Sunday, March 11, 2007

Part I - An INSIDE view (LITERALLY) of the subprime industry - New Century

Over the next week or so, I am going to show you...literally, why the subprime mortgage industry is imploding. I have known this was coming for a good 2+ years now. Those that have read this blog, and read my posts on Ben's blog, know that I have been saying these things for a long time. NOW, I am going to show you rate sheets and loan programs from various lenders. Some have already gone under, some are on their way, and others are still plugging along. You will be able to see what I was seeing on a daily basis in 2004, 2005, and 2006.

I saved a lot of mortgage hand-outs and flyers from my dealings in the mortgage industry. And now, I am going to share them with you. Some of you knew this stuff was crazy, some thought you knew, some of you had no clue. I am going to show you the 'paperwork' that was floating around every broker shop in the country. I am going to let you look at actual rate sheets and see if you think the 'risk' is priced into the loan. I am going to show you loan programs that were being marketed all day long by multiple lenders.

I will show you how competition drove standards into the toilet and how easy it was to get a loan the past few years. I am going to show you how mortgage lates, reserve funds, verifications of rent/mortgage, and other 'standards' were eliminated by the lenders to carve out their 'niche'. Unfortunately, about 30 companies have carved out their graves instead. Put a big 'W' next to the fundamentals...and a big 'L' (and some flowers) next to the companies that lost.

Before I get going, I will say this: Alt-A and the A-paper markets are next. Do not think for one second that the lax underwriting was only for the subprime borrowers. The booming market made 'everybody' feel good and risk assessment was no longer a priority or focus. Why would it be? That said, just because somebody has a high FICO score does NOT mean they have the income needed to afford their option-arm loan when it resets. You will see the alt-a and prime markets falter in the future. Probably not as bad as the subprime market, but you will see record defaults in alt-a and a-paper loans over the next 12-48 months. I will go into this more in depth at another time. Lets start by taking a look at a 'leading loser' in the subprime sector.

Of all the lenders out there, I will say that New Century was NOT one of the ones that was completely out of control, but they are in the news big-time right now, so I will start with them. Sure, they were doing the typical 'subprime' mortgage loans, but they were not doing some of the crazy stuff that I will show you over the next week or so. They might have had some funny accounting, but my point is, they are pretty representative of one of the top companies in the industry. Since we know where New Century is headed today, lets look at where they were a mere 27 months ago in December 2004: note that their stock price hit $65 a share in December of 2004 (closed at $3.87 on March 8, 2007...please pause while the 'shorts' cheer).

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I know, I know....some familiar names on that list. Some of which are already gone. Look at the triple digit growth of some of those companies...and look where they are now. I have data from many of these companies which I will be sharing with you...just be patient. It actually takes quite a bit of work and time to put together good posts...that are informative and entertaining.

Now, lets take a look at a 'risk sheet'...I mean a 'rate sheet' from June 2005 and see how much of a risk premium most of these 'subprime' and alt-a borrowers were paying. Remember how the media always says that subprime loans have high rates in the 8's and 9's and are priced much higher than 'prime' loans. Well, now you can see and decide for yourself. There is nothing really shocking (for the subprime industry of the past 5 years) about this rate sheet, or any program that New Century had, but I will point out a few things.

I suggest clicking on the rate sheet below, and following along as best you can. The best way to read this rate sheet is as follows: you have full doc on the left, and stated income on the right. Then you have different levels of credit quality that make up the far left hand side. This looks at mortgage lates, as well at BK and foreclosures (NOD). Notice the 'Max D/R' or max debt ratio that is across the top. 50-55% debt ratios for most of these loans. That means that 50-55% of your pre-tax income is going to DEBT. Not just mortgage debt, all of your debt (car payment, credit card, etc). Don't forget that many people are in the 25-33% tax brackets as well. So you can easily 'qualify' to spend 70-85% of your gross income on taxes and debt...doesn't leave much to eat on, put gas in the car, and heaven forbid...'save'. Oh, and don't forget that if you don't meet these debt ratios, you can always 'state' your income so that you qualify. And you wonder why people are up to their eyeballs in debt!?!?!?

Be sure to look at the adjustments on the right hand side. Please note that a quarter point (.25) was SUBTRACTED from all loans in the $250k to $600k range. Look at the difference between full doc and stated income rates. I don't expect most people to be able to understand all of it, but post your questions and myself and others will try and help explain things.

