Looks like a flurry of bearish news to balance out last week bullish news. But the important thing to note is that risk premium is going up. With all this bad news, the presumption of risk is going up. That means the interest required is going up.
Even with a heap of liquidity, someone will get a bit more cautious about losing their money.
Been looking around - Angry Bear, DeLong, Econobrowser, Economist's view - and nothing on the productivity release. Even here, the fastest living economic blogger hasn't covered productivity. Given the level of disinterest, I conclude that productivity doesn't matter. I will incorporate that conclusion in all future thinking about the economy. k harris | 02.07.07 - 1:10 pm | #
Productivity Growth Drops to Lowest Level in a Decade
Thu, 08 Feb 2007 01:45:37 GMT
by Asha Bangalore
Productivity grew 3.0% in the fourth quarter of 2006, following a 0.1% drop in the prior quarter. In 2006, productivity advanced 2.1%, the smallest increase since 1997 when productivity increased 1.6%.
I feel so compromised following this kharris digression...rats. Asha feels like this is more evidence that the Fed will hold as wages are threatening (yeah, I know, bite me), but isn't it the measurement of the numerator (your deflating house is not dissed just because you haven't been able to sell it for 11 months) that is a little more suspect now?
$10B sounds chunky to me too vader but I have my doubts that this will percipitate a proper pricing of "junk" and a return to higher interest rates. Is $100B the number? I don't know.
You're right, AC. Articles are beginning to percolate out now, about county and state services being trimmed, and tax collections running slow.
Kind of like the construction slowdown, I think this will impact temporary workers and contractors and government delays various projects and updates.
Didn't the employment figures CR has been posting show that government hiring has been one of the main drivers of the last few years? Will be interesting to keep an eye on this.
According to the Hyman Minsky's "Seven Stages of a Financal Crisis" ... it looks to me like we are now at Stage Five. Especially note the last paragraph about the contraction of credit ...
Stage Five Market Reversal: Prices Start to Fall
\tStage Five marks the end of the love affair with the object of speculation.
A market reversal occurs when there is a sharp shift in expectations about a continuing price rise, usually caused by new information or a significant event. Sometimes, the exit of the insiders (smart money) causes others to lose faith and become frightened. Other times, it could be the end of cheap money and easy credit. Or it could be that the object of speculation is finally seen to be overpriced. Whatever the precipitating cause, euphoria is now replaced by fear. It is a time to sell. Over demand in the market quickly turns into over supply. Now the race is on to get out of the market and into money.
\t.
The market is no longer in equilibrium as it was at the peak. A growing number of sellers are now fighting for a shrinking number of buyers. Speculators are no longer selling to speculators at an increasingly higher price. The number of greater fools has been exhausted. This causes the bubble to burst and prices to fall. Many speculators now find themselves falling into a hole that keeps getting deeper, unable to sell at a price that will pay off their loans.
\tAs asset prices fall, banks become scared and tighten up their lending requirements. Minsky called this discredit. Liquidity dries up because the availability of easy credit dries up. Thus, there are fewer willing lenders and even fewer willing buyers. Losses start to accelerate. The market reversal may turn into a panic as the realization spreads that there is only so much money and not everyone can get out near the top of the market.
This is just a story about a big bank buying into a very small very risky market at the wrong time. Obviously bank investor relations dept is blaming a "crashing" US real estate market instead of idiots at the bank who sold the idea to the idiots on the board.
A good read on HSBC's subprime business in the WSJ. A few mysteries start to unravel, such as who bought all the second lien paper:
"HSBC bought lots of mortgages. It was the top buyer of loans from Fieldstone Investment in Columbia, Md., a large mortgage originator. According to Fieldstone's securities filings, HSBC bought Fieldstone mortgages with a face value of $1.2 billion in 2005. By March 2006, the second-lien loans on HSBC's balance sheet totaled $10.24 billion, up from $6.3 billion in September 2005."
and of course they did stated income seconds:
"Some decisions later proved to be mistakes. To speed up these purchases from other lenders, HSBC accepted loan paperwork that didn't verify whether borrowers made as much as they claimed. Mortgages that rely on the borrower's word about that are called "stated-income" loans."
