Actually, I do think that Alt-A delinquency rates 18 months from now will be higher than sub-prime delinquency rates are now.
Again we see a CEO projecting the results of the last 5 years into the future. "Past performance is proof positive of future results."
Are "Alt-A loan losses" and "loan losses for subprime loans" equal to delinquency rates or dollar losses?
If dollar losses, then his 1/17th figure is meaningless without knowing the relative amounts of Alt-A and subprime loans taken out during the previous 5 years.
If delinquency rates, then he is ignoring the fact that Alt-A delinquency rate at the end of 2006 were approximately 23% of the delinquency rate for subprime loans (5.0%/21.7%) whereas the Alt-A delinquency rate for the past 5 years was approximately 5.9% of the delinquency rate for subprime loans (1/17).
Either way, it appears that Alt-A delinquency rates are making significant strides to catch up to subprime delinquency rates. So, unless he can show that Alt-A delinquency rates have plateaued, this is just more happy talk that ignores the clear upward trend, IMHO.
Contagion is when one financial problem causes other problems. The tightening of lending standards in Alt-A seems to be because there are problems with the Alt-A loans. I don't see how the subprime problems caused this.
(reposting as it's more appropriate for this thread) I found this on another blog:
thought you might find this interesting. It came from a Washington Mutual broker that I have never met or heard of:
While many non-prime companies are getting out of the market, WaMus adding more non-prime programs . . .
No need for perfect creditclients with FICO® scores as low as 500 can
qualify for financing (no scores required for co-borrowers!)
With expanded qualifying guidelines and debt ratios up to 55%, more
buyers can get into the house they want
Plus special programs for clients with past defaults, foreclosures or
bankruptcies
Cash reserves are not required
Loan amounts up to $1.3M
Sellers contribution allowed up to 6%
NOT high-cost loans
Faster processing with flexible documentation guidelines
Does this sound credible? Wouldn't the FDIC be very interested in what WaMu is doing if this is the case?
--
"Cumulative mortgage industry Alt-A loan losses over the last five years are 1/17th the loan losses for subprime loans based on the FALP data. In addition, as of Dec. 31, 2006, the 30+day delinquency percentage for Alt-A loans in the mortgage industry was 5.0 percent as compared to 21.7 percent for subprime loans..."
As if the period 2002-06 is a good guide for what lies ahead in 2007-10. Sub-prime is just the leading-edge of the gigantic mortgage problem as home prices decline.
What will happen to all types of mortgage loans when the home prices decline 20%+, i.e., go back to 2002-03 levels?
i still think the issue is not prime/alt-a/subprime but adjustable. i still see a bigger correlation between that andd default rather than some bogus risk measurement.
No, on this one I think CR is correct. There is just enough crossover in the businesses, and perhaps more importantly the same research anaylysts tend to cover companies across the credit spectrum that no CEO wants to be claiming that he is headed against the wind. At least for now.
it's very simple,
the avg. alt-a loan is ~ $400k and the avg. subprime loan is ~$100k.
So in total dollar terms, that's what matters, not how many mortgages are in delinquency per category, but the total dollar amount in deliquencies.
Thus, even though delinquency rates for alt-a is 5% compared to 20% for subprime, 1/4th less.
Since on the avg. alt-a loans are 4 times bigger than the avg. subprime loan, the total dollars are comparable.
This a classic case of a ceo trying to confuse people with stats.
when New Century got a margin call, it wasn't for x-number of mortgages it was for a total dollar amount of $290 million.
Thus when NDE gets a margin call, it doesn't matter how many mortgages are sent back, but the total dollar amount that needs to be bought back.
Again guys, the Total Dollar Sum is the key here, not the percentage of mortgages in delinquency.
I don't agree. The document from ResCap that CR linked to suggests that they're tightening lending in Alt-A because of poor underwriting (not contagion), not because they've taken such a bath on subprime that they can't offer as many Alt-A loans (contagion).
Look at it this way. Even if these problems in the subprime arena never existed, there would still be problems with the Alt-A loans. How can that be contagion?
As I see the matter, AltA may or may not eclipse subprime in number of defaults but given the much higher loan amounts, the dollar value of losses will crush subprime.
If home values begin to tank even the default numbers might converge. Again, this is an ARM reset (and recast) problem. The recasts will be a KILLER.
And, this is a nice piece of disingenuous work, using losses from 2002-2006 to, by inference, suggest future loss rates without actually making that assertion. Like it's even remotely relevant...
Suffering loan losses during 2002-2005 is the equivalent of hitting the BANKRUPT notch on the Wheel of Fortune. Appreciation was running 20% in many areas!!! Those were hard to come by and probably due to sickness/death/divorce the typical failure modes.
