Tag Archives: subprime mortgage

How 2 US Senators Profited From America’s Mortgage Crisis

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Bob Corker and Mark Warner speaking in an interview with Zillow about mortgage-finance reform

“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”

So said then-Senator Edward E. Kaufman, a Democrat from Delaware, at the Congressional hearing in the spring of 2010 where assorted members of Congress lambasted Goldman Sachs’ activity in the run-up to the financial crisis.

But it turns out two members of Congress actually made money from that crisis, according to publicly available documents. During the crisis years, two now-senators, Mark Warner (D-Va.) who was the governor of Virginia until his Senate term began in 2009, and Bob Corker (R-Tenn.), who took office in 2007, were invested in a fund that appears to have made sizable profits from Goldman products that were designed to bet against the real estate market.

There’s no evidence either Senator was aware of the specific strategy, although both have reported millions of dollars of income from the fund. A little bit of ancient history: Back in the spring of 2010, the SEC charged Goldman Sachs with fraud over a deal called Abacus 2007-AC1. Abacus 2007-AC1 was a so-called CDO, which in essence requires investors to wager against each other. One set of investors was betting that homeowners would continue to pay their mortgages. Others, who were short, were betting there would be massive defaults.

In this particular deal, Goldman allowed a hedge fund client, Paulson Capital Management, to take the short position and help choose which securities would go into it. The SEC alleged that Goldman hadn’t told the long investors that Paulson’s team essentially had designed the CDO to fail. According to a report done by the US Senate Permanent Subcommittee on Investigations, three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount.

Goldman paid $550 million to settle the SEC’s charges in the summer of 2010. A young vice president who had worked on the deal, Fabrice Tourre, was eventually found liable in a civil suit brought by the SEC, making him one of the few to face any repercussions from the crisis era.

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But Abacus 2007-AC1 wasn’t unique. In fact, it was merely the last in a series of Abacus CDOs. According to the Senate report, these were “pioneered by Goldman to provide customized CDOs for clients interested in assuming a specific type and amount of investment risk” and “enabled investors to short a selected group” of securities. Many of the Abacus deals were tied in part to the performance of subprime residential mortgage-backed securities, but some were also tied to the performance of commercial mortgage-backed securities.

Because AIG provided insurance on at least some of the Abacus deals, the Abacus deals were also part of the collateral calls that Goldman made to AIG, and part of the reason that taxpayers ended up bailing out AIG. Plenty of well-known hedge funds availed themselves of Goldman’s Abacus deals, according to a document Goldman provided the Financial Crisis Inquiry Commission. The list of those who were short various Abacus deals includes Moore Capital Management, run by billionaire Louis Bacon; Magnetar, an Illinois-based fund run by Alec Litowitz; Brevan Howard, a European hedge fund management company; and FrontPoint Partners (which shows up in the movie “The Big Short”).

There are also some lesser known names in the document, including Pointer Management, a Tennessee-based fund which was founded in 1990 by Joseph Davenport, a Chattanooga area businessman and former Coca-Cola executive, and Thorpe McKenzie, also from Chattanooga, according to the Campaign for Accountability.

Specifically, Pointer took short positions in an Abacus deal called ABAC07-18, as did FrontPoint Partners and several others. According to several sources, this Abacus deal was based entirely on securities tied to commercial real estate, rather than residential real estate. While few people have heard about this particular Abacus deal, it too resulted in Goldman making a collateral call on AIG. According to a document Goldman submitted to the FCIC, it looks as if by late 2008, AIG had posted a total of $308 million in collateral to Goldman in connection with Abacus 2007-18.

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And it too was controversial — so controversial that at a meeting of the Financial Crisis Inquiry Commission on October 12, 2010, the commissioners voted to refer the matter to the Department of Justice, citing “potential fraud by Goldman Sachs in connection with Abacus 2007-18 CDO.”