And as I was suggesting a few days ago, HSBC seems to have developed second thoughts about FICO scores as a risk measure:
"HSBC acknowledges that it erred in the way it assessed such subprime mortgages. "What is now clear is that FICO scores are less effective or ineffective" when lenders are granting loans in an unusually low interest-rate environment, Douglas Flint, HSBC's finance director, told investors in December"
and finally, they drank the Kool-Aide on the "never mind credit analysis, we've got math PhDs" meme of structured finance:
"Household's then-chief executive, William Aldinger, bragged that Household employed 150 Ph.D.s skilled at modeling credit risk. Household had developed a system for assessing consumer-lending risk -- called the Worldwide Household International Revolving Lending System, or Whirl"
One issue to watch going forward is what constitutes a non-performing loan on the HSBC books - looks like they are prepared to move the goal posts for borrowers who come up short:
"HSBC is hiring "ARM modification specialists" in Tampa to help troubled borrowers. The bank says it is willing to stop short of jacking up rates as much as it is entitled to if that would help borrowers avoid default -- but only case-by-case."
A great case study in what not do as a lender in the midst of a credit bubble.
What is presenting here is classic "COCKROACH THEORY".
If you see one cockroach in your kitchen there are usually a whole lot more.
So take a look around, #2 HSBC, #6 Option One,#7Ameriquest, #3 New Century, #5Fremont, Ownit, MLN.
How many more cockroaches are out there.
Tommorrow starts the extermination. The entire industry is coming unraveling in slow motion. There is no credibility in the numbers and no trust in management. These companies and investors all drank the same koolaid.
The elephants are moving to the doors.
As hard as this is to believe the bad news is just starting. It will get much worse and quicker.
Look at NEW's stockholder list. Goldman Sachs & Morgan Stanley own a ton. Along with HedgeFund David Einhorn of Greenlight Capital.
When these guys make up their mind to exit a stock they blow it out completely. They do not want to be left holding the next timebomb.
And these are timebombs on a short fuse.
It looks like the Liliputians, who these predators lent to, are getting in their last shot and exacting their revenge.
One issue to watch going forward is what constitutes a non-performing loan on the HSBC books - looks like they are prepared to move the goal posts for borrowers who come up short:
"HSBC is hiring "ARM modification specialists" in Tampa to help troubled borrowers. The bank says it is willing to stop short of jacking up rates as much as it is entitled to if that would help borrowers avoid default -- but only case-by-case."
A great case study in what not do as a lender in the midst of a credit bubble.
Brian, I'm puzzled about why you think this. I've run into a flurry of comments here and elsewhere (see Mish) to the effect that what the FASB calls "troubled debt restructuring" are somehow sinister things that exist "only" to improve the lender's "reporting."
Look, if you are a prime lender--or perhaps a subprime owned by a big "prime" bank--you want to "cure" as many delinquent loans as you can, because you want those folks to start paying you back again (become "performing"). This is especially true if we are no longer in the "midst of a bubble" but in the wind-down phase, when FC will be extremely expensive for all parties involved.
It remains true that a "restructured debt," once it comes current and begins repaying again, can be taken out of "nonperforming assets" and reported as performing, because it is. It also remains true that SFAS 114 requires you to take an impairment on that loan, because 1) it must be classified as higher risk because of its history, requiring higher reserves, and 2) it reduces earnings, since you just lowered your interest rate, and 114 requires you to calculate the value of the loan taking the reduced yield into account.
Sure, maybe these outfits aren't applying SFAS 114 correctly. But if they're going out of their way to modify loans while also brazenly ignoring the impairment rules, they're certainly asking for trouble.
All I can say is that if I were an HSBC shareholder, I'd sleep better knowing that they were trying to "cure" these loans rather than just letting them go to FC in a market where the haircut is going to be worse than the modification impairment by a significant margin.
If I were a regulator, I'd sleep better knowing that banks were using "loss mitigation" techniques like case-by-case modifications to keep small losses from becoming huge losses.
If I were an accountant, I'd sleep better knowing that one of the things I factored into my reserve calculations--the willingness and ability of the bank to mitigate loss in some cases with modification, which is part of its "historical" performance as a servicer--is actually being deployed, which increases the chances that the reserves will be adequate.
So why are we all so weirded out over it? Servicers have been modifying troubled loans ever since about a year after banks started making mortgages. It comes with the territory.
