Oops, put comment on previous thread because I didn't realize you'd got this one up - it is/was
As there are so many MBO/MBSs out there with "insurance", I hope you'll explain to all us out here where MGIC and the others are going to get the funds to pay all those claims. Or am I being too optimistic?
Let me put it another way - where in the circular movement of invested funds does the buck stop? Is the CBOC holding MGIC (et alia) bonds? Or just the poor institutional pension funds?
I love it when the little guy gets to pay extra. reminds me of a favorite quote:
There are many in this old world of ours who hold that things break about even for all of us. I have observed, for example, that we all get the same amount of ice. The rich get it in the summertime and the poor get it in the winter.
Bat Masterso
fatbear, I'll try to address your question more fully in a follow-up post. For now, just this: the MIs are different from certain other parties in the mortgage food chain because they're insurers. In other words, they get their money to pay claims from the same place your homeowner's insurer or your auto insurer or your health insurer gets it: they collect premiums and invest the money.
Now, those other insurers (particularly life insurers, because of the long-term nature of some of their term policies) are investing a fair amount of their premiums in mortgages. The MIs try, if they're smart, to diversify a little. But that's one thing you want to know if you're looking at the financials of an MI: what are they investing in?
Back in '03 I'd read that the housing bust could decimate the PMI players because they were few and thinly capitalized. Of course, the bubble going ballistic in the following years shifted mortgage financing entirely away from PMI. Still, going back to pre-boom home pricing would appear to wreak havoc on these guys, no?
Well on Bloomberg these three articles are on the front page.
Fed Keeps Rate at 5.25%, Drops Reference to `Firming'
Treasuries Gain as Fed Softens Reference to Interest-Rate Boost
Dollar Trades at Two-Year Low Versus Euro as Fed May Cut Rates
Hmmmm, I wonder what the market is expecting? Has the Fed ever failed to deliver on expectations? Is this the turning point to lower rates or are we going to have some big talking tommorow to confuse the markets?
I may have missed an important point. My understanding is MI is paid for by the borrower in the event that a loan is over 80% LTV. Is there other insurance taken out and paid for by the lender?
Also, in the case of piggy-back loans or HELOCs my understanding is the 2nd lien(s) is the 1st's MI, so the borrower gets off the MI hook -- Correct? If so and these loans were popular from '04, when the market peaked, perhaps the MI companies might not have to fork out too much, at least at first.
"more 100% financing evaporates, this time from HSBC and affecting what we call ALT A.-not A paper, but not quite subprime either. Keep an eye on your 100% financing, even if it is already approved. If your lock expires before you can close, you may be without a loan.
PLEASE LOCK ALL 80/20 SIVA AND FULL DOC LOANS ALREADY REGISTERED TODAY WITH HSBC!!
HSBC WILL HONOR ALL LOANS ALREADY LOCKED BUT WILL NOT ACCEPT ANY MORE!!
NEW GUIDELINES WILL GO INTO EFFECT ON ALT-A IMMEDIATELY
SIVA (stated income, verified assets) MAX CLTV 90%
FULL DOC MAX CLTV 95% "
question 1: all the numbers you have there are LTV to 1st/only lien, right? no CLTVs..?
Correct. The spreadsheet shows only what the loss to the first lien lender would be with an 80% LTV loan. The point is that in any case where the first lien lender is taking a partial loss, any second lien lender is taking a total loss.
question 2: In which markets are the costs higher than 15%
That varies so much that I won't even try to answer it. You really need to look at each market. Just to think of a few things: hazard insurance is a lot more expensive in coastal areas than in the dry hills of flyover country. States like Ohio, in which all foreclosures are judicial, will have higher FC expenses (but possibly lower loan balances) than states like CA, where most foreclosures are power-of-sale (nonjudicial). Georgia is known as a fast FC state, because of its statutes; a state like Illinois, with a long right of redemption, is a slower state. You can always figure that property taxes are higher in bubble markets. Etc.
question 3: Do the markets in question 2 happen to be the exact same ones where REO might yield less than 80k ?
Maybe, maybe not; see above. One thing to bear in mind is that prices on REO are always at some level "distress sales"; the lender wants to unload the REO as fast as possible, and so it may have to undercut other property sellers. So REO in any market can end up unloading at big discounts.
question 4: where will the default-to-liquidation period be longer? could it be that we're talking about - again - the exact same local markets?
Again, see above. I will only note that it will also matter whether any given lender also has lent money to builders of local developments, or has currently performing RE loans in neighborhoods where it now owns RE. This makes the decision of when and how fast to pull the trigger a lot more complicated.
Go on vacation for the next three months, you were correct, the recession is certain, no reason to sit back, post what we already know is coming, and gloat.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them.
There will be some serious 'leveling' if that happens.
While many have beat up on unsophsiticated investors relying too much on the mistaken opinino of rating agencies, it would seem that the MIs are informed players.
Was their risk-pricing of stated-incmoe and interest-only loans appropriate, or have they also been going through a significant correction in 2007:Q1.
Have they played an important role in disciplining brokers, or is this the case of two potential regulators -- the rating agencies and the MI insuers -- competing to the bottom?
Thank you. I really like your UberNerds posts. Not sure what that says about me, though.
I have a couple of related questions: you briefly touched on the fact that the mortgage insurer has some contractual rights to dictate or approve the foreclosure process, since it is in first loss position. I've heard in the MSM that banks are trying to work with distressed lenders because they don't want the property as an REO. So, how much control do these insurers have to make banks start and proceed with foreclosure? And how does the mortgage insurer's rights in this regard get reconciled with the rights/desires of investors who have purchased the loans? In other words, if there is a battle between the mortgage insurer and the owner of the loan (whether a bank or investors), who is the servicer (assuming it is a third party) beholden to? Thanks.
This topic is interesting, but kind of a non-starter, since the majority of recently originated loans (in CA anyway) don't even have PMI. Most FBS here have been avoiding it by taking out 80/20 or 80/10/10 piggy-back loans.
barely - primary mortgage insurance is the insurance that individuals pay for. MI companies provide the coverage on a loan by loan basis. MI companies also sell pool insurance, typically but not necessarily covering first losses on MBS. It doesn't limit coverage to the first (say) 30% on each loan, but might instead cover something like the first 10% of losses on a pool of loans. This is purchased by the securitizer or investor, not by the individuals.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them. - realist
You want to know scary? What if all that debt is trying to short the stock market? What if the market actually crashes up? D'oh!
Note to self: Don't use a half full glass of Kool-Aid to wash down a red pill AND a blue pill again. There seems to be all sorts of unintended consequences.
