This post is for the stock market participants out there.

This did not make the big news circuit and quite frankly, with all the other news swirling, I forgot about it. The reason why I am bringing it up is because I have been reporting on Wells Heloc and Subprime exposure for almost a year and have been ridiculed to death by the Buffet cheerleaders. (see links below to other Wells reports)

Now, Buffet is taking my side. Last weekend at the Berkshire meeting, he said:

2:38 pm:Buffett says Wells Fargo (in which he has a stake) will have larger than usual losses, but that won’t be the end of the world and he’ll keep owning it over the next 5-10 years. “I would predict that Wells will be earning a lot more money ten years from now than it is now.” It wouldn’t matter to him if Wells Fargo was delisted for three years and he could just watch the business. He doesn’t feel that way about every bank, of course.

2:40 pm:Munger says, “What your seeing now is justice.” Banks that were stupid and overreached deserve to suffer. Buffett notes that justice is coming from the shareholders, but also affecting shareholders who didn’t really know what was going on.

So, it should be obvious now that Wells Fargo isn’t what management portray it to be. They did their fair-share of dirty lending as one of the leaders in Subprime, Alt-A and Home Equity. As a matter of fact, they still hold $84 BILLION in Home Equity Loans worth a small fraction of a dollar.

Those of us in the mortgage industry have known this for years. It still amazes me how everyone on Wall Street and the bank itself, can be in such denial. Now, the truth is coming out and as a shareholder, you should know.

In addition to the above, I was told by someone actually at the meeting that the words ‘near-term’ were also used in association with the ‘losses’ so big Wells Fargo news maybe coming sooner than you think.

A second story making the the rounds this week, but much more under-the-covers, is that BofA will cut its dividend in the next week or so. This is only a rumor but from very credible sources. Warren Buffet did not say this. -Best Mr Mortgage

Mr Mortgage Exposes Wells Fargo’s Toxic Waste

Home Equity Loans - A Big Bank Killer

Home Equity Delinquencies Surge - S&P, BofA and Fitch Concur

A Fitch must-read just came out. Other than Egan-Jones, I feel that Fitch is the best rater out there, although they are a little slow at this one. But, then again much faster than S&P, Moody’s, most mutual and hedge funds and 99% of the mainstream press. 

Fitch concluded that ‘high-risk attributes coupled with continued home price declines and the sharp contraction in available NON-AGENCY mortgage capital’ are the primary factors in ‘The Alt-A Implosion’, playing in city near you this very minute.

They cite that in the Alt-A arena, as with subprime, that loans with ’simultaneous second liens (SSLs, aka piggybacks) are defaulting at very high rates relative to other loans and to history’. They say the ‘performance divide between loans with SSL compared to those without exhibit delinquency levels 71% to 300% higher’. They also say ‘borrowers with perceived equity default at lower rates than those without’. This is the ‘negative equity effect’ I have talked about so many times in the past year.

Fitch says ‘hybrid ARMs are exhibiting the highest rate of delinquency and fixed rate the lowest’. OPTION ARM performance is comparable to that of fixed rates ONLY FOR THE FIRST 12-MONTHS AND THEN DELINQUENCIES QUICKLY APPROACH HYBRID ARM LEVELS BY MONTH 18.

For those of you who are not acknowledging the ‘Alt-A Implosion’ is real and is here, this is more evidence for you. It has been my opinion for a very long time that ‘The Alt-A Implosion will make the Subprime Implosion look like a bad earnings report because Alt-A cuts across all socio-economic boundaries and the loans in most cases are truly exotic.’At least with subprime, the principal mortgage balance does not GROW each month as with the soon-to-be infamous Alt-A Pay Option ARM.’

Below are many stories I have done on the impending Alt-A crisis. You might want to have a look. This story so important and gets so little attention. The US housing market and economy in general likely cannot withstand an all-out Alt-A Implosion, which could be a blow equal or larger than the Subprime Implosion. -Best, Mr Mortgage

MORE MR MORTGAGE STORIES/RESEARCH ON ALT-A

ALT-A Exposed - The Worst Is Yet To Come

The ‘Pay Option ARM Implosion’…Subprime’s Big Brother

Moody’s Hits Lehman Due To ALT-A…Here Comes The ALT-A Crisis!