I should say that I have, actually, been in one or two of those icky meetings over the years wherein the servicing manager says, "You know, we're going to have to start modifying some of these loans," and the Executive present says "We can't do that! Think of what will happen to our net interest margin," and the CFO leans over and says "Suck it up, bubba. It went around and now it's coming around."
Hence my surprise that anyone thinks modifications are some trick banks play to avoid any pain.
I think you miscontrued my last comment. What I was trying to say was if you look (reading the story as a whole) at the risks that they decided to take (second vs first lien, no doc vs full doc, etc) at the very top of a credit bubble, you couldn't have created an uglier strategy. It's the ultimate credit horror movie.
With respect to "moving the goal posts" that is probably the right and rational decision at this point, unless the fraud with respect to the, ahem, "overstatement" of income is so great that there is no hope of the loan performing under any realistic interest rate (sorry if I gave you the wrong impression on that). I also suspect that they are probably trying to get ahead of the political firestore that is sure to follow in in the wake of the wave of foreclosures. They have already been put in the stocks in the past for sins of a much smaller magnitude than have been committed in the last few years. No doubt there are still people in the company who have scar tissue from that episode, and who probably realize better than anyone else that mortgage brokers will be doing the perp walk by the dozen before this cycle has run its course. (Those white collar crime lawyers who were starting to worry about what they would do after all the Enron guys have been locked up can rest well. If I were them I'd buy a booth at the next MBA convention.) So when the regulators, Barney Frank, and the community activists show up on their doorstep, they can show a good faith effort to give people a soft landing where they can rationalize it.
Brian, I didn't want to sound like I was defending HSBC's lending or pricing decisions, which are the root of this. I have been bitching for years now about that, and arguing that you can either have the high-risk standards and the high reserves, or the low reserves and the conservative lending, but not the combination HSBC among others chose. So I certainly don't disagree that HSBC cooked its own goose.
That said. I would bet that the blue hairs in HSBC's Loss Mit department have been saying the same thing over the years, too. We'll just have to see how the modifications play out. My own experience is that the Loss Mit folks are generally bright enough not to process the modification the way some bozo processed the original loan, meaning that this time, if we're going to give the borrower another chance, income docs will be coughed up, appraisal will be somewhat more restrained in its enthusiasm, etc., or else you might as well just pass the borrower off to the FC folks. Frankly, if the original loan was fraudulent or negligent and was TPO, those hard-hearts at HBSC would be shoving it down the throat of the originator, not modifying it. I also wanted to point out that a modification is not a "get out of jail free" card. The other side of improvement to the delinquency numbers is impairment.
Time will, of course, tell which way HSBC decided to do this. I will not fall over in a dead faint if we find out that they handled their mods as irresponsibly as they handled their originations to begin with. But I still think "moving the goalposts" is an odd way to describe loss mit.
Tanta,
I agree that they will try to jam all they can back to the originator, but I'm guessing there will be no one left to answer the phone at a bunch of those places. I think the WSJ story references them doing biz with "hundreds" of small originators, who if they are still around these days are impersonating Saddam in his spider hole.
My "moving the goalposts" notion was made from looking at the loan from the point of origination. If, at the time the loan was made, you looked at DTI, the likely rate on reset and the prepayment penalties, there was no way the borrower was going to get the ball over the crossbar. Facing reality, the lender is now "moving the goalpost" to something that the lender can service. Maybe the football analogy doesn't work.
Brian, I think what's motivating me is that folks who aren't familiar with either mortgage accounting or loss mit have a tendency to see "accounting fraud" as the first most plausible explanation for a lender's actions in this kind of market. After all, those fine folks at NEW just up and 'fessed to having developed a weird case of amnesia about how SFAS 140 is applied. So suddenly, anyone who reports bad news is, in a lot of people's minds, going to have to restate or is going to jail over accounting games.
Perhaps we should switch metaphors from football to fire alarm. You want, ideally, to be able to evacuate the building by having everyone walk down the stairs under their own power. If you have to, though, you will try to carry some out on your back if they can't walk and it's still possible to get them out. Eventually, if the fire is out of control and there are too many wounded, you can't even do that. That you may have left flammable materials sitting around, and invited a bunch of barely-ambulatory people into your building without revising your evacuation procedures, still doesn't make your attempts to carry people out "sinister." It makes your original actions seriously suspect, but it doesn't mean that your neighbors, who are also now evacuating their own buildings, are in a conspiracy with you, either.
