Sunday, March 9, 2008

Countrywide is Probed by the FBI for Possible Fraud

"Countrywide Is Probed by FBI for Possible Fraud, Person Says
By Robert
Schmidt and David Mildenberg
March 9 (Bloomberg) -- Countrywide Financial
, the largest U.S. mortgage lender, is under investigation by the
Federal Bureau of Investigation for possible securities fraud, according to a
person familiar with the probe.
Investigators are focusing on whether
Countrywide officials misrepresented the company's financial position and
the quality of its mortgage loans in securities filings, the person, who
declined to be identified because he wasn't authorized to speak about the probe,
said yesterday. He described the inquiry, reported earlier by the Wall Street
Journal, as preliminary.
Countrywide is among at least 14 companies that the
FBI is checking for possible accounting violations related to the subprime
lending crisis, including mortgage lenders, housing developers and Wall Street
firms that package loans as securities. The FBI announced the review in January
without identifying any of the companies."

My take:

Well the blame game has already started. I expected this but I am surprised this has started when prices are down only 15% nationally. Usually the government doesn't get involved until all of the damage has been done. We are still in the early stages of this crisis. This is further proof that people are realizing that housing is turning out to be a big "scam" versus a boom to the economy. So just like Enron and MCI Worldcom, Countrywide because of their size will likely become the poster child for one of the biggest financial frauds in the history of the US.

There was something in this article that actually was more disturbing to me then the FBI starting a probe on Countrywide:

"Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report."

So why is this bad? 42% of foreclosures in the fourth quarter were subprime mortgages. I expected this number to be high. What is scary is that 58% were NOT subprime loans.

Remember a year ago the experts said this problem was contained to subprime. When more then half of your foreclosures are not subprime it means that all loans are in trouble. Prime, alt-A, everything. This is why we are in such trouble folks. As I have said before my worst case scenario for the housing problem is that all loans will begin to start having trouble.

When 58% of the loans that are going bad are considered to be good loans it means we have a national crisis. Whats becoming increasingly obvious is eveyone in the US made the same mistakes in terms of buying an unaffordable house. What many on Wall St. thought was the poor people that couldn't afford a house during normal times now could because of subprime loans, and this would would be the one area that housing might have a problem with foreclosures. This is why it was expected that this crisis was contained.

What we are no learning is people who made $300,000 made the same stupid mistakes as the subprime folks did. They went out and bought a $1.5 million dollar home when they should have bought something for around 900k which is 3 times income. The rich made the same mistakes as the poor, they bought houses that they couldn't AFFORD. The 58% foreclosure rates on prime loans confirms this. As a result this will be a national crisis that hits all neighborhoods regardless of income.

Perhaps this is why JP Morgan raised their expectations of houses dropping in value from 25% nationally to 30% nationally. This is going to be a pain full process to watch these houses drop. With the news this weekend of 325 billion dollar margin calls and predictions of 30% reductions in housing getting pasted all over the Internet and newspapers tells me that reality is setting in.

Expect losses in the market this week.

Stocks have only dropped about 15% so far as we enter this recession. The average drop in stocks is 28% during your average recession. What I see is developing is a severe recession and a chance of depression if the government does not take the right actions and address this problem correctly. As a result of this you could see stocks do worse then the average 28% drop during an average recession when this is all said and done. This may end up being the mother of all recessions. I hope we can avoid a depression. I will discuss more on what needs to be done to correct this problem later.

Link for Bloomberg article:

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