Now we're into the period where the LOAN itself will cause defaults without appreciation to provide cover. NDE is sitting in the bull's eye.
And, this is a nice piece of disingenuous work, using losses from 2002-2006 to, by inference, suggest future loss rates without actually making that assertion. Like it's even remotely relevant...
Suffering loan losses during 2002-2005 is the equivalent of hitting the BANKRUPT notch on the Wheel of Fortune. Appreciation was running 20% in many areas!!! Those were hard to come by and probably due to sickness/death/divorce the typical failure modes.
Now we're into the period where the LOAN itself will cause defaults without appreciation to provide cover. NDE is sitting in the bull's eye.
Actaully I suspect that if the subprime stuff was ok and all we were seeing was Alt A issues? The credit availability impact within the Alt A world would be less than it is with the subprime being so visible and leading this. So yes, subprime is contributing. I suppose we can quibble over the contagion being the common cold, The Ebola Virus or something in between.
remember, barely, they can do whatever they like right now, as long as it pushes the stock up 5% in a day and gives them another chance to do some more insider selling at a good price, before the inevitable hit once reality hits them in the face and they cant talk their way around it anymore. The thing to remember here is whether there is any hard info which makes what they are saying here actually negligent and criminal, in that it temporarily avoids telling the truth. So far, I dont see that, but it is just a matter of time before they cant make this kind of absurd statement and get away with it.
Issue #1: Lending to borrowers (sub-prime or Alt-A) who are currently unable to meet current debt service.[currently understated in my view]
Issue #2: Lending to borrowers (sub-prime or Alt-A) who will be unable to meet future debt service when (a) their interest rate resets; (b) their payment (for both interest/principal) resets to fully amortize the loan or (c) if (I was tempted to say "when" the economy goes south.[Let's see how this gets handled.]
Accordingly, whatever we are observing currently will be much exaggerated in the next 12-60 months--remember that these wascally rabbits (known as lenders) had very flexible terms--Sirens I suppose if one wanted to get more classy than Warner Bros. So the $hit covered with snow are the balloon payments/mortgage resets that will come due in the future.
I think that I've mentioned here before, that the current loan loss provisions that I've reviewed in a few 10-K's suggests over-reliance on past loan losses while not taking into account the expected increase due to more liberal underwriting. To me this is a bit disengenuous. My guess is that we will be seeing several come to Jesus discussions with investors over the coming year. I'm wondering how long it will take some of these lenders to come forward. Remember how long it took the homebuilders to start writing down assets?
Geoff - "So far, I dont see that, but it is just a matter of time before they cant make this kind of absurd statement and get away with it"
If you look at comparable releases out of other thrifts, they almost always issue some current delinqueny statistics. In this report they made a point of not disclosing those numbers. I am willing to bet A LOT that they are hiding those delinquency numbers for a reason - and it's not because they are looking too good. Potentially criminal misrepresentation?
Delinquency numbers will show up on their Q1 report. If they are trending up seriously their shares will get CRUSHED. I have puts, so I also have built in patience.
Must say though, the insiders have been buying NDE stock in the last week.
It could just be a smoke screen or they really believe in what they are saying.
can they be that dumb or are things not that bad with alt-a?
Sub Prime contagion.
I had stomach flu; it started out as a fever and nausea in the morning. By noon it moved to volcanic diarrhea and vomiting. Sub Prime is the fever and nausea, AltA and prime will be the volcanic diarrhea and vomiting. They are all symptoms of the same stomach flu (Bad Lending practices).
If the stomach flu is a contagion my Mom (S&P500), Dad (DOW), Sister (Porsche Dealer) and brother (Home Dept) will be taken out too by this bug.
If the stomach flu is Sub Prime and not the bad lending practices then this does not apply. I make the assumption that Liar Loans, 0 Down 100%, Exploding ARMS, Flippers and all the other non-sense IS the problem and not just giving money to people with low FICA scores. If all those non-sense loans are ok and the problem is 100% the persons FICA score then I stand correct, but if it was just the FICA score why is Freddie and all the other bankers scrambling to shut down those practices?
I take an issue with your last statement "ResCap estimated that their new guidelines would have eliminated 20% of Alt-A loans in 2006". Do you see a problem there? 5% of Alt-A loans are having problems, yet the latest changes would have eliminated 20% of the production. 15% too many! And the same is true with their subprime side. I believe you quoted ResCap as saying that 58% of their subprime would not have qualified today, yet only (!) 17% are having problems. This seems like a major overkill to me. Am I missing something?
