So it's hard to remove the millstone from around your neck when it is tangled among the ropes of all the other millstones around all your peers' necks?
I think you pretty much found the shell the pea is under, giacutter, although one should never downplay the extent to which it's a millstone only because you tied your rope to someone else in the first place. Had we allowed these risks to remain "concentrated," we might be seeing a "concentrated" effort to resolve some of them.
Hmmmmm so the innovation was supposed to spread risk and allow default without wiping out an investor and instead it relies on "19th century clearing methods" that the NY fed needs to look at with some urgency?
"Bondholders who may well understand that it is in their best interest to allow modifications of loans will discover what it will cost in legal and accounting fees to do that...Risk dispersion means never being able to get all your risk holders into the same room to hammer out a plan."
Good God, Tanta. This is probably the most groundbreaking (groundshaking) view of the mess I have ever read. Many, many thanks for posting. Opened my eyes way more than the morning coffee.
First thought is this is the best Exhibit A I have ever seen for what kind of damage trail you leave when you let lenders go wild.
Second is, there is no other way to fix this mess besides a heavy hand of gov't or courts-rewriting laws and cutting through these now-impractical requirments. Maybe it's a new murphy's law of sorts, or vicious cycle: An utterly unchained market is destined to morph into a chaos that can't be fixed without chains.
It looks like this will not be just herding cats but herding angry, wounded cats. If this is the situation, and this is the work-out method, there are not enough securities and tax attornies in the world for this. Time for a few calls to Washingon to get some new laws and regulations written to save the originator and packager.
I think the "dark matter" blathered on by economists is starting to show up, like rat shit in rice. Hey its a great analogy-I lived for a while in a country were we had to go through the bag of rice grain by grain to pick out the dark pellets of rat shit before cooking-the other option was to toss the rice in water and watch the pellets disappear by melting into the water. One way was slow but sure, the other was fast but sure could be deadly. And the dark pellets that happened to be stones instead of rat shit would crack your teeth even after cooking.
Had we allowed these risks to remain "concentrated," we might be seeing a "concentrated" effort to resolve some of them. - Tanta
If I understand this correctly, we'd prefer soap on a rope. We'd have 2 risks, but at least they'd be concentrated and therefore more manageable.
Unfortunately, we've got soap AND a rope. The soap is under a foot and the noose is around the neck. Not only does it increase the chances of stumbling, but also makes the recovery somewhat more difficult.
(I'm hoping I've pulled off a first here today. On topic AND gallows humor. )
"That means, among other things, that the risk premium these borrowers are paying is likely causing their defaults; if they werent subprime the day they got the loan, they are now. The theorists of "perfect" pricing of credit risk have some explaining to do. "
It seems much of that added risk that they were put into went as production fees for the whole chain:
Loan broker
Mortgage bank
Wall street securatiztion.
The Problem isn't just limited to those who need their loans restructured. I just finished representing a client who was attempting to sell a plot of land and when the title commitment came out found that his property had been encumbered by an already securitized deed of trust.
Even though the Borrower under the Deed of Trust never owned the property it encumbered, and we could prove it, it took us 6 months to finally get someone to release the property, as the servicer, originator, and trustee all pointed fingers because they could not go back to the bondholder. We ended up having to shell out like $5,000 for a REMIC opinion stating that the scriveners error did not affect the rating of the securities, not to mention our legal fees over the six month period to get the property released before the prospective purchaser purchased the property. It was nightmare.
"as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA. That's a pretty profound statement"
The understatement of the year, I think. I always assumed there were some exotic loans went to people who could have qualified for conventional loans. Either because they were steered, lured by the teaser, or because they were too clever by half and took the teaser assuming they could refi before the payment shock. But I assumed there weren't that many. That the great bulk of the exotics really did go to people who otherwise couldn't have afforded to buy.
This puts another face on bailout proposals. If there are a great many people in unaffordable exotics who could (still?) qualify for a conventional loan, at least if one could get round appraisal problems, there will be pressure to find ways to refi them into conventional loans.
If there are a great many people in unaffordable exotics who could (still?) qualify for a conventional loan, at least if one could get round appraisal problems, there will be pressure to find ways to refi them into conventional loans.
Well, yes, and that's what Fannie and Freddie both stood up last week and said in front of the House of Representatives, and a whole bunch of people went batshit over "bailouts."
The thing is, just because the loan is GSE-quality doesn't mean the GSEs have to be the buyer; any of these bozos could be issuing private-label pass-throughs full of agency-quality loans. But they won't do it, because they can't make the bucks on that.
WAMU and Citi and everyone else who has so publically committed funds lately for workouts are just cutting losses, and the fact they're willing to do that tells you that they see a bunch of loans whose quality justifies a rate step-down. If that isn't a public admission that predation has gone on, what is?
Housing in the United States is taking a big hit as "too-good-to-be-true" home loans fail, refinancing dries up, and foreclosures surge. How did the market plummet so quickly -- and are current homeowners paying the price? NOW revisits a California town whose real estate fortunes have taken a hard turn for the worse.
Yal, you're missing the point. If 50% of those loans qualified under Fannie, Freddie, or FHA rules, then they could have afforded the payment. That's what that means.
The other 50% are the ones who could only qualify with a 1% teaser OA.
It may seem difficult to get 'everyone' to agree to loss-mitigate this MBS mess, but during the 1998 LTCM collapse/global financial armaggedon, the NY FED summoned the head-honchos of the major financial institutions/lenders to LTCM and basically said "You guys are not leaving until you figure out how to fix this disaster". The NY Fed didn't need to lease a convention hall, football stadium; no lawyers; just the CEOs in the room, and CEOs figured out a plan.
So, why not just get the CEOs of the major financial institutions with the biggest stakes in this MBS mess and not them leave the meeting until they figure out how to loss-mitigate?
