It’s been a while since my last article.  I’ve been fully tied up with client requests and projects.   In any case, let’s get down to business.

In this article, I want to convey some thoughts about foreclosure timelines.   What they are and how they can impact various market participants.  Recently I performed an analysis of state-level foreclosure timelines.   Here’s some of what I found.

The biggest fact that jumps off the page about timelines, especially foreclosure timelines, is the HUGE disparity that exists from state to state.  For example, we restricted our study to those loans that have fully completed the foreclosure process within the last year and found that the average number of months before the borrower’s right to title in their home is extinguished is:

Fastest Foreclosure States (listed alphabetically)

State                     #Mths

Alabama               2.34

Arkansas               3.08

DC                          2.70

Georgia                 2.58

Maryland             2.79

Michigan              3.22

Missouri               2.06

New Hampshire 2.88

Tennessee          2.15

Texas                    2.85

Virginia                 1.89

Maybe that’s not such big news but compare it against the following list of the slowest foreclosure states

Slowest Foreclosure States

State                     #Mths

Delaware             6.92

Florida                  6.13

Iowa                      8.54

Illinois                   7.28

Indiana                 7.23

Kentucky             7.34

Louisiana             6.19

Maine                   8.83

New Jersey        7.51

New York            7.05

Ohio                      8.03

Pennsylvania     7.10

Vermont              8.39

Holy Smoke!!   What a difference!   Why is this important to know about?

Does anyone see an almost distinct regional influence in the above?  For example, most of the New England states are in the slowest group.  While Southern states (except Florida) tend to be more in the fastest group.     Why on earth would states like Georgia, Alabama, Texas and Virgina be, what appears to be, almost fanatically fast when it comes to getting people out of their homes when states like NJ, NY, PA, FL do it in a, comparatively, leisurely frame of mind.   For anyone in foreclosure, it usually is a pretty stressful situation.  You know, maybe you feel a bit degraded and wonder how could things have gotten so bad – all that kind of thinking.  Whether it’s a fast process or a slow one – you’re generally caught up in a situation that feels like “something has gotten out of control” in ones own life.   But let’s continue to look at this a bit more dispassionately for a moment.

As far as foreclosure timelines go, SLOWER is definitely better for the borrower.   It’s obviously worse for the lender because they don’t get to recoup any of their money for a much longer period of time.  For the sake of this example, let’s say that a person who becomes delinquent on their mortgage is NOT PAYING at all – in other words, the person isn’t even paying a little bit of money – just nothing being paid to the lender at all.  This is the usual state of affairs when a person becomes delinquent.   Additionally, it should be known that the person is not able to be evicted or thrown out of their house, at least until the foreclosure process has been completed (and, strangely, in some states not even then).   So how much money does a person “save” by not paying their mortgage.     For purposes of some simple math, let’s make a ballpark estimate of a $200,000 loan size and an average mortgage rate of 8%.   Keep in mind that some states like California have a much higher average loan size.

Let’s say that Pete lives in Missouri and he goes 30 days delinquent (1 missed payment), then 60 days delinquent (2 missed payments) and then the lender gets the foreclosure process started on Pete.  According to the above Pete can stay in his house for another two months.  This adds up to a total of 4 missed payments. So let’s see:

$200,000 * 8% = Annual mortgage payment of approximately $16,000.  That’s approx a monthly payment of 1,333.33 (these figures are not exact but close enough to get this point across)

So 1,333.33 * the 4 months Pete got to skip out on his mortgage payment and he ends up “saving” $5,333.32 in interest.

But if Pete lives in New York, he saves $12,000.00  – an additional $6,666.67!  So basically he’s living RENT FREE for at least 9 months (at least 2 in Pre-Foreclosure and another 7 during the actual foreclosure process itself).

In Maine (almost 9 months in foreclosure), Vermont (8.4) and Ohio (8) he saves even more money by not paying.

Now let me make it very clear that I’m not advocating to people that they not live up to their financial obligations.  Definitely not, but the point I’m making here is: “How come there’s so much disparity from state to state?”    I know the typical answer is that foreclosure laws and timelines are statutory, meaning they are created by state legislatures.   How is that possibly right?  Is it fair that a guy up in Michigan, who may have been laid off due to the meltdown of the auto industry there – he gets only 3 months of foreclosure process before he’s given the boot, whereas a guy who works on Wall Street and who’s living in NJ and who just got the can because of the mortgage market meltdown – he gets to not pay his mortgage for 7.5 months.  If the guy in NJ has a much higher loan amount he will save even more money because of this.

