This article on foreclosure issues in Sacramento is a very clear presentation of why the bailout does not help and in fact will hurt mortgage holders in distress
http://www.sacbee.com/142/story/1287910.html

It never ceases to amaze me how difficult it is to track down some of the most basic data on U.S. housing and mortgage markets. For instance, the Fed reports mtgs from commercial banks, but not mtgs overall. But on p.28 of this report (need the pdf to see the illustrations) is a chart at the top of which is reported $7.808 trillion outstanding of first lien residential mtgs, as of early 2007. Second liens would be a much smaller amt, so there’s presumably less than $10 trillion outstanding of residential mortgages.

Some of those loans were kept whole on the books at some bank, or bundled into a simple old-fashioned pass-through kind of bond. The large portion of loans that were written before the early 00s mostly fit here, and are not a big part of this discussion. But the rest, and the majority of those from the last 5yrs roughly, were put through the MBS/ABS tranchmaker or had CDOs written on them, which would leverage up their mortgage-related many times —a factor of 10 sounds quite possible. Then, perhaps the people 60Min talked to included CDSwaps, too. Then the sky’s the limit.

By the way, the report linked above is as close to a classic as the business research community is ever likely to produce. Highly recommened. It made such a huge splash when it went public in spring of 2007, after having been noised about for weeks or more I’ll bet, that anyone remotely close to the upper reaches of the finance community who says they had “no idea” until late that summer just how bad this turkey buzzard could potentially be, is almust surely flat out lying.

Mortgage Liquidity du Jour: Underestimated No More

Has Wall Street been buying up mortgage paper from around the world? Has the same paper been sold repeatedly to multiple investors?

An AngryMan wants to know.

Here’s a house owned by Albert. It has an “owner”, a mortgage and perhaps mortgage insurance or other property insurance.

On Wall Street there are two guys (working for the likes of Lehman, GSachs or other): one offers an ‘insurance policy’ (called a Credit Default Swap to avoid insurance regulation) and the other buys a ‘policy’ on Albert’s house. He wants 20 times the value of the house insured.

First, right away, you might wonder why somebody on Wall Street is insuring someone’s home/mortgage. That’s scary. Then he wants 20 times it’s value? Isn’t that a warning that they intend to burn it down to collect? No insurance regulation? OMG, this is bad.

So, you’ve got some value of mortgages out there “insured” multiple times over with leveraged money ($1 borrows $100 buys a lot of multiple of value insurance).

It all adds up to a lot of insurance — ON PAPER.

Then to finish it off…the ‘insurer’ has no real capital to back that non-regulated ‘insurance’.

It’s a scam and there were a lot of people doing it on Mortgage Backed Securities (MBSs) and it’s just incredibly stupid unless you know you’ve got a friend in the White House who will get you that insurance policy payoff.

Bush & Co need to be tarred & feathered & run out of town.

There’s a house up the road that’s been for sale for probably close to a year. About a month or so ago, they put up a McCain sign, near the for sale sign. I laugh every time I go by.

They probably don’t see the irony of a McCain sign and a house for sale sign side by side. It was probably a foreclosure too.

I understand leverage where an investor places $100 in a fund, and the fund buys $3600 worth of mortgage paper. But I don’t understand how that creates more mortgage paper. Fill me in.

Office of Financial Stability

that name sounds as approximately reassuring as “the clear skies initiative” or “no child left behind”

In the spirit of 1984 it should be a chilling moment to read that and know what it really means. Hold on tight to your dreams.

AngryMan