So, why not just get the CEOs of the major financial institutions with the biggest stakes in this MBS mess
Who would that be? The major financial institutions who securitized this stuff in the first place precisely in order to get those "stakes" off their books?
Do you really think the Fed could withstand the wrath of 8,000 bondholders who saw their holdings go up in smoke while Bernanke cut a deal with Citicorp?
Maybe we are all coming to Jesus at the moment? If nothing is done then the US economy will implode and the whole world will go down with it.
Inconsequential bondholders can be destroyed...important ones bailed out....
Lets be optimistic here
The chinese have $1,300,000,000,000-00, and you have all been wondering what it is going to be spent on. If that does not get spent the world implodes. God knows how many billion chinese will then rip the chinese leadership apart. Its an easy call:-)
So, what fraction of those who could have qualified under GSE rules but unknowingly went exotic, is considered an acceptable figure?
Let's consider how it is that this estimate is derived.
Just about every lender in the universe runs all its loan apps through Fannie or Freddie AUS first, as a prequal measure. They don't have to sell the loan to the GSEs in order to do that; the GSEs just take their $30 a pop or whatever the current charge is for using the AUS and the originator can do whatever it wants to do with the loan.
But the GSEs therefore know how many apps are hitting their dbs, getting an "accept" response, but going elsewhere. The reason these numbers being tossed around are estimates is that someone is sitting down and trying to map those loans the GSEs know about with the loans that got originated into subprime securities.
So we can just stop, pretty much, obsessively focussing on borrower ignorance, if it is in fact a fact that the originator knew all along that the loan could go GSE. That is the implication of this data.
What's acceptable? You tell me. Do you think there is any fiduciary responsibility of a loan originator to put you in the best product you qualify for?
After watching the NOW program, I'm conflicted over the demise of people who are in these situations. On the one hand, I hear their stories and think that they were just a bit greedy and didn't want to know what could happen if the market took a turn for the worse and where they would be when or if it could happen, and just buried their heads in the sand. On the other hand, and this will sound like I think I'm smarter than most of them, maybe they just don't have the intelligence to see the big picture. But either way, they don't come out looking too good in all of this.
What's acceptable? You tell me. Do you think there is any fiduciary responsibility of a loan originator to put you in the best product you qualify for?
I guess that was a loaded question. I would say that there's no acceptable figure from the borrowers' perspective, but from the originators' point of view, there must be some amount of GSE-qualified borrowers that originate with a higher interest rate and don't default. Also, the regulators must have some threshold (probably below 50%) before they consider the activity "predatory"
It would be a wonderful world indeed if the vast majority of these FBs were genuinely duped by their LO into taking a higher rate than they needed to. I just can't believe people were that stupid.
"as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA"
I'm not sure I buy this statement. The missing half is this: home prices wildly outran incomes for about 4 years. If home prices had not done so, people would not have resorted to 'exotics' in the first place. The "housing mess" is not simply a loan issue, it is also a price issue - there IS a bubble. The confluence of the price bubble and the mortgage abuses is what makes this as severe a problem as it appears to be.
I think you are being unfair. The system itself encouraged people to take out exotic loans they could not afford in order to get a head start towards the wealth that many of us in some manner leveraged off our parents to obtain. Was that fair? No. And that system implicitly gauranteed the borrowers loans by historically preventing recessions by several times allowing easy credit rather than cleansing recessions.
Because the borrowers knew deep down that they were taking part in an unreal wealth creation sanctioned at the very highest level of the system it did not really matter to them that the whole scheme seemed stupid or impossible. If they were daily bombarded with advertisements that you just had to do this thing under the watchful eye of all the authorities, then how bad could this bad thing they were doing turn out to be? They knew they were doing something bad but the bad system said it was ok. Surely with such a belief system it would then be hard to believe that it was possible to actually get a better deal via a government agency such as FHA? They felt fraudulent but i think they deserve some slack because the fraud when all the way to the top.
But wally, why does that make you doubt the 50% number?
Try it this way:
Not all loans are purchase-money loans.
Not all loans are originated in SoCal. Have you seen the numbers for Ohio, West Virginia, and Michigan?
Not all "exotics" are subprime. We are not (yet) talking here about Alt-A.
To be honest, I hear a lot of this "I can't believe people are that stupid" from people who--present company excepted, of course--wouldn't know what the current coupon is on a conforming loan if I gave them the entire internet and three hours to find it. And sure, all these hindsight TV shows that have all the intellectually-superior in a knicker-twist are now telling you how bad these deals are, but what were they telling everyone two years ago?
And finally, I have no intention whatsoever of bashing Lew Ranieiri--he's a smart guy and he's doing his best to put it all right. But the fact is that he didn't see where all this was headed. And there are a shitload of institutional investors and miscellaneous masters of the universe who bought these bonds with no idea what their true risks were. I remain overwhelmed with disgust, frankly, that these folks get a pass, but just rank and file normal decent garden variety people like my parents, who couldn't define neg am if you put a gun to their heads, are expected to outwit Wall Street.
We need to keep more than one idea in our heads at the same time.
It wasn't clear to me, you know, what this meant: Note: This is a rush transcript, not a final one, of oral remarks.
but, you know, after the first sentence I, you know, got it: People asked, you know, is financial innovation, you know, reaching a...
A couple of things stood out for me: the narrowness of the window (from the end of the 3rd quarter of 05) through which most of the trouble came through; the many, many, (you know, a bunch, a whole bunch) people who got into housing who might not otherwise have; the remark that half of these clients did not need to resort to sub-prime.
Can we have the envelope that states how many people got into these loans...who were not already "playing games"? (The % ownership stats from q305 to the present day would be close enough for me. Weren't we already on 68 or 69% --up from the traditional 65%?).
The robbers plea that they were lightening the burdens and providing a service for their victims has not changed much over the years. (It B their lawyers, lawyers lightening the burdens of their own clients who are too witless to notice this lack of imagination, no?)
