There Always Was A Subprime Market

THERE ALWAYS WAS A SUBPRIME MARKETMORTGAGE FINANCE UPDATE

NATIONAL AUCTIONEERS ASSOCIATION

Jillayne Schlicke Dec 1, 2008

Unfortunately, banks started doing this without knowing how to service the loans.

It takes time to work out non-performing loans.

Consumer Finance Companies are really good at this. Banks are not.

There always was a subprime market

Consumer

CDOs

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Federal ReserveFDIC

54 b

US Taxpayer

US Treasury

$

RatingsAgencie

sAAA

AAA

RMBS

Mortgage BrokerMortgage BankerConsumer Finance Co.

Wrong model

to rate the single As

Copyright Dec 2008Jillayne SchlickeDo Not Duplicate

Rise and Fall of Securitized Lending

Why The TARP Plan Failed

Re-underwrite Modify Re-package Re-sell

Money will return to the U.S. Treasury.

AssetsLoans

goodbad

Liabilities

Deposits

BanksU.S. TreasuryInvoluntary direct capital

injections

Feedback Loop

Higher Rates

Rising Bank Losses

LowerHomeValue

s

RisingInvento

ry

FewerBuyer

s

TighterUWGuideline

s

Rising SS & F

Lower Home Values

Rising Foreclosures

Time

Government Intervention

Gov will always try to interveneSome argue that this is necessary

Gov intervention will slow the downside and ultimately slow the recovery

Recent government intervention

Recent Gov Intervention

Loan modifications Voluntary participation in FDIC’s model Fannie Freddie loan mods

FHA Secure, H4H Mandatory foreclosure moratoriums (state

level) Note: some banks are voluntarily doing

this CitiGroup bailout Fed will purchase 600B in F&F’s MBS

Let’s now take a look at government regulation…

Tttttttt

Tangled Web of Regulation

Source: dfi.wa.gov

Top Ten Ways to Tell If Your Bank is Going Under

1. Paulson appears on Face the Nation and says, “Our banking system is safe and sound.”

2. CD rate offered is way, way higher than any other bank.

3. The change counting machine disappears and is replaced with a slot machine.

4. Instead of coffee and donuts, the bank is giving away Ford, Chrysler, or GM cars.

5. No pens and no withdrawal slips, only FDIC I.O.U.s

6. Sounds of loud sobbing can be heard coming from the vault.

7. Large pizza delivery truck parked outside on a Friday evening.

8. Branch manager has scrawled "REDRUM" on her glass wall with her lipstick.

9. There is a vacant lot where your branch used to be.

10. and….

“There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac used up $8 billion.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of it? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.”

Mike "Mish" Shedlockhttp://globaleconomicanalysis.blogspot.com

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Source: Bloomberg

Trends for the rest of this month

Car Companies Get Bailed Out Lehman Hedge Funds will evaporate Billions of losses at Goldman Sachs Commercial and Development loans

will freeze More bank failures Pressure to use TARP funds to lower

rates Details on President Obama’s stimulus

plan Will help commercial employment

Trends for 2009

Turnover of existing inventory will slow Loan modification default rates to rise

(currently 50% of loan mods are re-defaulting)

Banking system will continue towards nationalization (watch for an FDIC bailout)

Credit Unions will survive Consumer Finance Companies will

survive Watch for problems at FHA in 2009,

2010 Too soon to call the bottom Alt A & Option ARM Resets….

Option ARM Non-Bomb?

11th District COFI

60% of ARMS tied to LIBOR25% tied to various treasuries15% tied to the COFI (many in Calif)

Many option ARM holders were making the min payment or paying interest only.

When the loans recast, the borrower will begin making the amortized payment, which could have a much larger impact on the monthly payment than the rate reset.

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Good news for auctioneers

Individual foreclosure auctionsLarge, bulk investor purchase auctionsFSBO auctionsREO auctions v. individual resales

There always will be a subprime market

THERE ALWAYS WAS A SUBPRIME MARKETMORTGAGE FINANCE UPDATE

NATIONAL AUCTIONEERS ASSOCIATION

CEFORWARD.COMMORTGAGEFIDUCIARIES.COMRAINCITYGUIDE.COM

Jillayne Schlicke Dec 1, 2008