What is the point of captive MI? MI takes some of the risk of default off the lender and puts it onto the MI company, right? If the lender owns the MI company, why bother with all the paperwork if there is no risk actually shifted?
You mention that the lender somtimes only picks up part of the MI as captive MI. The question still remains, why take over the middle 25% of a MI policy for a mortgage you own when you can just set the terms of the MI to not cover that middle 25%.
All I can think of is that the lender might want to resell the mortgage, but still get some of the action via MI. But again, if it wants to keep some of the action, then it can just resell fewer mortgages.
On a related question, why not just have a loan that after a certain percentage of principle is paid off resets at a lower interest rate? Wouldn't this be better than MI because it is simpler, and better for the borrower because they can take the higher interest payments in the pre-reset period as a income tax deduction?
I want to pay attention but after many years I have accepted the fact that I can't learn anything after the sun sets. I will start studying tomorrow. Thanks,
Seems to me that 2007 is going to be the Year of MI. Whether intentionally or not, it is the MI providers that benefit the most from the subprime melt-down. And with the MI being now tax deductible for mortgages taken out this year, those companies could really clean up.
There is an argument to be made that MI providers could actually lose a lot of money due to the higher number of foreclosure-related pay outs that they will incur. Seems to me though that that is not very likely because one of the reasons Alt-A was invented was to get around the MI. And the subprime never has MI anyway - the risk is figured into the rate - so I don't think that MI providers will get burned too badly.
On yet another hand, "community lending" programs like MyCommunity and other FHA substitutes AND the FHA itself, allowed plenty of people with limited credit to get up 100% financing with reasonable MI payments, and that's where MI providers could lose some substantial dough.
So in the end, if I had a dollar to invest, MI providers like MGIC would be worth a serious look.
Any thoughts?
On a side-note: as far as the LPMI vs BPMI is concerned, if people actually kept their mortgages for longer than 24-36 months, BPMI might have some advantages, but people refinance and refinance and refinance until they can't. And here we are.
Thank you Tanta,may your life be full of chocolate.When it is time for you to go off the percodans,I highly recommend acupuncture to deal with the physical withdrawal symptoms.I have had to use opiates for chronic severe pain,twice for periods of years,and the acupuncture made a substantial difference.
Mar 22, 2007 6:51 pm US/Pacific
Irvine Subprime Mortgage Lender Saved By Deal
(AP) LOS ANGELES New Century Financial says it has reached a deal with Barclays Bank PLC that would effectively release the troubled subprime mortgage lender from having to buy back about $900 million in mortgage loans.
Barclays had demanded last week that New Century comply with an obligation to repurchase outstanding mortgage loans financed by the bank.
Barclays had alleged the company defaulted on its financial obligations.
According to a filing with the Securities and Exchange Commission, Barclays and Sheffield Receivables agreed to release New Century and its subsidiaries from the obligation. In turn, New Century gave up its rights to the loans financed by the bank.
The deal is dependent upon New Century transferring to Barclay an unspecified amount of money relating to the home loans.
tanta - love you. its been nice seeing you come on the scene and eventually take over the joint.
but i just can't read all that at once. i'm of the ADD age and more than a few paragraphs on the internet is too much for me.
while i realize everyone's got a different style, one of the things about CR that i always liked was the, shall we say, efficient information delivery.
while clearly your work is significantly deeper and more thorough, perhaps smaller dosages would reach more patients.
Don't change a thing. Haven't these guys ever read a book? Surely 5-6 paragraphs of very timely info is something they can comprehend if they'd only apply themselves. I'd hate to miss out because a few GTA playin' gamers can't concentrate on more than just headlines.
Why do captives exist? My guess is that the banks thought that the MIs were getting premiums that were too rich and wanted some of it back. But they are required to have MI if the loan is to be conforming, right? So isn't it really just a scam. They get around the requirement set by Fannie and Freddie by buying insurance from a company that they own which means not really getting insurance at all. What do FNM and FRE think of that? Obviously they know it is happening.
Also I figure, that maybe this is another accounting trick to make earnings look more stable. Kind of like what AIG was doing to manage earnings. If you can stablize earnings your stock can command a higher valuation. Is this mostly what it is about?
I read your post, cooked hamburgers and french fries for me and misses, ate same, watched CSI, listened to wife relate step daughter's problems-something about 2 guys and one prom all at once and found your post enlightening.
Not sure what the younger generation is coming to, maybe its sounding out the words that is making it boring.
You write well and lucidly. The amount of detail is incredibly valuable to me, a recently sold homeowner thinking about buying again in a few years. Just do what comes naturally--it's worked so far.
Tanta, you are the first person to have explained to me WHY MI companies bother to own servicing shops.
(Well, they used to be more involved in owning them before MSRs lost value faster than a cheerleader's prom dress during the RE boom, as portfolio runoff and prepay speeds increased. At that point, they figured better to make hay while the sun was shining - and, in PMI's case, better to stop thowing good money [MI premiums, with declining policy payouts during the boom] after bad [Fairbanks].)
When PMI bought Nomura's stake in Fairbanks back in the day, I wondered why in the hell they'd want to be the majority owner of the servicer? I didn't think it was just because they wanted to be like MGIC, who also owned/owns a servicer (Litton, if memory serves me right).
I now know why - they were taking it in the shorts from the investors, more or less (or so they felt, at least), who were pushing the servicers for their own benefit, and not in the MI company's benefit. The MI companies didn't like playing second fiddle, as the servicers knew where their bread got buttered.
So, the MI companies got in the business of owning, or at least controlling, the servicers - and thus helping to shape the servicing contracts (which in turn influenced the loss mit, FCL, and other practices). Good way for them to help stem to flow of policy payouts (remember, even if all they did was SLOW the flow of policy payouts, the interest income from that probably justified the investment in the servicing shops). AND, for the bonus round, they could control and hopefully minimize the magnitude of any payout that became a foregone conclusion (the whole "loss severity" thing, which today's default professionals who weren't around in the early 1990s are quickly learning the importance of).
