Mr Mortgage

Option ARMs: The Banking Backdrop of 2009

Hey Reg - First American's numbers are jacked. They 'track' $200 billion but there are more out there. Additionally, they have only been tracking POA's for about 2 years. But before that the methods of collecting the data did not include the markers needed to identify a POA from a 5/1 ARM for example. After two years of research on this, I have concluded that there were $750 billion originated since 2003 and $550 billion still in existence. Put it this way - we know WB has $122 billion on balance sheet. There is no way they hold 60% of all POA's in existence.

Meredith Whitney Threatens Severe Deflation For Your Portfolio

Whitney is the only one on bubblevision who tells the truth. I have read stories like yous since New Century failed in March 2007, and it has always been 'bashers are the cause, shorts are the cause and it is all contained.'. Well sir, you suck and your kind suck too. All of your relentless pumping and ignoring the facts has hurt the bulls much more than the bears because ultimately fundamentals come out and the levered up financials crash...they always do. They will keep doing it for quite some time. Lehman, Merrill, Goldman all products of leverage and cannot survive without it...just like Bear. The banks continue to lie.

Didn't you hear Paulsen last week??? I will summarize. 'Because you keep submitting very crappy collateral to our new facility, we want to look under your kimono like we do all other banks who borrow Fed money. We do not trust you. Also, to all banks, please cut your dividend and raise cash now. You will need it and not be able to 3 months from now.'

The gig is up pumpers...you lied for years and now you are paying the price.

By the way, the worst pumper of all, CNBC, put Whitney on after hours so as not to crash the markets while they were open. They only allow pumpers on during the day. On days that look really bad or at the end of a quarter, they put Cramer on all day to try to effect the markets. He just sits there and speculates and lies trying to orchestrate a short squeeze. If it were not for short squeezes, he probably would never find a stock that rises, because until someone whispered in his ear in Aug, he swore up and down all this was contained and Downey Savings was worth $100, Countrywide $45, IndyMac $40 and WAMu $45.

You need to quit following the pumper crowd and get the bell around your neck off. You may make some money. Reality is here. You lost.

Thornburg Is a Great Buy on This Dip

TMA has no assets worth over par...there is where your 'thesis' runs afoul.

Thornburg Is a Great Buy on This Dip

So are so wrong. I posted this to the Yahoo chat room weeks ago. TMA will be bankrupt within 30-days.

THORNBURG - THE MARKET HAS GOT IT WRONG...AGAIN!

General consensus is that Thornburg Mortgage is the Gold Standard in mortgage lending and carries very little credit risk. Being in the mortgage industry for 20-years, I must question that assumption.

First off, we know that Thornburg primarily holds Interest Only Hybrid Intermediate-term ARMs with the majority in CA and FL. That should be enough to prove risk. However, below I have listed items from their recent 10q, page 39, which proves the point.

Banks and lenders love looking at 'averages' or 'median', because things look better of course. However, when you break their portfolio down line by line it is evident they own Billions in high-risk ALT-A loans that cannot be sold for any amount of money. Even if there was a functioning mortgage secondary market, old vintage hybrid interest only ARMs, much if it stated income, would not carry much value.

The facts are TMA is sitting on a portfolio of $36 Billion, that has a street value of much less. While these loans are spinning off payments currently, it does not change the fact that one decent margin call from one warehouser renders them insolvent. In an interview a couple of months back, Larry Goldstone mentioned they had relationships with 13 warehousers.

TMA has set aside the lowest loan loss reserves in the industry. To raise the amount of money to cover a margin call of any substance, the damage to shareholder equity would be tremendous, as they cannot sell loan assets to raise money. In my opinion, the only reason TMA has not experienced a mortal margin call is because the warehousers do not want this paper back on their books due to the mark to market consequences.

NEGATIVE EQUITY

We are learning very quickly that 'negative equity' is a leading cause of loan default, even greater than periodic ARM adjustments. This phenomenon cuts across all socio-economic boundaries and FICO scores. As a matter of fact, those with the most to lose may default the fastest. For example a person with a 750 score and $200k in the bank who is able to make a move and spare himself the losses of paying into a massively devaluating assets, may do so faster than the subprime borrower who must fight for the home simply because they need a roof over their head. The subprime borrower may have no other options such as to rent due to lack of money and credit. A recent Boston Fed study confirmed the 'negative equity effect'. www.bos.frb.org/econom...

In CA, we are seeing a very troubling trend of strong 'a' paper borrowers, buying a new home at a great price and letting their present home go into default due to negative equity. If you look at the numbers below, it is obvious that Thornburg is sitting in a great deal of negative equity in their pool of 40k loans.

Thornburg's default rate may be look good now, but chances are great it will begin to grow sharply as housing prices fall. Due to the fact that the Jumbo home loan market has virtually disappeared, stated income loans are all but gone, affordable loans are gone, and values are down, a large percentage of their portfolio cannot refinance. A short pay for a sale transaction is an option, but that results in a loss for TMA. Much of their 40k loans in their portfolio will be with them for a long time, increasing default risk substantially.

The new Fannie/Freddie limits being raised may help slightly for new business but it will not help their existing portfolio because the majority of TMA's loans were funded or acquired prior to July 2007. Only loans funded after July 2007 are eligible for purchase by the Agencies. The 'caps' being raised today that the market took as such good news was procedural and necessary to enable the Agencies to do jumbo loans and to buy closed loans back to July 2007, so this was old news. They had to raise the caps to do jumbo loans.

