Ultimately, a minimum of a $2 trillion bailout is necessary, as mortgage bond losses will be at least that high, especially when considering the leveraged CDO bond losses. The new bigger broader Resolution Trust Corporation must be created as soon as possible without delay. Urgency is here and now. The system is in the process of degradation, sure to lead to some increased disorder. The changes will be similar in England and possibly to some degree Spain, because they went overboard on real estate speculation. England built an economic dependence upon an inflated housing sector. Spain permitted uncontrollable vacation property speculation. Be sure to know that Wall Street firms are in charge of the solution to a disaster that they themselves perpetrated. Wall Street firms will want to be in charge of the bailouts, even the Resolution Trust Corp. Wall Street firms will want to be involved in the grotesque bailouts, since so much corruption and opportunity will be presented. Like the parasites they are, they sense gain. Think Halliburton and the Iraq & Afghan Wars, with profits abounding to insiders on cozy contracts. Think contractors in New Orleans and Hurricane Katrina relief. Think the next RTC administrators, with more huge profits. To even consider the fraud-ridden Freddie Mac and Fannie Mae for serving as the foundation financial agency for secondary market reinvigoration is a travesty. It is a blatant endorsement of the entrenched Fascist Business Model.
FAILED INNOVATION IN MORTGAGES
Anyone who believes the mortgage debacle is limited to subprime loans and bonds has bought hookline & sinker the story trumpeted by Wall Street and the larger banking community. The risk pricing model has broken, with authorities determined not to have the story properly. Instead, it is framed in friendly terminology, distorted to the public and the investment community. The world of bizarre reckless adjustable rate mortgages (ARM) is soon to suffer a publicly visible and horrible implosion. The aftermath of irresponsible 0% down payment mortgages is soon to suffer implosion. The innovative creative flexible mortgages are soon to suffer implosion. No documentation, no income mortgages, unimaginable in normal cultures, are soon to suffer implosion. A vast world of under-water mortgages exists in the United States, soon to suffer implosion. The abuse of second mortgages and home equity loans is soon to suffer implosion. The main focus of attention will be on California, the center of innovation and creativity. Think the American Home Dream turning to a Ball & Chain toward serfdom, the New American Nightmare. Many details are provided in the Hat Trick Letter Special Report.
The key theme with innovative adjustable mortgages is their zombie nature. Resale is hindered, as is refinance, since the property is vastly under-water, loan balance greatly exceeding the home value. A return to similar mortgage loans is impossible, since they no longer exist. A loan rate freeze is a certified prescription for another zombie loan and zombie home title owner. Particular gratitude goes to ScottM in Seattle and that anonymous San Francisco mortgage broker who offered details after his personal experience in approving over $2 billion in mortgage loans himself. His information is appreciated, and needs to be made more public.
Negative amortization mortgage implosion. This type loan has permitted home title owners to pay less than the appropriate interest amount, thus adding to the loan balance. When the loans hit their maximum negative potential allowance, a huge increase is forced which could result in required monthly payments not 20% to 35% higher, but 100% to 200% higher. The full interest requirement kicks in, based upon the full loan balance, having risen. Imagine a $1400 monthly payment shooting to $2800 or $4000!
Prime second mortgages implosion. This type of loan enabled a huge number of home title owners to effectively invest 0% down payment in their original purchase. Many lending institutions have cut off further withdrawals from the home equity source, in a lockdown much like applying a tourniquet to a bleeding limb. Wells Fargo once boasted this spring not to be involved in subprime mortgages, but they possess $84 billion of these worthless loans. Expect Wells Fargo to go bankrupt. The bankrupt banks will not just have Wall Street addresses.
Pay option adjustable rate mortgage implosion. Called 'Option ARMs' in the finance industry, this category will make national news for their insanity in negative amortization features. In volume, they will greatly eclipse the subprime story, since the loan type involves all risk levels of borrowers and all sizes of properties. Again, this feature enabled many people to buy far too large a property. Shocking statistics are cited in the special report, pertaining to these truly reckless loans. Bear in mind that homes have fallen in value, so underwater percentages in extreme cases of these loans might be more than 25%!!! Analysts estimate that on many of these Option ARM loans, home title owners are underwater by 15% to 20%. Many of these loans have seen their balances rise by 7% per year for at least three years. These loans are more disguised subprimes. The negative amortization features act like a timeduse to explode, in a situation offering no hope of refinance, no qualification for other loans, and no equity. They will go bust.
Hybrid interest only adjustable rate mortgage implosion. The hybrids attracted borrowers by offering a fixed low introductory teaser rate for a fixed three, five, or seven years. After that period, they adjust annually. Again, this feature enabled many people to buy far too large a property. The 3/1 (3-year fixed, adjust every 1 year later) began to reset in 2006, with many more in 2007. The 5/1 will begin to reset in 2008, causing a nightmare. Many lenders offered Hybrid ARMs to lower quality borrowers. Plenty such loans did not require income verification. Like the Option ARM, the low teaser rate caused the loan balance to rise during the introductory period, thus leading to vast number of loans being under-water. Again, refinance or new mortgage loans will not be approved. They will go bust.
CONCLUSION
The downtrend in housing prices generally might actually motivate banks and other lending institutions not to make more home loans. A tidal wave of foreclosures comes soon, not related to subprime in any way, with California at the epicenter. Mortgage bond holders of above described abusive INSANE mortgage loans packaged into bonds will suffer massive losses. For some, like Option ARMs, no bond market exists anymore. The banks on the other hand will suffer from the tidal wave of loan losses, much of which is deserved. My only hope is that Wall Street banks suffer their fair share of the pain. Home property values in some metropolitan areas are likely to fall by 30% to 50% from peak, taking them back to 2000 and 2001 levels.