Anyways, enjoy reading your posts. And I will really laugh if you're someone I work with.
so I increased my short position on the up tick two days ago and I will likely increase it again after seeing Cramer (although I could not understand what he say at the end about "insider selling")
I want to point out that the media is focusing on 100% loans to "sub-prime" - this is really not the issue.
The issue is 80% LTV that was replaced by 100%LTV and now 95% LTV.
95% is still too high. (And in many cases the 5% are being receieved as a gift, or as a loan for some loan shark or some fraud that is involving a lick-back from the seller himself)
5% is better than 0% down but is not enough for making the buyer get enough "skin in the game". Home ownership is a good thing but when the interest-only and 5% down means that the buyer does not actually own any part of his home and is being mortgage to the gills the advantages of "home ownership" are washed.
There must be a return to the good old 20% down a number that shows also that the buyer is capable to save for this down payment. The 20% down is the best indicator of the buyer credit worthiness and a best proof that he will strive hard to protect his investment.
The 20% down also mean one more thing: Buyers will start thinking about the price of homes and not just the monthly payment his is the most important aspect of returning sanity to the housing market.
Please write letters to congress and to media along these line: sanity and affordability in housing will be done by correcting prices and return of the 20% down payment.
I think a very useful exercise is to answer the question: What does the American consumer have to believe?
a) That the presence of many millions of people on earth willing to do EXACTLY the same job that s/he does for longer hours and better done but for between one hundredth and one twentieth of his/her wages poses no threat to him/her.
b) That money is extremely cheap and extremely valuable.
c) The when s/he buys a house, because s/he is almost always simultaneously a buyer and a seller, s/he can pick the expectations of either the ideal buyer or the ideal seller to justify and support the desirability of the transaction.
b) That the political class is not for sale and is not lying to him/her.
As a gedanken experiment, I wonder if others could come up with some more?
Tanta's key assumption for housing is: housing prices are always going up.
This is an amazing effort on a subject that not many people understand. Learning requires an investment of time. As a money manager I can tell you that the stuff here is head and shoulders above 99% of the stuff that we pay for from Wall Street. (Yes, expect a tip from me)I would not look to edit primer pieces such as these. My two cents
You write well enough for someone with no experience in the financial industry to keep coming back for more--interesting stuff, keep it!
Have you ever thought of doing an article (er, post) on the history of mortgage products? I know that the 20% fixed has always been the gold standard, but I also know alternatives have existed for quite a while. When did I/O loans start? Buyer-directed (or whatever the term is...) no-doc? Piggybacks? What about products that have come and gone (don't hear much about balloon mortgages anymore, except maybe on piggybacks)?
Keep in mind that the whole mortgage thing worked until our elites told us that asset appreciation would substitute for income. Then ownership became a right and necessary instead of a convinence and headache.
I've been a lurking reader for about a month, coming out of the shadows to post for the first time. I'm here purely out of curiosity -- my only connection to the mortgage industry is as a borrower.
This style of article does a wonderful job of explaining, piece by piece, the behind-the-scenes structures that have allowed mortgage lending to get to its current state.
I have no problem with a long article that might ramble at times, as long as it stays informative. Sure, if all that information could be packed into a couple of paragraphs, great... but it can't. The articles are long, but still keep a high density of useful information, and have enough humor thrown in to keep them from glazing the reader's eyes over. They're literally what keeps me coming back to this site, even though there's little practical reason for me to do that.
Now, add in the facts that these articles are labeled "for uber-nerds", making them easy to avoid or save for later reading, and that other readers have started volunteering to summarize for you.
I don't think there's any reason to change from the writing style you've been using. Thank you for taking the time to write these articles!
Tanta, once again, you've provided me with information that I've been looking for literally for years. This is just one more piece of the Mortgage Servicing Fraud puzzle that I've been putting together. I've been fighting an illegal foreclosure instigated by Fairbanks Capital n/k/a Select Portfolio in 2001 with great, albeit excruciatingly slow success. Feb 1 I finally filed my damages litigation against Fairbanks/SPS, The PMI Group, Merrill Lynch Mortgage Capital AND Mortgage Investors, LaSalle Bank NA, and their local legal counsel Harmon Law Offices of Newton, Ma.
If ANYONE has any info that they feel could help my case please don't hesitate to contact me through my site. There are literally hundreds of thousands of homeowners losing their homes to illegal foreclosures across the country - in addition to the millions legitimately in default after their ARMs reset. And what has happened to me can happen literally to anyone with a mortgage. Homeowners simply cannot control who obtains the servicing rights to their loans.
Without a doubt, there are far more legit FCs than fraudulent ones out there and there is little to nothing that can or SHOULD be done to help those people outside of mainstream efforts. But for those of us losing our homes to manufactured defaults by greedy, unscrupulous third party servicers, the situation is a nightmare.
Thanks again for your incredible contributions, Tanta. You may never know just how much your analyses of the industry have helped victims like myself. Once my litigation finally comes to a close, I may owe you several (cases?) of your favorite distillations and/or fermentations.
TANTA, THIS IS HUGE!!!!!!!!!!!!
I read this morning in the Los Angeles Times, 'The FED has the authority to set rules prohibiting "unfair or deceptive" practices by (ALL) lenders under the Home Ownership & Equity protection Act of 1994.' (Caps & emphasis mine)
For two years I've been arguing for a single body regulatory control of our financial sector, with the FED at the helm. It appears, at least for housing, the FED had all the authority it needed to stop outrageous mtg. lending practices - but it CHOSE to do nothing!
THIS IS DAMNING TO FED CREDIBILITY.
