Dec. 4 (Bloomberg) -- If you're like me, you've spent the last few days sorting through the sketchy outline of the U.S. Treasury's subprime rescue plan and mulling the potential impact. (Hey, I never said I was a swinger!)

We learned last week that Treasury Secretary Hank Paulson was working with the mortgage industry and major financial institutions to craft a plan to freeze introductory teaser rates on certain subprime mortgages that are due to reset higher, as specified by the original terms of the loan.

Such a plan is easier said than done.....

And I'm glad that your memory is clearing up some on the orgininal justification for tax cuts. :wink:

I don't disagree that most people will weather the storm just fine

my point, like I said before, is that the aftermath will have farther reaching effects than the Internet Bubble.

If you start the thread from the first post, my warnings have been coherent and spot-on, unlike yours.

Dec. 6 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's plan to freeze some subprime mortgage rates in an effort to stop a wave of foreclosures may lead to ratings cuts on some mortgage bonds, Standard & Poor's said.

``Simply freezing interest rates on some U.S. first-lien subprime mortgage loans would have a negative impact'' on ratings of some residential mortgage-backed securities, analysts at New York-based S&P wrote in a report today. S&P said modifications to the loans will mean reduced payments available to investors from creditworthy borrowers.

The proposal comes as the number of Americans who fell behind on their mortgage payments rose to a 20-year high in the third quarter, according to the Mortgage Bankers Association. Adjustable-rate mortgages account for 70 percent to 80 percent of securitized subprime mortgages from 2005 through the first half of this year, S&P said in its report.....

The Government and the market are trying to boil this down to a ’sub-prime’ thing, especially with all constant talk of ‘resets’. But sub-prime loans were only a small piece of the mortgage mess. And sub-prime loans are not the only ones with resets. What we are experiencing should be called ‘The Mortgage Meltdown’ because many different exotic loan types are imploding currently belonging to what lenders considered ‘qualified’ or ‘prime’ borrowers. This will continue to worsen over the next few of years. When ‘prime’ loans begin to explode to a degree large enough to catch national attention, the ratings agencies will jump on board and we will have ‘Round 2′. It is not that far away.

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren’t the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered ‘prime’ so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered ‘prime’ or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The bailout we are hearing about for sub-prime borrowers will be the first of many. Sub-prime only represents about 25% of the problem loans out there. What about the second mortgages sitting behind the sub-prime first, for instance? Most have seconds. Why aren’t they bailing those out too? Those rates have risen dramatically over the past few years as the Prime jumped from 4% to 8.25% recently. seconds are primarily based upon the prime rate. One can argue that many sub-prime first mortgages on their own were not a problem for the borrowers but the added burden of the second put on the property many times after-the-fact was too much for the borrower.

Most sub-prime loans in existence are refinances not purchase-money loans. This means that more than likely they pulled cash out of their home, bought things and are now going under. Perhaps the loan they hold now is their third or forth in the past couple years. Why are bad borrowers, who cannot stop going to the home-ATM getting bailed out?

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

The ’second mortgage implosion’, ‘Pay-Option implosion’ and ‘Hybrid Intermediate-term ARM implosion’ are all happening simultaneously and about to heat up drastically. Second mortgage liens were done by nearly every large bank in the nation and really heated up in 2005, as first mortgage rates started rising and nobody could benefit from refinancing. This was a way to keep the mortgage money flowing. Second mortgages to 100% of the homes value with no income or asset documentation were among the best sellers at CITI, Wells, WAMU, Chase, National City and Countrywide. We now know these are worthless especially since values have indeed dropped and those who maxed out their liens with a 100% purchase or refi of a second now owe much more than their property is worth.

How are the banks going to get this junk second mortgage paper off their books? Moody’s is expecting a 15% default rate among ‘prime’ second mortgages. Just think the default rate in lower quality such as sub-prime. These assets will need to be sold for pennies on the dollar to free up capacity for new vintage paper or borrowers allowed to pay 50 cents on the dollar, for instance, to buy back their note.

The latter is probably where the ’second mortgage implosion’ will end up going. Why sell the loan for 10 cents on the dollar when you can get 25 to 50 cents from the borrower and lower their total outstanding liens on the property at the same time, getting them ‘right’ in the home again? Wells Fargo recently said they owned $84 billion of this worthless paper. That is a lot of seconds at an average of $100,000 a piece. Already, many lenders are locking up the second lines of credit and not allowing borrowers to pull the remaining open available credit to stop the bleeding. Second mortgages are defaulting at an amazing pace and it is picking up every month.