Thanks mort, that's what I thought. I doubt PMI sales have been very strong over the past 3 years so their exposure is likely limited as the FBs have been piggy-back'n - to skirt the insurance. The primary is covered by the 2nd... unless the primary lender sold that too, in which case they're both dumb and screwed. May change now though.
I'm still confused about the exchange between mort_fin and barely. I'm thinking back to all the classical "MI vs. 80/x/x" debates and all the assertions that "MI is something that covers the riskiest 20%" - all that stuff applies only to conforming loans, correct?
Also, I just found some blurb about GSEs no longer allowing 80/10/10 to avoid MI and requiring 75/15/10. Never knew that...
One more thing. One company's stats that I was reading said "LTV/CLTV at origination" and then on the bottom they explained: "LTV in case of 1st lien, CLTV in case of 2nd". Why would they blend these stats together? If they have a 2nd lien position on a property but not a 1st lien, their loan amount is very small but the readers won't know it because they're only listing averages. So they are blending on some small-face-value loans with high probability of loss into their general stats... without listing the total #of 2nd lien loans... sounds like a potential source of future bad news to me... unless I misunderstand what they are saying.
How does this play when BK is initiated?
Case: Mr. and Mrs Wayoverextended bought a house in 2004. In 2005 they toke out a HELOC (said to be a 2nd) while doing a refi to extract money from the appreciation. This home improvment protion was secured personally but tied to the property. Now this newly wed but nearly dead couple find themselves unable to make the payments on the first mort (insured)which would head to foreclosure, and instead of having the debt of the HELOC follow them they declare BK. Is there not wording in most mort. insurance that makes the policy void if BK is taken on the part of the borrower?
I review (administratively - not USPAP standard 3 - for any appraiser reading this post) between 40-50 appraisals a day. These are from every imaginable market all across the county. However, most are from major markets and their suburbs.
I have to say; a VERY small portion of the appraisals indicate declining property values (1 today out of 40 some).
This is how the data is fuzzied up:
The appraisal only focuses on a defined neigborhood where the subject is located. This can be as small as an indivdual subdivision in a densely populated area.
The appraiser can possibly substantiate stable values in an individual subdivision (market subset) when an entire zip code, city or even county shows a decline in median sale prices of say... 5%.
Also, generally accepted appraisal practice is to disregard REO sales (comps) in an analysis as they do not met the criteria of an arms length transaction (buyer and seller typically motivated). REO's are viewed as distressed sales that are not valid indicators of value.
Lets say for example the subject is in a mega sub (200+ homes). Lets say over the last 6 months there were 10 non REO sales ranging from $100k to $120K. Lets say also there were 2 REO's that sold for $75k-$80k. The value of any Heloc, PMI drop or refi will undoubtably be in the $100k-$120k range as the lowball REO's get tossed as distressed non arms length transactions.
The money train keeps rollin'
The only time I can remember REO's being used as actual comps are in dire situations where REO's have flooded the market (for example 6-7 sales out of 10 as noted above). For example ... Detroit proper recently, NC/SC manufactured home (trailer) subdivisions busts a short time ago and a few other oddball markets.
Sales are a different animal. I read a figure (from Fannie Mae or the Appraisal Institute - I forget) that indicated an insanely high percentage of appraisals met the contract price EXACTLY. The philosophy goes ... an informed buyer and seller have a meeting of the mind based on sound market information (read realtors); thus, the contract price should likley be the fair market value for the property.
In the age of dual agents, collusion and RE propoganda, I'm not sure how sound this philosophy actually is.
However, just like declining values, I RARELY see an appraisal not meet conract price.
This was an off the top of my head ... general thoughts flowing type o' post. Thoughts ?
Can you further expand on how/whether the appraisals you review is a good enough sample to represent various loan types, borrower types and property types? what is "administratively"? what is standard 3?
As a devil's advocate I'd tell you we've been hearing of some more honest appraisals coming in and of lenders making various demands from appraisers. The general feel (or at least mine) is that appraisal quality has improved over the past 3 months...
Most Of the appraisals I see are for Heloc or refi (say 75%). The other are appraisal audits (20%) with the remainder being sales (say 5%).
I have no idea on borrower type as I do not have access to credit issues. My strict focus is on collateral valuation.
Property types go from run down foreclosed meth houses all they way to 10-12 mil mega mansions.
I really can not comment on the honesty of the reports that I see since my company in no way pressures appraisers to met a specified value (unlike broker driven work). This also goes back to admistrative review v/s a USPAP standard 3 review.
long story short...
administrative review - generally are done by non appraisers and only check for incomplete, inconsistant and/or grossly illogical items. (can't really catch dishonest reports - but make it difficult for them to get through)
Standard 3 review - done only by appraisers and is focused on actual value support/conclusions and overall thouroughness of the original analysis. (will catch dishonest reports).
As I don't review ... standard 3 reviews... I can't give an accurate picture of how may appraisals 'get their value cut'. I'll do some research on this in the next few days and report back. I can say that the appraisal audits I see don't look stellar. I can get round figures on this.
Otherwise.. some of our clients have increased some valuation criteria while most others are just staus quo.
2nd lien positions (including HELOCs) are almost guaranteed a 100% loss in a foreclosure sale.
2nd lien positions in a scenario where the 1st lien is a neg am loan is in a worse position than if the 1st lien was an amortizing loan.
The worst position would be a 2nd lien position where the 1st loan is a stated, no doc, Option Arm, high CLTV, in a market where home values are decreasing.
The MI companies may have been lulled to sleep since the past years of increasing home values, many refinancings with very low claims, would indicate a low risk and therefore a low premium. However, as decreasing home values increase the CLTV, this is a double pox on the MI company as it reduces the foreclosure sale proceeds, and the borrower is more likely to walk away from the loan as their equity is either low or negative.
Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.
I am a small investor trying to Figure out whether to invest somewhere in the down housing industry. I came across mortgage insurers. They are selling close to book value but over the last two decades have been very profitable businesses. I blog a bit about them here
In that posting I point out the interesting bit of data on loss ratios provided kindly by PMI's 2002 10-K. Note that in the 80s they got killed by the real estate crash in the oil patch. Loss ratios over 200% for multiple years.
Here are the questions that I would love to have answered.
1) Are these companies as risky as they seem or do they hedge against a catatrophic RE crash? Note that PMI's existed prior to the Depression but not afterwards; not again until 1958. They all failed. Could that happen again?
2) It seems that piggy back loans will go the way of the Cabbage Patch Kid and MIs should reap a huge amount of new business that was lost over the past few years. Also due to market fear, they should be able to raise premiums. Right? Will all this new business help them offset massive losses. In other words could the fear of potential and actual losses be a smoke screen. Could these companies actually be a good investment? For example, I note that they did just fine during the 1990 RE slump and their investors did even better.