Lehman’s Dirty ALT-A Exposure Revealed

Yesterday, everyone was writing about Fannie so I left it alone. There is not much more to add, so let me summarize.

• -Loss of $2.2 BILLION, which slightly less than FOUR TIMES greater than expected
• $51 BILLION in Subprime exposure
• $345 BILLION in Alt-A exposure
• Cut dividend and issued $6 BILLION of debt to raise capital without telling anyone how much they had to pay for said debt
• Moody’s downgraded Fannie’s strength one level to ‘B’ and sees a possible $9 BILLION loss in 2008-2009
• Warns the housing ’slump’ will persist into next year 

FANNIE MAE STOCK RALLIED 15% from the opening lows on this news due to:

• News OFHEO will loosen capital requirements on Fannie
• Fannie said they will take advantage of this downturn to book quality business that will actually be profitable some time in the future.
• Barney Frank’s proposed $300 BILLION bailout, which requires banks to reduce mortgage notes to 85% loan to value looks to have much support

There ya go. Fannie is having serious trouble as they stated. But, all it takes is OFHEO to allow them to leverage up more and Barney Frank to come in with yet another bailout and the stock rallies 15%. I am not short Fannie Mae (right now), but dislocations in financial markets that are this obvious and this extreme rarely end positively for stocks. Well, that’s unless you are short. -Best, Mr Mortgage

If you have a Home Equity Line of Credit (HELOC) with unused credit, you may not have access to that credit for long. A few months back Countrywide led the pack by suspending 122,000 borrowers from tapping their lines and now they have suspended ALL lines in the city of Las Vegas, Nevada. Other ‘bubble’ cities are being targeted across the nation.

Since January, Countrywide, WAMU, BofA, IndyMacBank and Wells have frozen hundred’s of thousands of HELOC’s preventing home owners access to money they thought was available. Many use these lines for home improvement, business, college tuition etc and now, have been left out in the lurch.  CONTINUED…

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Merrill is getting very good at the number one game on Wall Street, ‘Hide the Mortgages’. When worthless mortgage paper is presenting a problem to your financial sitaution, move them to your Level 3 books, mark them at par or better and put out a press release saying ‘we don’t need to raise anymore capital’. Merrill’s top competitors in this game are Goldman, Lehman, Citi, Chase, Morgan, Bear etc. The usual suspects…the ones (other than Citi) that posted ‘really great earnings’ last quarter.

Merrill says it’s most difficult to value Level 3 ’assets’ jumped big-time in Q1.  It’s ratio of Level 3 to total assets rose to 8 percent from 5 percent. What the didn’t tell you was that Level 3 ‘assets’ as a percent of shareholder equity was 130% (see chart inside). Good de-leveraging job guys!

But, what about your $770 BILLION in Level 2 ‘assts’ John? Maybe they are not all ’illiquid’ as are the Level 3 assets, but are they really worth par? Level 3 is where most have stuck the subprime, home equity, alt-a etc paper, however, Level 2 also contains certain residential and commercial mortgages.

So, this is what being “80% done with the credit crisis” looks like. Untradable, marked-to-myth assets surge, as banks neatly get their books in order putting all their toxins on their Level 3 books, awaiting the day the Fed comes in and saves everyone? But until that day comes and even as the Fed, Treasury and the banks themselves preach ‘deleveraging’, the banks are levering up.

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In this video, I cover what I have always used as indicators of a home’s value or investment potential. There is no perfect valuation metric due to wildcards never before seen, such as bank REO inventory, which made up 38% of the existing home sales in March in the state of CA and is being discounted by 20-50%. But, at the very least this video outlines some easily understandable indicators and describes in detail the biggest risks confronting prospective home buyers. Oh and by the way, please subscribe to this blog by entering in your email address above and an daily recap will be sent to your email address. -Best, Mr Mortgage

YouTube Video Link http://www.youtube.com/watch?v=1PDeMZYRjLQ

Foreclosure Radar Link http://www.ForeclosureRadar.com

How much house can you afford?Use this table below is conjunction wih the video above in order to figure out how much the median home owner in your city can afford now that all the exotic loan programs are gone. The answer may shock you.

