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EIR's `Loudoun Effect' Report Confirmed
As Upper-Income Mortgage CDOs Are Hit

April 3, 2007 (EIRNS)—An April 2 Reuters article, "Mortgage Crisis Hits Million-Dollar Homes," collects a number of reports confirming EIR's coverage of the "Loudoun effect," and the accelerating spread of the mortgage meltdown into the markets of CDOs (collateralized debt obligations), mortgage-based securities supposedly "anchored" by high-priced, high-quality mortgages.

"Everyone's looking at subprime," PIMCO manager Mark Keisel warns in the article; "The rocks they aren't looking under are the adjustable rate mortgages and teaser rates and low money-down loans. It's going to affect prime as well." PIMCO is the world's largest bond-investment fund.

The foreclosure rate for homes "valued" at $750,000 and up has reached a surprising 2.5% nationwide. All ten of the cities with the most rapid increases in delinquency rates and foreclosures rates in the country, are in the high-priced and recently "superhot" home markets of Massachusetts and California, with the eastern Michigan lakeshore towns and Northern Virginia counties not far behind. The damage is hitting "Alt-A jumbo loans" of $400,000 or more. California is seeing 1,000 foreclosures a month of "high-scale" homes, according to RealtyTrac. The Center for Responsible Lending now estimates that the 2.2 million foreclosures it sees coming in 2007 will wipe out $164 billion in homeowners' equity—an average of $80,000 invested equity in each foreclosed home, many of them second and third homes bought for speculation.

In Ohio, the state with the nation's highest foreclosure rate at 3.4% in 2006, a new report shows that 73% of the loans which have triggered delinquencies, were made in 2005-06 to middle- and upper-income households, with incomes up to $140,000. High-income (above $65,000) households had 21% of the non-prime loans; low-income (below $27,000) households had only 5%. The report is by the Coalition on Homelessness and Housing in Ohio.

The financial disintegration problem is, as EIR's Lonnie Wolfe showed in the March 23 issue, that CDO securities package together, what are supposed to be debt instruments of different qualities, with the "golden debt" of high-income, high-priced mortgages anchoring the subprimes, etc. Lehman Brothers estimated on March 30 that mortgage CDOs had lost $20 billion in March alone.

The awaited bankruptcy of the largest U.S. "independent" subprime mortgage lender, New Century Financial of Irvine, California, was announced on April 2, and will immediately throw 3,200 of New Century's employees out of their jobs. It is very likely that the company will soon pass into a liquidation process, and nearly all of its 6,000 workers will be unemployed. But for now, New Century has received a slim $150 million in debtor-in-possession financing, by pledging some of its mortgage loans—those which still retain collateral not yet seized by banks or securities firms—to RBS Greenwich Capital. Sounding like Connecticut and having a Greenwich office, RBSGC is a division of the Royal Bank of Scotland, and its registration is in Bermuda.