Totally convincing: Securitization of loans did not, actually, eliminate the risks inherent in property markets; it seems to be capable, in fact, of magnifying those risks.
Tanta,
I do not doubt the implications of what Ranieri said - it is an excellent point that actually has come up, marginally, on this blog before (for instance, in discussions about Wells as a loan 'servicer'... what rights and obligations do they have in the foreclosure process) and I really am not qualified to say if 50% is a good number or not - but I bet Ranieri simply pulled that number out.
However, the point remains: you cannot move people from the current higher combined rates to a lesser agency one even if all entanglements were removed because a deal has already been struck on the underlying property at too high a price. That is the essence of the bubble.
Calmo, I think the best that can be said on that particular point is that Ranieri left out a couple steps in his argument. You're right, of course, that we didn't goose the homeowner percent in just the last six quarters.
What we seem to have done--looking at the vintage analyses--is just finally jumped the shark in the last six quarters. In other words, I think Ranieri is saying that it would have been manageable--if not exactly a walk in the park--until all hell broke loose, finally and fully, with standards in 2005. That is not to justify what went on prior to that (certainly not for me, and I don't think for Ranieri).
Wally, if people can carry the payments on a price that's too high, why not let them? Why force them into foreclosure? If you are correct and it is simply factually false that there are significant numbers of borrowers who can carry those loans at a near-prime interest rate, then we'll find that out. But I'd personally be surprised if Ranieri is getting made-up data from somebody and doesn't know it.
A few disagreements and notes on the last few hours.
1) Tanta - Ranieri doesn't give a source in this transcript, and I'd be surprised if it was much more than a SWAG, and doubt that it's from AU apps. To get that number from AU Apps, you'd note some wild guess about FHA (because FHA doesn't keep any kind of track of these apps) and you'd need to know how many loans are being run through both systems vs. just 1, and you'd need both GSEs to share all that privileged information. They don't even publicly release the number of submitted apps. I'm guessing that it's just Loan Performance data. And if either of us is right, it misses an important point - without the gonzo overdrive underwriting (or lack thereof) of the last couple of years, prices would be lower and more people could afford conventional or FHA payments, so wouldn't have been forced into the other stuff.
2) Tanta - not sure that I'd agree that this is proof that the loan terms are causing the defaults. Remember, he included FHA, so many of thse 'could have qualifieds' probably could have qualified FHA. And FHA is predicting a cumulative claim rate of almost 20%, right in line with the projected subprime claim rates that the industry derides. So if you moved a bunch of risky borrowers from subprime status to FHA status, why would you expect much of a change in default? I think the general observation is true - somebody paying $1200 a month is less likely to default than the same somebody paying $1800 a month, but I don't know that these stats constitute any additional evidence.
Finally, Ranieri's transcript talks about triggering 1099s, which sounds like he's talking about 1099s to the borrowers for loan forgivenness, but the bigger accounting issue, that he mentions but doesn't go into, is the Q election. The pool has to be passive or it can't be a pool, but if the pool is doing loan mods then that's active behavior, and inconsistent with their election to be a 'passive conduit' and remain untaxed. The natural leader for any restructuring is prohibited from leading - that will be the biggest issue going forward.
mort_fin, as far as I can tell that 50% number being bandied about is coming from Mudd and Syron. Did you read their testimony last week? They explicitly made reference to data gathered from AUS responses in their testimony.
Wouldn't you expect FHA's projected defaults to change if some hypothetical pool of decent quality borrowers had not been siphoned off in to either GSE or this hypothetically mispriced "subprime"? I have my concerns about the quality of the FHA portfolio, but I still also think it's getting cherry-picked. So I'm not yet inclined to agree fully that borrower direction back into FHA would make matters worse.
Hmmmm, more or less as I surmised a week or so back.
Seems to me we have a Prisoners' Dilemma here, with the added problem of time constraint. If so, I would expect Neal's excellent analogy of "herding angry, wounded cats" to prevent timely restructuring unless there is heavy coercion from above.
This level of coercion is unlikely until at least some horror stories have impacted upon the collective consciousness.
wally, I don't understand your response. You can have a loan at 100% LTV--or 125% LTV--that is "performing." That means the borrower is making the payments. If a borrower is willing and able to continue to make payments on an upside down loan, why should we not allow them to do that?
tanta - no I didn't read their testimony, just the press coverage (always a mistake). So it's probably a better SWAG then I was imagining, but still is a SWAG, as there are a lot of unknowns that have to be guesstimated, and if the GSEs ever tried sharing their apps data I think there are some antitrust litigators who would be fascinated at the news.
I'm not maintaining that a move from subprime to FHA would make defaults worse, just doubting that it would make defaults better.
You know, mort_fin, the first thing I thought of when I read Mudd's statement last week was, holy shit, the subpoenas are coming. If those litigators aren't finding those feedback certs stuffed into the back of those subprime loan files, they'll be asking the GSEs to cough up.
And sure, all these hindsight TV shows that have all the intellectually-superior in a knicker-twist are now telling you how bad these deals are, but what were they telling everyone two years ago?
I remain overwhelmed with disgust, frankly, that these folks get a pass, but just rank and file normal decent garden variety people like my parents, who couldn't define neg am if you put a gun to their heads, are expected to outwit Wall Street.
I don't think anybody is giving them a pass. I just think the borrowers deserve some culpability here. One of the great things about capitalism is the variety in the marketplace. Didn't any of these borrowers shop around a bit before making the biggest financial decision in their lives? Even if TV told them to do it?
Max, I'm not falling back on the "TV made me do it" thing.
You know, of course, that the whole idea of the mortgage broker is supposed to be that the broker has access to several dozen lenders, and so a borrower can deal with one broker and get "the benefits" of having his loan placed at the best possible price. Right?