Click the image for a larger picture

This simple table below illustrates how so much affordability has been lost in the past year. Without exotic loan programs/guidelines such as interest only, stated income, zero down, 2nd mortgages to replace down payment, higher debt-to-income (DTI) ratios, Pay Option ARMs etc, we have gone back to a 30-yr fixed rate society overnight.

MORE MR MORTGAGE - YOUTUBE SERIES

Mr Mortgage - Non-mainstream March Existing Home Sales Report

Mr Mortgage - March Foreclosure Crisis

Mr Mortgage - Here Comes the ALT-A Crisis

The ALT-A crisis  may make the subprime crisis look like a bump in the road when all is said and done. This story is really picking up steam, but it seems that, as with the suprime crisis, the mainstream media is not giving this much attention. In my opinion, the ALT-A space collapsing could cause much larger crisis for the broader economy because ALT-A loans cut across all socio-economic boundaries and were used most heavily in in the nation’s most affluent cities/regions. 

Many said a year ago when New Century collapsed that they were the ‘canary in the coal mine’. I have always said ’the entire subprime sector is the canary in the coal mine’.

Below is the Moody’s/LEH news just released and below that are various Mr Mortgage reports on the ALT-A crisis coming to a city near you right now. -Best Mr Mortgage 

12:59PM Lehman Brothers: Moody’s takes action on certain Lehman Alt-A deals (LEH) 46.30 -0.76 : Moody’s has downgraded the ratings of 28 tranches from eleven Lehman Mortgage Trust deals. Three tranches remain on review for possible further downgrade. Additionally, 103 tranches were placed on review for possible downgrade. The collateral backing these transactions consists primarily of first-lien, fixed, Alt-A mortgage loans. The ratings were downgraded or placed on review, in general, based on higher than anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels.

LEHMAN’S DIRTY ALT-A EXPOSRE - Mr Mortgage youTube Series

ALT-A DISASTER LOOMING - KNOW THE FACTS

PAY OPTION ARMS - SUBPRIME’S BIG BROTHER

Fresh news out…S&P pulled a slick one. They STOPPED rating second mortgage RMBS citing “anamolous and unprecedented” borrower behavior. Here is a little piece from Bloomberg that enhances the previous story very well, calling all Home Equity loans ‘junk’.

Remember, this is a $1.3 TRILLION market with the bulk belonging to very few banks such as BofA, Wells, Chase, CITI, Countrywide, WAMU, National City, GMAC and IndyMac. I put a couple of nice quotes below. This could turn out to be a fairly large story in the making.

Home Equity Lines of Credit and loans (HELOC, HEL’s, second mortgages) were the true ‘Home ATM Machine’ and could be a big wipe-out for the big banks. These loans were mostly used to avoid Mortgage Insurance on purchase and refinance loans over 80% LTV and went up to 100% of the house value in recent years. As a matter of fact, an appraisal or full documentation was often not required. These loans were very easy to get and primarily relied upon an electronic evaluation of the property value and credit score alone.

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Why would BofA Pay $50 Billion for Countrywide???

This is all my opinion of course…from day-one, the ‘BofA Buys Countrywide’ (CFC)deal reeked of a bailout. As a matter of fact, if you remember that week, David Faber of CNBC actually said he had heard rumblings that ’some influential folks in Washington told BofA to get in there and fix the problem’.

The problem was CFC was failing. They were running low on credit and heavy on margin calls from their investors. Spreads on their credit default swaps were soaring preventing them from getting more credit, they were quickly drawing down ‘emergency lines’ and many deep in-the-know were speculating that CFC was not far from a bankruptcy filing.

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