In various press articles it says HSBC was big in the second lien market. So them curtailing or tightening that market will effect a much greater portion of the market than just themselves, wouldn't it? If they are no longer willing to pick up the "20" of the 80/20 a lot of others lenders will get credit tightening whether they want to or not.
So does HSBC actually OWN the loans their originators wrote? Yes/No?
If so WHY??? I thought these folks hardly let the ink dry before they sliced & packaged them off for the outer space of the secondary market... Anyone?
Or was HSBC using them as the income source in some of their money market funds or REIT based funds or what.
If they did launch them into space... package & sell to somebody else... what's their problem? 'Fraid they'll find their way back home? Are there warranties they are worried about?
MOM- I was just thinking if they backed away from 2nd liens completely or just tightened up the guidelines of what they would take the 20 on it would hurt a much bigger swath of the market than someone who is a 100% financer. If HSBC is "the" big player in the secondary lean market, say $10 billion in second liens, and they back away from that, that would mean they actually would affect $50 billion dollars worth of loans. Where someone who does $10 billion worth of 100% loans could only affect $10 billion worth of the market.
Dunno if its anything, but it sure seems like a big secondary lien purchaser tightening would be a very big deal.
Cal,
I think you have a good point. As I commented on in a related thread the subprime bank lender I follow has experienced a drop in First Time Home Buyer from 25% to 2% of total originations in just 6 months! That is a more than 90% drop of FTHB or even more (considering total loan volume has also dropped somewhat).
Looks like a flurry of bearish news to balance out last week bullish news. But the important thing to note is that risk premium is going up. With all this bad news, the presumption of risk is going up. That means the interest required is going up.
Even with a heap of liquidity, someone will get a bit more cautious about losing their money.
From previous thread:
Ok, here's the comment on productovity:
Productivity Growth Drops to Lowest Level in a Decade
Productivity Growth Drops to Lowest Level in a Decade
Thu, 08 Feb 2007 01:45:37 GMT
by Asha Bangalore
Productivity grew 3.0% in the fourth quarter of 2006, following a 0.1% drop in the prior quarter. In 2006, productivity advanced 2.1%, the smallest increase since 1997 when productivity increased 1.6%.
I feel so compromised following this kharris digression...rats. Asha feels like this is more evidence that the Fed will hold as wages are threatening (yeah, I know, bite me), but isn't it the measurement of the numerator (your deflating house is not dissed just because you haven't been able to sell it for 11 months) that is a little more suspect now?
$10B sounds chunky to me too vader but I have my doubts that this will percipitate a proper pricing of "junk" and a return to higher interest rates. Is $100B the number? I don't know.
Let sit down and think what's going on.
Today we learned that #2 and #3 subprime lenders have major problems.
There is a rumour at wallstreetexaminer that credit default swaps market on subprimes just collapsed. What we have:
When it finally collapse, what happens? Questions:
I have some general ideas, but I don't have exact answers on any of those questions.
What do you think?
Check the story below about CountryWide Financial. Soon to be investigated by the SEC. This would be a good post to complement HSBC and "New" posts...
Countrywide Financial Trading Eyed - February 7, 2007 - The New York Sun
Welcome to Phase II of the housing bust.
You're right, AC. Articles are beginning to percolate out now, about county and state services being trimmed, and tax collections running slow.
Kind of like the construction slowdown, I think this will impact temporary workers and contractors and government delays various projects and updates.
Didn't the employment figures CR has been posting show that government hiring has been one of the main drivers of the last few years? Will be interesting to keep an eye on this.
According to the Hyman Minsky's "Seven Stages of a Financal Crisis" ... it looks to me like we are now at Stage Five. Especially note the last paragraph about the contraction of credit ...
Stage Five Market Reversal: Prices Start to Fall
\tStage Five marks the end of the love affair with the object of speculation.