Or how about in Texas where the PRE-foreclosure timeline is only 2 months.  2 missed payments and they rush you, (guns ablazing I guess) into foreclosure.  Other places, it’s 90 days at a minimum.  But not the lone star state of Texas.  2 missed payments and you’re in foreclosure.  Consider yourself “corralled” by the foreclosure “lasso”.  Then two months later, you’re out on the street.  In fact, in Texas they have a lovely name for the date each month when they do their foreclosures – it’s called “Texas Tuesday”.  Isn’t that cute?   Tell that to the guy who’s getting shoved out of his house, while the guy up in Delaware has about another 5 more months before he gets the official boot.   That additional 5 months gives a person a lot more time to try to figure out an alternative solution.  Call his friends, relatives, look for a 2^nd or 3^rd job.  Whatever!  He at least has more time during which to solve his problem.   He also “saves” much more money by simply not paying his mortgage.   These “fast foreclosure states” barely give someone any time to think – let alone solve their financial problems and they’re OUT of the house.

Once a person is in foreclosure, their credit is basically shot to hell anyway, so why try to pay at all?   Add to this the fact that the housing market has depreciated so fast recently – which has caused many borrowers to have zero or negative equity (the house is worth less than the mortgage they’re paying) that it’s now become a “bad financial transaction” for the borrower.   Again, I’m now looking at this in a “dispassionate” dollars and cents way.  What do you think a trader on Wall Street would do with a “bad trade” he’s gotten into?   Hopefully, he’d get the hell out and FAST so as to stop losing money.  And to hell with whether the borrower’s credit is bad.  Credit (FICO for example) can be rebuilt in time.  In the meantime, stop paying the damn mortgage and push that money towards something else.   Set aside that money for rent for after you officially don’t own the house any more.  Save it to be able to pay for gas for the winter.   How about maybe using that “saved” money for the very basic necessity of survival – FOOD for the kiddies.   Compare food and shelter to whether your credit score is good and I’m pretty sure I’d know which way people are gonna bounce on that decision if they have to exercise their “option” not to pay anything at all towards their mortgage.  The guy can’t be put in jail for not paying his mortgage in this day and age – so he’s not worried about ending up behind bars because of not paying.   The threat of “debtor prison” is long gone in this country.

As an aside, my father, who retired to Vermont just told me that he’s had to pay 8,000 towards heating oil for his house for the coming winter because of the rising prices of gas – he’s trying to head off the rising price by paying now at a specific price because if he waits until the winter, lord knows how high the price is going to be – so he’s trying to save money by buying now.

I must emphasize that I am NOT advising anyone to actually do the above.   I’m just giving what I think are some of the thought processes that may go through a borrower’s mind.   Lenders have got to be mighty worried about the current state of rising delinquencies in the overall mortgage market place.

Timelines increasing

Three other factors can work to INCREASE the timelines beyond what I’ve described above.

First of all, my understanding is that if a person is in foreclosure and declares bankruptcy it puts, at least for a few months, a “stay” (stops the process) on the foreclosure process.   Obviously this is going to increase the amount of time the person is living “rent-free” (so to speak).   I’ve heard stories of people declaring bankruptcy, stopping the foreclosure process.  Coming out of bankruptcy, then the foreclosure process starts again.   Then the person declares bankruptcy again which stops the foreclosure process again.  And so it goes.   You can think “isn’t that a scam?”.  Maybe, but maybe not.   The individual is permitted certain activities in our society and that is one way to do it.  In the meantime you get to stay in your house without paying a dime.   As Don King used to say:  “Only in America.”   Actually, it probably exists in other countries but I digress…