On yet another hand, "community lending" programs like MyCommunity and other FHA substitutes AND the FHA itself, allowed plenty of people with limited credit to get up 100% financing with reasonable MI payments, and that's where MI providers could lose some substantial dough.
Maybe, maybe not. My personal big fear is that these programs "cherry-picked" what used to be the top tier of FHA loans. Sure, the cherry-pickers might take some losses, but the cherry-picked--FHA--is now in a lot worse shape. You can't run successful insurance pools by continuing to repool them, as we've been doing over the "innovative" boom years, to the point where adverse selection blows up all the insurers on the bottom of the pile. In essence, that's what the "subprime spread" theory is all about. In any case, I do worry about FHA MMIF, not necessarily because FHA relaxed its guidelines, but because other players did so and thus took FHA's best borrowers at what may well turn out to be a real underpricing.
Of course, it's possible that those MyCommunity or A- borrowers actually got a worse deal than they'd have gotten in an FHA loan. The countervailing force here is the extent to which brokers sell the conventional products harder because they pay more back end spiff than FHA. In this sense, FHA is the victim of its own consumer protection efforts: it doesn't allow its borrowers to be gouged on fees, so anyone who wants to gouge a low-to-mod borrower has to do so in a "competitive" conventional program.
And this gets us back to incomprehensible things like neg am. FHA loan programs are (relatively) easy-to-understand FRMs or 1-year ARMs with very low annual rate adjustments, plus these insurance premiums the borrowers pay. In contrast, some of the competing programs are endlessly complicated, mind-numbing eye-glazing weird shit. The hapless borrower looks at the "minimum monthly payment," and we're off into toxic land. So the "competitive edge" of some of the Alt or subprime alternatives to FHA are "competitive" only on the obfuscation principle.
In ten minutes, we'll have another of our free-markets-solve-all-problems friends pipe up and tell us that the mortgage market is too transparent for this to happen. Sure. I write these long posts because it's all been so transparent that you all already knew all this, and all the comments to the posts indicate that I'm harping on the obvious.
tom stone: thanks for the suggestion. I have to confess that after all these months of endless blood draws, IV chemotherapy, transfusions and injections, the idea of improving my lot by seeking out someone who wants to stick another needle in me is . . . non-starting at the moment. Perhaps that will change. Right now, though, I think I'd rather be banged on the head with a blunt instrument than punctured with a fine needle. Fortunately, I read the papers every day, so that head-banging thing comes naturally.
dc1000, I am sorry I can't make everyone happy at once (myself included). Let me just say that I spent years and years in the corporate world where everyone wanted 1) sufficient expertise and detail to be effective risk management in 2) easy-reading bullet points suitable for ADHD execs on the go.
Part of me says, look around you at the results of that mindset.
Of course this is just a "hobby blog," so for any given reader it may not matter whether you got the deep details or the "executive summary." But then again, it's a hobby for me too, and the cool thing about that is that I can just ignore the contraints normally applied in the corporate world, wherein we can spend a jillion dollars a mile on the Lear Jet but not take the time to read a white paper instead of a PowerPoint presentation. Bummer for you, buzz for me. Life is trade-offs.
In any case, I will simply suggest that if you do happen to work for, buy shares of, or have a business that relies on lenders, MIs, etc., you might want to take the time to visit in the weeds a little. At least that's what I've been assuming by writing these things.
bailey, I may have to do a post on HOEPA--I'll add it to my long list.
Let me just go back to my Borg analogy for the moment. HOEPA is one of the Fed's phasers. The Borg has, in a real way, adapted.
Which is not to say that HOEPA has been ineffective. It has been. Depository lenders and conservatively-managed nondepository lenders stopped taking HOEPA-covered or "Section 32" loans. Good on them, and better for the safety and soundess of their borrowers and their banks.
But the whole substratum of unregulated and state-regulated bottom-feeders easily adapted to HOEPA.
Tanta,
isn't pool insurance cost effective to the bondholder if the premium prices the credit risk of the pool more optimistically than the bondholder (lender/residual holder) believes the underlying credits merit, regardless of the absolute premium paid?
Tanta, please continue your exceptionally detailed writing. If some people want watered-down, easily digestible sound bites, there are plenty of places where they can find them. You're the only source I've found for the details of how things really work.
adding to the feedback, I wouldn't prefer anything shorter - this was almost as brief as possible in my view. This UberNerd eagerly awaits more advanced material.
Tanta, I must repeat a question from an earlier thread. I am aware that it's not necessarily a significant factor but it really puzzles me. When a PMI puts on a powerpoint that says housing won't go down as much as stocks because housing is less liquid, housing is a feel-good investment and prices have not declined since the 30's, what conclusion does one draw?
I am can guess it's incompetence at some level - likely a rather senior level - or an incentive to pump the housing market with the knowledge that those arguments are stupid - which would also worry me. And even so, why didn't they present some of the better bullish arguments?
I just don't get why people with scars from the late 80's would have this on their powerpoint...
probert, I put your question off because I wanted to actually go read the report. Then I picked up a murder mystery instead, and here is is tomorrow already.
I hope what they're saying is that housing is neither as volatile nor as cheap to transact as the stock market, which I think is true and which does control its downward movement--the famous "stickiness." If they're then going on to actually claim this means it can't go down, well, that's of course horseshit. But is that really what they're saying?
isn't pool insurance cost effective to the bondholder if the premium prices the credit risk of the pool more optimistically than the bondholder (lender/residual holder) believes the underlying credits merit, regardless of the absolute premium paid?
Certainly. I hesitate to come right out and say you can fool all of the rating agencies some of the time, too, but that's the next step in the equation.
The conceptual difficulty is separating pool insurance from the other credit enhancements, subordinated structures being here considered another CE. Your point, of course, is that not all tranches have the same exact view of what is cost-effective, no?