The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them.

The clue to who will blow up first is each lenders ‘max neg potential’ allowance, which differs. The higher the allowance, the longer until the borrower gets the letter saying ‘you have reached your 110%, 115%, 125% etc maximum negative of your original loans balance so you cannot accrue any more negative and must pay a minimum of the interest only (or fully indexed payment in some cases). This payment rate could be as much as three times greater. They cannot refinance, of course, because the programs do not exist any longer to any great degree, the borrowers cannot qualify for other more conventional financing or values have dropped too much.

Also, the vast majority have second mortgages behind them putting them in a seriously upside down position in their home. If the first mortgage is at 115%, the second mortgage in many cases is at 100% at the time of origination — and values have dropped 10%-15% in states like California — many home owners could be upside down 20% minimum. This is a prime example of why these loans remain ‘no bid’ and will never have a bid. These also will require a workout. The big difference between these and sub-prime loans is at least with sub-prime loans, outstanding principal balances do not grow at a rate of up to 7% per year. Not considering every Option ARM a sub-prime loan is a mistake.

The 3/1, 5/1, 7/1 and 10/1 hybrid interest-only ARMS will reset in droves beginning now. These are loans that are fixed at a low introductory interest only rate for three, five, seven or 10 years — then turn into a fully indexed payment rate that adjusts annually thereafter. They first got really popular in 2003. Wells Fargo led the pack in these but many people have them. The resets first began with the 3/1 last year.

The 5/1 was the most popular by far, so those start to reset heavily in 2008. These were considered ‘prime’ but Wells and many others would do 95%-100% to $1 million at a 620 score with nearly as low of a rate as if you had a 750 score. No income or asset versions of this loan were available at a negligible bump in fee. This does not sound too ‘prime’ to me. These loans were mostly Jumbo in higher priced states such as California.

Values are down and these are interest only loans, therefore, many are severely underwater even without negative-amortization on this loan type. They were qualified at a 50% debt-to-income ratio, leaving only 50% of a borrower’s income to pay taxes, all other bills and live their lives. These loans put the borrower in the grave the day they signed their loan docs especially without major appreciation. These loans will not perform as poorly overall as sub-prime, seconds or Option ARMs but they are a perfect example of what is still considered ‘prime’ that is at risk. Eighty-eight percent of Thornburg’s portfolio is this very loan type for example.

One final thought. How can any of this get repaired unless home values stabilize? And how will that happen? In Northern California, a household income of $90,000 per year could legitimately pay the minimum monthly payment on an Option ARM on a million home for the past several years. Most Option ARMs allowed zero to 5% down. Therefore, given the average income of the Bay Area, most families could buy that million dollar home. A home seller had a vast pool of available buyers.

Now, with all the exotic programs gone, a household income of $175,000 is needed to buy that same home, which is about 10% of the Bay Area households. And, inventories are up 500%. So, in a nutshell we have 90% fewer qualified buyers for five-times the number of homes. To get housing moving again in Northern California, either all the exotic programs must come back, everyone must get a 100% raise or home prices have to fall 50%. None, except the last sound remotely possible.

What I am telling you is not speculation. I sold BILLIONs of these very loans over the past five years. I saw the borrowers we considered ‘prime’. I always wondered ‘what WILL happen when these things adjust is values don’t go up 10% per year’.

Caroline Salas and Jody Shenn Dec. 7 (Bloomberg) -- President George W. Bush's plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.

``If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,'' said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. ``When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.''

Bush and Treasury Secretary Henry Paulson yesterday announced an agreement with lenders that will fix rates on some loans for five years. The deal will help borrowers who will fall behind once rates reset to higher levels through July 2010. The plan may force investors in the $6.3 trillion market for home- loan bonds, created by pooling loans and funneling interest payments to bondholders, to revalue their holdings.

``It could end up there's less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody,'' said Kenneth Hackel, managing director of fixed- income strategy at RBS Greenwich Capital Markets.....

Dec. 11 (Bloomberg) -- What do Treasury Secretary Hank Paulson, the mortgage industry and investors in securitized loans have in common?

They have ``Hope Now'' that the so-called alliance to help subprime borrowers hang onto their homes will prevent the real- estate market, not to mention the rest of the financial system, from imploding.