Secondly, in some states, even after the foreclosure process has been completed, you are not allowed to even evict the person before a certain amount of time has elapsed.   What!!  You’re kidding right?   It’s true.  Let’s say you’re an investor and you’re hungry for foreclosure sales because you think you’re going to get a great deal by paying a really low price for some house that’s in foreclosure.  So you go to the foreclosure sale at the right time and bid on the house and voila!!  You’re the lucky winner.  Your bid was higher than anyone else’s.  Your bid was even LESS than the full amount that was owed to the original lender AND the lender accepted your bid.  Great deal right?   Um… Hang on a second…  The house you bought is in the lovely state of Vermont.   Guess what?  The person still gets to live in the house RENT-FREE and LEGALLY for another 6 months!!  THEN you can start eviction proceedings (which might take a bit of time if the guy decides to hole up in his house with supplies, ammo and a few wonderful guns).  You’re kidding right?   This is a joke right?   Nope, no joke.   You cannot even start eviction proceedings until the full 6 months have gone by.  Also, the person is still living in that house.  During that time you can drive by the house and look at it wistfully if you want – people might look at you a bit strangely.   Not only that but if the borrower were to actually come up with all the monies he owed – he could pay off the bank and reclaim the house.   Oh my god.  What a nightmare.  You’re livid.  You’re now gnashing your teeth and busting up the furniture in your house instead of drinking Crystal.  Yup – you made a bad trade (as they say on Wall Street).  This period of time after the foreclosure sale where the original borrower can still stay in the house is known as the “redemption rights” period.  Not all states have it but you’d best make sure before you get suckered into buying some “great” piece of real estate only to find out you don’t actually own it yet.

One other strange fact is that, of the slowest states given earlier, only Michigan has a “redemption rights” period (6 months).   This makes the rest of the slower states even more egregious in their “rush to get people out of their houses.”

Thirdly, case loads.   As the U.S. descends into uncharted real-estate economic territory, foreclosures are rising fast.   What’s that going to do with the legal and court systems responsible for pushing all these foreclosures through.   Think of that poor Texas sheriff who now has to sell 100’s of properties on his “Texas Tuesday”.   He’ll probably have to come up with a “Texas Wednesday” and “Thursday” and “Friday”.  Hell maybe even a “Texas Fortnight”.   Somehow that doesn’t evoke much sympathy from me.  Poor sheriff – 2 months delinquent. Into foreclosure for another 2 months and onto the streets with your rear end.   He’s so stressed by all the additional foreclosures he’s having to deal with.   Awww.  Poor guy.   But seriously, don’t you see the “log jam” on the horizon?  Actually, it’s closer than the horizon.  Lordy, it’s RIGHT HERE on our doorstep.   That does agree with the results I’m seeing in the data.  In other words the timelines ARE increasing – but not quite as much as I would have thought … yet.

At this point, my ability to be dispassionate has just about gone into orbit and I’m left in a state of complete “flabbergast” (if there isn’t such a word, I’m officially declaring there is one now).

If my parents or my brother and his family ever have trouble in Vermont, it appears they’ve got not only 8.4 months of average foreclosure timeline, but then have another 6 months redemption rights period.  If they spent 4 months being “merely delinquent” before the foreclosure process kicked in, then that’s 18.4 months of rent-free living.  Let’s throw a bankruptcy somewhere in there and maybe the Vermont legislature wanting to help people out by extending the Vermont statutory foreclosure timelines.  Man-o-man.  Who would have thought that possible?   We’re looking at maybe 2 years of rent-free living man.  Of course, I think ammo and survival supplies are probably unnecessary even though Vermont was a famous gun state historically speaking.    I’m also pretty happy about the fact I live in Florida.

At this point, I no doubt need a disclaimer for cya purposes (or is it cma purposes?):  Obviously, you should always consult an attorney and your financial advisor.

What I definitely would advise people to do though is NOT to get suckered into companies who, knowing the above, will try to get you to do what I’ve described above and then charge you some percentage of what you’ve “saved” by simply not paying your mortgage.   To me, that’s simply taking advantage of people’s fear and non-comprehension and is a pretty unethical practice at best.   When you have the ability to pay, you really should live up to your financial obligations.  After all, you signed on the dotted line.  If you can pay, do so.

Okay, so at this point we’re probably in agreement that it’s a pretty unfair situation for such disparity to exist between the states.   What should be done about it?  Some states are attempting to increase their foreclosure timelines such as Massachusetts and Colorado.  Try searching on Google for “foreclosure timelines” and you’ll be able to confirm most of what I’m talking about here.

I understand the idea of permitting each state to handle its own destiny but it almost forces people to know about these issues before even moving into a particular state.   Maybe the federal government should step in and say:  “Too much complexity.  Too un-standardized from one state to the next.   Too much disparity and unfairness.  Here’s how it’s going to be.”   In this case, I personally think it would be a good thing to standardize the processes and procedures surrounding timelines.   I have a 1500 page tome of a book from the US Foreclosure Network which gives state by state descriptions and details (by lawyers unfortunately) that is simply amazingly complex.  Trying to sort through that morass of information is one of the more difficult and somewhat unpleasant things I’ve studied in recent memory.   To my mind, there’s simply no reason for it to be that complex.