3) To summarise, What I want to know most is whether these companies might be a good contrarian play either now or when/if even more fear is priced in.
Tanta has done a marvelous job here. If you want to see the size of the private insured market for the collateralized mortgage securities securities issued (different topic in the same genre) I suggest that you go to this terrific website.
Also, if you want to read how the rating agencies go about their business in rating insurers, go to FGIC.com's website. Financial Guaranty Insurance Company | Investor Relations | Rating Agency Reports They have generously provided these reports and you can get Moody's outlook for the industry. You'd have to pay otherwise. Many of these firms have undertaken increased risks. What will be telling is what happens if these underwriters fail to meet capital requirements for their current rating due to loss severity. Radian was marginal and is being purchased by MGIC.
And here are a couple of tidbits out of MGIC's 10K
* "The increase in estimated severity is primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as a decrease in our ability to mitigate losses through the sale of properties in some geographical areas."
* "In the fourth quarter of 2006 California and Florida began to experience less favorable housing markets, which will likely increase the actual claim rates and severity in those areas."
I usually don't make stock marker prediction for a day or even a week.
Indeed I do not know if my PUTs and shorts will be worth more a month from now.
But I'll say this:
In the last 24 hours the amount of Main stream press articles talking about "bye bye to easy mortgage money" and about "alt-A" being a problem - the amount of these articles is the highest I have ever seen.
So while I am sure we will open lower today I wonder if the real reversal of yesterday and of the last 5 years is very near ? will we see another top before the decline ?
1. 2nd lien positions (including HELOCs) are almost guaranteed a 100% loss in a foreclosure sale.
Yep.
2. 2nd lien positions in a scenario where the 1st lien is a neg am loan is in a worse position than if the 1st lien was an amortizing loan.
Yep. One of the scariest of the loosening of guidelines over the boom years involved this. There was a time when every junior lien lender out there had and enforced a "no neg am on first lien" rule. Then some of them started drinking the Kool Aid. It's almost (but not quite) the dumbest thing I've ever seen a lender do. (I still think letting the builder or seller make the borrower's first six payments wins the Darwin Award, but this one sure gets an honorable mention.)
3. The worst position would be a 2nd lien position where the 1st loan is a stated, no doc, Option Arm, high CLTV, in a market where home values are decreasing.
Well, the worst would actually be doing that in third lien position, but otherwise you're quite right. (Are there thirds out there? You bet. Borrower buys with 80/10, then subsequently gets a third lien HELOC up to 100%. It's not that common, but it happens.)
4. The MI companies may have been lulled to sleep since the past years of increasing home values, many refinancings with very low claims, would indicate a low risk and therefore a low premium.
Actually, I think for the most part the MIs have managed as rationally as is probably possible in a highly irrational marketplace. I don't think they slept through the boom. In fact, as others have noted, the second lien lenders took away a lot of the MIs' normal business. They could have responded to that by lowering UW standards and premiums, but by and large they didn't; they gritted their teeth and waited for the second lien lenders to learn the hard way that the MIs price premiums the way they do for a reason. At some level they're going to be vindicated, unless the "correction" is so bad it sweeps them away with it. Tough bet, but that's the mortgage business. Most of the MIs weren't born yesterday.
High refinancing rates are not good for the MIs. If you're an MI, HPA is your friend, but amortization is also your friend. The longer an insured loan stays on the books, the longer it pays premiums and the lower its balance is in the event of default. The MIs' profitability takes a hit in refi markets, because they either don't get the new loan (HPA lowered the value to 80% or less) or they get it at a higher balance with the amortization clock starting over.
What will help the MIs is return to normal "selection." They need enough high-quality borrowers with LTVs at 90% or thereabouts; they can't take only the lowest quality 95-100% loans. The new regs allowing for (limited) tax deductability of MI premiums will help them.
Maybe, maybe not; see above. One thing to bear in mind is that prices on REO are always at some level "distress sales"; the lender wants to unload the REO as fast as possible, and so it may have to undercut other property sellers. So REO in any market can end up unloading at big discounts.
Sounds perfectly reasonable. The bank is neither living in or renting out the house. If you held a stock whose value was questionable, but were setting fire to the divedend checks you'd be more motivated to unload it than somebody who was cashing those checks.
While many have beat up on unsophsiticated investors relying too much on the mistaken opininon of rating agencies, it would seem that the MIs are informed players
I believe that Tanta pointed out a while ago that the reason for the popularity of 80/xx mortgages is that those investing in the 2nds were putting a different price on the risk of default than insurers. Of course the insurers are putting their own money on tha table. The bond raters... not so much. The splitting of those assessing risk from those taking risk does not incentivise accurate risk estimation.
""Despite the recent improvement in our first quarter net order experience and a lower cancellation rate, these trends should be viewed with caution," said Mezger. "Having now entered the spring selling season, we continue to observe instability in the marketplace. Moreover, recent problems in the subprime mortgage market combined with tightening credit requirements could exacerbate the already difficult conditions in the homebuilding industry. The rise in delinquency and foreclosure rates may increase the supply of homes on the market, generating additional downward pressure on prices. Under these conditions, it is hard to predict when the housing markets will stabilize. However, we believe that our build-to-order operating model with limited speculative production and the knowledge and experience we have gained from more than five decades of homebuilding will help us to continue to execute through these challenging times and put us in a position to capitalize on the housing market's eventual recovery." "
I tell you, what with Halo, Mediafire, and Blogger all misbehaving on me, I might just move to the desert and draw lines in the sand with a stick . . .
So, how much control do these insurers have to make banks start and proceed with foreclosure? And how does the mortgage insurer's rights in this regard get reconciled with the rights/desires of investors who have purchased the loans? In other words, if there is a battle between the mortgage insurer and the owner of the loan (whether a bank or investors), who is the servicer (assuming it is a third party) beholden to?
The MI has the stick any insurer does: it can refuse to pay the claim, or pay only a partial claim. If you as servicer or investor want to ignore the rules the MIs lay out in the policies and servicing agreements, you are free to do so. There's no law against it. The MI, however, is free to refuse to pay the claim. It's just like auto insurance: you're free to drive with a suspended license. Your insurer is free to refuse to cover you if you get into an accident.
By and large, the MI and the investor generally have the same interest: to improve collection/loss mit practices so that as few loans as possible go into foreclosure, and to manage any inevitable foreclosures well enough to minimize losses. Where their interests can diverge is, basically, the difference between the first loss party and the second loss party. The investor won't suffer until the MI's money is spent, so the investor might not get too worked up over managing the nickels and dimes in the FC process. The MI's money is at risk first, so MIs are known to worry about how nickels and dimes add up.