I attended the UBS CDO conference today and there were a few notable points. One was FICO's failure to serve as an accurate predictor of defaults (no surprise to anyone here). They focused on the risk layering factors of less than full doc and high LTV. Apparently that message hasn't made it to our friends at Indymac yet!
The other notable point was that in their view this all started in late 05 when there was a buyers strike on wall street because the WAC on subprime paper was basically the same as that for Alt-a and the street refused to buy the paper in Dec 05. In response coupons on subprime were raised in early 06, but all the other risk management factors went out the window so that volume wouldn't drop. This underwriting fiasco produced the EPDs that started to show up in the summer.
They were very explicit in saying the 2/28 product of the past is dead. They didn't provide an alternative structure, but said the Fed guidance that will roll out in mid year will force the issue.
One other point from the UBS conference about servicing these loans. First they characterized all the servicing people as being on Prozac since they were going everything that could go wrong was going wrong at one time. UBS suggested that the fear of litigation such as in the Fairbanks and Ameriquest cases would make them move very slowly on foreclosures.
I've been nosing around in S-3's and 10-D's..that is where the dirt is in these CDO's....
Credit quality of borrower: I'm going to lift this straight out of a Goldman Sachs S-3
From S-48: The credit score tables appearing in Appendix B show the credit scores, if any, that the originators or underwriters of the Mortgage Loans collected for some mortgagors. Third-party credit reporting organizations provide credit (or FICO) scores as an aid to lenders in evaluating the creditworthiness of mortgagors. Although different credit reporting organizations use different methodologies, higher credit scores indicate greater creditworthiness. Credit scores do not necessarily correspond to the probability of default over the life of the related Mortgage Loan, because they reflect past credit history, rather than an assessment of future payment performance. In addition, the credit scores shown were collected from a variety of sources over a period of weeks or months, and the credit scores do not necessarily reflect the credit scores that would be reported as of the date of this prospectus supplement. Credit scores also only indicate general consumer creditworthiness, and credit scores are not intended to specifically apply to mortgage debt. Therefore, credit scores should not be considered as an accurate predictor of the likelihood of repayment of the related Mortgage Loans."
"5% of Alt-A loans are having problems, yet the latest changes would have eliminated 20% of the production. 15% too many"
You might need to begin looking through the front windshield instead of the rear-view mirror to avoid getting in a wreck, is what ResCap was suggesting. They see the future. It's coming slowly enough, and with enough indicators & warning that they made changes that they feel are appropriate. They may need to go back in and revise, even tighter...
"Yes, Mr. Fed Official, we did package a lot of smelly poop but most went to those foreigners, now our balance sheets, err off balance sheet items are smelly and we need some cashola from you to clean it up."
Leisa - You might find it interesting to go through MER's Notes on the 06 Report. Fastinating reading on the SPEs and the derivatives risk. Look for the words "Unlikely event" in the Notes for the Notes. All off Balance Sheet, of course.
"There's nothing really new in the data," Paul Miller, an analyst at Friedman, Billings, Ramsey, said. "The data is somewhat misleading on the losses too. They used a five-year time frame. That includes 2002 to 2004 when there were very few losses. People are really worried about 2006."
SURPRISE! The FBR analyst also seems to suggest the losses from 2002-2005 are totally irrelevant and misleading...
Another MarketWatch article. Forgive me if this has been referenced before. Not sure who came up with this reset amount figure, but it's non-trivial...
"In the not-too-distant future, millions of Americans may receive a letter advising them of their mortgage "reset" or "recast" with the same dread they now feel for a pink slip or for bad news from their oncologist. The only difference: They know (or should know, if they noticed what they were signing) exactly what's coming: An average monthly increase of $1,512 in their monthly mortgage payment. "
servicefirst, Obviously ResCap's analysis of bad loans show certain characteristics, and since they can't perfectly identify which loans will get into trouble - they eliminate all loans with those specific characteristics.
I believe you are comparing ResCap loan eliminations with IndyMac delinquency rates. First, IndyMac numbers are better than the industry, and second. I believe delinquency rates are about to rise significantly.
CR, IndyMAC didn't disclose their delinquency rates in this release. They are only comparing historical foreclosures - perhaps for good reason.
They may be stalling the inevitable reconciliation too. I don't know but anything over 90days delinquent should for all practical purposes be considered a foreclosure.
BTW - What characterizes a NPA. Does it have to be foreclosed?
what indymac did was average several years of data and come to the conclusion that overall alt-a loans arent' bad. what it DIDN'T do was explain why the 2006 vintage is coming apart at the seams.