What’s amazing to me is I have seen almost nothing about the disparity I talk about above in the financial press.   How could some of these simple observations be missed – if someone knows of some sources where this is talked about please let me know.

It should be noted that we also studied the PRE-foreclosure timelines on a state level and as you’d expect, in general, it averages between 2-4 months (30 – 120 days) before someone is herded on into foreclosure.  But some states (such as Texas mentioned earlier in this blog) average on the low side of even the pre-foreclosure figure.   I mean what’s the big rush Texas?  (I’m not really expecting Texas to actually answer this question, but thought I’d give it a try anyway.)

To my mind this article gives information about one of those things where “truth is stranger than fiction”.   Anyone else have experience with this?  If so, I would really welcome your thoughts.

Sounds like it’s a good time to invest with companies that specialize in rental properties.

Coming Next:  “REO” (real estate owned) timelines

Let’s face it, traders are on the front lines evaluating complex securities such as ABS bonds and the more you can permit users to take the data and create useful models that don’t “lock them into a particular view” of what’s being traded, the better it will be. Most often, traders build their own spreadsheets and, in general, do a great job. However, the lack of ability to dynamically communicate with a database of securities information can cause a great deal of trouble in the ABS market, if only when the next month’s data set comes out from trustees and they find themselves scrambling to manually update their spreadsheets.

Additionally, IT departments blanche at the thought of those overly flexible, manipulable spreadsheets that defy “systemization”. In this article we will discuss a specific example and how to satisfy the needs of both areas: IT and the Trading Desk.

Let’s take up the subject of “Credit IO’s”.

Definition: A Credit IO is an ABS bond which is sufficiently far down in the Capital Structure of an ABS deal that, based on the level of collateral defaults and loss severities that the market is currently experiencing, cause an investor to NOT expect any payment of principal.

Assumption: the bond’s principal WILL be written down to zero at some point. The investor expects NOT to get any principal back. However, until that point, the bond can earn interest cash flows therefore it’s an “Interest Only” bond.

Key Factor: Loss timing. Between now and precisely WHEN the bond is fully written down, the bond will be earning interest. Those monthly cash flows are worth something. The faster the bond will be written down, the less interest cash will be received. The longer the bond exists, the longer the bond will receive cash flows. The trick is to figure out when the losses will hit the bond. The timing of the losses will therefore have a dramatic effect on the price that an investor should be willing to pay for the bond. Less time until the fully-written down point = lower price.

So let’s take a look at some of the elements relating to the data side of this. Here are some of the relevant points:

1. Delinquencies
2. Foreclosure and REO timelines
3. Loss Severities to be used in determining how much of each loan will be lost due to defaults.
4. Credit Enhancements levels - primarily overcollateralization (OC) and each tranche’s current level of credit support (how much of the capital structure is supporting the particular tranche(s) we are evaluating).

On a Bloomberg you can bring up a simplistic method of evaluating this by typing an ABS cusip followed by the Mortgage key (F3) and then typing “MTCS” <Go>. This gives you the ability to take the deal’s current level of 60 day and 90 day delinquencies and apply a particular percentage of each that you expect to go through to default. The amounts of loans in Foreclosure (FC) and Real Estate Owned (REO) are assumed to be 100% in default. So we have as an example:

For a total of 14.3% that we expect to end up in full default and thereby experience a loss.

Sum those figures up (14.3%) and multiply by a single loss severity input and you will have the approx amount of the deal that you will experience as a loss. Let’s say we use 50% Loss Severity. That will give us 7.15% of the outstanding collateral balance in the deal that we expect to impact the deal’s capital structure in the form of losses. Compare that amount versus the particular bond’s credit support that you’re evaluating and if you have a ratio (called the “Coverage Ratio” on Bloomberg), that is less than 1.00, then that bond is likely to disappear completely because there is simply not enough support for the bond to survive. Anyone with access to a Bloomberg can do the above. The above doesn’t actually try to predict WHEN the losses will occur - only that they are expected to occur at some point in the future. It also does not let you consider future loans that are current on their mortgage payments or are 30 days delinquent that will come down the “pipeline” into the more severely delinquent states and finally into realized losses. It also doesn’t try to tell you what it all means in terms of a “price” that you might be willing to pay for the bond.

So let’s kick this up a notch.