I thought I might not have been as clear as one would like - my concern is at what point the MIs run out of $. I would imagine that like most insurers they write more coverage than they have capital, and that they go to the reinsurance market for help. (Or, and this is the most concerning point, they issue debt in the institutional market - most concerning because I also imagine that they sell lots into the pension funds market.)
So, since their underwriters (by which I mean the individuals who actually do the underwriting within the bowels of the organization) probably drank the same Koolaid, the average MI probably has a gigantic exposure to the coming (already here in many cases) markdown.
So where does the buck stop? Who backstops the MIs? Are there hedge funds big in this reinsurance market? (And can those by definition highly leveraged players take the hit themselves?) The CBOC? Congress? (Although in that case Congress will just turn to the CBOC to finance.) Is this the straw that breaks the camel's back?
There's a major (gigantic) vaporization of equity in the works, so who is the final loser?
fatbear, I don't, actually, think the MIs drank the same Kool Aid. They surely drank some of it--they were probably just forced to, when the second lien lenders were taking too much of their business way. But by and large, I think they were smart enough to let the fools run where the angels feared to tread. I guess we'll see if I'm right. At any rate, I will do a future post on MI credit quality.
and then on the bottom they explained: "LTV in case of 1st lien, CLTV in case of 2nd".
probert, that's actually a good thing. "LTV" means the ratio between whatever loan you happen to be making and the value of the property. If you are making a second lien loan equivalent to 10% of the property value, it would be kind of misleading to report that as a 10% LTV loan--that could be confused with a first lien of actually 10%. So when a report combines first and second liens, the second liens are expressed as "on top of" the first lien, even though the lender might not have made the first lien. On an 80/10/10 deal, then, the second lien holder reports its 10% loan as 90% LTV instead of 10% LTV. Does that make sense?
Take a look at the following presentation by MTG. I think it's page 11 where they compare stocks to houses.
"why the housing market is not the stock market" (i.e. why it won't crash as badly). Their reasons:
-Homes are time consuming to sell
-high transaction cost
-home is place to live life
-[no scrutiny in stocks???]
-no national deline since 1930s
To me this appears like the most simple, low-quality, unsophisticated explanation I've ever seen, of an assertion which is arguably not even true or relevant. Why should one conclude that these guys - despite letting the 80/20 piggies eat crap - are not making severe mistakes.
Yes, this I understood. But let's continue further. If the lender makes one 90% 1st lien loan, it will mark a "90" in the LTV/CLTV column, and a +90000 in the debt oustanding column (assuming 100k home values).
If the same lender does nine 10% seconds in 80/10/10 deals, it will mark a "90" in the LTV/CLTV column, and a +90000 in the debt oustanding column (assuming 100k home values). In other words, the same thing.
But in the first case, this lender stands to losea heck of a lot more money than in the second. How then, can we figure out how many of each was done without being explicitly told how many there are? And even if we are explicitly told, can't averages hide some pretty fat tails...?
and bythe way, the "average LTV" is not necessarily dollar-weighed... and if it is, what would they weigh it to - the CLTV or the amount of their 2nd lien loan?
Well I think that the question as far as fatbear is concerned isn't, "have the mortgage companies drunk deep the same Kool Aid as the 2nd lien holders?" It's "Will the comming collapse of the housing market caused by the stupidity of 2nd Lien holders be so much worse than historic norms that the insurance companies will have difficulties meeting claims DESPITE relying on traditional lunderwriting standards?" There's little doubt that they will be spared in the first wave of bankrupcies sweeping the subprime market. It would seem that the dumbest and most likely to be foreclosed upon loans bypassed them. But if the market truly collapses they too could be in trouble.
probert, I'm not suggesting that it's smart to try to combine first and second liens in one report, just that if you do so, you "translate" LTVs on the second liens. Frankly, they should be reported separately. However, I'd be surprised to find someone report balances the way you've suggested. If I have a $10,000 second lien on a $100,000 property, I could report it at 90% LTV while still reporting a $10,000 balance.
WA LTV would always be calculated on actual loan balance. You see why I don't like to see anyone reporting firsts and seconds aggregated.
Congrats on your promotion. We are fortunate to be able to enjoy the fruits of CR's excellent labors and more so still to the extent that you become more interested and invested in educating us. Thank you!
For a future PMI topic, once we've finished the review of basics, perhaps a practical post on the MI cancellation would be interesting? I know I'd personally find it useful. Plugging in my loan #s over at the Mortgage Professor's MI cancellation calculator, I'm told:
My MI will automatically terminate in 110 months when the loan balance reaches 78% of the original property value.
I can request termination in 100 months when the loan balance will be less than 80% of the original V.
I can request termination in 24 months when the loan balance reaches 75% of the appreciated property value (assuming a continuing 3% rate of appreciation over its current Dominia/Zillow guestimated values).
The first two options (automatic at 78% of V and requested at 80% of V) where already familiar to me. The second one sounds like something I'd read before but I have no idea how it actually works (is it a right or a privilege; are the rules determined by state law and/or by my servicer, etc). Since I'm currently paying $180/mth in MI and 100 months is an easily computed $18,000 I'll be paying to protect my loan holder from me - obviously I'd like to cancel this at the earliest possible date.
Is "Tanta's Guide to MI Cancellation Options" a topic you feel you could explain in typical Tanta form? Much of what I've read on this topic has been rehashing of the Federal law for loans originated post-mid-1999 and very little on earlier cancellation. My guess is that if you have the time, interest, and experience for this topic, a Tanta post would likely become one of the definitive sources for a great many Googlers.
you briefly touched on the fact that the mortgage insurer has some contractual rights to dictate or approve the foreclosure process, since it is in first loss position. I've heard in the MSM that banks are trying to work with distressed lenders because they don't want the property as an REO. So, how much control do these insurers have to make banks start and proceed with foreclosure?
Oops, put comment on previous thread because I didn't realize you'd got this one up - it is/was
As there are so many MBO/MBSs out there with "insurance", I hope you'll explain to all us out here where MGIC and the others are going to get the funds to pay all those claims. Or am I being too optimistic?
Let me put it another way - where in the circular movement of invested funds does the buck stop? Is the CBOC holding MGIC (et alia) bonds? Or just the poor institutional pension funds?
I love it when the little guy gets to pay extra. reminds me of a favorite quote:
There are many in this old world of ours who hold that things break about even for all of us. I have observed, for example, that we all get the same amount of ice. The rich get it in the summertime and the poor get it in the winter.