Cal - WAC = Weighted Average Coupon, the average interest rate in a pool of mortgages. Not to be confused with things like WAM, which is Weighted Average Maturity, not to be confused with a boy band from Norway.
"ALT-A Sting Potential is the Margin" in the ARMS. Some of these loans carry a margin as low as 2.25%, while others carry a margin as high as 5%. The future problems in the ATL-A's will be in those borrowers with the 5% margin loans.
Here's an example: A current $100,000 loan 3/27 at 7% interest only cost the borrower $583/mth. In three years, with a 1 yr libor at 5.33% and a margin of 5%, the borrower will be faced with a 10% rate, a 27 yr amortized payment of $894/mth or a 53% increase in monthly payment. This will be PAIN!
The price of such loans are MUCH higher than they were in the past 2 years. They are also allowing less risky layering, so if you have a no doc the CLTV could be lower or not allowing IO (for example).
And there are signifcant tightening that wont be evident "on paper" of rate sheets and underwriting matrix , many lenders were making exceptions to guidelines rather than turn business away. Now they are turning business away instead of making exceptions.
The difference in volume and type of scenarios at broker outpost and the grapevine is much different than 6 months ago.
While we might not see a credit crunch in the traditional sense but there could be a relative credit crunch affecting those who need it most.
The tightening of lending standards in Alt-A seems to be because there are problems with the Alt-A loans. I don't see how the subprime problems caused this.
Subprime accounted for about 20% of new buyers. Take them out and you get a big drop in the demand curve and falling prices. This impacts the security of all mortgages.
banker,
They were very explicit in saying the 2/28 product of the past is dead. They didn't provide an alternative structure, but said the Fed guidance that will roll out in mid year will force the issue.
So, wouldn't the same happen to option ARMs, then?
I didn't follow your comment on
One other point from the UBS conference about servicing these loans. First they characterized all the servicing people as being on Prozac since they were going everything that could go wrong was going wrong at one time. UBS suggested that the fear of litigation such as in the Fairbanks and Ameriquest cases would make them move very slowly on foreclosures.
Could you embellish this a bit? Was this a concern that servicer performance would be potentially stressed with if the number of troubled loans increased?
(In theory, it's a nonsense to talk about HPA turning negative, but I acknowledge it's common usage. When prices start to fall, HPA actually becomes HPD {HP Depreciation}.)
Cash-out refi will put money in the borrower's pocket as the new mortgage exceeds the balance of the first and second (if any).
Rate term would just be a refi of the exisitng debt.
Except in the case where any of the 2nd lien debt was not used for the purchase of the house (new HELOCs) in which case it would be treated as a cash-out refi.
No-doc cash-out is almost impossible at any LTV, UBS is still selling it.
Prime: good loans.
Subprime: bad loans to bad borrowers.
Alt-A: bad loans to good borrowers.
Alt-A loans have the same unsustainable characteristics as subprime ones, but the borrowers have higher FICO scores. Come resets and recasts it won't matter. If you loan people way more than they can afford to pay, they will fail to pay. Their credit scores may make a couple of months difference.
Actually, I do think that Alt-A delinquency rates 18 months from now will be higher than sub-prime delinquency rates are now.
Again we see a CEO projecting the results of the last 5 years into the future. "Past performance is proof positive of future results."
Are "Alt-A loan losses" and "loan losses for subprime loans" equal to delinquency rates or dollar losses?
If dollar losses, then his 1/17th figure is meaningless without knowing the relative amounts of Alt-A and subprime loans taken out during the previous 5 years.
If delinquency rates, then he is ignoring the fact that Alt-A delinquency rate at the end of 2006 were approximately 23% of the delinquency rate for subprime loans (5.0%/21.7%) whereas the Alt-A delinquency rate for the past 5 years was approximately 5.9% of the delinquency rate for subprime loans (1/17).
Either way, it appears that Alt-A delinquency rates are making significant strides to catch up to subprime delinquency rates. So, unless he can show that Alt-A delinquency rates have plateaued, this is just more happy talk that ignores the clear upward trend, IMHO.
Reposting from the other thread because I think people should read the PDF :
BOT2, thanks for the link, by far most of the presentations are pretty bland/biased bear looted off various websites type stuff.... BUT
http://www.aei.org/docLib/20070327_ZimmermanPresentation.pdf
was DYN-O-MITE
p. 10-11 charts were even more informative than Ivy Zelmans report.
p. 18- "OMG"
p.27 - interesting
Everyone take a look, good stuff! Data-tastic!
It appears Perry is doing his best to support the stock before he enters the quiet period before they report earnings in April.
