Good Layman's guide to the financial crisis

[Watcher In The Middle]

Originally posted by Ski:

Mortgages have been bought and sold numerous times. Most lenders don't even know who actually owns the mortgage. That's a problem. You can't refi a loan because no one can identify what lending facility owns it.

There was an example I remember from a year or so ago. Dude in Miami owns a $3M house. Isn't making payments on the house. Lender calls him and says he owes. He says, "tell me who owns the mortgage and I'll pay them directly." Lender comes back two weeks later and says we don't know.

Dude is still living in his house.

It's worse than you think. I very, very recently wanted to take a look at a small RE mortgage backed CDO, to see how it was structured. In other words, what would it take in terms of effort, expertise/knowledge, time, and cost to unwind just one of these things - and what was supposed to be a simple one at that?

So I found a very very small CDO (lets say 8-10k mortgages, approx. total value of around $25 bil, or supposedly around $250k per financing. So I tried to see the paper (should be a pretty large amount of backup paper for 8-10k mortgages,).

Note: Never did see the paper. Should have been boxes & boxes & boxes. People I talked to weren't sure the paper wasn't still with the originating financial institutions. :eek

Well, the CDO is first broken down into "classes" (tranches; usually defined as as senior, mezzanine, and subordinated/equity).
Then, the paper (mortgages) are broken down into strips. The different strips, each with it's own risk element, go into the different classes (tranches). That's at it's most simple version.

So, the first goal is to figure out what's the "known world" of pieces of paper one has to deal with within this specific CDO. So, it's number of mortgage instruments times # of "strips" = extremely large pile of confetti.

Now, if you are going to have a bankruptcy court with the ability to adjust mortgages, you first have got to put all the appropriate strips back together to make a "complete single mortgage" which the court can then address.

If what I ran up against is any indication, this is going to be a task worthy of the Gods. Easy it is not. And btw, the folks who screwed this all up aren't even remotely capable of putting it all back together. They are all macro "big picture" types, while fixing this mess on a property-by-property basis is going to be a job for the folks who are out there digging ditches (not literally, but certainly not the wall street types). Most of them don't even know how to read a freakin legal description, much less what a Metes and Bounds legal description is. Or what a permanent parcel index number is, or a tax code is. They're pretty clueless about that type of stuff - not what they were being paid for.

And in my little research, I'm making a really giant assumption, which I have no idea if it's valid or not. And that is: I am assuming that (a) All the mortgages in (b) a single CDO have (c) all their "strips" contained in that same CDO. In other words, no strips or rights to strips from a specific CDO are contained in a totally different CDO. And right now, that's a question that has stumped everybody I've asked it of.

Folks, let me tell you, this all has terribly serious implications for the US housing market. Get ready for most all of us out here in the real world to feel a whole lot poorer - thanks, Wall Street!

I'll get you an updated post with a terminology link for all these different terms used by the so-called "Masters of the Universe". /sarcasm