Little House on PIMCO’s Prairie

The Wall Street Journal, in “Would You Pay $103,000 for This Arizona Fixer-Upper?”, reports on how a 576 square foot house not fit for human occupancy wound up as a foreclosure on a triple-A rated PIMCO MBS. PIMCO’s never short for words Bill Gross and Mohamed El-Erian refused to comment for the Journal article. These are the people that advertise themselves as the “experts” endlessly on CNBC, and are always available for television comment and consultation on every potential move by the Federal Reserve and Treasury. PIMCO is held in such high esteem that they were chosen as one of the four managers for the Fed’s $500B Fannie Mae (FNM), Freddie Mac (FRE), Ginnie Mae MBS purchase program.

The story starts with the $3,500 purchase of a suburban Phoenix home four decades ago by a woman who has been on various forms of public assistance for the last 13 years. The former homeowner admits that her weakness for hard liquor and gullibility for multiple cash-out refinancings lead to her downfall. In the end the house was in such disrepair that she gave up and moved to an apartment.

The last refinance in early 2007 netted the homeowner only an $11K cash-out on a $103K mortgage. The 30-year adjustable rate mortgage started at 9.25% and capped at 15.25% for a woman with children who was “earning” $3,000 per month in public assistance. The appraiser earned $350 for valuing the property at $132K. He plugged all the right numbers into to the formulas, even though he personally did not believe the house was worth that much. He claimed that he technically played by the rules, if not the spirit of the appraisal process.

This playing by the numbers amounted to putting “square foot logic in a round hole.” The Journal’s hut is certainly the type of outlier that trips up the mathematical formulas of the ratings agencies.

The final mortgage was originated by Integrity Funding LLC (a mortgage broker no longer in business) which collected $6,153 in origination, documentation and other fees. Integrity earned an additional $3,090 when the firm sold the mortgage to Wells Fargo (WFC). Wells Fargo subsequently sold the mortgage to HSBC (HBC) which packaged it along with 4,050 other subprimes into a security. Standard & Poor’s (MHP) and Moody’s (MCO) rated this collection triple-A. Our notable expert PIMCO was one of the greedy that bellied on up to this trough. And that’s the short story of how this love shack became PIMCO’s little house on the prairie.

Don’t forget how Sherri Winston, an educated Ft. Lauderdale Sun-Sentinel columnist, got seduced by cash-out refinancing. The Journal leads us to feel bad for its disadvantaged homeowner, but as I detailed in "The Anatomy of a Subprime Mortgage" almost anyone can be seduced by cash-out refinancing.

Disclosure: Author is long FNM, FRE, MCO and WFC.

Comments

[Real Estate...:]

Well what can I say....another uneducated fool duped by the greedy. Then the loan is repackagede by the highly educated....America you've got to love it.

Jan 05 05:10 AM

[nobull:]

I have never found PIMCO to be credible or ethical. They have constantly used CNBC to drum up support for interest rates as convenient to their own holdings. Bill Gross is a crook in that regard. He made a ton of money by being right once a long time ago. Since then he's been consistently wrong and dangerous in his "advice".

Jan 05 09:40 AM

[Emerald:]

The returns on some of their bond funds would say otherwise.


On Jan 05 09:40 AM nobull wrote:

> I have never found PIMCO to be credible or ethical. They have constantly
> used CNBC to drum up support for interest rates as convenient to
> their own holdings. Bill Gross is a crook in that regard. He made
> a ton of money by being right once a long time ago. Since then he's
> been consistently wrong and dangerous in his "advice".

Jan 05 11:45 AM

[joof:]

They have bene the WORST among the closed end bond sponsors in dealing with auction rate securities. Several of their funds have gone on non-distribution status - esp the muni funds . Google them and see

I know a major financial advisor firm that have told PIMCO that they will no longer sell their closed end products until they start showing some communication commitment , loyalty and concern for the channel especially the customers


However they are the biggest - good marketing and PR win

Jan 05 12:51 PM

[xmplary:]

The system is set up so that no one, but the whole is accountable... let me take that back. The system is set up so that no one is accountable, even the whole. Every one points finger to another. Its no body's responsibility, and every body's responsibility, yet there is no responsibility. A good place to start would be to start griling the appraiser as to how he came up with these figures. Maybe the listing agent or the lender or the seller made a suggestion to the appraiser as to what numbers it should come to, which should be illegal. Maybe the seller, the buyer, and the lender were conspiring... who knows what the story is... Either way, start moving up the ladder to see who was sleeping or overlooking, and where the money trail leads to.

Jan 05 04:02 PM

[BerkeleyBob:]

Interesting dissection of housing finance gone wild. Should there be increased federal jurisdiction and oversight of what historically has been considered purely a local matter? The appraiser presented a phony result, the mortgage broker was interested only in one-time transaction fees, the rating agency blessed the packaged loan with others (how many were this bad?) and the effects rippled out into the world financial markets. Who was looking out for the hapless and totally unqualified borrower? Why would anyone want to be long in Freddie/Fannie? (I sold Freddie and C long ago) Why does anyone make any decision based on the ratings issued by Moody's Fitch, et al. who were providing the lubricant for the machine of wealth destruction? They, and the analysts and the talking heads on CNBC have little credibility with this investor.

Jan 05 04:35 PM

[oldskool:]

What about the home owner? It all started (starts) there. She obviously never intended to pay this mortgage or she would have never signed for 9.25% adjustable mortgage in 2007! She & her accomplices should be convicted of fraud, embezzlement, theft, pick your crime. We should not tolerate the, “I'm not responsible for my actions” attitude. Its not her fault she’s a drunk, cheat, dumb__. Its the appraiser’s fault, its the mortgage companies fault, its the governments fault . . .

Not to worry, we'll just print more money & give it to the banks no questions asked (but make the car companies hitchhike to Washington and submit a 100 page repot for a fraction of what the banks got). Makes me confident our problems will all be over soon as Obama prints a little more money to give away.

Teach your kids to live within their means. Maybe their kids world won't be as screwed up that way.

Jan 05 10:50 PM

[Griz:]

The appraiser, lender, mortgage banker, and bond investors are all accomplices... but just that, only accomplices. The homeowner is the ultimate perpitrator driven by greed, out for personal gain; now pretending to be misguided. I say, let them fail.

Jan 06 01:17 AM