Low end mortgage market blowing out as economy slumps, folks default on payments

A major provider of low-end mortgages has suddenly shut down, as recently issued home mortgages haven't been covered by increasingly stretched Americans. The hedge funds that originally fueled so much activity in the mortgage industry are now on the hook owning loans that no one really wants. Derivatives in this area falling fast, they say, at the bottom of the massive U.S. mortgage pyramid.

I'll just add I had the experience of designing a website for a small mortgage company that turned out to just be the sketchiest SOB in the world who swindled my boss and never paid. That was a few years ago, when the mortgage-resale business was booming and we went after some of those guys as a briefly hot market in IT work. Of course it faded quickly.

More on this @ agonist.org. This could all get real bad, real soon... Too much revolving credit all over the place, when is the squeeze going to finally come in?

Cracks in the Mortgage Market are Becoming Visible

RANDALL W. FORSYTH

CRACKS ARE BEGINNING TO SHOW in the credit edifice.

While things couldn't be better on the top floors where the hedge-fund swells reside, down in the basement where speculative-grade mortgage borrowers live, fissures in the foundation are becoming visible.

One of the largest providers of mortgages to borrowers with marginal credit abruptly closed its doors earlier this week. Moreover, derivatives based on the lowest tier of subprime mortgage securities have been plummeting in price in recent days, sending the cost of insuring against these loans' default sharply higher. Thursday, stocks of major homebuilders also fell sharply as news of these dislocations in the mortgage market spread.

But elsewhere in the credit market, Citadel became the first hedge fund to tap the bond market, obtaining cheap credit and freeing it from dependence on big banks and prime brokers for the sustaining flow of financing on which all such leveraged players depend. Ford Motor also was able to issue $5 billion in convertible debt, albeit at extremely generous terms tailored to the hedge-fund crowd.

Tuesday, Ownit Mortgage Solutions of California shut down, citing "the unfavorable conditions of the mortgage industry." That's a euphemism for subprime home borrowers getting into trouble and defaulting on loans at unprecedented speed.

Ownit would sell loans it originated to Wall Street, which repackaged them as mortgage-backed securities. But, as Dow Jones Newswires reports, the issuers of the MBS can force Ownit to take back loans that go into default. Ownit ran out of cash to repurchase the bad loans for the street, according to industry sources quoted by Dow Jones Newswires.

The deteriorating conditions for subprime mortgages also have been evident in the relatively opaque market for credit derivatives. The benchmark for these loans is an index known as ABX, which are split into the various sub-indices of varying quality. According to Markit, an online source of valuation for derivatives, the lowest-quality indices, the ABX.HE 06-1 BBB and BBB-minus, recently suffered a "credit event." Two underlying bonds had interest shortfalls resulting in losses, according to a Nov. 27 release from Markit.

This week, the ABX has taken "a pounding," according to one mortgage professional, especially in the triple-B-minus indexes. Investors have been trying to get protection by selling this lowest tier of the ABX index. But, according to this pro, the value of the constituent credits in the index may be even lower than implied by the index's value -- because there's no market for credit protection for the individual names. So still more selling may be ahead.

Grant's Interest Rate Observer has been among the first to pick up the warning signs of the trouble in the subprime mortgage market. The current issue, dated Dec. 1, points out that loans made in 2006 already are turning bad. In past cycles, it generally took a few years for borrowers to go bust.

But such have been the excesses of this housing bubble, and now, bust. Borrowers whose main qualification was the possession of a pulse could avail themselves of an array of new "affordability" products -- 45-year, interest-only adjustable-rate option Libor-based loans. That gibberish boiled down to a monthly nut that got homebuyers into houses with inflated prices that they really couldn't afford. Not surprisingly, foreclosures are soaring -- up 51% in the three months ended October from a year earlier, according to Realty Trac.

As problems in the lowest rungs of the mortgage market were coming to light, homebuilders' stocks got clobbered Thursday. The SPDR Homebuilders (ticker: XHB), an exchange-traded fund made up of the industry's major companies, plunged 2.2%. ....