But aside from what the default rate does in the future, the facts remain that TMA sits on $36 Billion in DEBT on loans worth $18 Billion or less on a great day in the mortgage capital markets, which has not been seen in months. Many of their borrowers cannot refi or sell. They sit on a substantial number of homes in a risky negative equity position. Even if the capital markets improved what will the appetite be for old vintage stated income, interest only ARMs in CA and FL? Not much, if you ask this veteran.

FROM THE MOST RECENT 10Q, PAGE 39


(NOTE - both, hybrid intermediate-term ARMs and Pay Option ARMs are classified as ALT-A in most cases. Especially when they are STATED INCOME, which consists of 42.2% of their portfolio.)

-83.5% ($29 billion) of their portfolio in HYBRID INTERMEDIATE-TERM ARMS, primarily 5/1 and 10/1, which allows a low introductory TEASER RATES, mostly interest only for either 5 or 10 years respectively.

-16.5% ($6 billion) in traditional ARMs. Judging by the indices used of 1 month LIBOR, 6 month LIBOR, MTA and 'OTHER ($1.9 Billion), much of this could be PAY OPTION ARMs, which are worthless and currently not selling for any amount of money on the secondary market.

-42.2% of their portfolio are STATED INCOME . Stated income loans have virtually disappeared for anyone that is not self-employed. In the time that TMA acquired their portfolio, stated income was allowed for w-2 employees.

-43.6% are in CA. 7.2% in FL. 50.8% of their loans are in the worst two states in the nation for price depreciation.

-15.3% are Condos. Condo's are considered a risky property type.

-18.5% are second/vacation homes. 11.1% are Non-owner occupied. (both are very risky compared to owner occupied)

-48.1% have an ORIGINAL effective loan-to-value of between 70-80%. Recent studies show that at least 50% of all ARM holders have added a second mortgage over the past 3-years bring their effective CLTV much higher. Factor in a sharp value fall in CA and FL and much of TMA's portfolio is in a NEGATIVE EQUITY situation. A recent Boston Fed study released says 'negative equity is a leading contributor to loan default, even greater than periodic ARM adjustments.'

Sincerely,



Mr. Mortgage

Fannie and Freddie's Unbelievable Proposals

The reason why this is under serious consideration is because it is a way of moving underwater loans that will result in serious losses off the balance sheets of the banks and onto the balance sheets of the tax payer. They will never be able to securitize and well these so as they fall one by one for years the taxpayer will pick up the tab. With values down 40-70% in the bubble states where this is aimed, this will be a big tab.

Promising Regional Banks For Patient Investors - Barron's

Banks are a mess with asset valuations represented on quarterly reports nowhere near their true valuations. I would agree with your analysis if the banks were reporting the true value of their assets. The problem with basing an analysis upon NEW lending is they still have to clean upon the trillions in bad loans before they will realize any upside from new. This runs across all assets classes. Remember, we are in an asset re-valuation period and the leverage comes out of the system. New loans pale in comparison to highly leveraged bad deals currently falling apart.

U.S. Smallcap in Demand

By they way, what are your favorite picks. I am a gambler.

U.S. Smallcap in Demand

Edit - small caps ARE small caps for a reason,

when the funding really dries up over the next few MONTHS.

U.S. Smallcap in Demand

Puh-lease. If you must gamble in this treacherous market, then by all means small caps are the way to go. They have less to fall when they go to zero. But really, what is the purpose of this story? Watching inflows as you mentioned has been a disaster in the past year. Remember, we are in a credit crisis, small cap and small caps for a reason and when the funding really dries up over the next few years, short-to-zero plays using a dart board with small caps pinned up with be a much better trade than the one described here.

Private Equity to the Rescue of Banks?

They can't come 'riding to the rescue' until there is some transparency to their books with respect to the valuation of their assets. For example, WaMu has $55 billion in Pay Option ARMs, $60 billion in Home Equity Lines and $16 billion in Subprime. Performing, these loans types might fetch 10 cents to 50 cents on the dollar on a great day! Non-performing or as REO, you may get 30 to 50 cents of the new value of the underlying collateral. That would means WaMu is looking at a write down of $10s of millions yet to come. With the housing market continuing to fall and defaults now surging in Alt-A, Jumbo Prime and second mortgages, there is not enough clarity. Most of these banks that hold such large amount of mortgage paper are deep underwater if you were to sell assets to pay off liabilities and 'settle up'. I highly doubt if any private equity will be as foolish as BofA was with CFC or as foolish as TPG was with WaMu for years to come. Just my opinion.

Today's Negative-Equity Update

This information is by and large inaccurate and much worse in reality.

This is because Zillow uses original purchase price to compute the negative equity despite larger percentages having refi'd after the fact or added a second mortgage. The problem is much larger than depicted here.

Housing Crisis Likely to Wipe Out Two Decades of Family-Earned Wealth

Great analysis. I love the chart. It really shows that despite housing prices dropping the most in history over an period of time, that due to a total lack of financing, the spread between home prices and affordability is as wide as ever.

Assured Guaranty: Vulnerable to Continued Bond Market Troubles

good job reggie...I can't believe there are people who still believe in the business model.

Why I am Selling Thornburg Mortgage

Should have stayed short. Still should. I have been short since July and plan on riding it a bit further. I covered American Home at 48 cents. That is about 125% downside left!

Ambac, MBIA Finally Get the Rating They Deserve

You are right...it is all crooked. As housing prices continue to fall over the next couple of years, all ABP will be taken down with it. These guys do not have the money to pay even a remotely small portion of their potential liabilities. MBIA and ABK are the IMB and CFC of the insurance world. Worthless. AGO is next. How they skated through all of this is amazing.