Dear Tanta, thank you for you post. Even for people who believe in free markets there are a lot of useful info. In regard with your problem(health), I wonder if you have the chance to read dr. Linus Pauling take on treating cancer. In my opinion this guy was one of the greatest minds of the last century. It is worth taking the time to read it.
Tanta,
I agree with transaction costs etc'. The audio to the presentation is not available so I can't tell what it is they said but usually they say things along the lines of the .PPT's bullets, which are: "financial and place for life experiences" "no national price decline since 1930's" "time consuming" "$thousands" "mortgage lender scrutiny".
On their cc from 04/2006 they said they see delinquincies rising in midwest & CA which is normal. However, they said they heard there's "somewhat of a slowdown in CA, whereas anyone who followed CA back then should know that things almost screetched to a halt... in was in the papers and in the numbers.
Broker, let's make a deal. First of all, let's stop just trading slogans. I'll work on building my evidence-based argument for regulated markets, and you work on building your evidence-based arguments for unregulated markets. In that way, we can keep each other honest. However, just waving bumper-sticker phrases around is engaging in intellectual littering. My beef with you, precisely, is that you think it's a matter of "believing in" markets. Markets are, presumably, empirical things that can be measured, analyzed, changed, etc. Tooth Fairies are things you just "believe in" or not, as the fit strikes you. I am not a member of the Church of Economics (Mortgage Synod).
Second, as a cancer survivor I get real fired up about mentions of Linus Pauling. I firmly believe he has contributed in a direct way to the deaths of people who took his advice about vitamin C. You will not find my usual sense of humor on display on that subject.
Dear Tanta, I was very serios about dr. Linus Pauling. I dont joke about peoples health. Sorry you took it the wrong way. Like I mentioned before, this guy is considered to be one of the greatest ( some even consider him to be the greatest) minds of the last century.( actualy the only person ever with 2 Nobel prices)
I take it you know of some Nobel laureates with mediocre minds. Care to name a few?
Broker,
Curie did win them in 2 different fields - physics and chemistry.
Other than Curie, John Bardeen (both physics) and Fred Sanger (both chemistry) have also won the prize twice. Pauling, of course, was the only one to win both prizes unshared.
Anyway, to put his comments about Vitamin C into perspective, he started talking about it when he was in his late late 60's. That's an age when most have retired and are dabbling in hobbies. He just happened to be incredibly famous, with the unfortunate result that Tanta pointed out.
PS Tanta, for those of us with ADHD, ADD, whatever - we can actually come back and read your posts in multiple sittings. I really see no reason why that means you have to write them in multiple sessions!
PS Tanta, for those of us with ADHD, ADD, whatever - we can actually come back and read your posts in multiple sittings. I really see no reason why that means you have to write them in multiple sessions!
Well, it would probably improve the bloodflow to my butt if I wrote in smaller chunks.
Here I am, risking not just carpal tunnel but acute numb-butt to make you people happy, and all I get is whining!
"numb butts" such a lovely phrase...surely it can find a place in vocabulary to address those of us in need of a hug or 2.
Contrast that with "Fatass!" and experience the hostility.
Consider a medication perhaps for poor circulation that needs a name. "Numb Butts" wins hands down is all I can say.
Hey I've been looking forward for an explanation of why a lendor would sell captive MI rather than just charge a higher rate. See the 4th comment here way up top.
I saw one answer in that MI might be required in some GSE backed loans. Does that explain it?
If not I just don't understand why a company would bother asking a consumer to pay for an insurance policy when the insurer and the insured are the same entity, rather than just charging a higher interest rate.
Dork, unfortunately I can't remember where I saw the explanation but I seem to remember tripping over the "conditions" surrounding pmi and the borrower. pmi can, of course, be dropped when the 20% mark is reached between borrower payments and/or equity or any combination thereof. HOWever, and this is a big however, I seem to remember reading that the borrower had to be on time with their first 12 months of payments in order to drop pmi @ 20% - grace periods notwithstanding. If the borrower was one day late with one payment pmi not only could not be cancelled but the borrower was stuck with it for the next 15 years. An interesting scenarion when you consider that The PMI Group once owned Fairbanks Capital Corp n/k/a Select Portfolio Servicing - which was accused of holding borrowers' on time payments until they were past due before posting them.
I could be completely off base with this analysis but it's stuck in my head for some reason.
Fizzirsst!
Tanta
I do so enjoy these rambling posts. But then, I'm no stranger to the jargon. Thank you for taking the time to do this.
However, every good writer needs a good editor.
Also, sometimes it may make sense to diagram the process so as to be able to see the totality.
Wonderful stuff, though...
godot, this is the internet. You are the editor. Suggestions welcome. I assume you'd prefer shorter? I can do that.
Sadly, I suck at diagrams.
Tanta,
What is the point of captive MI? MI takes some of the risk of default off the lender and puts it onto the MI company, right? If the lender owns the MI company, why bother with all the paperwork if there is no risk actually shifted?
You mention that the lender somtimes only picks up part of the MI as captive MI. The question still remains, why take over the middle 25% of a MI policy for a mortgage you own when you can just set the terms of the MI to not cover that middle 25%.
All I can think of is that the lender might want to resell the mortgage, but still get some of the action via MI. But again, if it wants to keep some of the action, then it can just resell fewer mortgages.
On a related question, why not just have a loan that after a certain percentage of principle is paid off resets at a lower interest rate? Wouldn't this be better than MI because it is simpler, and better for the borrower because they can take the higher interest payments in the pre-reset period as a income tax deduction?
Tanta,
I want to pay attention but after many years I have accepted the fact that I can't learn anything after the sun sets. I will start studying tomorrow. Thanks,
Tanta,
Another great post. Love your work.
Few thoughts:
Any thoughts?
On a side-note: as far as the LPMI vs BPMI is concerned, if people actually kept their mortgages for longer than 24-36 months, BPMI might have some advantages, but people refinance and refinance and refinance until they can't. And here we are.