Loan-Level Delinquency information

First of all, let’s assume that we have access to loan-level information and that we know, not only the current delinquency status of each loan but exactly when the loan entered that status. Intex provides good loan level data for deals from about 2006 and onwards. Loan Performance provides loan-level information for all deals - loan level information is generally what Loan Performance is known for (but they don’t have very good data about the capital structures nor can they do really good cash flows on the bonds as Intex does). The point is that loan-level delinquency information is available.

So let’s retrieve all the loans from a particular deal into a spreadsheet from our database of loan-level information. Ideally, this should be automated from within the spreadsheet so we can always refresh the data whenever we need to ensure that it is representative of the most current data in our database.

We now have our hands on which loans are in which delinquency condition. Now, if we simplistically project out maximum timelines that all the loans will experience in FC and REO before they hit their loss point, we can derive a table of months going forward and WHEN those losses will be experienced.

For example, we can state the following:

A. Let’s say that a loan has been in FC for two months already: Let’s permit 6 months for the total “normal” amount of time that a loan is going to be in FC so that there are expected to be 4 months more of FC time for this particular loan. Then permit 6 months more for the full REO process. This means that month 10 is WHEN we expect the loss to hit.

B. Let’s say that a loan is currently in REO and has been so for 4 months. Permitting 6 months of complete REO time suggests that we have 2 more months to go. So 2 months from now is when we think we will realize a loss on this loan.

C. Let’s say that a loan has just become 90 days delinquent for the first time. They’re probably going to be in FC real soon, but maybe we feel that we should allow an additional month of being 90 days delinq. So we would have 1 more month of 90 days delinquency. A full 6 months of FC and 6 months of REO so that we expect the loss to hit in month 13.

We can continue to do the above for 60 days delinq loans and 30 day delinq loans. And possibly take some current loans based on the idea that some of these will also hit the skids.

Let’s assume an overall “Loss Severity” of 60%. According to some market participants 60% is getting more and more real. This means that, given a loan amount of $100,000 you are expecting to lose $60,000. Apply the loss severity input to each of the loan balances and sum those loss amounts up into each of the months you have projected into the future.

The result is that you end up with a table of months into the future within which losses can be summed up - month by month. At that point we have a relatively simplistic table giving us WHEN we expect the losses to hit. These losses will be applied to the bond’s outstanding balance and will eventually “amortize” the bond’s principal, via write-downs, down to zero. At each month, you calculate what amount of interest the bond should receive. Then we apply the loss amount for that month and decrease the bond’s outstanding principal balance so that in the next month there will, of course, be less interest earned. We keep doing this until the bond’s balance has been written down to zero, at which point you’re not earning any more interest on the bond. At that point, the bond has disappeared. Then sum up the interest payments that you received during the time when the bond was still “alive” and you have the amount of cash you’re going to receive on this bond. Divide that by the principal currently outstanding on the bond and you have the price that might be indicative of what you would be willing to pay. Notice that this last sentence is disregarding the time value of money. It can be an enhancement to “present value” (PV) those interest cash flows and then sum up the PV-ed cash flows to get a more accurate price.

It should be noted that if there is any “OC” remaining at the bottom of the capital structure in the deal, you have to allocate the loss amounts to the OC first before they start to impact the bond you’re evaluating. Likewise if there are any bonds BELOW the one you’re evaluating, because of the fact that losses are allocated from the bottom of the capital structure upwards, then each of those bonds below your bond each have to be written down to zero before the loss amounts start to impact your particular bond. The point being that your spreadsheet application must retrieve all of the bonds and any OC BELOW your bond and apply the loss amounts to EACH of their principal outstanding amounts BEFORE the losses start to impact your particular bond. Of course, this means that ALL of the bonds below the one you’re evaluating are also, each one, a “Credit IO” bond.

A few other observations

I want to emphasize that decreasing the FC and REO timelines in the model will have the impact of decreasing the amount of time that the bonds will survive thereby decreasing the length of time that the bonds will earn interest resulting in a lower price that one would be willing to pay for the bond. Obviously, if you’re buying you want to pay as low as possible so underestimating time lines will help you. If you’re selling, you’ll probably want to consider that the time lines are longer so that you can sell it for a higher price. These are the normal competitive sort of interests in the market place.

The above represents a simplistic model but one which gives a much greater degree of flexibility than the Bloomberg MTCS function. Done correctly, it also permits the user to adjust the time lines and severities to ones which they feel comfortable with when evaluating “Credit IO’s”.