Bat Masterso
fatbear, I'll try to address your question more fully in a follow-up post. For now, just this: the MIs are different from certain other parties in the mortgage food chain because they're insurers. In other words, they get their money to pay claims from the same place your homeowner's insurer or your auto insurer or your health insurer gets it: they collect premiums and invest the money.
Now, those other insurers (particularly life insurers, because of the long-term nature of some of their term policies) are investing a fair amount of their premiums in mortgages. The MIs try, if they're smart, to diversify a little. But that's one thing you want to know if you're looking at the financials of an MI: what are they investing in?
Back in '03 I'd read that the housing bust could decimate the PMI players because they were few and thinly capitalized. Of course, the bubble going ballistic in the following years shifted mortgage financing entirely away from PMI. Still, going back to pre-boom home pricing would appear to wreak havoc on these guys, no?
Tanta said "The MIs try, if they're smart, to diversify a little."
Is that why they bought C-Bass???
The Fed to the Rescue. Lower rates on the Horizen!!!!
question 1: all the numbers you have there are LTV to 1st/only lien, right? no CLTVs..?
question 2: In which markets are the costs higher than 15%
question 3: Do the markets in question 2 happen to be the exact same ones where REO might yield less than 80k ?
question 4: where will the default-to-liquidation period be longer? could it be that we're talking about - again - the exact same local markets?
Gracias for everything. CR you rock.
Well on Bloomberg these three articles are on the front page.
Fed Keeps Rate at 5.25%, Drops Reference to `Firming'
Treasuries Gain as Fed Softens Reference to Interest-Rate Boost
Dollar Trades at Two-Year Low Versus Euro as Fed May Cut Rates
Hmmmm, I wonder what the market is expecting? Has the Fed ever failed to deliver on expectations? Is this the turning point to lower rates or are we going to have some big talking tommorow to confuse the markets?
I may have missed an important point. My understanding is MI is paid for by the borrower in the event that a loan is over 80% LTV. Is there other insurance taken out and paid for by the lender?
Also, in the case of piggy-back loans or HELOCs my understanding is the 2nd lien(s) is the 1st's MI, so the borrower gets off the MI hook -- Correct? If so and these loans were popular from '04, when the market peaked, perhaps the MI companies might not have to fork out too much, at least at first.
Just saw this post
"more 100% financing evaporates, this time from HSBC and affecting what we call ALT A.-not A paper, but not quite subprime either. Keep an eye on your 100% financing, even if it is already approved. If your lock expires before you can close, you may be without a loan.
PLEASE LOCK ALL 80/20 SIVA AND FULL DOC LOANS ALREADY REGISTERED TODAY WITH HSBC!!
HSBC WILL HONOR ALL LOANS ALREADY LOCKED BUT WILL NOT ACCEPT ANY MORE!!
NEW GUIDELINES WILL GO INTO EFFECT ON ALT-A IMMEDIATELY
SIVA (stated income, verified assets) MAX CLTV 90%
FULL DOC MAX CLTV 95% "
question 1: all the numbers you have there are LTV to 1st/only lien, right? no CLTVs..?
Correct. The spreadsheet shows only what the loss to the first lien lender would be with an 80% LTV loan. The point is that in any case where the first lien lender is taking a partial loss, any second lien lender is taking a total loss.
question 2: In which markets are the costs higher than 15%
That varies so much that I won't even try to answer it. You really need to look at each market. Just to think of a few things: hazard insurance is a lot more expensive in coastal areas than in the dry hills of flyover country. States like Ohio, in which all foreclosures are judicial, will have higher FC expenses (but possibly lower loan balances) than states like CA, where most foreclosures are power-of-sale (nonjudicial). Georgia is known as a fast FC state, because of its statutes; a state like Illinois, with a long right of redemption, is a slower state. You can always figure that property taxes are higher in bubble markets. Etc.
question 3: Do the markets in question 2 happen to be the exact same ones where REO might yield less than 80k ?
Maybe, maybe not; see above. One thing to bear in mind is that prices on REO are always at some level "distress sales"; the lender wants to unload the REO as fast as possible, and so it may have to undercut other property sellers. So REO in any market can end up unloading at big discounts.
question 4: where will the default-to-liquidation period be longer? could it be that we're talking about - again - the exact same local markets?
Again, see above. I will only note that it will also matter whether any given lender also has lent money to builders of local developments, or has currently performing RE loans in neighborhoods where it now owns RE. This makes the decision of when and how fast to pull the trigger a lot more complicated.
Tanta,
thank you, good information.
CR,
Go on vacation for the next three months, you were correct, the recession is certain, no reason to sit back, post what we already know is coming, and gloat.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them.
Mortgage Grapevine: "No more 100% stated" - First Franklin
No more 100% stated for first franklin either.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them.
There will be some serious 'leveling' if that happens.
While many have beat up on unsophsiticated investors relying too much on the mistaken opinino of rating agencies, it would seem that the MIs are informed players.
Was their risk-pricing of stated-incmoe and interest-only loans appropriate, or have they also been going through a significant correction in 2007:Q1.
Have they played an important role in disciplining brokers, or is this the case of two potential regulators -- the rating agencies and the MI insuers -- competing to the bottom?
Tanta:
Thank you. I really like your UberNerds posts. Not sure what that says about me, though.
I have a couple of related questions: you briefly touched on the fact that the mortgage insurer has some contractual rights to dictate or approve the foreclosure process, since it is in first loss position. I've heard in the MSM that banks are trying to work with distressed lenders because they don't want the property as an REO. So, how much control do these insurers have to make banks start and proceed with foreclosure? And how does the mortgage insurer's rights in this regard get reconciled with the rights/desires of investors who have purchased the loans? In other words, if there is a battle between the mortgage insurer and the owner of the loan (whether a bank or investors), who is the servicer (assuming it is a third party) beholden to? Thanks.
This topic is interesting, but kind of a non-starter, since the majority of recently originated loans (in CA anyway) don't even have PMI. Most FBS here have been avoiding it by taking out 80/20 or 80/10/10 piggy-back loans.
barely - primary mortgage insurance is the insurance that individuals pay for. MI companies provide the coverage on a loan by loan basis. MI companies also sell pool insurance, typically but not necessarily covering first losses on MBS. It doesn't limit coverage to the first (say) 30% on each loan, but might instead cover something like the first 10% of losses on a pool of loans. This is purchased by the securitizer or investor, not by the individuals.
Did I tell you that margin debt hit another all time high, hedge assets hit over 1.75T, getting ready for a massive pity party, the hedgies are going to get their ass handed to them. - realist
You want to know scary? What if all that debt is trying to short the stock market? What if the market actually crashes up? D'oh!
