The eye of the mortgage hurricane

There's an old story about some Yankee farmer along the CT shoreline who hunkered down for the 1938 hurricane and thought he had been through it. The skies cleared and the air calmed, and he pushed open the basement door to inspect the devastation. A half hour later the storm returned and he was never seen again.

We are in that storm in the subprime crisis, both economically and politically.  Right in the eye and the less prudent will think it has passed only to be swept away.   Thise people who did high fives about the wonderful bailout bill last week http://www.washingtonpost.com/wp-dyn/content/article/2008/07/30/AR2008073002950.html?referrer=emailarticle    will soon eat a whole nest worth of crow.

On the economic front, the New York Times speculated earlier this week that the second shoe in mortgage lending is about to drop. http://finance.yahoo.com:80/loans/article/105504/Housing-Lenders-Fear-Bigger-Wave-of-Loan-Defaults . Evidently the borrowers with better credit are starting to default at a higher rate. This is particularly true for the "Alt-A" borrowers  who did not submit W-2 documentation for their loans. Called "liar's loans" by many, let's say the stated income was usually what was necessary to close the loan whether the borrower really earned it or not. Many Alt-A's wre "exotic" loans which were "interest only" , and and some point the lender wants to see some principal come back.  Add to that the honest Alt-A's were heavily self-employed and often in the RE business themselves---and the loan balances are now more than the collateral--  and we have a real perfect storm out there. JPChase's James Dimon, one of the more effective financiers of this era, was dead on as saying the impact was "terrible"

Now remember that Mortgage Bailout Bill we just passed? Because FannieMae  and Freddie Mac are holding over $1 trillion in subprime exposure, it was estimated that the Feds would have to advance $25 Billion to prop them up.

I don't think that included the yet unknown exposure to failing Alt-A mortgages's we're going to see over the next 24 months   Today, Freddie Mac announced an unexpected $800 million loss as the first of the Alt-A defaults started to show up. http://news.yahoo.com/s/ap/20080806/ap_on_bi_ge/earns_freddie_mac_14, Needless to say, Freddie's shares plunged.

So we're in for something on the real estate front akin to this    

Now for the political angle

In CT, we are now in Day 55 of the Chris Dodd Stonewall, as the Chairman of the Senate Banking Committee refuses to come clean on how he became a "Friend of Angelo"---i.e. Countrywide Financial's infamous robber baron Angelo Mozilo http://www.everydayrepublican.com/2008/08/06/dodd-watch-day-55-dick-sues-countrywide/

Evidently Dodd's early efforts to explain away being linked to an influence peddling scheme went awry    http://thenextright.com/ironman/now-that-chris-dodds-bridge-sale-has-failed. His last public statement was he would release the relevant loan documents after the Countrywide Bailout Bill passed   http://www.courant.com/news/nationworld/hc-ctdoddmortgage0725.artjul25,0,1419140.story?track=rss. Well Bush signed the miserable excuse of a bill, but we aren't even entitled to a miserable excuse from Dodd as to where his loan documents went? I presume he thought the media circus would move on and forget about this debacle

Well, there's a new sheriff in town.   Maybe.  

Today, CT's Democratic Attorney General, Richard Blumenthal, relented under pressure from CT Republicans and filed suit against Countrywide http://www.ct.gov/ag/cwp/view.asp?Q=420722&A=2795 http://www.courant.com/business/nationworld/ats-ap-countrywide-lawsuitaug06,0,6712837.story

At least for today, one Democrat sounds angry at what one of Chris Dodd's biggest contributors did

Blumenthal said, "Countrywide conned customers into loans that were clearly unaffordable and unsustainable, turning the American Dream of homeownership into a nightmare. When consumers defaulted, the company bullied them into workouts doomed to fail. Countrywide crammed unconscionable legal fees into renegotiated loans, digging consumers deeper into debt. The company broke promises that homeowners could refinance, condemning them to hopelessly unaffordable loans

Remember, these were the same people who offered Dodd "enhanced customer service" http://www.thenextright.com/ironman/chris-dodd-oh-what-a-tangled-web-we-weave

Perhaps Blumenthal--who is well known in CT for legal vendettas against such firms as Microsoft--will subpoena the documents Dodd refuses to produce voluntarily.

http://www.ct.gov/ag/lib/ag/consumers/countrywidelawsuit.pdf 

But it gets worse...we are reminded...

A federal grand jury has been investigating Countrywide, New Century Financial Corp. and IndyMac Bancorp Inc. — a sign that prosecutors are looking into whether fraud and other crimes might have contributed to the mortgage crisis that led to the demise of all three California-based lenders.

we might find out if Dodd under oath is more truthful than what he said about the nation's financial institutions