A market reversal occurs when there is a sharp shift in expectations about a continuing price rise, usually caused by new information or a significant event. Sometimes, the exit of the insiders (smart money) causes others to lose faith and become frightened. Other times, it could be the end of cheap money and easy credit. Or it could be that the object of speculation is finally seen to be overpriced. Whatever the precipitating cause, euphoria is now replaced by fear. It is a time to sell. Over demand in the market quickly turns into over supply. Now the race is on to get out of the market and into money.
\t.
The market is no longer in equilibrium as it was at the peak. A growing number of sellers are now fighting for a shrinking number of buyers. Speculators are no longer selling to speculators at an increasingly higher price. The number of greater fools has been exhausted. This causes the bubble to burst and prices to fall. Many speculators now find themselves falling into a hole that keeps getting deeper, unable to sell at a price that will pay off their loans.
\tAs asset prices fall, banks become scared and tighten up their lending requirements. Minsky called this discredit. Liquidity dries up because the availability of easy credit dries up. Thus, there are fewer willing lenders and even fewer willing buyers. Losses start to accelerate. The market reversal may turn into a panic as the realization spreads that there is only so much money and not everyone can get out near the top of the market.
This is just a story about a big bank buying into a very small very risky market at the wrong time. Obviously bank investor relations dept is blaming a "crashing" US real estate market instead of idiots at the bank who sold the idea to the idiots on the board.
A good read on HSBC's subprime business in the WSJ. A few mysteries start to unravel, such as who bought all the second lien paper:
"HSBC bought lots of mortgages. It was the top buyer of loans from Fieldstone Investment in Columbia, Md., a large mortgage originator. According to Fieldstone's securities filings, HSBC bought Fieldstone mortgages with a face value of $1.2 billion in 2005. By March 2006, the second-lien loans on HSBC's balance sheet totaled $10.24 billion, up from $6.3 billion in September 2005."
and of course they did stated income seconds:
"Some decisions later proved to be mistakes. To speed up these purchases from other lenders, HSBC accepted loan paperwork that didn't verify whether borrowers made as much as they claimed. Mortgages that rely on the borrower's word about that are called "stated-income" loans."
And as I was suggesting a few days ago, HSBC seems to have developed second thoughts about FICO scores as a risk measure:
"HSBC acknowledges that it erred in the way it assessed such subprime mortgages. "What is now clear is that FICO scores are less effective or ineffective" when lenders are granting loans in an unusually low interest-rate environment, Douglas Flint, HSBC's finance director, told investors in December"
and finally, they drank the Kool-Aide on the "never mind credit analysis, we've got math PhDs" meme of structured finance:
"Household's then-chief executive, William Aldinger, bragged that Household employed 150 Ph.D.s skilled at modeling credit risk. Household had developed a system for assessing consumer-lending risk -- called the Worldwide Household International Revolving Lending System, or Whirl"
One issue to watch going forward is what constitutes a non-performing loan on the HSBC books - looks like they are prepared to move the goal posts for borrowers who come up short:
"HSBC is hiring "ARM modification specialists" in Tampa to help troubled borrowers. The bank says it is willing to stop short of jacking up rates as much as it is entitled to if that would help borrowers avoid default -- but only case-by-case."
A great case study in what not do as a lender in the midst of a credit bubble.
In Home-Lending Push, Banks Misjudged Risk - WSJ.com
What is presenting here is classic "COCKROACH THEORY".
If you see one cockroach in your kitchen there are usually a whole lot more.
So take a look around, #2 HSBC, #6 Option One,#7Ameriquest, #3 New Century, #5Fremont, Ownit, MLN.
How many more cockroaches are out there.
Tommorrow starts the extermination. The entire industry is coming unraveling in slow motion. There is no credibility in the numbers and no trust in management. These companies and investors all drank the same koolaid.
The elephants are moving to the doors.
As hard as this is to believe the bad news is just starting. It will get much worse and quicker.
Look at NEW's stockholder list. Goldman Sachs & Morgan Stanley own a ton. Along with HedgeFund David Einhorn of Greenlight Capital.
When these guys make up their mind to exit a stock they blow it out completely. They do not want to be left holding the next timebomb.
And these are timebombs on a short fuse.
It looks like the Liliputians, who these predators lent to, are getting in their last shot and exacting their revenge.