If you're suggesting that we suggest to everyone that they talk to three different brokers (who are all working with the same several dozen wholesalers) to make sure that one of those brokers isn't steering toward the best back-end point deal, then we're getting to the point of establishing that the broker system is broke too. I'm in full agreement with that. That's my point about "fiduciaries." If you cannot hire someone to find you the best deal, then there is no point in hiring someone to find you a deal. But try finding a retail loan officer in most neighborhoods these days.
What a truly wonderful post and discussion! Oh, I love it!
Tanta, how dare you suggest that Chuck Prince permitted predatory lending at Citi! How dare you suggest that he threw sand in the eyes of borrowers to convince them to borrow from him at usurious rates when they could have had a GSE loan!
Un-American doesn't even begin to cover it. You are allied with Al Qaeda at the very least!
And you most assuredly have explained to me why there are two views of risk on Wall Street. Oh, that is coming into focus like crazy. There is the perpetually depressed bear view that, once again, confuses ignorance with understanding and there is...Chuck Prince, who promotes ignorance with all the purebred fiber in his sleek, tanned, personally-trained body.
Tanta, you are a Communist, and I suspect you are allied with Hillary Clinton.
If you cannot hire someone to find you the best deal, then there is no point in hiring someone to find you a deal.
Point taken. I've never been a very trusting soul myself; that's why I'm so incredulous when I hear these tales of woe from the borrowers' side. It's hard to keep your own perspective from coloring the argument.
The emotions buyers carried with them into this short-lived but crazy boom were created and fueled by constant and carefully targeted marketing by realtors and bankers, and their lapdogs in the media.
And don't forget- there was a dual drumbeat pounded out by profiteers: Fear was just as loud a beat as greed. If joe homebuyer didn't buy now, prices would keep going up and he'd forever be priced out.
Not only are these homebuyers folks not the chief culprits, they also can't help insure the losses aren't socialized.
Monday-morning bashing of them for 'stupidity' solves nothing and avoids the more important matter at hand -- making sure those who took the money and ran get caught and pay their fair share of cleanup costs.
There are some fundamental reasons why you don't want them carrying 125% LTV.
First, the likelihood of continued performance is much less, even for primes. No seller ever wants to take a check to a closing and for many, no matter how 'prime' they are, it is not even an option.
Second, the overall market price gets permantly displaced upward compared to income. That perpetuates a problem of imbalance that will bite and bite and bite until it is removed.
If you could restructure your way out of a price bubble, the Dutch would have done it 370 years ago.
Does anyone know why Citibank is sending letters to existing morgagees with Spanish names demanding proof of citizenship?
Certainly this must be for national security reasons and not for loss mitigation purposes.
So the MBS system is broke. But where's the pain? So far there's been a lot of coverage of the pain inflicted on originators and servicers, but I think suspiciously little of investors' pain. And given the proliferation of RE investment in the last few years, shouldn't the effects of MBS system being broke be - well, systemic? Is that to be expected in the near future?
Abe, try this link from yesterday's Bloomberg. A Florida insurer suing Credit Suisse over losses in an MBS investment, claiming that the loans were fraudulent. Also suing Triad for not paying the PMI claims. We are just now starting to hear of investor pain.
Mortgage loans are not callable for any reason other than default or sale of the security property. No mortgage lender can foreclose on you just because you're upside down.
So you have borrower A, who is making the payments on time and who intends to continue to do so, on a loan that is now upside down.
You have borrower B, who is would like to make those payments, but is struggling to do so because they're $300 a month too high.
It may or may not be in either borrower's best interest to continue with either loan, but since they have little chance of selling without taking a loss they can't afford, there it is.
You seem to be saying that the lender should FC borrower B, just because the loan is upside down. That won't help the lender any, and it will destroy B's credit history, making future credit much more expensive. But I guess you assume B can rent for less than the mortgage payment.
Meanwhile, A continues to make payments. A's loan cannot be FC'd. A will have to wait out the housing market or just get used to paying a lot for housing.
Neither I nor Ranieri is talking about saving HPA. We're talking about saving homeowners from foreclosure. It is perfectly possible that keeping people in those loans--and that only works if they want to stay in them--will help stabilize values by limiting the REO flood. You're right that that won't help bring house prices down. But I'm struggling with the idea that lenders should be in the business of bringing prices down for future homeowners by refusing to do workouts with current homeowners, if in fact those current homeowners can carry the debt at the "corrected" interest rate.
Personal opinion, Abe, but I think: yes, it is to be expected.
The housing-investment-to-recession link has been pursued by many analysts, but there is also the fundamental notion that we are in a bubble that is a debt bubble, not just a bubble of overprices houses. If so, that must correct.
I was checking through a list of insurance companies a couple of weeks ago, considering stock investment options. Most hold significant amounts of mortgage backed securities in their portfolios. Of those MBS holdings, clearly some will underperform... leading to investment underperformance by the insurance company... leading to a decreased stock price. And so it goes. The $64,000 question is: when does the underperformance ship hit the sand of leverage?
Even if there could be some universal workpout understanding hammered out, it's my belief that a high percentage won't get worked out anyhow, in the long run.
Prices are the problem that required fancy ARM loans in the bubble markets in the first place. SOunds like a new gravy train is being engineered for the mtg business that only delays the inevitable foreclosures or spreads them out a little which will lengthen the downturn into a prolonged grinding recession.
No one actually gives a shit about the few unwary honest borrowers that may have gotten snagged (and I doubt there were truly that many in the first place). This is strictly about protecting the lenders and bondholders so the market remains orderly.
Tanta,
I'm not sure why you are asking this question; you know as well or better than I do why LTVs are important... and not just to the mortgage business but to all banking and financing in general.
It may be Ranieri's myopic problem to clean up a mess he sees immediately around him, but it is in the long-term interest of ANY business to keep the fundamentals in order. And beyond that, it is a social issue. "Stabilized" values is a fine short-term goal, but stabilizing them at an out-of-whack level is nothing but a postponement of the inevitable. Pay now or pay later.
wally, the more a lender forecloses, the further values will fall. I think we agree on that general market mechanism.