Thank you Tanta,may your life be full of chocolate.When it is time for you to go off the percodans,I highly recommend acupuncture to deal with the physical withdrawal symptoms.I have had to use opiates for chronic severe pain,twice for periods of years,and the acupuncture made a substantial difference.
Sadly, I suck at diagrams. - Tantra
How about 20 step programs?
20 steps to a great home buy in 2007
When it comes to real estate, timing is everything. And if you're buying this year, your timing is perfect.
Woohoo!
"For someone who's been sitting on the sidelines, it's a great time to buy," says Eric Tyson, co-author of "Home Buying for Dummies."
Hey, sounds perfect. I'm sitting on the sidelines! History might also show I was a Dummy by sitting in US dollars!
The biggest problem many buyers may encounter: too many choices.
Oddly enough, that is also the seller's problem, and the lender's problem, and the home builder's problem, and Bernanke's problem, and ..., lol.
P.S. This UberNerd enjoys reading the information he finds on this site.
Oops, I messed up the link.
20 steps to a great home buy in 2007
OT... NEW saved?!?! WTF?!?!
ttp://cbs2.com/topstories/local_story_081215726.html
Mar 22, 2007 6:51 pm US/Pacific
Irvine Subprime Mortgage Lender Saved By Deal
(AP) LOS ANGELES New Century Financial says it has reached a deal with Barclays Bank PLC that would effectively release the troubled subprime mortgage lender from having to buy back about $900 million in mortgage loans.
Barclays had demanded last week that New Century comply with an obligation to repurchase outstanding mortgage loans financed by the bank.
Barclays had alleged the company defaulted on its financial obligations.
According to a filing with the Securities and Exchange Commission, Barclays and Sheffield Receivables agreed to release New Century and its subsidiaries from the obligation. In turn, New Century gave up its rights to the loans financed by the bank.
The deal is dependent upon New Century transferring to Barclay an unspecified amount of money relating to the home loans.
Oops...
Page Not Found - cbs2.com
tanta - love you. its been nice seeing you come on the scene and eventually take over the joint.
but i just can't read all that at once. i'm of the ADD age and more than a few paragraphs on the internet is too much for me.
while i realize everyone's got a different style, one of the things about CR that i always liked was the, shall we say, efficient information delivery.
while clearly your work is significantly deeper and more thorough, perhaps smaller dosages would reach more patients.
you know, make it up on volume
Tanta,
Don't change a thing. Haven't these guys ever read a book? Surely 5-6 paragraphs of very timely info is something they can comprehend if they'd only apply themselves. I'd hate to miss out because a few GTA playin' gamers can't concentrate on more than just headlines.
If you write it, I will definitely read it.
Haven't these guys ever read a book? Surely 5-6 paragraphs of very timely info is something they can comprehend if they'd only apply themselves.
Bullets.
I want bullets. Bullets and overviews.
Bullets, overviews and summaries, damn it. Brief summaries too. With pictures, lotsa pictures.
Now where did I put my coffee...
dryfly old friend, don't mock!
whatever, i'm a living travishamockery
dryfly old friend, don't mock!
LOL! Anyway, who's mocking... that describes ME.
The deal is dependent upon New Century transferring to Barclay an unspecified amount of money relating to the home loans.
Hey JBR... you think maybe that last short little paragraph might have more to it than the rest of the story implies?
Like maybe Barclay's realized there was nothing left to kick the loans back to? Just speculating.
Why do captives exist? My guess is that the banks thought that the MIs were getting premiums that were too rich and wanted some of it back. But they are required to have MI if the loan is to be conforming, right? So isn't it really just a scam. They get around the requirement set by Fannie and Freddie by buying insurance from a company that they own which means not really getting insurance at all. What do FNM and FRE think of that? Obviously they know it is happening.
Also I figure, that maybe this is another accounting trick to make earnings look more stable. Kind of like what AIG was doing to manage earnings. If you can stablize earnings your stock can command a higher valuation. Is this mostly what it is about?
Tanta
I read your post, cooked hamburgers and french fries for me and misses, ate same, watched CSI, listened to wife relate step daughter's problems-something about 2 guys and one prom all at once and found your post enlightening.
Not sure what the younger generation is coming to, maybe its sounding out the words that is making it boring.
come, come
look at these efficiencies.
i don't need a !@#$ing doctorate in lit to read it.
send it my way
i'll powerpoint it with glee.
like so
LAST TIME, REMEMBER?
TODAY...
etctetc
(my minions in Bangalore do the actual work...eficient efficient efficient...)
The investment merits of the MI's can be viewed as a baseball game.
In my experience unless you have special industry/company knowledge it can be very dangerous to pick recovery candidates in the middle innings.
Tanta,
You write well and lucidly. The amount of detail is incredibly valuable to me, a recently sold homeowner thinking about buying again in a few years. Just do what comes naturally--it's worked so far.
Tanta, you are the first person to have explained to me WHY MI companies bother to own servicing shops.
(Well, they used to be more involved in owning them before MSRs lost value faster than a cheerleader's prom dress during the RE boom, as portfolio runoff and prepay speeds increased. At that point, they figured better to make hay while the sun was shining - and, in PMI's case, better to stop thowing good money [MI premiums, with declining policy payouts during the boom] after bad [Fairbanks].)
When PMI bought Nomura's stake in Fairbanks back in the day, I wondered why in the hell they'd want to be the majority owner of the servicer? I didn't think it was just because they wanted to be like MGIC, who also owned/owns a servicer (Litton, if memory serves me right).
I now know why - they were taking it in the shorts from the investors, more or less (or so they felt, at least), who were pushing the servicers for their own benefit, and not in the MI company's benefit. The MI companies didn't like playing second fiddle, as the servicers knew where their bread got buttered.
