Forest or trees?

Guambat doesn't know if this guy is seeing the forest or just a bunch of trees, but it is an interesting perspective nonetheless. Herb Greenberg brings his vantage to us.

His name is Mark Hanson, "20-year veteran of the mortgage industry, who has spent most of his career in the wholesale and correspondent residential arena — primarily on the West Coast [who] lives in the Bay Area". Hanson says of himself, "I sold BILLIONs of these very loans over the past five years" and Greenberg says of Hanson, "based on his knowledge of the industry, he has been short a number of mortgage-related stocks".

The comments to Mark's commentary produced additional outlooks, if, again, not insights. You are encouraged to plow through the whole thing, but have a cuppa to hand; it'll take some doing. Some excerpts from Mark:

"What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers.

Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come.

The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

Most sub-prime loans in existence [and many prime ones, Guambat would observe, which Greenspan and others observed, and by their uncritical observation encouraged, for years] are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under.

[O]ver the past five years you could refi your way into a great [credit] score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%.

The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives.

These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation.

In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million [dollar] home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%.

None, except the last sound remotely possible."

Some of the readers' comments:

As a debtor on a 30 year fixed rate mortgage on a home that my income can support (25% income to payment), I’d like to thank all the mortgage industry participants for the 20%-40% haircut on my home’s value that I will probably realize over the next 2-3 years. The toxic waste that these corporate schills marketed to an uninformed (and at times intentionally misled public) should have been criminalized from the beginning. As the author admitted (having shorted mortgage industry stocks), at least a few people on the lending side understood the consequences of marketing this Ponzi scheme. It is especially thrilling that they are making money not once but twice on the financial destruction of the middle class of this country. -- Josh

Living in Southern California, my husband and I have seen firsthand the effects of easy lending. Most all of our friends, family, and co-workers bought homes and extracted huge sums of cash to finance very extravagant lifestyles (expensive cars, Euro vacations, jewelry, etc.). It was pure madness. With the exception of a few friends, these same people are now underwater in their loans and are living paycheck to paycheck. They thought that home equity was free money. These are high wage earners with high fico scores, by the way. I predict that most of them will simply walk away. Some have been telling me that they just don’t care about their homes anymore, and many are outright resentful of the heavy debt. There is no incentive to pay a $600k - 2.5MM loan with housing prices crashing. I wish I could tell them, “I told you so,” but that would just be too cruel at this point. It’s going to get ugly here in S. Cal. -- Rudi

I’m THE Mark Hanson who wrote this piece. Mortgage brokers and bankers were puppets for the most part. It is not like brokers and bankers invent loan programs and go out to markert to see if there are any buyers in the secondary markets.
In fact, the Wall St Banks, Conduits, Banks such as Lehman, Bear, Merrill, Countrywide ect told us what they would buy and we sold programs for them. If you were a mortgage banker, which made up a large portion of the field, you only sold programs that you could sell to four or five investors or it was too risky. Even the large portfolio banks sold off alot of their business and would only originate what the boys at the top were buying.
The press is trying to make this a ‘bottom-up’ problem when actually it is a ‘top down’ problem. The money and programs were provided by a select group of big money banks all competing for the loans. We were the army they hired to sell it. -- Mark Hanson

I own a small mortgage company in Wyoming and agree with you 100%. What do you think will happen to Countrywide? -- Jim David

But it is not the exotic loan options fault, its the buyers who took on the risk. -- joe

I see you brokers on this board applauding and pointing fingers too. Here is my advice for you all…go find a new career……your days of making 9 grand off of the old lady with social security income is numbered…See you all on the other side
We all know this plan to freeze rates is just pure nonsense. -- kevin

pretty humorous seeing all the mortgage professionals who agree. Look,anyone who was selling mortgages with any kind of teaser upfronts and anything less than 20% down is just as guilty as the TanMan from Countrywide. Didnt you all love it when Cramer was telling the world how great and smart this guy, who dresses like a pimp and looks like my bookie,was?
Two summers ago I was in SoCal and played golf with several groups of young people,none who made over $100grand a year and all who owned Million dollar homes.
Didnt Greenspan advise all Americans to take advantage of teaser rates? -- jack

Actually, all I really care about now is how can I make money off the implosion. Any ideas? -- AllyH

The most important takeaway is Borrower income. Ultimately, regardless of what anyone (regulators, servicers, bond holders) does a family income of $100K will not support a $1 million home debt (not to mention maintenance, taxes, utilities, insurance, HOA fees). -- JD

