Behind Subprime Woes
A Cascade of Bad Bets
By Carrick Mollenkamp and Ian McDonald
From The Wall Street Journal Online

Three years ago, Colorado truck driver Roger Rodriguez was in the market for a new mortgage loan. With radio and Internet ads trumpeting easy approvals, he picked up the phone.

That call set into motion Mr. Rodriguez's descent into the subprime mortgage mess. Over the next several months, his adjustable-rate loan passed through many hands. These included a local Denver broker, Livingston, N.J., finance company CIT Group Inc. and a Greenwich, Conn., unit of Royal Bank of Scotland Group PLC. Eventually, a piece of Mr. Rodriguez's loan landed in mutual funds run by a Tennessee investor named James C. Kelsoe Jr.

Little good has come to any party that touched the loan. Mr. Rodriguez, now 61 years old, has lost both his job and his home. All the middlemen, from the broker to CIT to RBS, have either shuttered their mortgage businesses or are struggling. Mr. Kelsoe, once a star mutual-fund manager, has hit a career low as defaults on subprime mortgages decreased the value of his investments.

The paper trail from Mr. Rodriguez to Mr. Kelsoe illustrates how the mortgage market meltdown scalded millions of homeowners and investors. It also foreshadows how the domino effect stands to continue.

Much of the mortgage lending of the past several years, as well as investments in mortgage-backed securities, was based on assumptions that left little room for error. As a result, even slight deviations from a perfect world -- in which people act prudently, unemployment stays low, lenders keep lending and house prices rise -- pose risks in the form of more defaults, foreclosures and other investment losses.

Behind the market turmoil of recent months: Lending standards were more lax than most people imagined, a fact that surfaced when house prices stalled.

The mortgage crisis is "a case study on the way that greed convinced everyone there wasn't risk," says Ivy Zelman, CEO of Zelman & Associates, an independent real-estate research firm.

Should house prices fall by 10% over the next two years -- an outcome analysts see as entirely possible -- losses stand to be staggering. Thomas Zimmerman, head of mortgage credit research at UBS in New York, estimates that in such a scenario losses due to defaults could wipe out as much as 16% of the nearly $600 billion in subprime-backed securities issued in 2006. In August, such losses were equivalent to less than 1% of the total.

The jobs market also plays a key role. If the unemployment rate ticks upward by a percentage point or more, Mr. Zimmerman believes losses due to defaults could easily exceed 20% -- enough to hit even some of the most highly rated securities.

Link the the full article: 

http://www.realestatejournal.com/buysell/mortgages/20071018-mollenkamp.html?refresh=on

The statement that if home prices fall 10% loses could equal 16% of the nearly 600 million dollars in subprime backed securities is certainly eye opening. The false hope that house prices would continue to rise and borrowers could refinance before rate increases has ended. While optimism is good, now those whose loans were approved on credit score alone, without verification of income are the reason some are loosing their homes. During the frenzy lenders never thought twice about what "COULD" happen "IF"....well let's Hope that collectively we have learned a lesson!