Archive for the ‘Subprime Mortgages’ Category

Via The New York Times:

option-armsAs shown by the graphic, Wachovia was one of the biggest players in Option-Adjustable Rate Mortage origination – mainly because they acquired several banks which specialized in this field.

The article itself contains a very thourough history of how “Option ARMs” came into existence, and how they are predatory by nature:

“I don’t think anyone thought a Pick-A-Pay product was a customer friendly product,” says a former Wachovia executive who requested anonymity to preserve professional relationships. “It is easy to mislead them.”



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The answer: I don’t know. If I had to guess, I’d say Bank of America since they bought Countrywide and Merrill Lynch (One would think they could have gotten both for free – the JP Morgan way).

From Citi’s town hall presentation:


Notice that even with Wachovia, Wells Fargo has by far the smallest balance sheet. This chart is by no means useful in describing the underlying assets of each company, as the arbitrary nature of “other loans” dominates a portion of every bank’s balance sheet (if we were really curious and did some research, we would probably find that this section is comprised of Hybrid ARM’s, Alt-A mortgages, and maybe even some Sub-prime mortgages).

I guess we haven’t achieved adequate transparency quite yet…

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From the WSJ:

J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.

The move by the New York bank will cover as many as 400,000 borrowers. They’ll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.

This is great news…They must have figured that these high yielding, Option Adjustable Rate Mortgages aren’t worth too much if the borrowers default on the mortgage. Option ARM’s are particularly toxic since they allow the borrower to make a minimum payment which may not even cover the due interest – resulting in a higher loan balance (which accrues more interest over time).

The changes will particularly focus on a type of loan structured in such a way that the borrower’s outstanding balance sometimes grows month after month. J.P. Morgan inherited $54 billion of such loans with its takeover of the beleaguered thrift Washington Mutual Inc. in September.

The article goes on to point out that Wachovia had $120 billion worth of these exposures from their purchase of Golden West Financial, and that they had initiated the process of restructuring the terms of the loans. It is a smart step in making sure that home owners will be able to eventually pay down their principle; the last thing these banks want is an increase in mortgage defaults – therefore reducing mortgage interest rates is necessary in preventing this from happening. Now that the Government has replenished some of the lost capital in the banking system, giving the bigger banks as much as $25 billion, don’t be surprised to see Bank of America, Wells Fargo, and Citi follow JP Morgan’s footsteps.

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There have been too many alleged culprits in this whole housing crisis: President Bush, poor people, Fannie Mae/Freddie Mac. If you yourself are unsure, then this piece from Thebigpicture should clear things up:

Understand this simple fact: In an ultra-low rate environment, where prices are appreciating rapidly, and mortgages are being securitized, ALL THAT MATTERS IS THAT THE BORROWER NOT DEFAULT IN 90 days (or 6 Months). The goal was to make a loan that did not default in that period of time, it cannot be put back to the originator.

As a mortgage salesman, you only lose your a fee if a borrower defaults within 3 or 6 months. What do you do to maximize your returns? The best way to do that — to put people in houses that would not default in 90 days — was the 2/28 ARM mortgages. Cheap teaser rates for 24 months, then the big reset. By then, it was no longer your problem.

Can you grasp what a monumental change this was? Instead of making sure that borrowers could pay back ALL OF THE 30 YEAR FIXED MORTGAGE, you only had to find people who could afford the teaser rate for a a few months. THIS WAS AN ENORMOUS AND UNPRECEDENTED SHIFT IN LENDING.

This is the key to the housing boom and bust, and ultimately underlies the entire credit freeze. And, it would not have been possible without the Greenspan ultra-low rates, which made the teaser portion (the “2” of the 2/28) of these mortgages so attractive.

As usual, when there is no accountability in a system, it is vulnerable to manipulation (see Enron and Worldcom scandals). We cannot blame a poor individual for watching a Countrywide commercial and believing that the American dream could be attained by putting a $30,000 down payment for a $500,000 house; from 2002-2007, there was no one around to tell them otherwise. If any blame should be assigned to the recipients of these loans, it should only be because they didn’t hire a lawyer to explain the terms and conditions of these mortgages, which very few people understood.

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