Also, by keeping all of the above factors in mind, the user/trader can still perform the analysis in the way that they see fits best for the environment they’re in. They’re not “locked” into a “black box” which they can’t see inside of.

There are, of course, much more extensive features that can be built into such a model which are not within the scope of this blog. For more information contact Jack Broad at Jack@thetica.com

Strangely, some of the most sophisticated investors in the world have been violating this simple idea. Last month at the 2008 ASF conference in Las Vegas, I asked one of the Collateralized Debt Obligation ("CDO") investors who was on a discussion panel if he had any plans to change how he would go about analyzing the collateral underlying CDO’s in the future. In front of maybe 500 people, his answer was a surprising and somewhat defensive, "We have our procedures in place for selecting managers and those won’t change." Umm. so hang on a second here. My jaw almost hit the floor. Let me get this straight. The CDO market itself is melting down right in front of our eyes and may even (especially in the area of "ABS CDO’s) vanish and go the way of the dinosaur. The contagion effect from sub-prime has infected all other areas of the CDO market including those CDOs that have experienced no defaults whatsoever in their underlying collateral such as "Collateralized Loan Obligations" (also known as "CLO’s") and this guy is telling me he isn’t going to change the way he operates. I’d bet that this guy is gonna vanish along with all of the CDO’s out there that are imploding right now.

Well I’ll be damned!! I didn’t know what I expected to hear but "do nothing" was the last thing I expected to hear.
So let’s see what I mean by "looking" at what you’re investing in:

For ABS bond investors, this would mean being able to look through to the underlying loans and see what this stuff is that is behind the ABS bond payments. See all the characteristics of all of those loans such as mortgage type, FICO scores, original appraisal values, interest rates on the mortgages, geographic distribution, who originated the loans, who is servicing the loans - in short, all of the standard attributes. A lot of this information can be found in the original prospectus for the bonds. It also means realizing that very quickly the "origination" data becomes stale quite fast. In particular, the FICO scores and the original property appraisal values get stale. Because the data vendors that are out there such as Loan performance and Intex do not give you updated property values what should you do when a deal has 2005 loan originations and here it is 2008? Here are a few things:

1. Get "Home Price Index" data from various places such as OFHEO’s web site (free); Case Shiller (S&P bought them and has freebie data for some areas of the states); purchase a subscription to the non-freebie Case Shiller indices or go out to one of the other vendors such as Loan Performance’s new Home Price Indices which are supposed to be quite good or Radar Logic’s indexes etc. In short, you’re trying to find something that will tell you how homes, in general, have been performing in the area that the loans backing your particular ABS are in? That way you can possibly work out:

a. what is the current estimate of home value right now.
b. use some basic projection formulas to work out what values could be into the future.

These things are being doing by quite a few people, but not enough people do it because they don’t have access to a full database of expensive Loan Performance or Intex data and so they are, to that degree, flying blind and depend on others for their research and analysis and "transparency" into the deals themselves.

2. Another thing to do is to retrieve ALL loans from that Zip code across ALL securitized deals - not just the single ABS bond you’re analyzing - and look at the # of loans and the payment status of each of those loans (Current, 30 days delinq, 60 days delinq, 90+ days delinq, Foreclosure or REO) to try to gauge how affected is that particular zip code by the sub-prime mortage market crash. Also, you could use some mapping services to find out exactly where that Zip is. Is it in a highly populated area etc? Keep in mind that the services provided by Loan Performance give you only the securitized loan database. Many investment firms also have a whole other "inventory" of loans that were never securitized and these loans will not be getting reported on by Loan Performance or Intex. But it’s definitely better than nothing and should serve to give you a better idea of what’s out there in your loan’s particular zip code and the surrounding areas.