Last week, a gaggle of officials from an acronym-heavy group of housing and regulatory agencies took to the podium to praise the ``Hope'' plan. A White House fact sheet touted the initiative as ``an example of government bringing together members of the private sector to voluntarily address a national challenge -- without taxpayer subsidies or government mandates.''

Calling the plan voluntary is a stretch. No one put a gun to lenders' and investors' heads, but when the U.S. government asks the banks it regulates to come up with a rescue, financial institutions aren't about to say no, especially at a time when they aren't doing swimmingly.....

Mortgage Market News

Through 12/12/07

Recent Headlines

Julie Siegler, Account Executive 720-945-3821



President Bush announced a plan made in partnership with the U.S. Treasury and a coalition of mortgage market players to freeze interest rates for five years on mortgage loans made to some subprime borrowers.

Those eligible for the freeze must have rates scheduled to adjust between January 2008 and July 2010 and must

be current on their payments. Such borrowers must also be deemed to be unable to afford the payments once their rate adjusts. Bush said the plan could help as many as 1.2 million borrowers. Criticism to the plan has been made regarding its 660 FICO cutoff that might penalize those who have struggled to maintain good credit. Also, S&P has warned that fixing rates will hurt the value of securities backed by the mortgages. (12/6)



The U.S. Federal Reserve lowered its benchmark fed funds rate by a quarter-point to 4.25% and signaled that officials are open to further cuts if the housing slump and credit crunch worsen.

Stocks fell sharply following the announcement as many believed the cut was not large enough to help avert a recession. The Fed also cut its discount rate, the rate at which it lends directly to banks, by a quarter-point to 4.75%. In addition, the Fed announced plans made in conjunction with other central banks to inject funds into global markets by lending at least $40 billion at heavily discounted rates and engaging in "swap" agreements designed to help control interbank lending rates. (12/11-12)



Corporate News - Swiss banking giant UBS AG said it will write off a further $10 billion on subprime mortgage troubles.

Also, the bank with borrow around $11.5 billion from outside investors and replace its 2007 cash dividend to stockholders with a stock dividend, saving $17.2 billion. In October, the company wrote down the value of some assets by $3.4 billion and posted its first quarterly net loss in nine years. (12/10)



IndyMac Bancorp's credit rating was downgraded to "junk" status by Standard & Poor's and also given a negative outlook status.

S&P cited increased risk that the lender will suffer additional losses because a high percent of its loans were originated toward the end of the housing boom and in California. The negative outlook means there is about a one-in-three chance the company's credit rating could be cut again in the next two years. (12/11)



Amid mounting mortgage losses, Washington Mutual has decided to lower its dividend by 73% to 15 cents a share and to fire 3,150 mortgage and corporate support employees.

The company is currently in the process of closing 190 of 336 mortgage offices. (12/11)



Economic Indicators and Outlooks

The Mortgage Bankers Association reported a year-over-year jump of almost 1% in the number of borrowers delinquent on their mortgages in the third quarter.

The delinquency rate for one-to-four unit residential properties stood at 5.6%, the highest in the MBA survey since 1986. The rate was driven by subprime loans, which posted a delinquency rate of 16.3%. The rate of loans entering the foreclosure process was 0.78%. 43% of loans starting the foreclosure process in the quarter were subprime, even though such loans only represent 6.8% of loans outstanding. (12/6)



The National Association of Realtors' Pending Home Sales Index unexpectedly rose 0.6% in October, after a upwardly revised gain of 1.4% in September.

The index is considered a leading indicator, as it tracks contract signings, which typically occur a month or two before closing. The NAR has also posted the first upward revision to its 2007-8 forecast in the past 10 months. The group is predicting 2007 home sales will come in at 5.56 million units and will grow to 5.7 million units in 2008. NAR chief economist Lawrence Yun stated that some markets are now seeing price increases and that "mortgage availability is increasing." (12/10-11)

Dear Valued Customer,

In response to continuing liquidity issues in the secondary mortgage market, we have found it necessary to revise a number of our program limits and underwriting guidelines. Affected product and programs include: Alt A Preferred, Alt A Jumbo, Super Jumbo, FlexPay, Home Construction Lending and Agency Conforming.

The following revisions, with the exception of Agency Conforming, became effective for loans that were not ratelocked prior to December 12th, 2007. Agency Conforming loans not ratelocked prior to December 14th, 2007 are subject to the new revisions.