One issue to watch going forward is what constitutes a non-performing loan on the HSBC books - looks like they are prepared to move the goal posts for borrowers who come up short:
"HSBC is hiring "ARM modification specialists" in Tampa to help troubled borrowers. The bank says it is willing to stop short of jacking up rates as much as it is entitled to if that would help borrowers avoid default -- but only case-by-case."
A great case study in what not do as a lender in the midst of a credit bubble.
Brian, I'm puzzled about why you think this. I've run into a flurry of comments here and elsewhere (see Mish) to the effect that what the FASB calls "troubled debt restructuring" are somehow sinister things that exist "only" to improve the lender's "reporting."
Look, if you are a prime lender--or perhaps a subprime owned by a big "prime" bank--you want to "cure" as many delinquent loans as you can, because you want those folks to start paying you back again (become "performing"). This is especially true if we are no longer in the "midst of a bubble" but in the wind-down phase, when FC will be extremely expensive for all parties involved.
It remains true that a "restructured debt," once it comes current and begins repaying again, can be taken out of "nonperforming assets" and reported as performing, because it is. It also remains true that SFAS 114 requires you to take an impairment on that loan, because 1) it must be classified as higher risk because of its history, requiring higher reserves, and 2) it reduces earnings, since you just lowered your interest rate, and 114 requires you to calculate the value of the loan taking the reduced yield into account.
Sure, maybe these outfits aren't applying SFAS 114 correctly. But if they're going out of their way to modify loans while also brazenly ignoring the impairment rules, they're certainly asking for trouble.
All I can say is that if I were an HSBC shareholder, I'd sleep better knowing that they were trying to "cure" these loans rather than just letting them go to FC in a market where the haircut is going to be worse than the modification impairment by a significant margin.
If I were a regulator, I'd sleep better knowing that banks were using "loss mitigation" techniques like case-by-case modifications to keep small losses from becoming huge losses.
If I were an accountant, I'd sleep better knowing that one of the things I factored into my reserve calculations--the willingness and ability of the bank to mitigate loss in some cases with modification, which is part of its "historical" performance as a servicer--is actually being deployed, which increases the chances that the reserves will be adequate.
So why are we all so weirded out over it? Servicers have been modifying troubled loans ever since about a year after banks started making mortgages. It comes with the territory.
I should say that I have, actually, been in one or two of those icky meetings over the years wherein the servicing manager says, "You know, we're going to have to start modifying some of these loans," and the Executive present says "We can't do that! Think of what will happen to our net interest margin," and the CFO leans over and says "Suck it up, bubba. It went around and now it's coming around."
Hence my surprise that anyone thinks modifications are some trick banks play to avoid any pain.
Tanta,
I think you miscontrued my last comment. What I was trying to say was if you look (reading the story as a whole) at the risks that they decided to take (second vs first lien, no doc vs full doc, etc) at the very top of a credit bubble, you couldn't have created an uglier strategy. It's the ultimate credit horror movie.
With respect to "moving the goal posts" that is probably the right and rational decision at this point, unless the fraud with respect to the, ahem, "overstatement" of income is so great that there is no hope of the loan performing under any realistic interest rate (sorry if I gave you the wrong impression on that). I also suspect that they are probably trying to get ahead of the political firestore that is sure to follow in in the wake of the wave of foreclosures. They have already been put in the stocks in the past for sins of a much smaller magnitude than have been committed in the last few years. No doubt there are still people in the company who have scar tissue from that episode, and who probably realize better than anyone else that mortgage brokers will be doing the perp walk by the dozen before this cycle has run its course. (Those white collar crime lawyers who were starting to worry about what they would do after all the Enron guys have been locked up can rest well. If I were them I'd buy a booth at the next MBA convention.) So when the regulators, Barney Frank, and the community activists show up on their doorstep, they can show a good faith effort to give people a soft landing where they can rationalize it.
Brian, I didn't want to sound like I was defending HSBC's lending or pricing decisions, which are the root of this. I have been bitching for years now about that, and arguing that you can either have the high-risk standards and the high reserves, or the low reserves and the conservative lending, but not the combination HSBC among others chose. So I certainly don't disagree that HSBC cooked its own goose.