So, the MI companies got in the business of owning, or at least controlling, the servicers - and thus helping to shape the servicing contracts (which in turn influenced the loss mit, FCL, and other practices). Good way for them to help stem to flow of policy payouts (remember, even if all they did was SLOW the flow of policy payouts, the interest income from that probably justified the investment in the servicing shops). AND, for the bonus round, they could control and hopefully minimize the magnitude of any payout that became a foregone conclusion (the whole "loss severity" thing, which today's default professionals who weren't around in the early 1990s are quickly learning the importance of).
Anyways, enjoy reading your posts. And I will really laugh if you're someone I work with.
My best contrarain indicator, Cramer is pumping CFC:
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so I increased my short position on the up tick two days ago and I will likely increase it again after seeing Cramer (although I could not understand what he say at the end about "insider selling")
I want to point out that the media is focusing on 100% loans to "sub-prime" - this is really not the issue.
The issue is 80% LTV that was replaced by 100%LTV and now 95% LTV.
95% is still too high. (And in many cases the 5% are being receieved as a gift, or as a loan for some loan shark or some fraud that is involving a lick-back from the seller himself)
5% is better than 0% down but is not enough for making the buyer get enough "skin in the game". Home ownership is a good thing but when the interest-only and 5% down means that the buyer does not actually own any part of his home and is being mortgage to the gills the advantages of "home ownership" are washed.
There must be a return to the good old 20% down a number that shows also that the buyer is capable to save for this down payment. The 20% down is the best indicator of the buyer credit worthiness and a best proof that he will strive hard to protect his investment.
The 20% down also mean one more thing: Buyers will start thinking about the price of homes and not just the monthly payment his is the most important aspect of returning sanity to the housing market.
Please write letters to congress and to media along these line: sanity and affordability in housing will be done by correcting prices and return of the 20% down payment.
CSPAN-2 showing subprime hearings right now.
I think a very useful exercise is to answer the question: What does the American consumer have to believe?
a) That the presence of many millions of people on earth willing to do EXACTLY the same job that s/he does for longer hours and better done but for between one hundredth and one twentieth of his/her wages poses no threat to him/her.
b) That money is extremely cheap and extremely valuable.
c) The when s/he buys a house, because s/he is almost always simultaneously a buyer and a seller, s/he can pick the expectations of either the ideal buyer or the ideal seller to justify and support the desirability of the transaction.
b) That the political class is not for sale and is not lying to him/her.
As a gedanken experiment, I wonder if others could come up with some more?
Tanta's key assumption for housing is: housing prices are always going up.
Is that contained in my assumptions?
In other words, what goes into the much-vaunted "consumer confidence"?
Should we embrace "increases" in consumer confidence?
Or should we be shaken with dread by them?
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I think they confused billion with trillion.
Tanta -
This is an amazing effort on a subject that not many people understand. Learning requires an investment of time. As a money manager I can tell you that the stuff here is head and shoulders above 99% of the stuff that we pay for from Wall Street. (Yes, expect a tip from me)I would not look to edit primer pieces such as these. My two cents
Tanta,
You write well enough for someone with no experience in the financial industry to keep coming back for more--interesting stuff, keep it!
Have you ever thought of doing an article (er, post) on the history of mortgage products? I know that the 20% fixed has always been the gold standard, but I also know alternatives have existed for quite a while. When did I/O loans start? Buyer-directed (or whatever the term is...) no-doc? Piggybacks? What about products that have come and gone (don't hear much about balloon mortgages anymore, except maybe on piggybacks)?
Keep in mind that the whole mortgage thing worked until our elites told us that asset appreciation would substitute for income. Then ownership became a right and necessary instead of a convinence and headache.
Tanta,
I've been a lurking reader for about a month, coming out of the shadows to post for the first time. I'm here purely out of curiosity -- my only connection to the mortgage industry is as a borrower.
This style of article does a wonderful job of explaining, piece by piece, the behind-the-scenes structures that have allowed mortgage lending to get to its current state.
I have no problem with a long article that might ramble at times, as long as it stays informative. Sure, if all that information could be packed into a couple of paragraphs, great... but it can't. The articles are long, but still keep a high density of useful information, and have enough humor thrown in to keep them from glazing the reader's eyes over. They're literally what keeps me coming back to this site, even though there's little practical reason for me to do that.
Now, add in the facts that these articles are labeled "for uber-nerds", making them easy to avoid or save for later reading, and that other readers have started volunteering to summarize for you.
I don't think there's any reason to change from the writing style you've been using. Thank you for taking the time to write these articles!
Tanta, once again, you've provided me with information that I've been looking for literally for years. This is just one more piece of the Mortgage Servicing Fraud puzzle that I've been putting together. I've been fighting an illegal foreclosure instigated by Fairbanks Capital n/k/a Select Portfolio in 2001 with great, albeit excruciatingly slow success. Feb 1 I finally filed my damages litigation against Fairbanks/SPS, The PMI Group, Merrill Lynch Mortgage Capital AND Mortgage Investors, LaSalle Bank NA, and their local legal counsel Harmon Law Offices of Newton, Ma.
If ANYONE has any info that they feel could help my case please don't hesitate to contact me through my site. There are literally hundreds of thousands of homeowners losing their homes to illegal foreclosures across the country - in addition to the millions legitimately in default after their ARMs reset. And what has happened to me can happen literally to anyone with a mortgage. Homeowners simply cannot control who obtains the servicing rights to their loans.
Without a doubt, there are far more legit FCs than fraudulent ones out there and there is little to nothing that can or SHOULD be done to help those people outside of mainstream efforts. But for those of us losing our homes to manufactured defaults by greedy, unscrupulous third party servicers, the situation is a nightmare.
Thanks again for your incredible contributions, Tanta. You may never know just how much your analyses of the industry have helped victims like myself. Once my litigation finally comes to a close, I may owe you several (cases?) of your favorite distillations and/or fermentations.