Note to self: Don't use a half full glass of Kool-Aid to wash down a red pill AND a blue pill again. There seems to be all sorts of unintended consequences.
Thanks mort, that's what I thought. I doubt PMI sales have been very strong over the past 3 years so their exposure is likely limited as the FBs have been piggy-back'n - to skirt the insurance. The primary is covered by the 2nd... unless the primary lender sold that too, in which case they're both dumb and screwed. May change now though.
thanks Tanta,
I'm still confused about the exchange between mort_fin and barely. I'm thinking back to all the classical "MI vs. 80/x/x" debates and all the assertions that "MI is something that covers the riskiest 20%" - all that stuff applies only to conforming loans, correct?
Also, I just found some blurb about GSEs no longer allowing 80/10/10 to avoid MI and requiring 75/15/10. Never knew that...
One more thing. One company's stats that I was reading said "LTV/CLTV at origination" and then on the bottom they explained: "LTV in case of 1st lien, CLTV in case of 2nd". Why would they blend these stats together? If they have a 2nd lien position on a property but not a 1st lien, their loan amount is very small but the readers won't know it because they're only listing averages. So they are blending on some small-face-value loans with high probability of loss into their general stats... without listing the total #of 2nd lien loans... sounds like a potential source of future bad news to me... unless I misunderstand what they are saying.
How does this play when BK is initiated?
Case: Mr. and Mrs Wayoverextended bought a house in 2004. In 2005 they toke out a HELOC (said to be a 2nd) while doing a refi to extract money from the appreciation. This home improvment protion was secured personally but tied to the property. Now this newly wed but nearly dead couple find themselves unable to make the payments on the first mort (insured)which would head to foreclosure, and instead of having the debt of the HELOC follow them they declare BK. Is there not wording in most mort. insurance that makes the policy void if BK is taken on the part of the borrower?
OT ... Appraisal Primer for UberNerds
I review (administratively - not USPAP standard 3 - for any appraiser reading this post) between 40-50 appraisals a day. These are from every imaginable market all across the county. However, most are from major markets and their suburbs.
I have to say; a VERY small portion of the appraisals indicate declining property values (1 today out of 40 some).
This is how the data is fuzzied up:
The appraisal only focuses on a defined neigborhood where the subject is located. This can be as small as an indivdual subdivision in a densely populated area.
The appraiser can possibly substantiate stable values in an individual subdivision (market subset) when an entire zip code, city or even county shows a decline in median sale prices of say... 5%.
Also, generally accepted appraisal practice is to disregard REO sales (comps) in an analysis as they do not met the criteria of an arms length transaction (buyer and seller typically motivated). REO's are viewed as distressed sales that are not valid indicators of value.
Lets say for example the subject is in a mega sub (200+ homes). Lets say over the last 6 months there were 10 non REO sales ranging from $100k to $120K. Lets say also there were 2 REO's that sold for $75k-$80k. The value of any Heloc, PMI drop or refi will undoubtably be in the $100k-$120k range as the lowball REO's get tossed as distressed non arms length transactions.
The money train keeps rollin'
The only time I can remember REO's being used as actual comps are in dire situations where REO's have flooded the market (for example 6-7 sales out of 10 as noted above). For example ... Detroit proper recently, NC/SC manufactured home (trailer) subdivisions busts a short time ago and a few other oddball markets.
Sales are a different animal. I read a figure (from Fannie Mae or the Appraisal Institute - I forget) that indicated an insanely high percentage of appraisals met the contract price EXACTLY. The philosophy goes ... an informed buyer and seller have a meeting of the mind based on sound market information (read realtors); thus, the contract price should likley be the fair market value for the property.
In the age of dual agents, collusion and RE propoganda, I'm not sure how sound this philosophy actually is.
However, just like declining values, I RARELY see an appraisal not meet conract price.
This was an off the top of my head ... general thoughts flowing type o' post. Thoughts ?
Admn Revwr,
Can you further expand on how/whether the appraisals you review is a good enough sample to represent various loan types, borrower types and property types? what is "administratively"? what is standard 3?
As a devil's advocate I'd tell you we've been hearing of some more honest appraisals coming in and of lenders making various demands from appraisers. The general feel (or at least mine) is that appraisal quality has improved over the past 3 months...
Probert
Most Of the appraisals I see are for Heloc or refi (say 75%). The other are appraisal audits (20%) with the remainder being sales (say 5%).
I have no idea on borrower type as I do not have access to credit issues. My strict focus is on collateral valuation.
Property types go from run down foreclosed meth houses all they way to 10-12 mil mega mansions.
I really can not comment on the honesty of the reports that I see since my company in no way pressures appraisers to met a specified value (unlike broker driven work). This also goes back to admistrative review v/s a USPAP standard 3 review.
long story short...
administrative review - generally are done by non appraisers and only check for incomplete, inconsistant and/or grossly illogical items. (can't really catch dishonest reports - but make it difficult for them to get through)
Standard 3 review - done only by appraisers and is focused on actual value support/conclusions and overall thouroughness of the original analysis. (will catch dishonest reports).
As I don't review ... standard 3 reviews... I can't give an accurate picture of how may appraisals 'get their value cut'. I'll do some research on this in the next few days and report back. I can say that the appraisal audits I see don't look stellar. I can get round figures on this.
Otherwise.. some of our clients have increased some valuation criteria while most others are just staus quo.
Tanta, thank you for sharing another great post.
Based on your post, I would assess:
Would you agree with the above?
Subprime Loan Meltdown Engulfs Even Borrowers With Good Credit
Subprime Meltdown Snares Borrowers With Better Credit (Update3) - Bloomberg.com
Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.
Hi Tanta,
Love your blogging.
I am a small investor trying to Figure out whether to invest somewhere in the down housing industry. I came across mortgage insurers. They are selling close to book value but over the last two decades have been very profitable businesses. I blog a bit about them here
CertainRuin - a stock picker's record: Mortgage Insurers
In that posting I point out the interesting bit of data on loss ratios provided kindly by PMI's 2002 10-K. Note that in the 80s they got killed by the real estate crash in the oil patch. Loss ratios over 200% for multiple years.
Here are the questions that I would love to have answered.
1) Are these companies as risky as they seem or do they hedge against a catatrophic RE crash? Note that PMI's existed prior to the Depression but not afterwards; not again until 1958. They all failed. Could that happen again?
2) It seems that piggy back loans will go the way of the Cabbage Patch Kid and MIs should reap a huge amount of new business that was lost over the past few years. Also due to market fear, they should be able to raise premiums. Right? Will all this new business help them offset massive losses. In other words could the fear of potential and actual losses be a smoke screen. Could these companies actually be a good investment? For example, I note that they did just fine during the 1990 RE slump and their investors did even better.