That said. I would bet that the blue hairs in HSBC's Loss Mit department have been saying the same thing over the years, too. We'll just have to see how the modifications play out. My own experience is that the Loss Mit folks are generally bright enough not to process the modification the way some bozo processed the original loan, meaning that this time, if we're going to give the borrower another chance, income docs will be coughed up, appraisal will be somewhat more restrained in its enthusiasm, etc., or else you might as well just pass the borrower off to the FC folks. Frankly, if the original loan was fraudulent or negligent and was TPO, those hard-hearts at HBSC would be shoving it down the throat of the originator, not modifying it. I also wanted to point out that a modification is not a "get out of jail free" card. The other side of improvement to the delinquency numbers is impairment.
Time will, of course, tell which way HSBC decided to do this. I will not fall over in a dead faint if we find out that they handled their mods as irresponsibly as they handled their originations to begin with. But I still think "moving the goalposts" is an odd way to describe loss mit.
Tanta,
I agree that they will try to jam all they can back to the originator, but I'm guessing there will be no one left to answer the phone at a bunch of those places. I think the WSJ story references them doing biz with "hundreds" of small originators, who if they are still around these days are impersonating Saddam in his spider hole.
My "moving the goalposts" notion was made from looking at the loan from the point of origination. If, at the time the loan was made, you looked at DTI, the likely rate on reset and the prepayment penalties, there was no way the borrower was going to get the ball over the crossbar. Facing reality, the lender is now "moving the goalpost" to something that the lender can service. Maybe the football analogy doesn't work.
Brian, I think what's motivating me is that folks who aren't familiar with either mortgage accounting or loss mit have a tendency to see "accounting fraud" as the first most plausible explanation for a lender's actions in this kind of market. After all, those fine folks at NEW just up and 'fessed to having developed a weird case of amnesia about how SFAS 140 is applied. So suddenly, anyone who reports bad news is, in a lot of people's minds, going to have to restate or is going to jail over accounting games.
Perhaps we should switch metaphors from football to fire alarm. You want, ideally, to be able to evacuate the building by having everyone walk down the stairs under their own power. If you have to, though, you will try to carry some out on your back if they can't walk and it's still possible to get them out. Eventually, if the fire is out of control and there are too many wounded, you can't even do that. That you may have left flammable materials sitting around, and invited a bunch of barely-ambulatory people into your building without revising your evacuation procedures, still doesn't make your attempts to carry people out "sinister." It makes your original actions seriously suspect, but it doesn't mean that your neighbors, who are also now evacuating their own buildings, are in a conspiracy with you, either.
In various press articles it says HSBC was big in the second lien market. So them curtailing or tightening that market will effect a much greater portion of the market than just themselves, wouldn't it? If they are no longer willing to pick up the "20" of the 80/20 a lot of others lenders will get credit tightening whether they want to or not.
So does HSBC actually OWN the loans their originators wrote? Yes/No?
If so WHY??? I thought these folks hardly let the ink dry before they sliced & packaged them off for the outer space of the secondary market... Anyone?
Or was HSBC using them as the income source in some of their money market funds or REIT based funds or what.
If they did launch them into space... package & sell to somebody else... what's their problem? 'Fraid they'll find their way back home? Are there warranties they are worried about?
Where actually is HSBC's risk?
Cal - those second liens also bear a mucher larger proportion of losses, which is why they seem to be allocating so much to reserves.
MOM- I was just thinking if they backed away from 2nd liens completely or just tightened up the guidelines of what they would take the 20 on it would hurt a much bigger swath of the market than someone who is a 100% financer. If HSBC is "the" big player in the secondary lean market, say $10 billion in second liens, and they back away from that, that would mean they actually would affect $50 billion dollars worth of loans. Where someone who does $10 billion worth of 100% loans could only affect $10 billion worth of the market.
Dunno if its anything, but it sure seems like a big secondary lien purchaser tightening would be a very big deal.
Cal,
I think you have a good point. As I commented on in a related thread the subprime bank lender I follow has experienced a drop in First Time Home Buyer from 25% to 2% of total originations in just 6 months! That is a more than 90% drop of FTHB or even more (considering total loan volume has also dropped somewhat).
HSBC fires US executives as it works to get Household in order
HSBC fires US executives as it works to get Household in order -
Business News, Business - The Independent
mp - that didn't take long.
Of course two years ago he was probably the hero & not the goat... bringing in all that BODACIOUSLY 'profitable' US sub-prime biz.
Gotta love that corporate game.