You know you're subprime when...

A classic from Broker Outpost: "You know you're subprime when,"

• When the lender I used for your purchase is now out of business and now we cant get out of your 80/20 that is about to adjust to 12%?

• When you need a stated income letter from the borrower stating what they do for a living (ameriquest) and they fax you "I HAVE A JOB. Signed Joe Borrower."

• Your borrower walks in to your office in his Waffle House uniform and wants a stated income loan.(happened)

The Loan Officer Forum at Broker Outpost is a gold mine for finding out what was going on in the mortgage business during the bubble. You can find out that Countrywide would allegedly loan 95% LTV to a 590 FICO with no tradelines.

Why Countrywide is Done

First of all, the rumor about Buffett buying Countrywide turned out to be wrong, as usual.

Second, the Bank of America investment produced a huge pop that instantly faded once people realized what a desperate move it represented for Countrywide.

An article in today's New York Times: Inside the Countrywide Lending Spree.

Countrywide has a huge presence in California: 46 percent of the loans it holds on its books were made there, and 28 percent of the loans it services are there.

But Countrywide documents show that it, too, was a lax lender. For example, it wasn’t until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home’s appraised value and required no documentation of a borrower’s income.

As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70 percent of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)

You can bet that any loans like this are underwater and the borrower is going to default. If you read the "If Only I Waited" posts from Bubble Markets Inventory Tracking, you can see that a 30% equity cushion based on the 2005 price of a California house is now no cushion at all.

That is why default rates and recovery rates are inversely correlated. Countrywide has so much Real Estate Owned that they will have to accept terrible prices to get rid of it.

The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.

...Countrywide was willing to underwrite loans that left little disposable income for borrowers’ food, clothing and other living expenses. A different manual states that loans could be written for borrowers even if, in a family of four, they had just $1,000 in disposable income after paying their mortgage bill. A loan to a single borrower could be made even if the person had just $550 left each month to live on, the manual said.

The bullish argument on Countrywide goes: Countrywide is so big that they will be the only lender left standing and will gain huge market share.

Mortgage lending is a commodity business. Lenders don't have valuable brands. They attract business by offering a competitive rate (the prime model) and/or by not asking borrowers very many questions (the Alt-A model).

In fact, many people hate Countrywide. And the NY Times article suggests that their business model was to abuse their customers.

When Congress holds hearings about the housing collapse, which they will but only well after the horse is out of the barn, they will be looking for companies to pillory.

If Countrywide is still around, it will be a perfect target.

Edit: I just saw something that makes me much more confident in my Countrywide short and put options position. The manager of Second Curve Capital, appears to be a Countrywide sympathizer. That article is a straw-man argument that knocks down the least damning elements from the New York Times article.

Second Curve gets fawned over for its "branch hunts" where the hedge fund staffers go around to bank branches to examine their customer service. Good idea, except that if you ignore what the bank is investing its deposits in, you make mistakes. After all, Second Curve owned New Century stock.

Tom Brown quote:

"Given the level of investor panic surrounding the subprime borrower lately, I'm feeling very greedy regarding subprime lenders these days, and am especially greedy over subprime-mortgage lenders," Brown wrote on Feb. 27. "This is one of those times in investing, I believe, when it will pay to be very, very aggressive."

Absurd CFC Rumor Presents Shorting Opportunity

This rumor was printed in the WSJ and hyped to death all day long on CNBC. The actual wording was "Some investors speculate Berkshire could be a buyer for parts of mortgage lender Countrywide Financial Corp..."

There is no substance to this story. Unnamed people are speculating that something could happen. So this is just a rehash of the rumor that Buffet was going to buy HOV. Look how that turned out.

WB likes to buy companies with strong, trustworthy management and leave them in place.

Meanwhile, "Examiners from the Office of Thrift Supervision, which regulates Countrywide Bank, recently set up a full-time presence in a conference room at the Calabasas, Calif., headquarters of Countrywide Financial..."