3) To summarise, What I want to know most is whether these companies might be a good contrarian play either now or when/if even more fear is priced in.
Thanks
Dave
Tanta,
The link to the spreadsheet is broken
Free File Hosting Made Simple - MediaFire
does not work for me.
Thank you for another great contribution!
Mark
Tanta has done a marvelous job here. If you want to see the size of the private insured market for the collateralized mortgage securities securities issued (different topic in the same genre) I suggest that you go to this terrific website.
Asset Backed Alert - Asset Backed Securities - ABS Asset Backed Security - Four Zero Four
Also, if you want to read how the rating agencies go about their business in rating insurers, go to FGIC.com's website. Financial Guaranty Insurance Company | Investor Relations | Rating Agency Reports They have generously provided these reports and you can get Moody's outlook for the industry. You'd have to pay otherwise. Many of these firms have undertaken increased risks. What will be telling is what happens if these underwriters fail to meet capital requirements for their current rating due to loss severity. Radian was marginal and is being purchased by MGIC.
And here are a couple of tidbits out of MGIC's 10K
* "The increase in estimated severity is primarily the result of the default inventory containing higher loan exposures with expected higher average claim payments as well as a decrease in our ability to mitigate losses through the sale of properties in some geographical areas."
* "In the fourth quarter of 2006 California and Florida began to experience less favorable housing markets, which will likely increase the actual claim rates and severity in those areas."
revolving credit deliquencies rising;
Topic Galleries -- chicagotribune.com
I usually don't make stock marker prediction for a day or even a week.
Indeed I do not know if my PUTs and shorts will be worth more a month from now.
But I'll say this:
In the last 24 hours the amount of Main stream press articles talking about "bye bye to easy mortgage money" and about "alt-A" being a problem - the amount of these articles is the highest I have ever seen.
So while I am sure we will open lower today I wonder if the real reversal of yesterday and of the last 5 years is very near ? will we see another top before the decline ?
1. 2nd lien positions (including HELOCs) are almost guaranteed a 100% loss in a foreclosure sale.
Yep.
2. 2nd lien positions in a scenario where the 1st lien is a neg am loan is in a worse position than if the 1st lien was an amortizing loan.
Yep. One of the scariest of the loosening of guidelines over the boom years involved this. There was a time when every junior lien lender out there had and enforced a "no neg am on first lien" rule. Then some of them started drinking the Kool Aid. It's almost (but not quite) the dumbest thing I've ever seen a lender do. (I still think letting the builder or seller make the borrower's first six payments wins the Darwin Award, but this one sure gets an honorable mention.)
3. The worst position would be a 2nd lien position where the 1st loan is a stated, no doc, Option Arm, high CLTV, in a market where home values are decreasing.
Well, the worst would actually be doing that in third lien position, but otherwise you're quite right. (Are there thirds out there? You bet. Borrower buys with 80/10, then subsequently gets a third lien HELOC up to 100%. It's not that common, but it happens.)
4. The MI companies may have been lulled to sleep since the past years of increasing home values, many refinancings with very low claims, would indicate a low risk and therefore a low premium.
Actually, I think for the most part the MIs have managed as rationally as is probably possible in a highly irrational marketplace. I don't think they slept through the boom. In fact, as others have noted, the second lien lenders took away a lot of the MIs' normal business. They could have responded to that by lowering UW standards and premiums, but by and large they didn't; they gritted their teeth and waited for the second lien lenders to learn the hard way that the MIs price premiums the way they do for a reason. At some level they're going to be vindicated, unless the "correction" is so bad it sweeps them away with it. Tough bet, but that's the mortgage business. Most of the MIs weren't born yesterday.
High refinancing rates are not good for the MIs. If you're an MI, HPA is your friend, but amortization is also your friend. The longer an insured loan stays on the books, the longer it pays premiums and the lower its balance is in the event of default. The MIs' profitability takes a hit in refi markets, because they either don't get the new loan (HPA lowered the value to 80% or less) or they get it at a higher balance with the amortization clock starting over.
What will help the MIs is return to normal "selection." They need enough high-quality borrowers with LTVs at 90% or thereabouts; they can't take only the lowest quality 95-100% loans. The new regs allowing for (limited) tax deductability of MI premiums will help them.
Maybe, maybe not; see above. One thing to bear in mind is that prices on REO are always at some level "distress sales"; the lender wants to unload the REO as fast as possible, and so it may have to undercut other property sellers. So REO in any market can end up unloading at big discounts.
Sounds perfectly reasonable. The bank is neither living in or renting out the house. If you held a stock whose value was questionable, but were setting fire to the divedend checks you'd be more motivated to unload it than somebody who was cashing those checks.
While many have beat up on unsophsiticated investors relying too much on the mistaken opininon of rating agencies, it would seem that the MIs are informed players
I believe that Tanta pointed out a while ago that the reason for the popularity of 80/xx mortgages is that those investing in the 2nds were putting a different price on the risk of default than insurers. Of course the insurers are putting their own money on tha table. The bond raters... not so much. The splitting of those assessing risk from those taking risk does not incentivise accurate risk estimation.
KB Homes;
""Despite the recent improvement in our first quarter net order experience and a lower cancellation rate, these trends should be viewed with caution," said Mezger. "Having now entered the spring selling season, we continue to observe instability in the marketplace. Moreover, recent problems in the subprime mortgage market combined with tightening credit requirements could exacerbate the already difficult conditions in the homebuilding industry. The rise in delinquency and foreclosure rates may increase the supply of homes on the market, generating additional downward pressure on prices. Under these conditions, it is hard to predict when the housing markets will stabilize. However, we believe that our build-to-order operating model with limited speculative production and the knowledge and experience we have gained from more than five decades of homebuilding will help us to continue to execute through these challenging times and put us in a position to capitalize on the housing market's eventual recovery." "
MarketWatch.com
Mark, try this:
Free File Hosting Made Simple - MediaFire
I tell you, what with Halo, Mediafire, and Blogger all misbehaving on me, I might just move to the desert and draw lines in the sand with a stick . . .
So, how much control do these insurers have to make banks start and proceed with foreclosure? And how does the mortgage insurer's rights in this regard get reconciled with the rights/desires of investors who have purchased the loans? In other words, if there is a battle between the mortgage insurer and the owner of the loan (whether a bank or investors), who is the servicer (assuming it is a third party) beholden to?