The further values fall, the more loans in a given book are underwater. More of them will fail as sale is not an option. Therefore, there will be more FCs, and values will plummet further, creating a new round of high-LTV loans.
What are you suggesting? That lenders keep driving LTVs up until everybody's underwater?
I'm sorry if I'm being dense here, but I just don't get it. Of course there's a social issue here, but I'm not sure that those conservative folks who have 60% LTVs today and will have 100% LTVs next year by the time we're done with the wholesale foreclosures are going to feel that their interests have been furthered.
Of course there's no perfect solution to this, either way. But I have more fear of a credit crunch and the effects of foreclosure epidemics than I do of modest levels of workout loans. I am not at all suggesting that there shouldn't be some punishment here for the lenders--far from it. But I'm afraid we're not going to punish anyone but the borrowers.
"did not anticipate the difficulties of modifying securitized loans, given the constraints of the true-sale requirement (which means that the sponsor/servicer cannot control the collateral, and youd have to get 400 bond holders in the Coliseum to vote on a loan modification). "
What's the difference betweeen modifing a loan on a foreclosure Vs refinance? Shouldn't the same constraints hold good for refinancing as well?
I'm sorry if you have already answered this question.
REBear, to an MBS, a refinance is a payoff: the borrower goes and gets a new loan from someone--paying all the closing costs again in cash or in the loan--and the loan proceeds pay off the principal held by the MBS. This is also called a "take out." That is, someone else takes out the loan.
A modification of a delinquent (not yet foreclosed) loan means that the noteholder/servicer makes some modification to the contractual terms of the loan without paying it off. Usually, it's a matter of reducing the rate, reducing the ARM margin, rolling some past-due payments onto the balance and recasting the payments, moving the maturity date out (which lowers the monthly payment), and so on. In extreme cases it could involve debt forgiveness (where the lender just reduces the loan balance).
The problem here is that refinances are no longer options for these borrowers in a lot of cases. Now that that party's over, the only workouts on the table are modifications (or short sales, which cost at least as much as mods).
What Fannie and Freddie are stepping up with, by the way, is an attempt at providing a refi option for that class of borrowers they believe can, actually, qualify under a better set of loan terms. It will mean that the agencies will be taking higher LTVs and recent mortgage lates in a refi--those are two things that are keeping these loans from being "refinanceable." Insofar as this strategy works, it means the GSEs will be "taking out" the loans from these subprime MBS.
Tanta,
If a modest level of workout loans would mean no credit crunch, then: great. But I don't think that will do it.
Maybe my perception of what is the problem differs from yours. I think the whiz-bang mortgage artistry is a fine sideshow, but too many people borrowing too high a percentage of their incomes to buy things for which they paid too much is something that won't go away without pain. That pain is going to come back on them, on appraisers, on mortgage originators, on mortgage securities investors, on homebuilders (already has) and on other homeowners who innocently had nothing to do with anything (but who now think they are rich but are not and who will pay higher property taxes on values that do not exist and who may borrow home equity to spiff up the place so someday they can sell it for a a price they will never get).
Oh well, maybe I'm just in one of those moods.
And, completely off topic: are you solidly in the ranks of cancer 'survivors' at this point? Or is that not a discussion for this board?
I'm certainly surviving cancer so far, Wally. My odds of having a recurrence are very high; that's just a fact about ovarian cancer. (Median 5-year survival for cancers at the stage mine was at diagnosis is still about 20%.) But I have no evidence of metastasis at this point and I feel a great deal better than I have since my last round of chemo ended. I still have some problems related to old surgical complications, but they are receding as my immune system improves. I may never run the 4-minute mile again, but by jimminy I can still type 90 wpm. I beat the odds every day just by getting up in the morning. Anything more lively than that is just gravy. And I will take all the gravy I can get.
IMO, which may well be wrong, current legalities imply that most of these loans will have to be reworked as payoffs. I don't think there is room in these MBS structures to do the type of wholesale mods that would do the job. It's not just the passive/active issue - it's also the highly tranched structure. My guess is that the result of major loan modifications would weigh unequally on trancheholders, and thus spawn a legion of lawsuits. Your thoughts? You know way more about this than I do.
Another major question to me is that if we take the people who could pay out of these subprime pools, what will the resulting losses look like? One way or another, the takeout now looks like it will happen. It seems to me that the questionable issues rely heavily on getting a relatively high payout from those who can be milked further in order to balance the high default losses.
It might be better if law changes were made to allow retaining the loans and doing reworks. Just a thought.
PS: If you are a communist for your ideas on this issue, than I must be a communist. I'm guessing that the vast majority of American citizens would also be communists by that definition.
It's not just the passive/active issue - it's also the highly tranched structure. My guess is that the result of major loan modifications would weigh unequally on trancheholders, and thus spawn a legion of lawsuits.
MOM, I think you are probably right about that. Interestingly enough, CS just came out with a special report (behind the paywall, sorry):
Loan modifications are a double-edged sword. They can lessen ultimate losses, but may also reduce excess spread, delay losses to when excess spread is lower, and mask true borrower hardship. For these reasons, servicers should utilize loan modifications prudently and should enhance their current modification reporting.
Moody's also says this:
Some residential mortgage securitizations have limits on the percentage of loans in any one securitization pool that the servicer may modify. Moody's believes that restrictions in securitizations which limit a servicer's flexibility to modify distressed loans are generally not beneficial to the holders of the bonds. Loan modifications, when used judiciously, can mitigate losses on mortgage loans. Consequently, while loan modifications cannot eliminate losses or generate more credit enhancement for a given transaction, we believe that they typically have
positive credit implications for securities backed by subprime mortgage loans.
But there will always be tranches who believe they have been screwed, and undoubtedly will be some who do get screwed. So it will be interesting to see how the "class warfare" plays out.
