Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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ACA Capital shares could fall on subprime: Barron's

Sun Aug 5, 2007 3:01PM EDT

NEW YORK (Reuters) - ACA Capital Holdings (ACA.N: Quote, Profile, Research) shares, already down 50 percent in the last two months, could fall further if the subprime mortgage crisis continues, Barron's said on Sunday.

ACA, with a market value of about $260 million, has guaranteed $61 billion of collateralized debt obligations, including subprime and other instruments backed by various corporate and commercial mortgage debt, Barron's said in its August 6 edition.

Should the U.S. subprime troubles prove to be systemic across different geographies, then not only would shares be hammered, but the company could be toast, Barron's said.

If ACA buckles under, Wall Street firms whose securities the company insured would also be hurt. The $61 billion of ACA's insured exposure would come cascading back to balance sheets of the likes of Bear Stearns (BSC.N: Quote, Profile, Research), Merrill Lynch (MER.N: Quote, Profile, Research), Lehman Brothers (LEH.N: Quote, Profile, Research), and Citigroup (C.N: Quote, Profile, Research) along with some 25 other Wall Street counterparties, Barron's said.

There is No There There, Sub-Prime Mortgage Crisis Continues

The August 6, 2007 issue of Barron’s has an excellent article on an insurer of the sub-prime mortgage market and its CDOs, (collateralized debt obligations).

ACA Capital Holdings is on the line for 61 billion dollars of guaranteed commercial debt, up from 14.6 billion in 2005.

The company’s shareholder net worth is 326 million dollars.

Bear Stearns, of collapsed hedge fund fame, owns 27.7% of ACA. Why?  Well, it insures a bunch of Bear Stearns’ mortgage investments, allowing Bear’s balance sheets to look better.  But what is underneath?

The article notes the company does have one billion dollars of claims paying resources.

But it insures 9.3 billion in so-called mezzanine CDOs, mostly rated triple B or B minus.

What would it take for all this to fall at ACA’s door?  According to Barron’s,  a 7% impairment pulls the rug out from the entire 9.3 billion.

This points out the ratings mistake, in that the ratings agencies assumed continued real estate appreciation.  Sometimes in the financial markets, if it didn’t happen yesterday, they don’t remember it.

Until the last couple of years, U. S. homes had appreciated in value every year since 1937.

S & P now projects losses of 11% to 14% in the 2006 class of sub-prime’s alone.

I expect 2007 to be worse, as lending standards were getting lower over time.

Barron’s points out other risks to ACA in particular, but those risks are all over the market.

The emperor has no clothes.  There is neither an accurate assessment of the overall risk, nor of who holds how much of it.

Wall Street firms point to insurance and other hedges that will protect them if things get worse, which point, of course, they do not concede.  But how solvent are the insurers?  Is ACA typical?  My opinion, a guess, is yes.
The economic reality is that more loans will go into default, more homes foreclosed, further depressing the housing market, further blowing up the ratings agency assumptions.

What about the people put into mortgages they could not afford?  As the law stands, they will lose their homes.

If the current scenario plays out, many of the mortgagees will file bankruptcy, and chapter 7 trustees will liquidate the homes.  Or, they will be re-sold after foreclosure, for less than what was owed on the mortgage.

A better resolution would be amending the bankruptcy laws, to allow the owner to keep the home in Chapter 13, by paying the mortgagee no more than the value of the home, plus interest.

The dislocation expenses are saved, people stay in their homes, fewer homes on the market to further depress prices, for the same end result, a realization to the end mortgagee of only what the home was worth.

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