Imagine a fictitious company called ABC Loan and it has 100 $100,000 second trust deeds with a 12 year life span. Right now, we know 3 of them will go bad this year and because of foreclosure, the second trust deed will drop off of the title rendering it worthless.
So ABC Loan has 10 million in second trust deeds at say 7% interest. Net interest on 10 million at 7% is $700,000. Subtract the 3 foreclosures. Now the interest for the year is $400,000. The following two years could be just as risky, considering the market. After 3 years, the loans are pretty well seasoned and your going to be back in the banking business. So for three years, your business model which worked in the good old days, kind of sucks. You're only getting 4% interest on a high risk loan for the first 3 years. (I could be shot for over simplification!)
Now if you examine all of these sub prime borrowers that were given second trust deed mortgages, it doesn't take much math to realize that 8 no pays out of 100 pretty much puts the lender in survival mode. Add on top of that the number of lawyers who have decided to save these foreclosed borrowers from themselves by suing the "Fog-A-Mirror" Mortgage writer. On top of that we have predictions that 20% of all loans from 2004 to now could default.
Sounds unreal so far doesn't it. But let's ask only one more question: Where is the money coming from for these loans? Its not coming from the banks, they still remember the banking fiasco of the 1990's.
Who is willing to pay almost Treasury rates for unadulterated crap? The word retirement fund comes to mind. I hope I'm wrong, but the answer to the question should be self evident within the coming year.