In its write-up, the FCIC quoted Steve Eisman, the FrontPoint trader whose character figures prominently in “The Big Short.” According to his interview with the FCIC, Eisman seemed to feel that Goldman might have gamed the rating agencies, and might have brought in outside investors so that the firm could justify marking the deal down immediately, meaning long investors would suffer and short sellers would make money.

According to Eisman’s testimony, he said to the Goldman traders, “So you put this stuff together and you went to the agencies to get a rating and the biggest issue with the rating is the correlation of loss, and you presented a correlation analysis that was lower than you actually thought it was but the rating agencies were stupid, so they’d buy it anyway. So assuming your correlation analysis was correct, you took the short side, sold it to the client, and then [did the deal with me to get a mark].” One of the Goldman traders responded, according to Eisman’s testimony, “Well, I wouldn’t put it in those terms exactly.”

Eisman went on to say he believed Goldman “wanted another party in the transaction so if we have to mark the thing down, we’re not just marking it to our book.” He added that, “Goldman was short, and we [FrontPoint] were short. So when they go to a client and say we’re marking it down, they can say well it wasn’t just our mark.”

The FCIC noted that if Goldman did agree with Eisman’s characterization, this could raise legal issues for Goldman as to whether the firm deliberately misled the rating agencies, thereby leading to a material omission in the offering documents for Abacus 2007-18 and violating securities laws. The FCIC also noted that if Goldman indeed knew it was expecting to lower the value of the security as the firm was creating it, and brought in other investors only to make that look more genuine, that could be another potential violation of securities laws. Anyway. Nothing came of this, just as nothing came of any of the FCIC’s other referrals to the Justice Department.

According to a document Goldman submitted to the FCIC, the short investors did very well: Pointer appears to have been paid $120 million in “termination payments” in 2008 and 2009. (Although commercial real estate held up fairly well in the end, prices also collapsed in the crisis.) The documents don’t make it clear what, if any, upfront investment was required; the monthly coupon rate was small.

“This amount of money that’s going into AIG, there is no upside now,” Corker told Politico in early 2009 about the taxpayer bailout of the company. “This is all just like gone money.”

Gone where? Well, what is clear is that Corker especially, but also Warner, made money from their overall investments in Pointer.  According to his disclosure forms, Corker’s investment in Pointer first shows up in 2006. He put the value of his investment between $5 million and $25 million. In July 2007, several months before the effective dates for Pointer’s Abacus deals, he put an additional $1 million to $5 million into Pointer. From 2006 to 2014, he reported total income from Pointer of between $3.9 million at the low end and $35.5 million at the high end (including funds from the sale of part of his stake in the fund in 2012.) He sold the rest of his stake in 2014 and reported a cash receivable from Pointer of between $5 million and $25 million that year.

According to Warner’s disclosure forms, he first invested in Pointer in 2007. He assigned his stake the same value range as Corker did his: between $5 million to $25 million. Warner, who sold his entire position in 2012, reported total income from Pointer of between $1.5 million and $10 million. There’s no evidence that either senator knew that a fund in which they had invested was shorting the real estate market.

A letter from Pointer’s chief compliance officer says that Corker “can neither exercise control nor have the ability to exercise control over the financial interest held by Pointer.” Nonetheless, Corker and the principals of Pointer have known each other for a long time. According to the Campaign for Accountability, in 2004, Corker named Joseph Davenport among his co-chairs of his campaign committee ahead of his 2006 election; Pointer employees and their spouses have contributed $76,840 to Corker’s campaigns and $55,000 to his Rock City PAC, says CfA. And several business entities tied to Corker list the same address as Pointer. There aren’t any obvious ties between Warner and Pointer.

Pointer did not return a call for comment. A spokesperson for Warner declined to comment.  Corker’s spokesperson says, “This is yet another ridiculous narrative being peddled by a politically-motivated special interest group that refuses to disclose its donors. This dark money entity has an abysmal track record for accuracy, and just like the other unfounded claims they have leveled against Senator Corker, this too is completely baseless.” (They are apparently referring to the Campaign for Accountability, although this story was sourced from publicly available documents.)