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I don't want to overwhelm everybody with a bunch of rate sheets and information on this first 'look' at the subprime industry. Every company has slight differences in their rate sheet. I am sure there will be questions on how to read a rate sheet and what things mean. Hopefully we can get a lot of questions answered early on, and focus on the fundamentals and have more discussion more on the coming posts. This post is just to give you a taste of what is to come. I have many more rate sheets and flyers to show you...look at these mortgage flyers as just a sample of what I have picked up along the way.

This first one is a CLASSIC!!! Don't just look at the loan program...look at the picture...and see if you notice anything else...

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YUP! The company that is going to give you $750k can't spell the item you will be sticking in the master bedroom. But wait, got your eye on a 1.5 million dollar house, but don't have money for the downpayment?? No problem!

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Yes, I know. They are a 'no name' lender that most people haven't heard about...and their stock price is about the same as a can of soda. But I will leave you with this flyer from a company you MIGHT have heard of:

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Yup, you read that right...."1 day out of bankruptcy" you can get to 95% LTV with a 560 FICO score. But, at least it isn't a 'stated loan'. See, the lenders know what they are doing! I would be willing to bet this loan program probably isn't around anymore...but I have been wrong before.

Let me know what you think of this type of post. I have LOTS of rate sheets and flyers from a good 15+ lenders. Think Encore, Long Beach, Countrywide, Argent, First Street, Acoustic, Peoples Choice, Fremont, WMC, Meritage, Harbor Capital, Residential Capital, First NLC, BNC...and more!

I look forward to the comments and feedback.

Stay tuned...



Anonymous Anonymous said...

I fear this will spread like a fast growing cancer, through the whole system. Deep recession coming? Big Al thinks so.
Thank you for your insight.

3/12/2007 5:44 AM  
Anonymous Anonymous said...

Great post. It is good to see the "insider's perspective".

Question about the credit ratings: under each letter there is a formula (i.e. AA 0x30, C 1x90). These are obviously the number and severity of delinquencies. Are those on mortgage payments only or does it include credit cards? How does a 500's FICO guy even fit into the AA matrix at all?

3/12/2007 6:19 AM  
Blogger SoCalMtgGuy said...

Those are strictly mortgage lates from the last 12 months.

I have seen people with low 500 fico scores...they had bad credit...but as long as they pay their mortgage and don't have BK or foreclosure...they will be in 'top' credit bracket.


3/12/2007 8:14 AM  
Anonymous Anonymous said...

Add in inflated appraisals, falsified incomes, and a host of other types of fraud and you have the perfect storm.

3/12/2007 8:59 PM  
Blogger graphrix said...

Let me know if there is any way in which I can contribute to your blog. I am a ex-mortgage retail guy and could add some details that would add to the other side of the story. I don't come from the chop shops and unfortunately know more than I should. If you think it would be beneficial add a 2 and gmail it. I have a copy of an "A" paper rate sheet with a 3.625% rate three year I/O loan.

3/14/2007 12:54 AM  
Anonymous Anonymous said...

Life Inside a Wall Street Chop Shop

I used to work for one of the oldest and largest financial services companies in the world. But you wouldn't have known it from looking at the sign on the outside of the building. You see, the firm kept its name out of public view when it came to this business: the sub prime mortgage lending racket.


This Wall Street firm, spoken about in hushed tones around country clubs and cocktail parties, DOES NOT want to have its name associated with the financial services equivalent of a chop shop or a whore house. Oh no. It just wants the money associated with this despicable operation, and none of the press. Questions in the media about the propriety of these activities might cause discomfort for investors. Certain public appearances need to be maintained, after all.

This firm premeditated the exit from the crash unfolding before our eyes, both legally and in terms of public relations, years in advance.

Here's what it did...

3/14/2007 4:05 AM  
Anonymous Anonymous said...

First Franklin, People's and a few others used to have this one in 2006.

620 FICO - get a CPA letter saying you are self employed.
State your income.
Have 3 tradelines of any amount. 1 must be 24 months old and 2 must be 6 months old.
You get 100% financing up to $650,000. No questions asked...640 FICO if you wanted to say you were not self employed.

3/14/2007 2:04 PM  
Anonymous Anonymous said...

does anybody have any old time flyers from option one or D1

2/11/2010 8:10 PM  

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