TANTA, THIS IS HUGE!!!!!!!!!!!!
I read this morning in the Los Angeles Times, 'The FED has the authority to set rules prohibiting "unfair or deceptive" practices by (ALL) lenders under the Home Ownership & Equity protection Act of 1994.' (Caps & emphasis mine)
For two years I've been arguing for a single body regulatory control of our financial sector, with the FED at the helm. It appears, at least for housing, the FED had all the authority it needed to stop outrageous mtg. lending practices - but it CHOSE to do nothing!
THIS IS DAMNING TO FED CREDIBILITY.
On yet another hand, "community lending" programs like MyCommunity and other FHA substitutes AND the FHA itself, allowed plenty of people with limited credit to get up 100% financing with reasonable MI payments, and that's where MI providers could lose some substantial dough.
Maybe, maybe not. My personal big fear is that these programs "cherry-picked" what used to be the top tier of FHA loans. Sure, the cherry-pickers might take some losses, but the cherry-picked--FHA--is now in a lot worse shape. You can't run successful insurance pools by continuing to repool them, as we've been doing over the "innovative" boom years, to the point where adverse selection blows up all the insurers on the bottom of the pile. In essence, that's what the "subprime spread" theory is all about. In any case, I do worry about FHA MMIF, not necessarily because FHA relaxed its guidelines, but because other players did so and thus took FHA's best borrowers at what may well turn out to be a real underpricing.
Of course, it's possible that those MyCommunity or A- borrowers actually got a worse deal than they'd have gotten in an FHA loan. The countervailing force here is the extent to which brokers sell the conventional products harder because they pay more back end spiff than FHA. In this sense, FHA is the victim of its own consumer protection efforts: it doesn't allow its borrowers to be gouged on fees, so anyone who wants to gouge a low-to-mod borrower has to do so in a "competitive" conventional program.
And this gets us back to incomprehensible things like neg am. FHA loan programs are (relatively) easy-to-understand FRMs or 1-year ARMs with very low annual rate adjustments, plus these insurance premiums the borrowers pay. In contrast, some of the competing programs are endlessly complicated, mind-numbing eye-glazing weird shit. The hapless borrower looks at the "minimum monthly payment," and we're off into toxic land. So the "competitive edge" of some of the Alt or subprime alternatives to FHA are "competitive" only on the obfuscation principle.
In ten minutes, we'll have another of our free-markets-solve-all-problems friends pipe up and tell us that the mortgage market is too transparent for this to happen. Sure. I write these long posts because it's all been so transparent that you all already knew all this, and all the comments to the posts indicate that I'm harping on the obvious.
tom stone: thanks for the suggestion. I have to confess that after all these months of endless blood draws, IV chemotherapy, transfusions and injections, the idea of improving my lot by seeking out someone who wants to stick another needle in me is . . . non-starting at the moment. Perhaps that will change. Right now, though, I think I'd rather be banged on the head with a blunt instrument than punctured with a fine needle. Fortunately, I read the papers every day, so that head-banging thing comes naturally.
you know, make it up on volume
Ah, the lender's credo.
dc1000, I am sorry I can't make everyone happy at once (myself included). Let me just say that I spent years and years in the corporate world where everyone wanted 1) sufficient expertise and detail to be effective risk management in 2) easy-reading bullet points suitable for ADHD execs on the go.
Part of me says, look around you at the results of that mindset.
Of course this is just a "hobby blog," so for any given reader it may not matter whether you got the deep details or the "executive summary." But then again, it's a hobby for me too, and the cool thing about that is that I can just ignore the contraints normally applied in the corporate world, wherein we can spend a jillion dollars a mile on the Lear Jet but not take the time to read a white paper instead of a PowerPoint presentation. Bummer for you, buzz for me. Life is trade-offs.
In any case, I will simply suggest that if you do happen to work for, buy shares of, or have a business that relies on lenders, MIs, etc., you might want to take the time to visit in the weeds a little. At least that's what I've been assuming by writing these things.
And I will really laugh if you're someone I work with.
Imagine how much you'd be laughing if I were someone you worked for.
Or, well, maybe not . . .
bailey, I may have to do a post on HOEPA--I'll add it to my long list.
Let me just go back to my Borg analogy for the moment. HOEPA is one of the Fed's phasers. The Borg has, in a real way, adapted.
Which is not to say that HOEPA has been ineffective. It has been. Depository lenders and conservatively-managed nondepository lenders stopped taking HOEPA-covered or "Section 32" loans. Good on them, and better for the safety and soundess of their borrowers and their banks.
But the whole substratum of unregulated and state-regulated bottom-feeders easily adapted to HOEPA.
Tanta,
isn't pool insurance cost effective to the bondholder if the premium prices the credit risk of the pool more optimistically than the bondholder (lender/residual holder) believes the underlying credits merit, regardless of the absolute premium paid?
Tanta, please continue your exceptionally detailed writing. If some people want watered-down, easily digestible sound bites, there are plenty of places where they can find them. You're the only source I've found for the details of how things really work.
adding to the feedback, I wouldn't prefer anything shorter - this was almost as brief as possible in my view. This UberNerd eagerly awaits more advanced material.
Tanta, I must repeat a question from an earlier thread. I am aware that it's not necessarily a significant factor but it really puzzles me. When a PMI puts on a powerpoint that says housing won't go down as much as stocks because housing is less liquid, housing is a feel-good investment and prices have not declined since the 30's, what conclusion does one draw?
I am can guess it's incompetence at some level - likely a rather senior level - or an incentive to pump the housing market with the knowledge that those arguments are stupid - which would also worry me. And even so, why didn't they present some of the better bullish arguments?
I just don't get why people with scars from the late 80's would have this on their powerpoint...
probert, I put your question off because I wanted to actually go read the report. Then I picked up a murder mystery instead, and here is is tomorrow already.