Tanta - I think REBear and others are getting at a good point. What are the differences between 'workout' and 'refi' - the practical differences, not the formal differences. There are two sets of issues that Ithink matter. One is that the holder of the credit risk is an existing bag holder, and the holder of the credit risk for the new loan is a new bagholder. In some circumstances, the old and new bagholder are the same, so this makes life easy. A reason for FHA streamline refinances is that FHA is the current bagholder, and even if the loan is underwater or the borrower has employment issues, FHA can't be worse off with a new loan on better terms than they were with the old loan - they don't increase their risk by refinancing even a pretty shakey FHA loan. To the extent that the credit risk bag holder on a troubled loan can be identified and agree to take the risk on a new loan, this isn't an impediment to using refis in place of work outs. But in a highly tranched world, with insurance and reinsurance and CDOs, oh my, it's hard to identify one bagholder who might agree to remain the bagholder with a new loan, because their odds are a little better.
The other issue is one of costs. A new loan entails new origination costs, recordation fees, etc., which can be pretty nasty in some jurisdictions. And there's a prepay penalty issue with a lot of these loans - a mod isn't necessarily a prepay that triggers the penalty, but a refi clearly is.
Tanta,
You write like a dream. I wish you the exceptionally very, very best with your cancer. I pray for you.
Changing the subject to mortgages, what appears to be the case is that there are a ton of basically dishonest loans out there which the weasels have deceived folks into signing.
What I fear is that the weasels are going to get those loans fixed up at taxpayer's expense under the cover of helping poor people out of a jam...kind of like Halliburton rebuilding Iraq.
Tanta, an exceptional piece. Once again, you're way ahead of the MSM in terms of analysis! Seriously, you should be charging for your thoughts. I am grateful you aren't though.
Cathy-
Some people took these deals because they thought it was their last chance to get a house. It's easy on this list to laugh at them, but the crowd has miscalculated before: Katrina, Long Term Capital Mortgage, Enron.
MOM writes: It seems to me that the questionable issues rely heavily on getting a relatively high payout from those who can be milked further in order to balance the high default losses.
and this concern is related to wally's general thrust that prices have to come down (ok, wages up then) as those that have milked the system for all they could get, have collapsed the cow.
The investors who thought that they were owed a double digit return just for having money are the only ones with the milk and there seems to be a sliding scale about who is going to milk who in that crowd.
Don't see how housing gets back to normal (roll the clock back 6 years) and inclined to think we don't see a more equitable distribution of income/wealth that allows people to buy homes from wages/salaries in the next few years.
A self-asphyxiating housing market in an economy that is short on alternative breathing apparatuses.
"But I'm afraid we're not going to punish anyone but the borrowers."
Who shall be punished, that is the question. Those who borrowed irresponsibly, or those who refused to?
NorkaWest
As John Lennon sang
Instant Karma's gonna get you,
Gonna knock you right on the head
Amusing that they are suing Triad over not paying claims. I notice that post says that they are part of Conseco. There's an outfit that should know a thing or two about mortgages.
If I was a holder of AAA tranche why would I ever agree to any workout? Workouts are to save the borrower and lower quality tranches. I wasn't paid for the risk, so why should I bear any loss? Am I wrong?
Lurker, it might depend on how old your nice pretty AAA is and how many future losses you think you might take. If you let the subs get whacked on early defaults while the whole deal's still a year old or less, then there may not be much credit support left for you in a year or two when the "normal" defaults set in. Of course you may assume you'll be paid off by then. Or that a notch down to AA+ (not because you lost anything, but because your CE is down) won't hurt you.
"As I said earlier, we're in a housing recession but more importantly, they argued that looking at the production, the subprime production, in those five or six quarters that as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA. That's a pretty profound statement because a subprime loan is, at best, [an] eight plus coupon."
I would love to chat with Ranieri about this comment/opinion. Ranieri may know how to securitize a loan, but he must know zero about credit and qualification. The fact is VERY FEW of these so called subprime borrowers would have qualified for A paper loans.
This blog has spent a lot of time criticizing the loan standards(or lack thereof) that had evolved during the time home appreciation was canceling out loan delinquency. How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?
Anyone who shares a belief in this theory just does not know any better or is being dishonest.
"How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?"
If you admit to one dishonesty, how can you claim innocence of other charges on the fact you admitted to that dishonesty.
The missing half is this: home prices wildly outran incomes for about 4 years. If home prices had not done so, people would not have resorted to 'exotics' in the first place
Prices are driven by wealth -- be it cash or credit, rising household (nominal) wages, falling interest rates, loan structuring innovations (eg teaser rate), speculative demand for the asset class, and the wider public sentiment to not be left out of the mania/party.
In the 90s in the SF Bay Area, the dotcom IPO mania brought immense cash wealth to the area, which saw a RE bubble blow through 1998-2001.
Prices cooled off a bit in 2002, only to be driven up again by the increased availability of mortgage credit (lowered credit standards wrt FICO, LTV, reserve funds), falling interest rates, borrower qualification on only the teaser rate payment, and speculator flippers who were able to abuse the above to fuel the demand side even more.
In short, I believe wally's above statement is putting the cart before the horse.
How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?
Obviously these aren't completely compatible.
If 50% "could" have gone through GSE agencies as a conforming loan, then the subprimers are much better credit risks than has been supposed and the hedge funds buying the subprimes from the imploding lenders will really win.
Somehow I doubt this is true. 50% may have been 'theoretically' able to get GSE loans if the numbers were honest but they probably aren't. Do they really have cash for 10% or 20% down?
The people who are good credit risks are probably furiously attempting to refinance right now and pay those egregious fees.
Matthew - one of the problems is that because of loan terms, some of these borrowers may now be in more trouble and less likely to get refis. Sure, they could originally have gotten close to prime rates, but now they may have been pushed further out on the plank by higher interest rates and funkier loan terms combined with declining home values.
