T2 Hedge Fund Report on Mortgage Market

Barrons Magazine writes on a T2 Hedge Funds report on the mortgage market: "It traces the beginnings of the mortgage mess to an almost unimaginable decline in lending standards from 2001 through 2006, which led, as night must follow day, to the extraordinary surge in subprime mortgages, which in turn touched off an astonishing and unprecedented boom in prices.

Wall Street, (T2 report) relates, was a prime agent in inflating the monster mortgage bubble, since to produce those richly profitable asset-backed securities (ABSs) and collateralized debt obligations (CDOs) it needed a vast store of loan "product," and mortgages fit the bill.

It was no sweat, as T2 points out, to generate ever-greater volumes of mortgage loans: Simply lend at higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers and never bother to verify their income and assets (if any). A modest drawback: "Don't expect to get repaid." But, hey, so what: House prices were destined to rise eternally, if not longer.

Things didn't quite work out that way. Home prices are in free fall, the mortgage market is frozen, refinancing in many instances is a mission impossible, $440 billion worth of mortgages are slated to reset this year and defaults are rampant.

"We are seeing," warns the T2 report, "only the tip of the iceberg: An enormous wave of defaults, foreclosures and auctions is just beginning to hit the U.S. We believe it will get so bad that large-scale federal government intervention is likely."