3. Items #1 and #2 above can only really give you an estimate of the value of the homes because none of those data vendors give you data that has a "finer granularity" than the zip code of the individual loans. This means that you do NOT have a property address. Sounds somewhat reasonable because giving the property address probably violates some sort of privacy information laws. Ok, fair enough. So what if you really want to nail it down closer then the guestimate in steps 1 and 2. Is there any way around this without violating any laws? Well, there are now data vendors appearing on the scene who will sell you a "county records" database. It’s expensive as hell. A cool annual subscription from one vendor of 1 million USD and from another 1.2 to 1.5 million. This database gives you detailed information about loans in a particular area and is publicly available information about who owns a particular property. Right down to the street address, when the loan was originated and the size of the loan etc. Wow! Not bad. If you’ve got a million bucks to spend (and some hedge funds are doing just that from what I’ve heard) you can really get down and LOOK at these loans. One problem is how to "marry up" the property data with the loan-level data provided by Loan Performance and Intex. One way that has been suggested is to simply run a process across all of the loans in your database looking for Zip, Origination Date and Origination Dollar Amount and look for exact matches within the same zip code of the County Records database. If you find only one record that matches your loan from that Zip code, chances are really quite high that you’ve found the exact right property. Now you can drill into the street address and actually see your property using Google Earth (watch out for stale data) or other services and try to get a real sense of what the value of the property is. You also now know who owns the property and maybe you’ve crossed the line so watch out here. Would this be a violation of privacy laws. Maybe some lawyer can tell me. Someone would have paid a lot of money for Loan Performance and a lot of money for the county records database but if these expenses translate into valuable investing insight, it’s probably worth it.

Okay, let’s go further into looking at our loans.

4. We should map all of the above loans onto mapping software so that you can see where your geographical concentrations are. The sets of loans would include:

a. The loans in the particular ABS deal you’re looking at investing in
b. The loans across all securitized deals for the particular areas that are in the specific SPV you’re looking at.
c. If you now have the property addresses you can look much more closely at the property
(I didn’t say it wouldn’t take some time to actually LOOK at the data. But isn’t that what good investors do? They perform "due diligence" on their investments before taking the plunge.)

5. Another approach to take is to always run your loans through standard "econometric models". There are various vendors out there who have these models. You feed it the data about the loan and it comes back and gives you an "estimated loss" figure amongst other figures. Loan Performance has their own "analytical" model. Sum up all the estimated losses on your loans and you have some idea of a projected loss amount for your loans.

6. So let’s step up into the next layer of atmosphere in the Structured Products arena. Let’s say you’re a CDO bond trader and you’re supposed to be looking at investing in a CDO bond. You should be able to do one or more of all of the above items for every single ABS bond that backs the particular CDO Bond you’re looking at investing in. When I talked to one CDO trader he said: "we didn’t do any of that stuff. these things were just more bonds to be traded." Yikes! I think you could say this violates the idea of "looking" at ones investments.

7. Now let’s get really extreme. For CDO’s, that invested heavily in ABS bonds (which in turn had sub-prime mortgages in them), you should be able to run cash flows on every single ABS bond underlying that specific CDO given appropriate prepayment speeds, interest rate curves, default rates and loss severities. You should be able to stress each of those factors to get some kind of idea of how sensitive the prices of EACH of the ABS bonds are to various scenarios. Additionally, if the CDO has some investments in OTHER CDO bonds as part of its collateral, then you should probably look hrough to each of those CDO’s and see what sort of collateral underlies those bonds because if the losses on those underlying assets reach a certain level, it will most certainly result in writedowns (losses) on the CDO bonds themselves.

8. Now, obviously CDO’s became a highly complicated and "layered" bit of stuff. Layers on top of layers on top of layers - but what was forgotten was if the underlying foundation were to erode, ie. the individual underlying mortgage loans themselves, the entire edifice would collapse. Hmmmm. Doesn’t that basically just about sum up where we are at the current moment?

The bottom line really reduces down to these simple ideas:
A. THE INDIVIDUAL COUNTS. As goes the individual, so goes the ENTIRE economy.
B. You have to actually LOOK at what you’re investing in.

In the weekend edition of the WSJ there is an article on the coming glut of condos on the market. The article is not talking so much about the already completed glut of condos, but the fact that many developers back at the height of the housing boom committed some of their own funds initially, started development of condos, rushed around and got loan commitments that would enable them to go ahead and complete the project and really got themselves STARTED on their projects to a point where they can’t really back away from completing the projects now. They’re COMMITTED in other words.

The article is attempting to explain why there was such a furious building up of condos in the U.S. during the years 2004 through 2006. It says: “Speculation was rampant as investors believed empty nesters and young professionals seeking an urban experience akin to what they watched on ‘Friends’ would prop up the condo market for years.”

Huh!! Are you kidding me? You mean to say that a bunch of people dutifully glued to their TV sets watched a sufficIent number of episodes of “Friends” that they were thereafter infected with the idea of “Friends”and their condo-living existence complete with congregating in their ‘hive-like’ structures in urban environments because it maybe reminds those yuppies of their dorm-like existence with their collegiate buddies and that somehow this idiocy became so embedded in their minds that it was as if ROOTED in the very cores of their collective psyches, so much so that it was the CAUSE of a furious condo build out. Ha ha ha!! That is an utter fallacy. Who are they kidding? Does the WSJ really believe that investors are so utterly stupid as to believe the above nonsense. What an insult to investors, yuppies and empty nesters alike.

