Call Girls In Yusuf Sarai Women Seeking Men 9654467111
T2 Partners Presentation On The Mortgage Crisis
1. An Overview Of The Housing/Credit Crisis And
Why There Is More Pain To Come
T2 Accredited Fund, LP
Tilson Offshore Fund, Ltd.
T2 Qualified Fund, LP
May 19, 2009
2. T2 Partners Management L.P. Is A
Registered Investment Advisor
145 E. 57th Street 10th Floor
New York, NY 10022
(212) 386-7160
Info@T2PartnersLLC.com
www.T2PartnersLLC.com
7. For the Second Half of the 20th Century,
Housing Was a Stable Investment
300
Shiller
Lawler
275
Real Home Price Index (1890=100)
250
225
200
175
Trend Line
150
125
100
0
4
8
2
6
0
4
8
2
6
0
4
8
5
5
5
6
6
7
7
7
8
8
9
9
9
19
19
19
19
19
19
19
19
19
19
19
19
19
Source: Robert J. Shiller, Irrational Exuberance, Princeton University Press 2000, Broadway Books 2001, 2nd edition, 2005, also Subprime
Solution, 2008, as updated by the author at http://www.econ.yale.edu/~shiller/data.htm; Lawler Economic & Housing Consulting
7
8. …And Then Housing Prices Exploded
300
Shiller
Lawler
275
Real Home Price Index (1890=100)
250
225
200
Housing
Bubble
175
Trend Line
150
125
100
66
74
86
94
02
0
54
8
62
70
8
82
90
98
6
5
5
7
0
19
19
19
19
19
19
19
19
19
19
20
19
19
19
20
SOURCES: Robert J. Shiller, Irrational Exuberance: Second Edition, as updated by the author; Lawler Economic & Housing Consulting.
8
9. From 2000-2006, the Borrowing Power of a
Typical Home Purchaser Nearly Tripled
$400,000
Pre-Tax Income
Borrowing Power
$300,000
$200,000
9.2x in January 2006
$100,000
3.3x in January 2000
$0
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Factors contributing to the ability to borrow more and more were:
1. Slowly rising income
2. Lenders being willing to allow much higher debt-to-income ratios
3. Falling interest rates
4. Interest-only mortgages (vs. full amortizing)
5. No money down
Source: Amherst Securities 9
10. Housing Became Unaffordable in Many
Areas
80
Riverside, CA
70 Los Angeles, CA
San Diego, CA
60
Housing Opportunity Index
50
40
30
20
10
0
96
97
98
99
00
1
05
06
07
02
04
0
20
20
20
19
20
20
19
20
19
19
20
3
3
3
1
3
1
1
1
1
1
1
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
SOURCES: NAHB/Wells Fargo Housing Opportunity Index, which measures percentage of households that could afford the average home with a standard
mortgage 10
11. Americans Have Borrowed Heavily Against Their Homes Such
That the Percentage of Equity in Their Homes Has Fallen
Below 50% for the First Time on Record Since 1945
$12,000 90%
80%
$10,000
70%
Equity as a % of Home Value
$8,000 60%
Mortgage Debt (Bn)
1945 50%
$6,000 Mortgage Debt: $18.6 billion
Equity: $97.5 billion
2008 40%
Mortgage Debt: $10.5 trillion
Equity: $8.5 trillion
$4,000 30%
20%
$2,000
10%
$0 0%
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
SOURCE: Federal Reserve Flow of Fund Accounts of the United States
11
12. There Was a Dramatic Decline in Mortgage
Lending Standards from 2001 through 2006
Combined Loan to Value 100% Financing
86 18%
84
17%
• In 2005, 29% of
84
83
16%
new mortgages
82
81 81
14%
14%
were interest only
80 12% — or less, in the
Combined Loan to Value (%)
Percent of Originations
78 10%
9%
case of Option
76
76
8%
8%
ARMs — vs. 1%
74
74
74 6%
in 2001
72 4%
3% • In 1989, the
70 2%
1%
average down
1%
68
2001 2002 2003 2004 2005 2006 2007
0% payment for first-
2001 2002 2003 2004 2005 2006 2007
time home buyers
Limited Documentation 100% Financing & Limited Doc was 10%; by
70% 12%
2007, it was 2%
65%
63% 11%
60%
• The sale of new
10%
56%
homes costing
49%
50%
45% 8% 8%
$750,000 or more
quadrupled from
Percent of Originations
Percent of Originations
40% 39%
33% 6%
5%
2002 to 2006.
