Subprime Twist: Exception Loans

The NYT reported recently that New York prosecutors are investigating whether Wall Street banks withheld information about the risks stemming from subprime loan-linked investments:

Citing people with knowledge of the matter, the newspaper said the inquiry, begun last summer by state Attorney General Andrew Cuomo, was focusing on how banks bundled billions of dollars of exception loans and other subprime debt into complex mortgage investments.

Charges could be filed as soon as the coming weeks, the Times said. Connecticut Attorney General Richard Blumenthal told the newspaper he was also conducting a review and cooperating with New York officials.

The federal Securities and Exchange Commission is also investigating, the Times said.

Reports commissioned by Wall Street banks raised alerts about the high-risk loans, known as exceptions, which fell short of even the lax credit standards of subprime mortgage companies and the Wall Street firms, the newspaper said, but the banks failed to disclose those details to credit-rating agencies or investors.

Hmm, exception loans? Loans that fell short of even the lax credit standards of Subprime mortgage companies? I guess nothing should surprise me when it comes to Subprime, however, I was not aware that one can even lower the credit standards further. How low can you go and how many of those beauties were created?

Industry officials say the so-called exception loans make up anywhere from 25 percent to 80 percent of the $1 trillion subprime mortgage market among portfolios they had seen, the Times said.

The banks also failed to disclose how many exception loans were backing the securities they sold, with underwriters using such words as “significant” or “substantial,” securities law requires banks to disclose all pertinent facts about securities they underwrite, the report said.

OK, so they did not disclose the percentage. Really, do you think that with the then gold rush mentality anybody would have cared?

My issue with this is that there seems to be always new twists appearing and this may not have been the last one. What this means is that the fallout from the Subprime crises will be (unfortunately) with us for quite some time to come.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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