What are we some sort of damn termite with a deeply embedded genetic goal to “build-build-build-until-we-reach-the-very-stars”. I must admit that some of the images of termite nests I found on a Google search do look quite a bit like some of those structures lining the shores of Miami and other cities around the U.S. if only because of how many of them are dark at night because no one is actually living in them.

Are we sort of like an ant colony pre-programmed by nature out of many millions of years to do things that way because “this is what ants do so we must do it.” Sort of like doing the “CC” (colonially correct”) thing.

This idea of “Friends” causing the excess building of condos in America is just another financial “insanity of the day” or another “lunacy of the month” being foisted off on the financially interested public.

I can just see them now… Millions of yuppies and investors, dark-eyed and unthinking sitting there thinking about their American Dream. Repeat after me in a robotic monotone voice: “I have watched ‘Friends’. I want to live like the lovely people on that show and laugh and say silly things. This must be one of my life-long sought after goals. It is now engraved on my inner being. I will forever more strive to achieve that end.” Give me a break.

If you repeated the above in that monotone are you starting to hear how it’s a bit like the unthinking Borg of Star Trek fame: “Resistance is futile. You will be assimilated.”

This even harkens back to my childhood when getting the bejesus scare out of me by watching a British show called, “Dr. Who”. There were these killer robots called the “Daleks” shaped like big salt shakers with rounded bumps all over them frightening little kids all over the United Kingdome with their: “You will be exterminated.” line of utter terror.

Okay, reel me back in please. I’ve drifted off into a no man’s land of utter silliness.

So you now see the connection between the condo craze and the Borg right? Sorry, we ain’t robots. We’re not the Borg. We’re not ants. We’re not termites. We are not even “herds of animals”. We’re living, breathing, thinking, beings - who can make judgements and decide and are aware of our environments and of ourselves. We are not machines.

What does this have to do with finance. Not too much, I guess. It’s just

Bear Stearns stock closed at $30 on Friday Mar 14 and over the weekend was bought (pending shareholder approval) by JP Morgan for $2 a share.

What! You’ve got to be kidding. Bear’s mystique down through the decades made this story an absolute stunner of a revelation. How could Bear cave in to pressures like that? Where’s the firm stance and the NY attitude? Instead we get a weak namby-pamby, “we had to do what was best for the shareholders.” This is a different Bear Stearns than the one I worked at as a consultant for 15 years.

One big indicator of this was in Friday’s Wall Street Journal where you could find out that Ace Greenberg (the legendary ex-CEO of Bear) has only 15,000 shares of Bear’s stock. Compared to Jimmy Cayne’s 2 million + shares, that’s a drop in the bucket. 15,000 shares!! That’s it? Guess you see what Ace himself thought of what the “new” straw Bear Stearns had become.

But my god, how could Allan Schwartz – the new CEO – cave in so easily? Where was Bear’s Chutzpah? Nowhere in sight. Where was Jimmy when this all went down – playing bridge of course. Where was Warren Spector? playing bridge of course. What back nine was Stanley O’Neal on? Oops wrong company. What beach was Angelo Mozillo to be found on. Oh sorry, wrong company again. I digress. Where was Allan Schwartz? No where to be found either. He just wasn’t THERE for Bear’s stockholders when it really counted. Where was the FIGHT in the Bear? What’d you do, put him on psychiatric drugs to make him more malleable? The company is 30% owned by its employees for god’s sakes. In what nightmare could $2 per share possibly be “the best deal” for the shareholders? Stand up and FIGHT damn it. At least make it fun, adventurous, exciting. Go into temporary bankruptcy. To hell with what the Fed thinks – they have no business messing with the financial affairs of a securities firm anyway. Then scramble around and work your financial wizardry and come out of bankruptcy – restructured, reorganized. Whatever!! Anything but the massive slap in the face that $2 represents and the ruination of so many people’s lives.

Forget porridge! Goldilocks actually put the Bear over a barrel and well… you know. I think Goldi is now letting each one of the 14,000 employees at Bear take their turn bending over the barrel. One at a time…

And after Goldi had her way with the Bear, she promptly turned around and devoured him.

What a fairy tale.