I hope what they're saying is that housing is neither as volatile nor as cheap to transact as the stock market, which I think is true and which does control its downward movement--the famous "stickiness." If they're then going on to actually claim this means it can't go down, well, that's of course horseshit. But is that really what they're saying?
isn't pool insurance cost effective to the bondholder if the premium prices the credit risk of the pool more optimistically than the bondholder (lender/residual holder) believes the underlying credits merit, regardless of the absolute premium paid?
Certainly. I hesitate to come right out and say you can fool all of the rating agencies some of the time, too, but that's the next step in the equation.
The conceptual difficulty is separating pool insurance from the other credit enhancements, subordinated structures being here considered another CE. Your point, of course, is that not all tranches have the same exact view of what is cost-effective, no?
Dear Tanta, thank you for you post. Even for people who believe in free markets there are a lot of useful info. In regard with your problem(health), I wonder if you have the chance to read dr. Linus Pauling take on treating cancer. In my opinion this guy was one of the greatest minds of the last century. It is worth taking the time to read it.
exactly.
Tanta,
I agree with transaction costs etc'. The audio to the presentation is not available so I can't tell what it is they said but usually they say things along the lines of the .PPT's bullets, which are: "financial and place for life experiences" "no national price decline since 1930's" "time consuming" "$thousands" "mortgage lender scrutiny".
On their cc from 04/2006 they said they see delinquincies rising in midwest & CA which is normal. However, they said they heard there's "somewhat of a slowdown in CA, whereas anyone who followed CA back then should know that things almost screetched to a halt... in was in the papers and in the numbers.
Broker, let's make a deal. First of all, let's stop just trading slogans. I'll work on building my evidence-based argument for regulated markets, and you work on building your evidence-based arguments for unregulated markets. In that way, we can keep each other honest. However, just waving bumper-sticker phrases around is engaging in intellectual littering. My beef with you, precisely, is that you think it's a matter of "believing in" markets. Markets are, presumably, empirical things that can be measured, analyzed, changed, etc. Tooth Fairies are things you just "believe in" or not, as the fit strikes you. I am not a member of the Church of Economics (Mortgage Synod).
Second, as a cancer survivor I get real fired up about mentions of Linus Pauling. I firmly believe he has contributed in a direct way to the deaths of people who took his advice about vitamin C. You will not find my usual sense of humor on display on that subject.
For further reading:
The Dark Side of Linus Pauling's Legacy
Dear Tanta, I was very serios about dr. Linus Pauling. I dont joke about peoples health. Sorry you took it the wrong way. Like I mentioned before, this guy is considered to be one of the greatest ( some even consider him to be the greatest) minds of the last century.( actualy the only person ever with 2 Nobel prices)
Broker, you forget Marie Curie.
mph, correct. I meant 2 Nobel prizes in two different subjects of expertise.
obel prize=great mind???
broker=silly!!!
bacon dreamz,
I take it you know of some Nobel laureates with mediocre minds. Care to name a few?
Broker,
Curie did win them in 2 different fields - physics and chemistry.
Other than Curie, John Bardeen (both physics) and Fred Sanger (both chemistry) have also won the prize twice. Pauling, of course, was the only one to win both prizes unshared.
Anyway, to put his comments about Vitamin C into perspective, he started talking about it when he was in his late late 60's. That's an age when most have retired and are dabbling in hobbies. He just happened to be incredibly famous, with the unfortunate result that Tanta pointed out.
PS Tanta, for those of us with ADHD, ADD, whatever - we can actually come back and read your posts in multiple sittings. I really see no reason why that means you have to write them in multiple sessions!
ame,
Philipp Lenard, 1905. this is way too off topic though.
PS Tanta, for those of us with ADHD, ADD, whatever - we can actually come back and read your posts in multiple sittings. I really see no reason why that means you have to write them in multiple sessions!
Well, it would probably improve the bloodflow to my butt if I wrote in smaller chunks.
Here I am, risking not just carpal tunnel but acute numb-butt to make you people happy, and all I get is whining!
bacon dreamz,
Is anti-Semitism sufficient for you to conclude mediocrity?
I'm curious to hear the basis of your choice.
Thanks.
"numb butts" such a lovely phrase...surely it can find a place in vocabulary to address those of us in need of a hug or 2.
Contrast that with "Fatass!" and experience the hostility.
Consider a medication perhaps for poor circulation that needs a name. "Numb Butts" wins hands down is all I can say.
Yasser Arafat also got a Nobel. Murder...
Tanta,
Isn't Vitamin C nevertheless a stong antioxidant, anti-bacteria and anti-viral agent?
Hey I've been looking forward for an explanation of why a lendor would sell captive MI rather than just charge a higher rate. See the 4th comment here way up top.
I saw one answer in that MI might be required in some GSE backed loans. Does that explain it?
If not I just don't understand why a company would bother asking a consumer to pay for an insurance policy when the insurer and the insured are the same entity, rather than just charging a higher interest rate.
Dork, unfortunately I can't remember where I saw the explanation but I seem to remember tripping over the "conditions" surrounding pmi and the borrower. pmi can, of course, be dropped when the 20% mark is reached between borrower payments and/or equity or any combination thereof. HOWever, and this is a big however, I seem to remember reading that the borrower had to be on time with their first 12 months of payments in order to drop pmi @ 20% - grace periods notwithstanding. If the borrower was one day late with one payment pmi not only could not be cancelled but the borrower was stuck with it for the next 15 years. An interesting scenarion when you consider that The PMI Group once owned Fairbanks Capital Corp n/k/a Select Portfolio Servicing - which was accused of holding borrowers' on time payments until they were past due before posting them.
I could be completely off base with this analysis but it's stuck in my head for some reason.
How is that working out for you MIs out there? Are there any left to hear my question?