Today he's done a pretty good job, even if he's being disingenuous.
The subprime contagion is already here.
Is this really contagion?
Contagion is when one financial problem causes other problems. The tightening of lending standards in Alt-A seems to be because there are problems with the Alt-A loans. I don't see how the subprime problems caused this.
(reposting as it's more appropriate for this thread) I found this on another blog:
thought you might find this interesting. It came from a Washington Mutual broker that I have never met or heard of:
While many non-prime companies are getting out of the market, WaMus adding more non-prime programs . . .
No need for perfect creditclients with FICO® scores as low as 500 can
qualify for financing (no scores required for co-borrowers!)
With expanded qualifying guidelines and debt ratios up to 55%, more
buyers can get into the house they want
Plus special programs for clients with past defaults, foreclosures or
bankruptcies
Cash reserves are not required
Loan amounts up to $1.3M
Sellers contribution allowed up to 6%
NOT high-cost loans
Faster processing with flexible documentation guidelines
Does this sound credible? Wouldn't the FDIC be very interested in what WaMu is doing if this is the case?
--
"Cumulative mortgage industry Alt-A loan losses over the last five years are 1/17th the loan losses for subprime loans based on the FALP data. In addition, as of Dec. 31, 2006, the 30+day delinquency percentage for Alt-A loans in the mortgage industry was 5.0 percent as compared to 21.7 percent for subprime loans..."
As if the period 2002-06 is a good guide for what lies ahead in 2007-10. Sub-prime is just the leading-edge of the gigantic mortgage problem as home prices decline.
What will happen to all types of mortgage loans when the home prices decline 20%+, i.e., go back to 2002-03 levels?
Jas
i still think the issue is not prime/alt-a/subprime but adjustable. i still see a bigger correlation between that andd default rather than some bogus risk measurement.
I really like the sentence:
"The subprime contagion is already here."
The Masque of the Red Death
Steve,
No, on this one I think CR is correct. There is just enough crossover in the businesses, and perhaps more importantly the same research anaylysts tend to cover companies across the credit spectrum that no CEO wants to be claiming that he is headed against the wind. At least for now.
it's very simple,
the avg. alt-a loan is ~ $400k and the avg. subprime loan is ~$100k.
So in total dollar terms, that's what matters, not how many mortgages are in delinquency per category, but the total dollar amount in deliquencies.
Thus, even though delinquency rates for alt-a is 5% compared to 20% for subprime, 1/4th less.
Since on the avg. alt-a loans are 4 times bigger than the avg. subprime loan, the total dollars are comparable.
This a classic case of a ceo trying to confuse people with stats.
when New Century got a margin call, it wasn't for x-number of mortgages it was for a total dollar amount of $290 million.
Thus when NDE gets a margin call, it doesn't matter how many mortgages are sent back, but the total dollar amount that needs to be bought back.
Again guys, the Total Dollar Sum is the key here, not the percentage of mortgages in delinquency.
U B right GAZ.
Thanks for the UBS link Cal : a great graphical presentation.
Banker,
I don't agree. The document from ResCap that CR linked to suggests that they're tightening lending in Alt-A because of poor underwriting (not contagion), not because they've taken such a bath on subprime that they can't offer as many Alt-A loans (contagion).
Look at it this way. Even if these problems in the subprime arena never existed, there would still be problems with the Alt-A loans. How can that be contagion?
AltA IS Subprime, by definition.
As I see the matter, AltA may or may not eclipse subprime in number of defaults but given the much higher loan amounts, the dollar value of losses will crush subprime.
If home values begin to tank even the default numbers might converge. Again, this is an ARM reset (and recast) problem. The recasts will be a KILLER.
Didn't the First Boston/Credit Suisse graph show the first major wave of resets in all classes beginning May, June and July of this year?
We're in only the first inning of this match...
And, this is a nice piece of disingenuous work, using losses from 2002-2006 to, by inference, suggest future loss rates without actually making that assertion. Like it's even remotely relevant...
Suffering loan losses during 2002-2005 is the equivalent of hitting the BANKRUPT notch on the Wheel of Fortune. Appreciation was running 20% in many areas!!! Those were hard to come by and probably due to sickness/death/divorce the typical failure modes.
Now we're into the period where the LOAN itself will cause defaults without appreciation to provide cover. NDE is sitting in the bull's eye.
And, this is a nice piece of disingenuous work, using losses from 2002-2006 to, by inference, suggest future loss rates without actually making that assertion. Like it's even remotely relevant...
