Sunday, February 28, 2010

Who REALLY Made the Bad Mortgage Loans?

You'll be finding out in the next 5 years or so.

There's a lot of flapjaw that 'it's all the greedy Banks.' Well, not really. It's more accurate to state that 'it's all the greedy mortgage-brokers.' Yes, banks were also brokers, but it seems that non-bank brokerages (think Countrywide and GM's DiTech, for examples) were more a factor than bank-operated brokers.

We'll soon find out.

...As Barry Ritholtz of Fusion IQ reminds us, the profound problems that beset the industry spring from the fact that over the past decade, something like five million to 10 million people bought dwellings they couldn’t afford and still can’t, and a heap of those homes today are worth less, often a whole lot less, than they paid for them.

The Treasury’s proposal, he scoffs, will achieve nothing more than keeping those unfortunate folks in homes they can’t afford, many underwater and burdened by payments they can’t make.

Such mortgages were riddled, not infrequently, with the connivance or encouragement of the lenders — says Mark Hanson, the insightful real-estate analyst who runs the eponymous Hanson Advisors — with fraud, white lies and like nasty stuff that violate the loan warranties. Investors, he relates, are only beginning to seize on such breaches to demand so-called put-backs — repurchases of principal, accrued interest and expenses for loans that have been compromised.

Mark warns that as more investors turn to put-backs to recoup losses, this process will begin to take a toll on financial institutions that were active in the mortgage and housing arena. He points out that because the put-back push is in its infancy, there is no way for financial institutions to estimate future losses or need to recognize the potential costs under current accounting requirements. All of which is apt to make losses that much more painful for those institutions.

--Mark Hanson in Barron's

Who REALLY made the 'bad mortgage loans'? Watch the put-back numbers to find out.

HT: Ritholtz

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