It’s also a little ironic that Corker and Warner were the co-sponsors of the Corker Warner bill, which set out to reform the housing finance system. Let’s give them some credit. Since they already benefited from the last crisis, maybe they’re trying to protect us from the next one?

by Bethany McLean | Yahoo Finance

 

The Subprime Mortgage Is Back: It’s 2008 All Over Again!

Apparently the biggest banks in the US didn’t learn their lesson the first time around…

Because a few days ago, Wells Fargo, Bank of America, and many of the usual suspects made a stunning announcement that they would start making crappy subprime loans once again!

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I’m sure you remember how this all blew up back in 2008.

Banks spent years making the most insane loans imaginable, giving no-money-down mortgages to people with bad credit, and intentionally doing almost zero due diligence on their borrowers.

With the infamous “stated income” loans, a borrower could qualify for a loan by simply writing down his/her income on the loan application, without having to show any proof whatsoever.

Fraud was rampant. If you wanted to qualify for a $500,000 mortgage, all you had to do was tell your banker that you made $1 million per year. Simple. They didn’t ask, and you didn’t have to prove it.

Fast forward eight years and the banks are dusting off the old playbook once again.

Here’s the skinny: through these special new loan programs, borrowers are able to obtain a mortgage with just 3% down.

Now, 3% isn’t as magical as 0% down, but just wait ‘til you hear the rest.

At Wells Fargo, borrowers who have almost no savings for a down payment can actually qualify for a LOWER interest rate as long as you go to some silly government-sponsored personal finance class.

I looked at the interest rates: today, Wells Fargo is offering the exact same interest rate of 3.75% on a 30-year fixed rate, whether you have bad credit and put down 3%, or have great credit and put down 30%.

But if you put down 3% and take the government’s personal finance class, they’ll shave an eighth of a percent off the interest rate.

In other words, if you are a creditworthy borrower with ample savings and a hefty down payment, you will actually end up getting penalized with a HIGHER interest rate.

The banks have also drastically lowered their credit guidelines as well… so if you have bad credit, or difficulty demonstrating any credit at all, they’re now willing to accept documentation from “nontraditional sources”.

In its heroic effort to lead this gaggle of madness, Bank of America’s subprime loan program actually requires you to prove that your income is below-average in order to qualify.

Think about that again: this bank is making home loans with just 3% down (because, of course, housing prices always go up) to borrowers with bad credit who MUST PROVE that their income is below average.

[As an aside, it’s amazing to see banks actively competing for consumers with bad credit and minimal savings… apparently this market of subprime borrowers is extremely large, another depressing sign of how rapidly the American Middle Class is vanishing.]

Now, here’s the craziest part: the US government is in on the scam.

The federal housing agencies, specifically Fannie Mae, are all set up to buy these subprime loans from the banks.

Wells Fargo even puts this on its website: “Wells Fargo will service the loans, but Fannie Mae will buy them.” Hilarious.

They might as well say, “Wells Fargo will make the profit, but the taxpayer will assume the risk.”

Because that’s precisely what happens.

The banks rake in fees when they close the loan, then book another small profit when they flip the loan to the government.

This essentially takes the risk off the shoulders of the banks and puts it right onto the shoulders of where it always ends up: you. The consumer. The depositor. The TAXPAYER.

You would be forgiven for mistaking these loan programs as a sign of dementia… because ALL the parties involved are wading right back into the same gigantic, shark-infested ocean of risk that nearly brought down the financial system in 2008.

Except last time around the US government ‘only’ had a debt level of $9 trillion. Today it’s more than double that amount at $19.2 trillion, well over 100% of GDP.

In 2008 the Federal Reserve actually had the capacity to rapidly expand its balance sheet and slash interest rates.

Today interest rates are barely above zero, and the Fed is technically insolvent.

Back in 2008 they were at least able to -just barely- prevent an all-out collapse.

