Bear Stearns - First but not the last to fall.
The Lender Implode-O-Meter will turn into the Wall Street Implode-O-Meter.
Recently I've been frustrated by the lack of understanding, or misunderstanding financial types seem to have about the true nature of what is really behind the mortgage backed securities. I even had a discussion at the Federal Reserve Board HOEPA meeting with a financial reporter who insisted I was full of BS and didn't understand the markets. I may not understand the stock market from the perspective of a financial analyst and maybe that is a good thing. They seem to take whatever companies say at face value. If you go over to my article under Countrywide, there it is Bear Stearns saying they don't believe that the subprime market will spill over into the broader markets. Then here we go just a few weeks later and the Bear Stearns hedge funds are collapsing. Really people need to use common sense here. Forget financial analysis. Not one of the companies who have imploded admitted anything was wrong until the implosion took place. Not one! Still I'm amazed at how many people, with the overwhelming publicity surrounding all of the action taking place are choosing to ignore the cold hard facts.
Let's get serious.
The underlying MBS are worth the paper they were printed on.
First the value of real estate was artificially inflated due to lax underwriting sending a glut of borrowers out to buy houses they couldn't afford.
Then appraisers obliged brokers and lenders in justifying the loan amount no matter what.
Now if that original property was really worth $300,000 in a normal market vs. $400,000 in an inflated one, the paper is now worth $100,000 less.
But it gets worse:
The same property also would have never appraised for $300,000 but the appraiser inflated amenities, square footage and other items to make the property appraise. Lenders will find incorrect SF, decks that don't exist, basements which aren't finished and properties which should be condemned when they go to foreclose. So now that paper is worth maybe $250,000.
Then the GRAND finale:
The glut of foreclosure hitting the market have depreciated the value even further so that house is worth( if they can even sell it) maybe $200,000.
Oh, how could I forget:
If that borrower took out a 100% LTV at $400,000 (many did) or worse a "Pay Option Arm" which negatively amortized the balance up to 125 % of the original loan balance or $500,000 then defaults, the investor (hedge fund) will be holding a note for $500,000 that is only worth $200,000 ( if they can sell it at all). Imagine the losses.
Consider the GREED:
The same Wall Street, mortgage and finance executives who took millions in profits and salaries while creating this house of cards will not willingly cough up the ill gotten gains. They will all hide in every way possible their role in this debacle. They had to know at some point the S--- would hit the fan. Didn't they? OR did they really believe at some point every one in American would be able to afford a million dollar house on a bus drivers or school teachers salary?
COMMON SENSE:
I may not be smart about financial investment matters, but common sense tells me, the market is in serious jeopardy at the moment. If someone doesn't figure out how to undo what has already been done. No small feat. How do you undo loans for more then properties are worth? How do you get people out of houses they couldn't afford to begin with in a market condition like this?
http://usmarket.seekingalpha.com/article/39231?source=d_email&u=72390 