Comments on: Will Investigations of "Exception" Mortgages Go Anywhere? http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html Sun, 22 Nov 2009 21:02:38 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: steve http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html#comment-2979 steve Sun, 13 Jan 2008 07:26:00 +0000 http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception-mortgages-go-anywhere/#comment-2979 I'm sure the banks will point to their own losses as a defense (though in reality their losses stem from warehousing and inventory risk from when the music suddenly stopped). <br/><br/>The CDO prospectuses I've read have disclaimers about collateral quality out the wazoo. Odd stuff for AAA paper...The banks will point to the rating agencies (which I believe crossed the line with their modeling input on many deals and became underwriters).<br/><br/>Still, there may be liability to the banks if representations about due dilligence on the collateral were wrong or misleading...this would differ from broad generalizations about the high credit risk on the collateral. Did the percentage of loans tested per pool decline (I've heard it did), and were the testing criteria modified (I've heard they were). I’m sure the banks will point to their own losses as a defense (though in reality their losses stem from warehousing and inventory risk from when the music suddenly stopped).

The CDO prospectuses I’ve read have disclaimers about collateral quality out the wazoo. Odd stuff for AAA paper…The banks will point to the rating agencies (which I believe crossed the line with their modeling input on many deals and became underwriters).

Still, there may be liability to the banks if representations about due dilligence on the collateral were wrong or misleading…this would differ from broad generalizations about the high credit risk on the collateral. Did the percentage of loans tested per pool decline (I’ve heard it did), and were the testing criteria modified (I’ve heard they were).

]]> By: Anonymous http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html#comment-2978 Anonymous Sat, 12 Jan 2008 23:41:00 +0000 http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception-mortgages-go-anywhere/#comment-2978 These investigations continue to badger the lenders and banking community, while nothing may be proved in this case it may uncover other problems or point out new direction the AG might consider in the future. Jimmy Hoffa if alive today would tell you that having the gov't constantly looking for wrong doing in your backyard is a bad sign. These investigations continue to badger the lenders and banking community, while nothing may be proved in this case it may uncover other problems or point out new direction the AG might consider in the future. Jimmy Hoffa if alive today would tell you that having the gov’t constantly looking for wrong doing in your backyard is a bad sign.

]]> By: newsman http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html#comment-2977 newsman Sat, 12 Jan 2008 20:35:00 +0000 http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception-mortgages-go-anywhere/#comment-2977 One thing is murky to me: how were these securities ultimately sold, and to whom? As I understand it, nobody was buying these things retail, from their local Edward Jones financial advisor. The customers were big shots, am I correct?<br/><br/>Giving some of my own mutual funds more than my usual limited DD, I noticed one (Westcore Flexible Income) reporting some relatively small holdings in CDOs with very long names and VERY high interest rates(18 percent in some cases; I'm guessing junior tranches or something)--with footnotes revealing that in some cases these cdos were no longer performing as advertised. <br/><br/>So when I discovered this fund a couple of years ago and bought it based on an online fund-screening tool for income funds, I was buying a little taste of these CDOs. No real harm done to me--the fund was not terribly vulnerable to these dodgy investments--its share price has declined, but not below the level of my original purchase, and i got the yields I was expecting. One thing is murky to me: how were these securities ultimately sold, and to whom? As I understand it, nobody was buying these things retail, from their local Edward Jones financial advisor. The customers were big shots, am I correct?

Giving some of my own mutual funds more than my usual limited DD, I noticed one (Westcore Flexible Income) reporting some relatively small holdings in CDOs with very long names and VERY high interest rates(18 percent in some cases; I’m guessing junior tranches or something)–with footnotes revealing that in some cases these cdos were no longer performing as advertised.

So when I discovered this fund a couple of years ago and bought it based on an online fund-screening tool for income funds, I was buying a little taste of these CDOs. No real harm done to me–the fund was not terribly vulnerable to these dodgy investments–its share price has declined, but not below the level of my original purchase, and i got the yields I was expecting.

]]> By: High Yield Harv http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html#comment-2976 High Yield Harv Sat, 12 Jan 2008 19:40:00 +0000 http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception-mortgages-go-anywhere/#comment-2976 Of they were not disclosed. None of the buyers of these securities knew nor cared what was in them. They were buying the highest AAA yields they could find and did no due diligence. Of they were not disclosed. None of the buyers of these securities knew nor cared what was in them. They were buying the highest AAA yields they could find and did no due diligence.

]]> By: newsman http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception.html#comment-2975 newsman Sat, 12 Jan 2008 18:34:00 +0000 http://www.nakedcapitalism.com/2008/01/will-investigations-of-exception-mortgages-go-anywhere/#comment-2975 In the Household International case from several years ago, borrowers were told they would get an "equivalent rate" of six to seven percent. That's because these were 18-year mortgages, as I recall, and the monthly payment on the principal was "equivalent" to the payment of a six to seven percent loan SPREAD OVER 30 YEARS. That meant their actual apr was more like 12 percent. This was not explained. Some people only figured this out when they had their taxes done--their tax preparer pointed it out to them. <br/><br/>Fortunately for the borrowers, some of them did have "odd bits of confirming information" that the Household "loan officers" had given them in an unguarded moment. (btw--many or most of these people were not "subprime;" only their loans were.)<br/><br/>Some borrowers got partial redress in the litigation that followed. One hfc local office manager who was fired for doing this sued the company and alleged she had been following orders. The company produced all kinds of documentation to show that this kind of behavior was frowned upon by headquarters. <br/><br/>It appeared as though the company did, in fact, formally forbid its sales force to mislead borrowers. It also appeared that the sales force was goaded to make loans at an ever-accelerating pace, and if they did they were handsomely rewarded. Local and regional managers developed too-clever sales pitches involving things like "equivalent interest rates" to close more deals (which were also loaded down with hidden fees, insurance premiums etc.)<br/><br/>I suspect one would find the same things in many of these suspect mortgage companies: a fine code of ethics on the wall, and ample financial incentives to break that code.<br/><br/>The sales manager's lawsuit was settled out of court. In the Household International case from several years ago, borrowers were told they would get an “equivalent rate” of six to seven percent. That’s because these were 18-year mortgages, as I recall, and the monthly payment on the principal was “equivalent” to the payment of a six to seven percent loan SPREAD OVER 30 YEARS. That meant their actual apr was more like 12 percent. This was not explained. Some people only figured this out when they had their taxes done–their tax preparer pointed it out to them.

Fortunately for the borrowers, some of them did have “odd bits of confirming information” that the Household “loan officers” had given them in an unguarded moment. (btw–many or most of these people were not “subprime;” only their loans were.)

Some borrowers got partial redress in the litigation that followed. One hfc local office manager who was fired for doing this sued the company and alleged she had been following orders. The company produced all kinds of documentation to show that this kind of behavior was frowned upon by headquarters.

It appeared as though the company did, in fact, formally forbid its sales force to mislead borrowers. It also appeared that the sales force was goaded to make loans at an ever-accelerating pace, and if they did they were handsomely rewarded. Local and regional managers developed too-clever sales pitches involving things like “equivalent interest rates” to close more deals (which were also loaded down with hidden fees, insurance premiums etc.)

I suspect one would find the same things in many of these suspect mortgage companies: a fine code of ethics on the wall, and ample financial incentives to break that code.

The sales manager’s lawsuit was settled out of court.

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