30%
4% The construction
4%
20% of inexpensive
2%
1%
homes costing
10%
0%
$125,000 or less
0%
0%
2001 2002 2003 2004 2005 2006 2007
0%
2001 2002 2003 2004 2005 2006 2007
fell by two-thirds
SOURCES: Amherst Securities, LoanPerformance; USA Today (www.usatoday.com/money/economy/housing/2008-12-12-homeprices_N.htm) 12
13. Among the Many Causes of The Great
Mortgage Bubble, Two Stand Out
• The companies making crazy loans didn’t care very much if the
homeowner ended up defaulting for two reasons:
1. Either they didn’t plan to hold the loan, but instead intended to pass it along
to Wall Street, which would bundle, slice-and-dice it and sell it (along with
any subsequent losses) to investors around the world;
2. Or, if they did plan to hold the loan, they assumed home prices would keep
rising, such that homeowners could either refinance before loans reset or, if
the homeowner defaulted, the losses (i.e., severity) would be minimal.
• There were many other reasons, of course – a bubble of this
magnitude requires what Charlie Munger calls “Lollapalooza Effects”
– The entire system – real estate agents, appraisers, mortgage lenders,
banks, Wall St. firms and ratings agencies – became corrupted by the vast
amounts of quick money to be made
– Regulators and politicians were blinded by free market ideology or the
dream that all Americans should own their homes, causing them to fall
asleep at the switch, not want to take the punch bowl away and/or get
bought off by the industries they were supposed to be overseeing
– Debt became increasingly available and acceptable in our culture
– Millions of Americans became greedy speculators and/or took on too much
debt
– Greenspan kept interest rates too low for too long
– Institutional investors stretched for yield, didn’t ask many questions and
took on too much leverage
– In general, everyone was suffering from irrational exuberance
13
14. As Long As Home Prices Rise Rapidly,
Even Subprime Mortgages Perform Well –
But If Home Prices Fall, Look Out Below!
Cumulative Five-Year Loss Estimates for a Bubble-Era Pool of Subprime Mortgages
60%
50%
40%
Cumulative Loss (%)
30%
20%
10%
0%
20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40%
Home Price Appreciation
Source: T2 Partners estimates
14
15. Deregulation of the Financial Sector Led to a
Surge of Leverage, Profits and Compensation
Ratio of Financial Services Wages to Nonfarm Private-Sector Wages, 1910-2006
• Among the most profitable areas for Wall Street firms was producing Asset-Backed Securities
(ABSs) and Collateralized Debt Obligations (CDOs)
• To produce ABSs and CDOs, Wall Street needed a lot of loan “product”
• Mortgages were a quick, easy, big source
• It is easy to generate higher and higher volumes of mortgage loans: simply lend at higher
loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and don’t bother
to verify their income and assets (thereby inviting fraud)
• There’s only one problem: DON’T EXPECT TO BE REPAID!
Source: Ariell Reshef, University of Virginia; Thomas Philippon, NYU; Wall St. Journal, 5/14/09 15
16. Over the Past 30 Years, We Have Become a
Nation Gorged in Debt – To The Benefit of
Financial Services Firms
3.0% 350%
Low Debt Era Rising Debt Era
Financial Profits as Percent of GDP
2.5%
Total Debt as Percent of GDP
300%
2.0%
250%
1.5%
Total Debt
Financial Profits 200%
1.0%
150%
0.5%
0.0% 100%
Dec- 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05
Sources: Federal Reserve, BEA, as of Q2 2007, GMO presentation
16
17. There Was a Surge of Toxic Mortgages
Over the Past 10 Years
$4,000
Conforming, FHA/VA
Jumbo
$3,500 Alt-A
Subprime
Seconds
$3,000
$2,500
Originations (Bn)
$2,000
$1,500
$1,000
$500
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
SOURCE: Inside Mortgage Finance, published by Inside Mortgage Finance Publications, Inc. Copyright 2009.
17
18. Private Label Mortgages (Those Securitized by
Wall St.) Are 15% of All Mortgages, But Are 51%
of Seriously Delinquent Mortgages
Number of Seriously
Number of Mortgages (million) Delinquent Mortgages (000)
Banks & Thrifts
Banks & Thrifts 397 Fannie Mae
8
444
Fannie Mae
Freddie Mac
18
232
Private Label
15% 8
Ginne Mae/FHA
378
Ginne Mae/FHA
6
Private Label
Freddie Mac 1734
13
51%
Approximately two-thirds of homes have mortgages and of these, 56% are owned or
guaranteed by the two government-sponsored enterprises (GSEs), Fannie & Freddie
SOURCE: Freddie Mac, Q4 2008.