This time around the government, central bank, and FDIC are all out of ammunition to fight another crisis. The math is pretty simple.

Look, this isn’t any cause for alarm or panic. No one makes good decisions when they’re emotional.

But it is important to look at objective data and recognize that the colossal stupidity in the banking system never ends.

So ask yourself, rationally, is it worth tying up 100% of your savings in a banking system that routinely gambles away your deposits with such wanton irresponsibility…

… especially when they’re only paying you 0.1% interest anyhow. What’s the point?

There are so many other options available to store your wealth. Physical cash. Precious metals. Conservative foreign banks located in solvent jurisdictions with minimal debt.

You can generate safe returns through peer-to-peer arrangements, earning up as much as 12% on secured loans.

(In comparison, your savings account is nothing more than an unsecured loan you make to your banker, for which you are paid 0.1%…)

There are even a number of cryptocurrency options.

Bottom line, it’s 2016. Banks no longer have a monopoly on your savings. You have options. You have the power to fix this.

by Simon Black | ZeroHedge

Subprime “Alt”-Mortgages from Nonbanks, Run by former Countrywide Execs, Backed by PE Firms Are Hot Again

Housing Bubble 2 Comes Full Circle

Mortgage delinquency rates are low as long as home prices are soaring since you can always sell the home and pay off the mortgage, or most of it, and losses for lenders are minimal. Nonbank lenders with complicated corporate structures backed by a mix of PE firms, hedge funds, debt, and IPO monies revel in it. Regulators close their eyes because no one loses money when home prices are soaring. The Fed talks about having “healed” the housing market. And the whole industry is happy.

The show is run by some experienced hands: former executives from Countrywide Financial, which exploded during the Financial Crisis and left behind one of the biggest craters related to mortgages and mortgage backed securities ever. Only this time, they’re even bigger.

PennyMac is the nation’s sixth largest mortgage lender and largest nonbank mortgage lender. Others in that elite club include AmeriHome Mortgage, Stearns Lending, and Impac Mortgage. The LA Times:

All are headquartered in Southern California, the epicenter of the last decade’s subprime lending industry. And all are run by former executives of Countrywide Financial, the once-giant mortgage lender that made tens of billions of dollars in risky loans that contributed to the 2008 financial crisis.

During their heyday in 2005, non-bank lenders, often targeting subprime borrowers, originated 31% of all home mortgages. Then it blew up. From 2009 through 2011, non-bank lenders originated about 10% of all mortgages. But then PE firms stormed into the housing market. In 2012, non-bank lenders originated over 20% of all mortgages, in 2013 nearly 30%, in 2014 about 42%. And it will likely be even higher this year.

That share surpasses the peak prior to the Financial Crisis.

As before the Financial Crisis, they dominate the riskiest end of the housing market, according to the LA Times: “this time, loans insured by the Federal Housing Administration, aimed at first-time and bad-credit buyers. Such lenders now control 64% of the market for FHA and similar Veterans Affairs loans, compared with 18% in 2010.”

Low down payments increase the risks for lenders. Low credit scores also increase risks for lenders. And they coagulate into a toxic mix with high home prices during housing bubbles, such as Housing Bubble 2, which is in full swing.

The FHA allows down payments to be as low as 3.5%, and credit scores to be as low as 580, hence “subprime” borrowers. And these borrowers in many parts of the country, particularly in California, are now paying sky-high prices for very basic homes.

When home prices drop and mortgage payments become a challenge for whatever reason, such as a layoff or a miscalculation from get-go, nothing stops that underwater subprime borrower from not making any more payments and instead living in the home for free until kicked out.

“Those are the loans that are going to default, and those are the defaults we are going to be arguing about 10 years from now,” predicted Wells Fargo CFO John Shrewsberry at a conference in September. “We are not going to do that again,” he said, in reference to Wells Fargo’s decision to stay out of this end of the business.

