Mortgage loans originated for 2005 and 2006 were marketed to first time homebuyers. Appallingly the standards were loosened and products tailored to get anyone with a pulse into their first house. At least 40% of the mortgage loans were questionable, probably more when played out to the end.

70% of mortgage loans in 2004 were to refinance existing mortgages. It was a boon for the homeowner. Their home value appreciated to the point where they had more than 20% equity. They refinanced to lower rates, could cash out equity or consolidate other debts, have no out of pocket expenses, eliminate mortgage insurance and still have the same monthly payment on their home. After interest rates began raising it didn’t matter to them. They were locked into fixed rate loans and hadn’t planned on moving. People that previously refinanced were able to hunker down for the long haul.

Investors and lenders were not pleased with the action. The paid off mortgage is removed from the mortgage backed security and pays a lower return unless replaced with another mortgage. Lenders had a glut of money and without new borrowers, nowhere to throw it. Products to sub-prime and Alt-A borrowers were created to target those minimally eligible for a mortgage. The quantity of mortgages to sub-prime borrowers nearly doubled over earlier years.

Lenders gone wild were rabid to make new loans. New products created included Interest only fixed rate mortgage (IO FRM), IO adjustable rate mortgage (ARM), ridiculously low teaser rates for ARMs, fixed payment ARM (for up to 10 years or until deferred interest (negative amortization) reaches 25% of the original loan, 40 and 50 year mortgages. Nationwide 35% of all home purchases in 2005 and 2006 were with simultaneous subordinate (SS) mortgages (second mortgage and other loans) used for down payments. SS mortgages and ARMs were particularly attractive to speculators and real estate investors.

Everyone should watch a few episodes of Flip that House, Flip this House, or Property Ladder. The idea is to find a hot market, buy low, sell high, use other people’s money (OPM) and sell before the first payment comes due. Syndication and a 30 minute to hour time slot makes it look so easy.

The percentage of SS closing in the 20% Alt-A tranche is between 50% and 72% in CA, FL, AZ, and NV. Out of all defaulted loans Non-Owner Occupied Share (speculators and investors) make up 32% of the share in NV, 26% in AZ, 25% in FL, and 21% in CA.