Product and Program Modifications

Agency Conforming Program
Fannie Mae / DU eligible recommendations are limited to:

Approved/Eligible

Expanded Approval I, II or III / Eligible with LTV/CLTV equal to or less than 75%.

Alt A Preferred Program
No Ratio and No Income/No Asset documentation types are no longer available under this program.

Alt A Jumbo Program
Changes to this program are as follows:


Program Limits for Stated Income documentation:
* Maximum LTV/CLTV is 75%.


Documentation Types:
* No Ratio and No Income/No Asset documentation types are no longer available under this program.

Super Jumbo Program
* The maximum LTV/CLTV for Stated Income documentation is capped at 75%.


Discontinued Programs

The following programs are no longer available:

* FlexPay Option ARM Program
* Consumer Residential Lot Program - Home Construction Lending
* Bridge Second Mortgage Program - Home Construction Lending

Loans affected by the revisions above but ratelocked prior to the effective date will be accepted and funded provided all QuickPricer ratelocks are converted to full e-MITS submissions by December 22nd, 2007, all credit packages are delivered to Indymac by December 31st, 2007 and all affected loans are closed or purchased by January 15th, 2008. In addition, there will be no grace period or "auto-extensions" for clearance of conditions after the ratelock expiration for closed loan deliveries. All loans that were previously delivered and not ratelocked are subject to the revised guidelines.

If you have any questions about the contents of this bulletin, please contact your Indymac sales professional or your Regional Operations Center.

(c)2007 IndyMac Bank, F.S.B. Registered trade/service marks are the property of IndyMac Bank, F.S.B. and/or its subsidiaries. All illustrations and designs are the property of Indymac Bank, F.S.B. and/or its affiliates. Information shown is subject to change without notice.

Member FDIC
Equal Housing Lender

Indymac Bank is committed to maintaining our customers' privacy. View our privacy policy. This e-mail communication has been sent to you by Indymac Bank, 888 E. Walnut St., Pasadena, CA 91101.

By Daniel Taub Dec. 14 (Bloomberg) -- For U.S. homeowners,
builders, bankers and realtors, the crash of 2007 will only get worse in
2008.
Everyone from mortgage-finance company Fannie Mae to Lehman
Brothers Holdings Inc. expects declines next year. Existing home
sales will drop 12 percent and existing home prices will fall
4.5 percent, Washington-based Fannie Mae says. Lehman analysts
estimate almost 1 million mortgage loans will default in 2008,
up from about 300,000 this year.
``We're only halfway through the housing shock,'' said
Ethan Harris, chief U.S. economist at New York-based Lehman, the
fourth-biggest U.S. securities firm by market value. ``It's just
a matter of time before the weakness spreads to the rest of the
economy.''
The housing market collapse has been anything but the
``soft landing'' that Federal Reserve Bank of San Francisco
President Janet Yellen and David Lereah, former chief economist
at the National Association of Realtors in Chicago, predicted
for real estate at the start of 2007.
Median home prices declined in the U.S. this year, the
first annual drop since the Great Depression, according to
forecasts from the National Association of Realtors.
``I'm not going to sit here and tell you it's going to turn
real strong next year,'' said Jim Gillespie, chief executive
officer of Coldwell Banker Real Estate LLC, the largest U.S.
residential brokerage, according to Franchise Times. ``It's not
going to turn real strong next year.''

`Let the House Go'

Analysts at New York-based CreditSights Inc. predict
housing won't rebound until ``2009, at best.'' Moody's
Economy.com Inc., the economic forecasting unit of Moody's Corp.
in New York, says home sales will hit bottom next year,
declining 40 percent from their peak. And U.S. Treasury
Secretary Henry Paulson's plan to slow foreclosures won't help
those who already are facing the loss of their homes, like C.W.
and Sandy Hicks of Las Vegas.
The Hickses refinanced the mortgage on their four-bedroom,
1,300-square foot home two years ago. Their $237,000 adjustable-
rate loan resets every month, and now their monthly payment has
jumped 50 percent to $2,700. The couple can't afford it.
``It looks like we're going to have to let the house go,''
said C.W. Hicks, 65, a long-haul truck driver who has kept
working past retirement age to help pay medical bills for his
wife Sandy, 59, who has heart problems. ``I guess we'll try to
rent a house or something.''
The Hickses aren't the only ones grappling with the
consequences of this year's housing market. The number of
Americans behind on their mortgage payments rose to a 20-year
high in the third quarter, the Washington-based Mortgage Bankers
Association said earlier this month.

