subsidiary that owns it, do you know whether the problem mortgages that might be forced back to Countrywide will affect the parts that have been brought over to BOA or will they be in the parts that are still owned by Countrywide Financial?

John Hempton said...

I am a bush lawyer - so you wouldn't take my opinion as worth anything - but the words "fraudulent conveyance" come to mind.

If a lawyer out there wishes to comment that would be valuable.

Anonymous said...

Don't know if you've read this yet. Discussion of problems with 2007 vs. 2006 vintages that seems relevant to your "pig in a python" problem.

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