Suffering loan losses during 2002-2005 is the equivalent of hitting the BANKRUPT notch on the Wheel of Fortune. Appreciation was running 20% in many areas!!! Those were hard to come by and probably due to sickness/death/divorce the typical failure modes.
Now we're into the period where the LOAN itself will cause defaults without appreciation to provide cover. NDE is sitting in the bull's eye.
Steve,
Actaully I suspect that if the subprime stuff was ok and all we were seeing was Alt A issues? The credit availability impact within the Alt A world would be less than it is with the subprime being so visible and leading this. So yes, subprime is contributing. I suppose we can quibble over the contagion being the common cold, The Ebola Virus or something in between.
remember, barely, they can do whatever they like right now, as long as it pushes the stock up 5% in a day and gives them another chance to do some more insider selling at a good price, before the inevitable hit once reality hits them in the face and they cant talk their way around it anymore. The thing to remember here is whether there is any hard info which makes what they are saying here actually negligent and criminal, in that it temporarily avoids telling the truth. So far, I dont see that, but it is just a matter of time before they cant make this kind of absurd statement and get away with it.
Issue #1: Lending to borrowers (sub-prime or Alt-A) who are currently unable to meet current debt service.[currently understated in my view]
Issue #2: Lending to borrowers (sub-prime or Alt-A) who will be unable to meet future debt service when (a) their interest rate resets; (b) their payment (for both interest/principal) resets to fully amortize the loan or (c) if (I was tempted to say "when" the economy goes south.[Let's see how this gets handled.]
Accordingly, whatever we are observing currently will be much exaggerated in the next 12-60 months--remember that these wascally rabbits (known as lenders) had very flexible terms--Sirens I suppose if one wanted to get more classy than Warner Bros. So the $hit covered with snow are the balloon payments/mortgage resets that will come due in the future.
I think that I've mentioned here before, that the current loan loss provisions that I've reviewed in a few 10-K's suggests over-reliance on past loan losses while not taking into account the expected increase due to more liberal underwriting. To me this is a bit disengenuous. My guess is that we will be seeing several come to Jesus discussions with investors over the coming year. I'm wondering how long it will take some of these lenders to come forward. Remember how long it took the homebuilders to start writing down assets?
Geoff - "So far, I dont see that, but it is just a matter of time before they cant make this kind of absurd statement and get away with it"
If you look at comparable releases out of other thrifts, they almost always issue some current delinqueny statistics. In this report they made a point of not disclosing those numbers. I am willing to bet A LOT that they are hiding those delinquency numbers for a reason - and it's not because they are looking too good. Potentially criminal misrepresentation?
Delinquency numbers will show up on their Q1 report. If they are trending up seriously their shares will get CRUSHED. I have puts, so I also have built in patience.
Must say though, the insiders have been buying NDE stock in the last week.
It could just be a smoke screen or they really believe in what they are saying.
can they be that dumb or are things not that bad with alt-a?
GAZ "Must say though, the insiders have been buying NDE stock in the last week"
I noticed that too. Not quite sure what to make of it. Would make sense that they feel the price is going up, but why? Any reasonable guesses?
Sub Prime contagion.
I had stomach flu; it started out as a fever and nausea in the morning. By noon it moved to volcanic diarrhea and vomiting. Sub Prime is the fever and nausea, AltA and prime will be the volcanic diarrhea and vomiting. They are all symptoms of the same stomach flu (Bad Lending practices).
If the stomach flu is a contagion my Mom (S&P500), Dad (DOW), Sister (Porsche Dealer) and brother (Home Dept) will be taken out too by this bug.
If the stomach flu is Sub Prime and not the bad lending practices then this does not apply. I make the assumption that Liar Loans, 0 Down 100%, Exploding ARMS, Flippers and all the other non-sense IS the problem and not just giving money to people with low FICA scores. If all those non-sense loans are ok and the problem is 100% the persons FICA score then I stand correct, but if it was just the FICA score why is Freddie and all the other bankers scrambling to shut down those practices?
CR,
I take an issue with your last statement "ResCap estimated that their new guidelines would have eliminated 20% of Alt-A loans in 2006". Do you see a problem there? 5% of Alt-A loans are having problems, yet the latest changes would have eliminated 20% of the production. 15% too many! And the same is true with their subprime side. I believe you quoted ResCap as saying that 58% of their subprime would not have qualified today, yet only (!) 17% are having problems. This seems like a major overkill to me. Am I missing something?
I attended the UBS CDO conference today and there were a few notable points. One was FICO's failure to serve as an accurate predictor of defaults (no surprise to anyone here). They focused on the risk layering factors of less than full doc and high LTV. Apparently that message hasn't made it to our friends at Indymac yet!