Lender, Homebuilder Woes

``The whole thing has deteriorated faster and further than
we or anyone else had anticipated,'' said Ron Muhlenkamp,
president of Wexford, Pennsylvania-based Muhlenkamp & Co., which
has about $2.5 billion under management and holds shares of
mortgage lender Countrywide Financial Corp. and homebuilder
Ryland Group Inc.
The five biggest U.S. homebuilders by revenue, led by
Miami-based Lennar Corp., recorded writedowns and charges
totaling about $7.5 billion this year for land that plunged in
value.
Mortgage companies, including Irvine, California-based New
Century Financial Corp., the second-largest subprime lender in
2006, have filed for bankruptcy protection after borrowers
unable to repay their loans defaulted.
H&R Block Inc. of Kansas City, Missouri, shut Option One
this month after plans to sell the subprime home-lending unit
fell apart, and U.S. regulators ordered Santa Monica,
California-based Fremont General Corp. to stop selling subprime
mortgages, loans given to people with poor or limited credit
histories or high debt levels.

O'Neal, Prince Fall

Bank and brokerage writedowns and losses related to
subprime loans totaled more than $80 billion. Citigroup Inc.,
the biggest U.S. bank by assets, last month said it would write
down the value of subprime mortgages and collateralized debt
obligations -- securities backed by bonds and loans -- by $8
billion to $11 billion. At Merrill Lynch & Co., writedowns on
mortgage-related investments and corporate loans have cost the
world's biggest brokerage $8.4 billion. Both companies are based
in New York.
The losses led to the ouster of Merrill Chief Executive
Officer Stan O'Neal and the resignation of Citigroup CEO Charles
O. ``Chuck'' Prince III. O'Neal's exit came after he said as
late as July that ``not even a sharp downturn in one market
today necessarily portends financial disaster in another, and
we're seeing this play out today in the subprime market.''
Fallout from the subprime crisis in the U.S. has crimped
economic expansions in the U.K., Canada and Germany.
Investment in U.K. commercial real estate may slump 60
percent in the fourth quarter as buyers shun large acquisitions
of shops and offices, Chicago-based Jones Lang Lasalle Inc., the
world's second-largest property brokerage, said Dec. 10.

Fund Markdowns

Spending on British commercial real estate, Europe's
largest investment market, may decline in the final three months
of the year to 5 billion pounds ($10.2 billion) from 18.6
billion pounds a year earlier, Jones Lang said in a statement.
Investment for all of 2007 may fall 24 percent to about 48
billion pounds.
Falling prices are already hurting U.K. property funds. New
Star Asset Management Group Ltd., the fund company founded by
John Duffield, said earlier this week that value of its U.K.
commercial property mutual fund was cut by 8.2 percent after the
value of its buildings dropped 18 percent since July.
Market lending rates rose worldwide in the past month as
writedowns linked to subprime defaults heightened concerns about
the strength of financial institutions.

Anxiety Continues

``Until the public is convinced that the subprime credit
exposure has been identified, quantified and dealt with, there
will continue to be anxiety,'' said Todd Canter, international
director at LaSalle Investment Management in Baltimore, where he
helps manage about $11 billion in real estate stocks. ``There
will continue to be volatility in the marketplace.''
U.S. office sales fell 70 percent in October from a year
ago, industrial sales declined 24 percent, and retail and
apartment sales dropped 50, according to New York-based research
firm Real Capital Analytics Inc. The declines are the biggest
since the company began keeping records in 2001.
The 128-member Bloomberg REIT Index rose 62 percent in the
two years ended Feb. 8, the day before New York-based Blackstone
Group LP bought Equity Office Properties Trust for $39 billion,
including debt, in the real estate industry's biggest leveraged
buyout. The index has dropped 26 percent since then.
``You're not seeing the Equity Office transactions
anymore,'' said Dan Fasulo, Real Capital's managing director for
research. ``It's extremely difficult right now to finance the
large portfolio transaction and privatizations we've seen over
the last couple of years. I can't even think of one major
privatization that has been announced since the credit crunch.''