The unpleasant reality is that a few hundred dollars a month often makes a big long-term difference to such borrowers. Write good loans for them, and they can wind up prime in a few years. Write bad loans for them, and they can easily be pushed firmly into the subprime camp. Many of these borrowers in the more bubbly areas are now underwater when they weren't, and they now have drained their reserves and run up the CC debt more.
This is not a proud moment in the lending industry, for good reason.
"However, the point remains: you cannot move people from the current higher combined rates to a lesser agency one even if all entanglements were removed because a deal has already been struck on the underlying property at too high a price. That is the essence of the bubble."
Lets not forget that this is a world wide credit bubble so unwinding will be dificult, consider getting all the players into the same room with the same objective: bailing out everyone in the room!
Tanta: You quoted Moody's suggesting that limits on the percentage of loans that can be modified in a securitization may limit a servicer's flexibility. I am interested in the implications of this for MGIC's C-BASS, which holds the residuals of a lot of subprime securitizations. In a much older post, you spoke favorably of MGIC (or maybe specifically of C-BASS), suggesting that at one time they had a great loss mitigation department. But does the Moody's comment generalize to C-BASS? (I realize you are not likely to have specific information about MGIC, but I am trying to understand the parameters of the problem.) Thanks, and best of luck with your health -
Although I have no doubt that customers were steered into lower quality, higher fee generating loans... can the highly questionable 50% number be due to gross overstatement of borrower incomes? Yes, the income would have to be verified for a GSE, but it never got that far did it?
IMO this is just another nail in the coffin. No amount of "workouts" will save this market. The money simply isn't there and never has been.
Tanta, thanks for sharing that. That really puts some cherry on the icing for the arrogant innovators, whose greed and short-sightedness has build up the greatest housing bubble in history.
Somehow, I'm not convinced this accounting dilemma rests at the exclusive 05-06 subprimes, though.
This Lew Ranieiri speech reminds me of Greenspan's recent speeches trying to warn in code that the end is nigh, while wrapping it in the language of Manageable Problem to keep those not in the know from panicing.
Everyone should have known that if you don't have skin in the game, you are subject to moral hazard and shouldn't be originating loans. I personally feel the subprime mortgage industry was deliberately constructed to reap as much fee and interest money as possible and then disappear into bankruptcy courts, thus hiding the true robbers from prosecution.
But none of them would have had so damn much money to lend in the first place, if it had not been for bank deregulation in the 1990's, and the Fed's easy money policies making all that credit available. Any person who listened to Greenspan during the recession and took out an adjustable loan should have KNOWN that if the Fed could not keep rates low, they would be screwed.
Is the Fed guilty of enabling a massive pump and dump? Frankly I think the Austrians are right. Ban private central banking.
Thank you, Calvert. I'm not exactly sure, but I would wager that the "best of the combat servicing operations" Ranieri is referring to here is C-BASS. Before reading Ranieri's remarks, I would have been skeptical of the idea that C-BASS would be running its loss-mit "magic" (that's an old MGIC joke) without knowing damned well what its legal rights are or are not. Ranieri's comments suggest that servicers are at more litigation risk than I at least have thought. That is uncomfortable, to say the least.
It does shed some heat, if not light, on that business of Banker's Life including Triad in its suit against CS, which I have to say sounds pretty ridiculous to me on the face of it, but I don't have the complaint in front of me, just the Bloomberg piece. MIs are famous, far and wide, for being big loss mit proponents. If the MI policy is good only to the extent that the MI's loss mit rules are followed, and the security won't/can't follow the loss mit rules, well, someone's going to court. The MIs won't stand around paying claims left and right for insta-foreclosures with no effort to even try working out the loan in eligible cases first. And they will not and never have paid for fraud or misrep. That's not even in the fine print of the policies; I believe it's in bold italic caps somewhere near the second paragraph. So suing Triad for refusing to cover claims on fraudulent loans is pretty rich, especially coming from a life insurer!
This is going to end up looking like nickel beer night in Mos Eisley.
I have no sympathy for the vast majority of people who took out these loans. Remember, two things motivate people - fear and greed. The greed pushed them to the point of stupidity (buying homes at presale hoping to flip them at huge profits) and now it is fear that has them all crying foul. (the music stopped and they were left without a chair).
Sorry, I've been in this business for 20+ years. 98% of the problem loans are due to consumer stupdity. I've told people they shouldn't buy a house, only to have them get indignant that I would pass such judgement on them. They went elsewhere, bought the house, and now they are in foreclosure. Good!
I won't deny that some were taken advantage of, but it's maybe 2%.
Tanta, I think this is the most important post you've done to this point. SFAS 140 sales accounting is absolutely critical for keeping assets off-balance-sheet. A couple of years ago, there was loose talk of Fannie having to find up to $30 billion more capital because of sloppy QSPE documentation, and that was just the accounting. These vehicles are used to share risk (or maybe just to hide problems under the rug). Start tearing them down, and this whole house of cards may start to fall over.
How about a simpler view? Abroker has to by law offer any program available to them to any potential borrower that asks. If they think the borrower is committing fraud, the broker can't say no just on conjecture. If they do say no just because of a hunch, the broker will be sued for discrimination because the borrower was a Smurf or Cenobite or whatever flavor will make the jury cry. So we have even the most unsophiticated borrowers being educated by the MSM as to how to perpetrate a fraud. If they do get turned down they have garnered enough information during the turndown process to go to the next lender and next using each as a dress rehersal for the big lie.
