THERE ALWAYS WAS A SUBPRIME MARKET MORTGAGE FINANCE UPDATE NATIONAL AUCTIONEERS ASSOCIATION Jillayne Schlicke Dec 1, 2008

Unfortunately, banks started doing this without knowing how to service the loans. It takes time to work out non-performing loans. Consumer Finance Companies are really good at this. Banks are not. There always was a subprime market

Unfortunately, banks started doing this without knowing how to service the loans.

It takes time to work out non-performing loans.

Consumer Finance Companies are really good at this. Banks are not.

Consumer CDOs |||||||| Federal Reserve FDIC 54 b US Taxpayer US Treasury $ Ratings Agencies AAA AA A RMBS Mortgage Broker Mortgage Banker Consumer Finance Co. Wrong model to rate the single As Copyright Dec 2008 Jillayne Schlicke Do Not Duplicate Rise and Fall of Securitized Lending

Consumer

Why The TARP Plan Failed Re-underwrite Modify Re-package Re-sell Money will return to the U.S. Treasury. Assets Loans good bad Liabilities Deposits Banks U.S. Treasury Involuntary direct capital injections

Re-underwrite

Modify

Re-package

Re-sell

Money will return to the U.S. Treasury.

Assets

Loans

good

bad

Feedback Loop Higher Rates Rising Bank Losses Lower Home Values Rising Inventory Fewer Buyers Tighter UW Guidelines Rising SS & F Lower Home Values Rising Foreclosures Time

Government Intervention Gov will always try to intervene Some argue that this is necessary Gov intervention will slow the downside and ultimately slow the recovery Recent government intervention

Gov will always try to intervene Some argue that this is necessary

Gov intervention will slow the downside and ultimately slow the recovery

Recent government intervention

Recent Gov Intervention Loan modifications Voluntary participation in FDIC’s model Fannie Freddie loan mods FHA Secure, H4H Mandatory foreclosure moratoriums (state level) Note: some banks are voluntarily doing this CitiGroup bailout Fed will purchase 600B in F&F’s MBS Let’s now take a look at government regulation…

Loan modifications

Voluntary participation in FDIC’s model

Fannie Freddie loan mods

FHA Secure, H4H

Mandatory foreclosure moratoriums (state level)

Note: some banks are voluntarily doing this

CitiGroup bailout

Fed will purchase 600B in F&F’s MBS

Let’s now take a look at government regulation…

Tangled Web of Regulation Tttttttt Source: dfi.wa.gov

Top Ten Ways to Tell If Your Bank is Going Under Paulson appears on Face the Nation and says, “Our banking system is safe and sound.” CD rate offered is way, way higher than any other bank. The change counting machine disappears and is replaced with a slot machine. Instead of coffee and donuts, the bank is giving away Ford, Chrysler, or GM cars. No pens and no withdrawal slips, only FDIC I.O.U.s Sounds of loud sobbing can be heard coming from the vault. Large pizza delivery truck parked outside on a Friday evening. Branch manager has scrawled "REDRUM" on her glass wall with her lipstick. There is a vacant lot where your branch used to be. and….

Paulson appears on Face the Nation and says, “Our banking system is safe and sound.”

CD rate offered is way, way higher than any other bank.

The change counting machine disappears and is replaced with a slot machine.

Instead of coffee and donuts, the bank is giving away Ford, Chrysler, or GM cars.

No pens and no withdrawal slips, only FDIC I.O.U.s

Sounds of loud sobbing can be heard coming from the vault.

Large pizza delivery truck parked outside on a Friday evening.

Branch manager has scrawled "REDRUM" on her glass wall with her lipstick.

There is a vacant lot where your branch used to be.

and….

“ There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac used up $8 billion. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of it? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back. What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.” Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com

“ There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac used up $8 billion. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of it? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back. What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.” Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com

t Source: Bloomberg

Trends for the rest of this month Car Companies Get Bailed Out Lehman Hedge Funds will evaporate Billions of losses at Goldman Sachs Commercial and Development loans will freeze More bank failures Pressure to use TARP funds to lower rates Details on President Obama’s stimulus plan Will help commercial employment

Car Companies Get Bailed Out

Lehman Hedge Funds will evaporate

Billions of losses at Goldman Sachs

Commercial and Development loans will freeze

More bank failures

Pressure to use TARP funds to lower rates

Details on President Obama’s stimulus plan

Will help commercial employment

Trends for 2009 Turnover of existing inventory will slow Loan modification default rates to rise (currently 50% of loan mods are re-defaulting) Banking system will continue towards nationalization (watch for an FDIC bailout) Credit Unions will survive Consumer Finance Companies will survive Watch for problems at FHA in 2009, 2010 Too soon to call the bottom Alt A & Option ARM Resets….

Turnover of existing inventory will slow

Loan modification default rates to rise (currently 50% of loan mods are re-defaulting)

Banking system will continue towards nationalization (watch for an FDIC bailout)

Credit Unions will survive

Consumer Finance Companies will survive

Watch for problems at FHA in 2009, 2010

Too soon to call the bottom

Alt A & Option ARM Resets….

Option ARM Non-Bomb? 11 th District COFI 60% of ARMS tied to LIBOR 25% tied to various treasuries 15% tied to the COFI (many in Calif) Many option ARM holders were making the min payment or paying interest only. When the loans recast , the borrower will begin making the amortized payment, which could have a much larger impact on the monthly payment than the rate reset .

t

Good news for auctioneers Individual foreclosure auctions Large, bulk investor purchase auctions FSBO auctions REO auctions v. individual resales There always will be a subprime market

Good news for auctioneers

Individual foreclosure auctions

Large, bulk investor purchase auctions

FSBO auctions

REO auctions v. individual resales

THERE ALWAYS WAS A SUBPRIME MARKET MORTGAGE FINANCE UPDATE NATIONAL AUCTIONEERS ASSOCIATION CEFORWARD.COM MORTGAGEFIDUCIARIES.COM RAINCITYGUIDE.COM Jillayne Schlicke Dec 1, 2008