18
20. All Types of Loans, Led by Subprime, Are
Seeing a Surge in Delinquencies
45%
Alt A
Option ARM
40%
Jumbo
Subprime
35% Prime
Home Equity Lines of Credit
30%
Percent Noncurrent
25%
20%
15%
10%
5%
0%
Q 01
Q 01
Q 99
Q 99
Q 00
Q 00
Q 02
Q 03
Q 03
Q 04
Q 04
Q 05
Q 06
Q 06
Q 07
Q 08
08
Q 07
Q 02
Q 05
20
20
20
20
20
20
20
20
20
20
20
19
19
20
20
20
20
20
20
20
3
1
1
3
3
1
1
3
1
3
3
3
1
3
1
3
1
3
1
1
Q
SOURCES: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile;
T2 Partners estimates. Note: Prime is seasonally adjusted. 20
21. The Decline in Lending Standards Led to a
Surge in Subprime Mortgage Origination
$700 25%
$600
20%
20% 20%
18% % of
$500
T ota l
Origina tions
(Bn)
15%
$400
$300
10% 10% 10%
10% 10%
9% 9%
9%
8%
$200 7% 8%
7%
5%
$100
$0 0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Reprinted with permission; Inside Mortgage Finance, published by Inside Mortgage
Finance Publications, Inc. Copyright 2009.
21
22. The Wave of Resets from Subprime
Loans Is Mostly Behind Us
$35
$30 We are
here
$25
Loans with Payment Shock (Bn)
$20
$15
$10
$5
$0
07
7
0
6
08
09
7
0
6
8
8
09
10
0
6
7
9
06
8
9
-0
-0
-1
-0
l-0
l-0
l-1
l-0
r-0
-0
-0
-1
-0
l-0
n-
n-
n-
r-
n-
n-
ct
pr
pr
pr
ct
ct
ct
ct
Ju
Ju
Ju
Ju
Ju
Ap
Ap
Ja
Ja
Ja
Ja
Ja
O
O
O
O
O
A
A
A
Sources: LoanPerformance, Deutsche Bank; slide from Pershing Square presentation, How to Save the Bond Insurers, 11/28/07. 22
23. Numerous Areas of the Mortgage Market Will
Suffer Significant Losses Going Forward
Prime Mortgage
Commercial Real Estate
Alt-A
Other Corporate
Commercial & Industrial
Subprime
High-Yield / Leveraged Loans
Jumbo Prime
Home Equity
Credit Card
Auto
Option ARM
Construction & Development
Other Consumer
CDO/ CLO
$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0
Amount Outstanding (Trillions)
SOURCES: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial Stability Report October 2008, Goldman Sachs Global
Economics Paper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data, T2 Partners estimates. 23
24. There Are $2.4 Trillion of Alt-A Mortgages
and Their Resets Are Mostly Ahead of Us
$300
$10
We are $9
here
$250
Estimated Cumulative Reset Amount (Bn)
$8
$7
$200
$6
Amount (Bn)
$150
$5
$4
$100
$3
$2
$50
$1
$0
$0
4
0
2
15
13
10
12
5
3
1
14
11
l-1
l-1
l- 1
l-1
l-1
l-1
n-
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ju
Ja
Ja
Ja
Ja
Ja
Ja
SOURCES: Credit Suisse, LoanPerformance.
24
NOTE: This chart only shows resets for a small fraction of Alt-A loans, but is representative of all of them.
25. Percent Noncurrent (60+ days)
Ja
n-
0%
5%
10%
15%
20%
25%
99
Ju
l-9
Ja 9
n-
0
Ju 0
l-0
Ja 0
n-
01
Ju
SOURCES: Amherst Securities, LoanPerformance.
l-0
Ja 1
n-
0
Ju 2
l-0
Mortgages Are Soaring
Ja 2
n-
03
Ju
l-0
Ja 3
n-
0
Ju 4
l-0
Ja 4
n-
05
Ju
l-0
Delinquencies of Securitized Alt-A
Ja 5
n-
0
Ju 6
l-0
Ja 6
n-
07
Ju
l-0
Ja 7
n-
0
Ju 8
l-0
Ja 8
n-
09
25
26. Alt-A Delinquencies By Vintage Show the
Collapse in Lending Standards in 2006 and 2007
30%
2007 2006
25%
Percent Noncurrent (60+ days)
20%
15%
2005
10%
2004
5%
2003
0%
0 5 10 15 20 25 30 35 40 45 50 55 60
Months of Seasoning
SOURCES: Amherst Securities, LoanPerformance.