The MI has the stick any insurer does: it can refuse to pay the claim, or pay only a partial claim. If you as servicer or investor want to ignore the rules the MIs lay out in the policies and servicing agreements, you are free to do so. There's no law against it. The MI, however, is free to refuse to pay the claim. It's just like auto insurance: you're free to drive with a suspended license. Your insurer is free to refuse to cover you if you get into an accident.
By and large, the MI and the investor generally have the same interest: to improve collection/loss mit practices so that as few loans as possible go into foreclosure, and to manage any inevitable foreclosures well enough to minimize losses. Where their interests can diverge is, basically, the difference between the first loss party and the second loss party. The investor won't suffer until the MI's money is spent, so the investor might not get too worked up over managing the nickels and dimes in the FC process. The MI's money is at risk first, so MIs are known to worry about how nickels and dimes add up.
Tanta, I added an update with the new link. It looks like we exceeded the bandwidth limits for a free account!
Best Wishes.
I thought I might not have been as clear as one would like - my concern is at what point the MIs run out of $. I would imagine that like most insurers they write more coverage than they have capital, and that they go to the reinsurance market for help. (Or, and this is the most concerning point, they issue debt in the institutional market - most concerning because I also imagine that they sell lots into the pension funds market.)
So, since their underwriters (by which I mean the individuals who actually do the underwriting within the bowels of the organization) probably drank the same Koolaid, the average MI probably has a gigantic exposure to the coming (already here in many cases) markdown.
So where does the buck stop? Who backstops the MIs? Are there hedge funds big in this reinsurance market? (And can those by definition highly leveraged players take the hit themselves?) The CBOC? Congress? (Although in that case Congress will just turn to the CBOC to finance.) Is this the straw that breaks the camel's back?
There's a major (gigantic) vaporization of equity in the works, so who is the final loser?
It looks like we exceeded the bandwidth limits for a free account!
Nothing 'sucks' like success.
fatbear, I don't, actually, think the MIs drank the same Kool Aid. They surely drank some of it--they were probably just forced to, when the second lien lenders were taking too much of their business way. But by and large, I think they were smart enough to let the fools run where the angels feared to tread. I guess we'll see if I'm right. At any rate, I will do a future post on MI credit quality.
and then on the bottom they explained: "LTV in case of 1st lien, CLTV in case of 2nd".
probert, that's actually a good thing. "LTV" means the ratio between whatever loan you happen to be making and the value of the property. If you are making a second lien loan equivalent to 10% of the property value, it would be kind of misleading to report that as a 10% LTV loan--that could be confused with a first lien of actually 10%. So when a report combines first and second liens, the second liens are expressed as "on top of" the first lien, even though the lender might not have made the first lien. On an 80/10/10 deal, then, the second lien holder reports its 10% loan as 90% LTV instead of 10% LTV. Does that make sense?
Tanta,
Take a look at the following presentation by MTG. I think it's page 11 where they compare stocks to houses.
"why the housing market is not the stock market" (i.e. why it won't crash as badly). Their reasons:
-Homes are time consuming to sell
-high transaction cost
-home is place to live life
-[no scrutiny in stocks???]
-no national deline since 1930s
To me this appears like the most simple, low-quality, unsophisticated explanation I've ever seen, of an assertion which is arguably not even true or relevant. Why should one conclude that these guys - despite letting the 80/20 piggies eat crap - are not making severe mistakes.
I've been in the mortgage business 20 years, learning from Tanta, love your blog.
regarding LTV reporting,
Yes, this I understood. But let's continue further. If the lender makes one 90% 1st lien loan, it will mark a "90" in the LTV/CLTV column, and a +90000 in the debt oustanding column (assuming 100k home values).
If the same lender does nine 10% seconds in 80/10/10 deals, it will mark a "90" in the LTV/CLTV column, and a +90000 in the debt oustanding column (assuming 100k home values). In other words, the same thing.
But in the first case, this lender stands to losea heck of a lot more money than in the second. How then, can we figure out how many of each was done without being explicitly told how many there are? And even if we are explicitly told, can't averages hide some pretty fat tails...?
and bythe way, the "average LTV" is not necessarily dollar-weighed... and if it is, what would they weigh it to - the CLTV or the amount of their 2nd lien loan?
Well I think that the question as far as fatbear is concerned isn't, "have the mortgage companies drunk deep the same Kool Aid as the 2nd lien holders?" It's "Will the comming collapse of the housing market caused by the stupidity of 2nd Lien holders be so much worse than historic norms that the insurance companies will have difficulties meeting claims DESPITE relying on traditional lunderwriting standards?" There's little doubt that they will be spared in the first wave of bankrupcies sweeping the subprime market. It would seem that the dumbest and most likely to be foreclosed upon loans bypassed them. But if the market truly collapses they too could be in trouble.
probert, I'm not suggesting that it's smart to try to combine first and second liens in one report, just that if you do so, you "translate" LTVs on the second liens. Frankly, they should be reported separately. However, I'd be surprised to find someone report balances the way you've suggested. If I have a $10,000 second lien on a $100,000 property, I could report it at 90% LTV while still reporting a $10,000 balance.
WA LTV would always be calculated on actual loan balance. You see why I don't like to see anyone reporting firsts and seconds aggregated.
Jim, great summary. I agree entirely.
exactly, and it's not the only industry where this sort of bundled reporting goes on.
Tanta,
Congrats on your promotion. We are fortunate to be able to enjoy the fruits of CR's excellent labors and more so still to the extent that you become more interested and invested in educating us. Thank you!
For a future PMI topic, once we've finished the review of basics, perhaps a practical post on the MI cancellation would be interesting? I know I'd personally find it useful. Plugging in my loan #s over at the Mortgage Professor's MI cancellation calculator, I'm told:
The first two options (automatic at 78% of V and requested at 80% of V) where already familiar to me. The second one sounds like something I'd read before but I have no idea how it actually works (is it a right or a privilege; are the rules determined by state law and/or by my servicer, etc). Since I'm currently paying $180/mth in MI and 100 months is an easily computed $18,000 I'll be paying to protect my loan holder from me - obviously I'd like to cancel this at the earliest possible date.
Is "Tanta's Guide to MI Cancellation Options" a topic you feel you could explain in typical Tanta form? Much of what I've read on this topic has been rehashing of the Federal law for loans originated post-mid-1999 and very little on earlier cancellation. My guess is that if you have the time, interest, and experience for this topic, a Tanta post would likely become one of the definitive sources for a great many Googlers.
Thanks,
-E
once again thank s tanta
you briefly touched on the fact that the mortgage insurer has some contractual rights to dictate or approve the foreclosure process, since it is in first loss position. I've heard in the MSM that banks are trying to work with distressed lenders because they don't want the property as an REO. So, how much control do these insurers have to make banks start and proceed with foreclosure?