I am surprised someone with your experience in the mortgage industry does not realize that these 5/1 7/1 arms that Wells Fargo financed were underwritten by majority via Freddie Mac / Fannie Mae guidelines and sold to them.
a majority of the non-subprime loans are facing troubles because the borrowers home values dropped too far to allow them to refinance out of their ARM’s to 30 year fixed rates if they were at high Loan to Value ratios when the bought / refinanced.
Attempting to blame Wells Fargo is ridiculous, as they are by far the most conservative lender, especially in the sub-prime market. -- Andrew

I was in the mortgage industry for several years myself. I got out because i saw what was happening in this industry a long time ago. The mortgage industry had become a legal way to rip people off of their equity, especially when we look at companies that targeted sub-prime customers taking advantage of their circumstances and placing them in risky loans to make a quick buck, not considering the impact to the borrower if they were unable to refinance out of those ARM’s. Not to say Prime and ALT-A loans are not affected, but most of the prime loans were sold off, transfering the inherent liability. -- Same Andrew, again

I refinanced my 30 year fixed to a 20 year fixed back in 2004. The Countrywide peddler I spoke with asked if I wanted to buy another home. I said that I was living on Social Security, and had no other income. The peddler said “Wait a minute, I’ll be right back.” One minute later, he said “You’re approved for a $300,000 loan, as long as you aren’t going to “flip” the house” As if they really cared. The point is obviously that had I taken up his offer, I would be stuck with 2 foreclosure-headed homes, especially since the equity I once had on my home has gone down the tubes-I live in Las Vegas. -- Robert D

I have been in the mortgage business for 42 years. I have owned two successful mortgage borkerage and banking companies since 1982. I sold the last business in December,2003. My comment to anyone who would listen was that I couldn’t, in my wildest imagination, comprehend why the mortgages summerized my Mark would be clammered for by large banks, S & L’s and Wall Street security issuers. Now the fox is really in the hen house. -- Phil Hoskin

I live in Seattle and have a good paying job and I could have EASILY scored a 500k-$1million loan - exotic of course - but instead decided it was smarter to rent a nice apartment for a fraction of the cost and no maintenace, and best of all NO RISK.
I still browse open houses today and apparently, the mortgate lenders STILL have not learned any lesson here. I sometimes eavesdrop on a Seattle area mortgage lender talking to perspective clients and guess what? Yes, they are still encouraging no documentation, no money down, negative amortization loans in Seattle. -- EddyG

Let me be the first on this post to call Bullshit on Mark Hanson. Let’s start with a simple question for Mark Chicken Little Hanson: Why has Buffet been buying shares of Wells Fargo, Bank of America and US Bancorp? He’s had big positions in both USB and WFC for years, understands banking, the economy, and the housing market much better than Mr. Hanson thanks to his ownership of banks, Clayton Homes, Acme Bricks, carpeting, paint, etc. -- Justin Seigel

I moved down to N. Ca from Bellevue, WA. in April of 2006. I’m a top wholesale rep in the US and always wanted to make more money with larger loan Sizes and finally got my opportunity with National City Mortgage. You never really think about things when the money is coming from Wall St and they come up with the programs to put people in homes. It was all about the kid from an investment firm who was reading the charts that said, hey these STATED loans at 95 CLTV’s with 680 FICO’s have performed excellent. Maybe we need to come up with a more flexible loan to make more money. How about 100% STATED loan with 680 FICO’s? and then because those performed well, lower the FICO’s to 640, and so on down to 580.
The ice cream man (drives the little white truck) that made 17,000 a month on his app(no Nat City didn’t do his loan-but some lender did) and the 22 yr old bus boy who bought the 1 million dollar house in Concord with a no money down because he had 720+ FICO are just a few examples of loans I saw.... -- Chris McGahan

I was actually one of the founders of a gigantic subprime lender which I will not mention, but he is right on about the option arms. The large lenders withh these type of loans are World (Wachovia now),Countrywide,Wamu, and Downey. They will have more problems down the road. This thing is far from over and the option arm meltdown will far exceed the subprime. -- John Bennett

I have been in the mortgage industry for 15 years-sat next to a woman on a plane who lives in the Bay Area-she didn’t even understand that she was in an option arm-this is going to be a HUGE problem in markets like SF! -- Charyl Gordon

I was involved with correspondent and wholesale lending in Las Vegas for the last 4 years and this article hits the nail the head with complete accuracy.
People in the real estate business are trying to ‘ride out the storm’ The storm hasn’t even begun. -- D

Herb’s been saying that the end of the world is coming for 20 years. Now, he finds this guy who tells him he’s right. Every home in America, 50% less. Every home owner in America defaults. Credit ratings mean nothing, compared to what a guy revelling in his 15 minutes of internet fame says, because he’s been reading Herb for 20 years. Cats and dogs, sleeping together! We’re all gonna die! -- Pat

And, certainly, this is not a new story; see this and this