But when home prices are soaring, as in California, delinquencies are low and don’t matter. They only matter after the bubble bursts. Then prices are deflating and delinquencies are soaring. Last time this happened, it triggered the most majestic bailouts the world has ever seen.

The LA Times:

For now, regulators aren’t worried. Sandra Thompson, a deputy director of the Federal Housing Finance Agency, which oversees government-sponsored mortgage buyers Fannie Mae and Freddie Mac, said non-bank lenders play an important role.

“We want to make sure there is broad liquidity in the mortgage market,” she said. “It gives borrowers options.”

But another regulator isn’t so sanguine about the breakneck growth of these new non-bank lenders: Ginnie Mae, which guarantees FHA and VA loans that are packaged into structured mortgage backed securities, has requested funding for 33 additional regulators. It’s fretting that these non-bank lenders won’t have the reserves to cover any losses.

“Where’s the money going to come from?” wondered Ginnie Mae’s president, Ted Tozer. “We want to make sure everyone’s going to be there when the next downturn comes.”

But the money, like last time, may not be there.

PennyMac was founded in 2008 by former Countrywide executives, including Stanford Kurland, as the LA Times put it, “the second-in-command to Angelo Mozilo, the Countrywide founder who came to symbolize the excesses of the subprime mortgage boom.” Kurland is PennyMac’s Chairman and CEO. The company is backed by BlackRock and hedge fund Highfields Capital Management.

In September 2013, PennyMac went public at $18 a share. Shares closed on Monday at $16.23. It also consists of PennyMac Mortgage Investment Trust, a REIT that invests primarily in residential mortgages and mortgage-backed securities. It went public in 2009 with an IPO price of $20 a share. It closed at $16.64 a share. There are other intricacies.

According to the company, “PennyMac manages private investment funds,” while PennyMac Mortgage Investment Trust is “a tax-efficient vehicle for investing in mortgage-related assets and has a successful track record of raising and deploying cost-effective capital in mortgage-related investments.”

The LA Times describes it this way:

It has a corporate structure that might be difficult for regulators to grasp. The business is two separate-but-related publicly traded companies, one that originates and services mortgages, the other a real estate investment trust that buys mortgages.

And they’re big: PennyMac originated $37 billion in mortgages during the first nine months this year.

Then there’s AmeriHome. Founded in 1988, it was acquired by Aris Mortgage Holding in 2014 from Impac Mortgage Holdings, a lender that almost toppled under its Alt-A mortgages during the Financial Crisis. Aris then started doing business as AmeriHome. James Furash, head of Countrywide’s banking operation until 2007, is CEO of AmeriHome. Clustered under him are other Countrywide executives.

It gets more complicated, with a private equity angle. In 2014, Bermuda-based insurer Athene Holding, home to other Countrywide executives and majority-owned by PE firm Apollo Global Management, acquired a large stake in AmeriHome and announced that it would buy some of its structured mortgage backed securities, in order to chase yield in the Fed-designed zero-yield environment.

Among the hottest products the nonbank lenders now offer are, to use AmeriHomes’ words, “a wider array of non-Agency programs,” including adjustable rate mortgages (ARM), “Non-Agency 5/1 Hybrid ARMs with Interest Only options,” and “Alt-QM” mortgages.

“Alt-QM” stands for Alternative to Qualified Mortgages. They’re the new Alt-A mortgages that blew up so spectacularly, after having been considered low-risk. They might exceed debt guidelines. They might come with higher rates, adjustable rates, and interest-only payment periods. And these lenders chase after subprime borrowers who’ve been rejected by banks and think they have no other options.

Even Impac Mortgage, which had cleaned up its ways after the Financial Crisis, is now offering, among other goodies, these “Alt-QM” mortgages.

Yet as long as home prices continue to rise, nothing matters, not the volume of these mortgages originated by non-bank lenders, not the risks involved, not the share of subprime borrowers, and not the often ludicrously high prices of even basic homes. As in 2006, the mantra reigns that you can’t lose money in real estate – as long as prices rise.

by Wolf Richter for Wolf Street