Monday, December 24, 2007

The Credit Crisis - Subprime Mortgages & Various Idiots

Here is an Article that really educates and also pinpoints the root of the problems we are facing. It looks like the real villains have a Wall Street work address.

The Credit Crisis - Subprime Mortgages & Various Idiots
December 7, 2007 by Richard Whitworth, Morsystems CEO

We are in a credit crisis brought on by a lack of confidence – so what’s next?
The crisis has exploded beyond Wall Street, driving the Dollar to record lows - and now, it appears to be sending the prices of commodities, especially oil, to historic new highs. The results could be extremely destructive for the economy in general. The subprime crisis and the ripple effect in commodity and foreign exchange markets raise the odds of a recession.

Estimates from various sources show that the subprime mess will ultimately cause $250 to $500 billion of losses. It is inevitable that more players will have to revalue at least a portion of assets that are presently held. Another important point - the majority of these Collateralized Debt Obligation or “CDO” assets do not reside in institutions, they are scattered through various pension funds, insurance portfolios, hedge funds, etc. Those losses haven’t even been addressed yet.

The banks are not forthcoming with any detailed information on their true positions, making it difficult for anyone to assess what the future really holds. Uncertainty is holding the financial and real estate markets in a huge vacuum, where it is difficult to function normally.

So let’s see if we can get a clearer picture of the players, and the mistakes made by some of the most powerful institutions in America. How did the banks begin purchasing huge amounts of high-risk mortgage debt and Bonds that most investors and analysts thought the firms were selling to their customers?

Instruments of Doom: First on the list of instruments involved; the Collateralized Debt obligation, or CDO, a type of investment vehicle that buys and sell Bonds. Wall Street banks typically do not actually operate CDO’s; instead, they create CDO’s for their clients, take a fee, and then move on.

This is the main point of departure AND the critical mistake made by the Wall Street banks – greed and fear set in, and they began to change their normal mode of operation – they became huge investors in the funds they generated. A very risky move – more on this as we move ahead.

Here's how a typical CDO backed by subprime mortgages worked. The game begins when a client comes to a Wall Street bank and requests financing for a CDO that will hold, for example, $2 Billion worth of Bonds backed by subprime mortgages. The banks also created a variety of Bonds backed by the interest and principal payments the CDO collects. Wait – there’s more…the bankers also create tranches of securities with different interest rates and levels of risk.

The banks then peddle their wares to hedge funds, pension funds, Money Market funds and other investors. The appeal to investors is simple: The CDO’s pay better rates than corporate issues with identical credit ratings – which brings me to the rating agencies.

Here’s another genius move made by the banks – many of those instruments offered in essence guaranteed returns. The refund policies, technically known as “liquidity puts,” were crucial. Those guarantees allowed the credit rating agencies to bless the investments with AAA ratings. An example of the idiocy of this particular move: The two now defunct Bear Sterns hedge funds relied on guarantees from Citi to raise $10 billion from money-market investors for three CDOs, well derrr!!

The rating agencies may be the main culprit in the game. They were extremely lax in their initial ratings on subprime mortgages – none of those offerings EVER deserved an AAA rating. Never mind that now with the cat out of the bag, they are still slow to downgrade subprime paper and securitizations.

This should not be a surprise to anyone, because the ratings agencies also prosper from the rising tide of credit issuances. Moody's, Fitch, & S&P literally ignored the erosion in the credit quality of the offerings and they basically elected to give the issuers the ratings they asked for. Amazing that issues that were rated AAA just months ago are now being re-written at junk bond status. Sadly – the rating agencies are great at passing the buck when things go wrong and they will probably sneak by any SEC scrutiny.

Back to the Banks…as the fees kept rising through the good times, the banks got greedy, they began buying big chunks of AAA paper themselves, loading the debt onto their own books. Even when the markets began to sour – foreclosures, home prices dropping, etc. the banks continued on their buying binge – all of a sudden they found that they needed to feed those CDO’s in order to keep the game alive. That was the kiss of death for Merrill’s CEO, Stanley O’Neal and for Citi’s CEO Charles Prince.

Wall Street banks are now holding tens of Billions in risky securities on their own books. And at this point in the game, it is difficult to assign an actual value to them. The banks are changing their estimates of the value of these assets as frequently as they change their underwear.

The SEC is on the attack, requesting real numbers and information from Merrill and other banks on what they knew at the time they were telling investors and the public that all was wonderful and they were in control of the situation.

Bottom line - the subprime story is far from over…and it will likely take a few years for the whole thing to shake out.

Sadly, this is Richard Whitworth’s last economic report that you’ll receive, he was in a fatal motorcycle accident 12-8-07. Since he nearly finished this report the night before, we needed to share it with you. Thank-you for your support,

The Whitworth family business at where his dream lives on for
Richard Whitworth, CEO, MorSystems

Thursday, December 20, 2007

The "No Cost Loan" from Countrywide

We have all seen Countrywide in the news for the past few months for a variety of reasons, most not good. One that I would like to speak about today is their heavy advertising of the "No Cost Loan". They have been under fire from both state regulators and the media for pushing these. Many innocent borrowers are swept into this loan thinking it is the cheapest way to get a loan. The borrower feels (and Countrywide says) that because of their huge size, Countrywide can offer no fee, no point, or no cost loans with no whammies. NOT TRUE! The Borrower will always pay for the fees somehow, either in closing or in the form of a higher interest rate. Every Lender, Broker, or Bank will incur fees to write a mortgage loan. Most of these fees are third party fees paid to outside companies. The points are part of the "cost of Money" or in laymans terms, your rate will always be effected by how many points you pay up front (regardless of whether included in the loan or paid out of pocket).

How do they do it? They increase your interest rate. Yes. Is that bad? Many times it is, but not necessarily. You may end up paying tens of thousands of extra interest. KNOW YOUR OPTIONS. One Size does not fit all.

Why do they do it? Higher rate loans are more lucrative for Countrywide to sell in the secondary Mortgage Paper Market. Period. They get more bang for their buck.

The No Cost, No Fee, No Point loan is a great loan for some people. It is not for everyone, and just like many loan programs, it isn't for every situation. You have to consider the benefits of a no cost loan with a higher rate vs a lower rate loan with some fees. More often than not, it pays to go with option 2, paying some fees, and getting a lower rate. It doesn't make sense if you do not plan on having the loan for atleast 24 months, you won't recoup the fees with your monthly interest/payment savings. If you have a smaller loan (under $175K), you should take a very close look at the options, as your recoup period may be longer.

A great compromise is to look at many fee/point/rate options to measure the best overall fit for your situation. The best way to find the optimal fit for your loan is to work with a professional you can truly trust and rely on for sound financial advice. One who will review the options with you, show you the differences between the choices and guide you to the lowest overall cost. Hire a Professional, get professional results.

If you would like to review your options with us, please feel free to contact us on the web at or toll free 866-900-2342.