The other notable point was that in their view this all started in late 05 when there was a buyers strike on wall street because the WAC on subprime paper was basically the same as that for Alt-a and the street refused to buy the paper in Dec 05. In response coupons on subprime were raised in early 06, but all the other risk management factors went out the window so that volume wouldn't drop. This underwriting fiasco produced the EPDs that started to show up in the summer.
They were very explicit in saying the 2/28 product of the past is dead. They didn't provide an alternative structure, but said the Fed guidance that will roll out in mid year will force the issue.
One other point from the UBS conference about servicing these loans. First they characterized all the servicing people as being on Prozac since they were going everything that could go wrong was going wrong at one time. UBS suggested that the fear of litigation such as in the Fairbanks and Ameriquest cases would make them move very slowly on foreclosures.
I've been nosing around in S-3's and 10-D's..that is where the dirt is in these CDO's....
Credit quality of borrower: I'm going to lift this straight out of a Goldman Sachs S-3
From S-48: The credit score tables appearing in Appendix B show the credit scores, if any, that the originators or underwriters of the Mortgage Loans collected for some mortgagors. Third-party credit reporting organizations provide credit (or FICO) scores as an aid to lenders in evaluating the creditworthiness of mortgagors. Although different credit reporting organizations use different methodologies, higher credit scores indicate greater creditworthiness. Credit scores do not necessarily correspond to the probability of default over the life of the related Mortgage Loan, because they reflect past credit history, rather than an assessment of future payment performance. In addition, the credit scores shown were collected from a variety of sources over a period of weeks or months, and the credit scores do not necessarily reflect the credit scores that would be reported as of the date of this prospectus supplement. Credit scores also only indicate general consumer creditworthiness, and credit scores are not intended to specifically apply to mortgage debt. Therefore, credit scores should not be considered as an accurate predictor of the likelihood of repayment of the related Mortgage Loans."
"5% of Alt-A loans are having problems, yet the latest changes would have eliminated 20% of the production. 15% too many"
You might need to begin looking through the front windshield instead of the rear-view mirror to avoid getting in a wreck, is what ResCap was suggesting. They see the future. It's coming slowly enough, and with enough indicators & warning that they made changes that they feel are appropriate. They may need to go back in and revise, even tighter...
RE: http://www.aei.org/docLib/20070327_ZimmermanPresentation.pdf
Gotta love this: "Without Government Support"
Is Wall Street looking for a government handout?
"Yes, Mr. Fed Official, we did package a lot of smelly poop but most went to those foreigners, now our balance sheets, err off balance sheet items are smelly and we need some cashola from you to clean it up."
Leisa - You might find it interesting to go through MER's Notes on the 06 Report. Fastinating reading on the SPEs and the derivatives risk. Look for the words "Unlikely event" in the Notes for the Notes. All off Balance Sheet, of course.
In case you haven't seen this from MarketWatch...
IndyMac says subprime contagion concern 'overblown' - MarketWatch
"There's nothing really new in the data," Paul Miller, an analyst at Friedman, Billings, Ramsey, said. "The data is somewhat misleading on the losses too. They used a five-year time frame. That includes 2002 to 2004 when there were very few losses. People are really worried about 2006."
SURPRISE! The FBR analyst also seems to suggest the losses from 2002-2005 are totally irrelevant and misleading...
Brian and Leisa,
Wonderful stuff, thanks!
Another MarketWatch article. Forgive me if this has been referenced before. Not sure who came up with this reset amount figure, but it's non-trivial...
"In the not-too-distant future, millions of Americans may receive a letter advising them of their mortgage "reset" or "recast" with the same dread they now feel for a pink slip or for bad news from their oncologist. The only difference: They know (or should know, if they noticed what they were signing) exactly what's coming: An average monthly increase of $1,512 in their monthly mortgage payment. "
Will 'lemming loans' drive U.S. economy off the cliff? - MarketWatch
Great finance blog you have here. Great work!
Jord _ UK Home Mortgages
UK Home Mortgages
Excuse my ignorance, what is "WAC" .
servicefirst, Obviously ResCap's analysis of bad loans show certain characteristics, and since they can't perfectly identify which loans will get into trouble - they eliminate all loans with those specific characteristics.
I believe you are comparing ResCap loan eliminations with IndyMac delinquency rates. First, IndyMac numbers are better than the industry, and second. I believe delinquency rates are about to rise significantly.
Best Wishes.
CR, IndyMAC didn't disclose their delinquency rates in this release. They are only comparing historical foreclosures - perhaps for good reason.