26
27. A Primer on Option ARMs
• An Option ARM is an adjustable rate mortgage typically made to a prime borrower
• Sold under various names such as “Pick-A-Pay”
• Banks typically relied on the appraised value of the home and the borrower’s high
FICO score, so 83% of Option ARMs written in 2004-2007 were low- or no-doc (liar’s
loans)
• Each month, the borrower can choose to pay: 1) the fully amortizing interest and
principal; 2) full interest; or 3) an ultra-low teaser interest-only rate (typically 2-3%), in
which case the unpaid interest is added to the balance of the mortgage (meaning it is
negatively amortizing)
• Approximately 80% of Option ARMs are negatively amortizing
• Lenders, however, booked earnings as if the borrowers were making full interest
payments
• A typical Option ARM is a 30- or 40-year mortgage that resets (“recasts”) after five
years, when it becomes fully amortizing
• If an Option ARM negatively amortizes to 110-125% of the original balance (depending
on the terms of the loan), this triggers a reset even if five years have not elapsed
• Upon reset, the average monthly payment jump 63% from $1,672 to $2,725 ($32,700
annually)
• ‘My sense is that many option ARM borrowers are in a worse position than subprime
borrowers,’ says Kevin Stein, associate director of the California Reinvestment
Coalition, which combats predatory lending. ‘They wind up owing more and the resets
are more significant.’ 27
28. About $750 Billion of Option ARMs Were
Written, Nearly All at the Peak of the Bubble
$300 9%
9%
8%
$250 8%
7%
$200 6%
Originations (Bn)
Percent of Total
5% 5%
$150 5%
4%
$100 3%
2%
$50
1% 1%
$0 0%
2004 2005 2006 2007 2008
SOURCES: 2008 Mortgage Market Statistical Annual, published by Inside Mortgage Finance Publications, Inc. Copyright 2008. T2 Partners estimates.
28
29. Options ARMs Were a Bubble State
Phenomenon
Other
25%
Arizona
3%
California
Nevada 58%
3%
Florida
10%
SOURCES: Amherst Securities, LoanPerformance.
29
30. Beginning in March 2005, High-FICO-Score
Borrowers Opted for an Above-Market-Rate
Option ARM in Exchange for the Low Teaser Rate
8.5
Fannie Mae 30 Year FRM Index
Option ARM Index
8.0
Nearly all option ARM borrowers during
7.5
this period (when nearly all option
ARMS were written) can’t afford a fully-
7.0
amortizing mortgage – otherwise they
would have taken one
Interest Rate (%)
6.5
6.0
5.5
5.0
4.5
4.0 6
07
7
08
2
03
3
04
6
2
3
7
4
05
5
5
06
02
2
3
4
6
7
4
5
-0
-0
-0
-0
-0
-0
l-0
l-0
l-0
l-0
l-0
-0
-0
-0
-0
-0
r-0
l-0
n-
n-
n-
n-
n-
n-
n-
pr
pr
ct
pr
pr
pr
ct
ct
ct
ct
ct
Ju
Ju
Ju
Ju
Ju
Ju
Ap
Ja
Ja
Ja
Ja
Ja
Ja
Ja
O
O
O
O
O
O
A
A
A
A
A
SOURCE: Amherst Securities, BloombergFinance, L.P.
30
31. Percent Noncurrent (60+ days)
Ja
n-
0%
5%
10%
15%
20%
25%
30%
35%
99
Ju
l-9
Ja 9
Are Soaring
n-
0
Ju 0
l-0
Ja 0
n-
01
Ju
l-0
Ja 1
n-
02
Ju
l-0
Ja 2
n-
03
SOURCES: Amherst Securities, LoanPerformance, T2 Partners estimates.
Ju
l-0
Ja 3
n-
04
Ju
l-0
Ja 4
n-
05
Ju
l-0
Ja 5
n-
06
Ju
l-0
Ja 6
n-
07
Ju
l-0
Delinquencies of Securitized Option ARMs
Ja 7
n-
08
Ju
l-0
Ja 8
n-
09
31
32. Option ARM Delinquencies By Vintage Show the
Collapse in Lending Standards in 2005-2007
45%
2006
40%
35%
2007
Percent Noncurrent (60+ days)
30%
2005
25%
20%
2004
15%
10% 2003
5%
0%
0 5 10 15 20 25 30 35 40 45 50 55 60
Months of Seasoning
SOURCE: Amherst Securities, LoanPerformance.
32
33. Percent Noncurrent (60+ days)
Ja
n-
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
99
Ju
l-9
Ja 9
n-
0
Ju 0
l-0
Ja 0
n-
01
Ju
SOURCES: Amherst Securities, LoanPerformance.
l-0
Ja 1
n-
02
Ju
l-0
Mortgages Are Soaring
Ja 2
n-
03
Ju
l-0
Ja 3
n-
04
Ju
l-0
Ja 4
n-
05
Ju
l-0
Ja 5
n-
06
Ju
l-0
Ja 6
n-
07
Ju
l-0
Delinquencies of Securitized Jumbo Prime
Ja 7
n-
08
Ju
l-0
Ja 8
n-
09
33