Financing Difficulties

Mission West Properties Inc., owner of almost 8 million
square feet of Silicon Valley commercial buildings, disclosed
talks in July with a private equity firm about being acquired.
The Cupertino, California-based company said a month later the
sale might fail after a bank withdrew funding. Mission West then
said in October that there remained three potential bidders. A
transaction hasn't yet been announced.
Highwoods Properties Inc., the owner of almost 34 million
square feet of commercial space, said last month that it no
longer expects to sell properties in Winston-Salem, North
Carolina, totaling 1.6 million square feet. The company cited
``volatility of the capital markets'' as the reason the sale
didn't go through.
``I know we weren't predicting things would get this bad,''
said Frank Liantonio, executive vice president for global
capital markets at New York-based Cushman & Wakefield Inc., the
largest closely held real estate services provider. ``There were
some signs there, but I don't think anyone anticipated the level
of dislocation that was actually created.''

Snowbirds bring checkbooks to grab properties at deep discount

Dec. 18 (Bloomberg) -- One week in 2002, Daniel Sadek was $6,000 short of covering the payroll for his new subprime mortgage company, Quick Loan Funding Corp. So he flew to Las Vegas and put a $5,000 chip on the blackjack table.

``I could have borrowed the money, I suppose,'' Sadek says.

That wouldn't have been his style. With his shoulder-length hair and beard, torn jeans and T-shirts with slogans such as ``Where is God?'' Sadek looked more like a guitarist for Guns N' Roses than a mortgage banker.

Sadek says he was dealt a jack, then an ace. Blackjack. He would make payroll. Quick Loan Funding, based in Costa Mesa, California, would survive and, for a while, prosper as one of 1,300 mortgage lenders in the state vying to satisfy Wall Street's thirst for subprime debt.

As home prices rose and hunger for high-yield investments grew, Sadek found his niche pushing mortgages to borrowers with poor credit. Such subprime home loans grew to $600 billion, or 21 percent, of all U.S. mortgages last year from $160 billion, or 7 percent, in 2001, according to Inside Mortgage Finance, an industry newsletter. Banks drove that growth because they could bundle subprime loans into securities, parts of which paid interest as much as 3 percentage points higher than 10-year Treasury notes.

``I never made a loan that Wall Street wouldn't buy,'' Sadek says. He worked hard to build the business, he says, and the company did nothing illegal.....

"There's been a change in social attitudes toward default," Mr. Lewis says. Bankers typically have believed that cash-strapped borrowers would fall behind on their credit cards, car payments and other debts -- but would regard mortgage defaults as calamities to be avoided at all costs. That isn't always so anymore, he says.

"We're seeing people who are current on their credit cards but are defaulting on their mortgages," Mr. Lewis says. "I'm astonished that people would walk away from their homes." The clear implication: At least a few cash-strapped borrowers now believe bailing out on a house is one of the easier ways to get their finances back under control.

... there is a new class of homeowners in name only. Because these people never put up much of their own money, they don't act like owners, committed to their property for the long haul.

By Mark Pittman Dec. 19 (Bloomberg) -- J. Kyle Bass, a hedge fund manager from Dallas, strode into a New York conference room in August 2006 to pitch his theory about a looming housing market meltdown to senior executives of a Wall Street investment bank.

Home prices had been on a five-year tear, rising more than 10 percent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.

``Interesting presentation,'' Bass says the firm's chief risk officer said into his ear, his arm draped across Bass's shoulders. ``God, I hope you're wrong.''

Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these subprime mortgages plunged. The world's biggest financial institutions would write off more than $80 billion in subprime losses, while Bass, his allies and a handful of Wall Street proprietary trading desks racked up billions in profits.....

Commentary by Jonathan Weil
Dec. 19 (Bloomberg) -- Why did Alan Greenspan fail to act while the roots of the subprime-mortgage crisis spread? Here's one possible explanation: The Ayn Rand disciple held fast to his unwavering laissez-faire beliefs.

Yesterday's New York Times carried a front-page article chronicling the many warnings the former Federal Reserve chairman received about aggressive subprime lenders luring unsuspecting customers into crazy mortgages they never could afford. ``Where was Washington?'' the newspaper asked. And where was Alan?

There was Edward Gramlich, the late Fed governor, who urged Greenspan in 2000 to have Fed examiners investigate the industry. Greenspan said no. Activists from a California housing group, the Greenlining Institute, met with Greenspan in 2004, urging him to press lenders for a voluntary code of conduct. Greenspan wasn't interested and didn't give a reason.....