They may be stalling the inevitable reconciliation too. I don't know but anything over 90days delinquent should for all practical purposes be considered a foreclosure.
BTW - What characterizes a NPA. Does it have to be foreclosed?
CR and Barely,
With those kind of numbers, I think we should all hope that you're terribly wrong.
Keep up the blog, it's awesome.
what indymac did was average several years of data and come to the conclusion that overall alt-a loans arent' bad. what it DIDN'T do was explain why the 2006 vintage is coming apart at the seams.
Cal - WAC = Weighted Average Coupon, the average interest rate in a pool of mortgages. Not to be confused with things like WAM, which is Weighted Average Maturity, not to be confused with a boy band from Norway.
Then there's WALA, but I won't even go there.
alt-A mortgage matrix. not sure when this was last updated, but it looks like one can get a no doc if u got a 620 FICO! what credit tightening!
http://www.scotsmanguide.com/pdfs/Matrix_Res/ALT-A.pdf
"ALT-A Sting Potential is the Margin" in the ARMS. Some of these loans carry a margin as low as 2.25%, while others carry a margin as high as 5%. The future problems in the ATL-A's will be in those borrowers with the 5% margin loans.
Here's an example: A current $100,000 loan 3/27 at 7% interest only cost the borrower $583/mth. In three years, with a 1 yr libor at 5.33% and a margin of 5%, the borrower will be faced with a 10% rate, a 27 yr amortized payment of $894/mth or a 53% increase in monthly payment. This will be PAIN!
stinkyfinger,
The price of such loans are MUCH higher than they were in the past 2 years. They are also allowing less risky layering, so if you have a no doc the CLTV could be lower or not allowing IO (for example).
And there are signifcant tightening that wont be evident "on paper" of rate sheets and underwriting matrix , many lenders were making exceptions to guidelines rather than turn business away. Now they are turning business away instead of making exceptions.
The difference in volume and type of scenarios at broker outpost and the grapevine is much different than 6 months ago.
While we might not see a credit crunch in the traditional sense but there could be a relative credit crunch affecting those who need it most.
The tightening of lending standards in Alt-A seems to be because there are problems with the Alt-A loans. I don't see how the subprime problems caused this.
Subprime accounted for about 20% of new buyers. Take them out and you get a big drop in the demand curve and falling prices. This impacts the security of all mortgages.
many ABX are heading down:
Markit Homepage
banker,
They were very explicit in saying the 2/28 product of the past is dead. They didn't provide an alternative structure, but said the Fed guidance that will roll out in mid year will force the issue.
So, wouldn't the same happen to option ARMs, then?
"Stretchers" CAN default with much lower CLTV's as HPA turns negative
HPA?
IndyMac segments their Loan Production under the following categories:
a) 'Purchase Transactions'
b) 'Cash-out Refinance Transactions'
c) 'Rate/term Refinance Transactions'
Can someone clarify the difference between the 'Cash-out' and 'Rate/term' transactions?
Could 'Rate/term' include issuing a re-structured loan to someone that couldn't afford the recast?
Brian-
Thanks for sharing the UBS conference info.
I didn't follow your comment on
One other point from the UBS conference about servicing these loans. First they characterized all the servicing people as being on Prozac since they were going everything that could go wrong was going wrong at one time. UBS suggested that the fear of litigation such as in the Fairbanks and Ameriquest cases would make them move very slowly on foreclosures.
Could you embellish this a bit? Was this a concern that servicer performance would be potentially stressed with if the number of troubled loans increased?
Leisa,
Are you short on FED ?
It is my #1 short position but it is acting strange.....
I like the art on your blog (photos etc..) - did you took them ?
probert,
HPA = House Price Appreciation
(In theory, it's a nonsense to talk about HPA turning negative, but I acknowledge it's common usage. When prices start to fall, HPA actually becomes HPD {HP Depreciation}.)
Cash-out refi will put money in the borrower's pocket as the new mortgage exceeds the balance of the first and second (if any).
Rate term would just be a refi of the exisitng debt.
Except in the case where any of the 2nd lien debt was not used for the purchase of the house (new HELOCs) in which case it would be treated as a cash-out refi.
No-doc cash-out is almost impossible at any LTV, UBS is still selling it.
Prime: good loans.
Subprime: bad loans to bad borrowers.
Alt-A: bad loans to good borrowers.
Alt-A loans have the same unsustainable characteristics as subprime ones, but the borrowers have higher FICO scores. Come resets and recasts it won't matter. If you loan people way more than they can afford to pay, they will fail to pay. Their credit scores may make a couple of months difference.