The broker is a 'per piece' salesperson just like a car salsesman or the girl at Nordstroms that tol you how fine you looke in that puke green shirt.
houses prices should be at 2.5 times the borrowers income. Let me redress that; the LOAN should be at 2.5 times the annual income, down payment gets you into a nicer house. You buy a mortgage, not a house. Joe lunchbox got on board thinking that he had a new and novel idea called flipping. almost every case I've observed [I'm in the business of observing such things] have always involved a school teacher marries to a civil servant [more or less but the same lunchbox crew plus a liberal arts BA and a 401k]. Someone who just shouldn't be speculating, they should be saving. So here it is; 2.5 times incom plus downpayment is what neighborhoods will fall back to for pricing. Foreclosures will help drive the prices down, but the borrower shouldn't have been in that neighborhood anyway. Credit will go back to 1989 standards for home purchase. Appraisals will agian say that the value of the home was based on 'highest and best use' of RENTAL INCOME. The MSM seldom puts out a 'cry' story anymore without a disclaimer. The most brilliant one I saw recently started with an intro of someone losing the home they grew up in and ending with the fact that the turd took out a $170k mortgage to fix up the house and send a stepkid to college, then his wife quit work at the PETSHOP and he is quitting his job to tap his 401k in hopes of swaving the house.. So few of the buyers will lose the house reasons that they did not instigate. Lastly, why is it bad when food and gas prices increase but bad when houses decrease? It's shear greed to think that just because you lived in a home for 3 years you're entitled to make $200k more than you paid.
Ranieri's comments seem to be lumping Fannie, Freddie and FHA/Ginnie together. They serve two very different homeowner constituencies.
Ginnie focuses on first-time and low-income homebuyers. The explicit government guarantee is a way to support home ownership by people who previously didn't have access to ownership. 3% down, 97% LTV is typical.
I can't find a link for my source, but Congress and FHA bureaucrats have acknowledged that the FHA/Ginnie programs have not been well-marketed over the past few years, and many people who got subprime teaser-rate loans that are in pain now could have gotten an FHA loan if they'd only known about the program.
Contrast this with Fannie and Freddie, who, as best as I can tell, have no obligation to lend to anyone above an 80% LTV and strict underwriting requirements.
Also, Ranieri's comments about the difficulty of restructuring the loans should be applied differently to pools with guarantees vs. private-label MBS. Ginnie, Fannie and Freddie guarantee the payment of principal and interest for agency MBS. Bondholders don't have to "get together" because Fannie is the guarantor. The private-label stuff like CBASS pools carries no such guarantee.
"as much as 50 percent of that production could have gone to the agencies.."
Lou has lead you guya a little astray here ..
could have and would have are two differnt things ..
Yes FH/FN take 625 FICO's at 75% LTV and yes those loans are in these pools.
However, the capital markets are extremely effecient at getting full value for a mtg asset ..those loans went to these deals because the price was higher ..said another way ..FH//FN would have taken them and charged a very high fee to guarantee them ..then the fh/fn pool backed by them would have sold in the seconday maarket ..
during the drunken mtg orgy of 2005/2006 the bonds backed by these things were trading so tight that the seller could get more for them in a private deal than w/ a Fh/Fn deal net of the guarantee fee
..
thats more because of the rating agy's being completely asleep at the wheel
Lou is leaping to the conclusion that just because they can go Agy the homeowner would have netted a better deal. It's just as likely that the borrower got the same deal and the seller of the loan got a better deal..you can argue that as the market figured this out, competition may have netted the borroer a lower rate ..anyone looked at subprimme mtg rate in 1998 when FH/FN used to be relevant ?
It's a big market, I'm sure there are examples of everyone being at fault ...borrower/broker/underwriter/fed//
The dumbest is making a loan you know the borrower can't pay ..2yr pmt @ 50% DTI ..then payment goes to 100% DTI ?? I guess i'm just confused how the schmo that leant the money is to blame for the borrowers problem on that one..seems like the lender (bondholder) will get back 50c for every $ leant(invested) ..you gotta do allot of volume to make those economics work out !
There is a bright side to all of this ..very little of this risk sits on American balance sheets ..its in Arabia/ and the far east ...so that $75 dollar a barrel of oil gets sold ..and the dollar gets invested in this junk or, neg real rates, or any other ridiculously priced financial asset..then they lose 50%..
it's the circle of life for unsophisticated investors w/ allot of oil or labor that they are swapping for dollars.
markets always find the patsy ..in this market it's not the borrower ..it's the invetor
well this is my first ever response to a blog ..i hope when i hit Publish it doesnt evaporate !
So it's hard to remove the millstone from around your neck when it is tangled among the ropes of all the other millstones around all your peers' necks?
Or do I misunderstand?
I think you pretty much found the shell the pea is under, giacutter, although one should never downplay the extent to which it's a millstone only because you tied your rope to someone else in the first place. Had we allowed these risks to remain "concentrated," we might be seeing a "concentrated" effort to resolve some of them.
Hmmmmm so the innovation was supposed to spread risk and allow default without wiping out an investor and instead it relies on "19th century clearing methods" that the NY fed needs to look at with some urgency?
"Bondholders who may well understand that it is in their best interest to allow modifications of loans will discover what it will cost in legal and accounting fees to do that...Risk dispersion means never being able to get all your risk holders into the same room to hammer out a plan."
Good God, Tanta. This is probably the most groundbreaking (groundshaking) view of the mess I have ever read. Many, many thanks for posting. Opened my eyes way more than the morning coffee.
First thought is this is the best Exhibit A I have ever seen for what kind of damage trail you leave when you let lenders go wild.
Second is, there is no other way to fix this mess besides a heavy hand of gov't or courts-rewriting laws and cutting through these now-impractical requirments. Maybe it's a new murphy's law of sorts, or vicious cycle: An utterly unchained market is destined to morph into a chaos that can't be fixed without chains.
It looks like this will not be just herding cats but herding angry, wounded cats. If this is the situation, and this is the work-out method, there are not enough securities and tax attornies in the world for this. Time for a few calls to Washingon to get some new laws and regulations written to save the originator and packager.
I think the "dark matter" blathered on by economists is starting to show up, like rat shit in rice. Hey its a great analogy-I lived for a while in a country were we had to go through the bag of rice grain by grain to pick out the dark pellets of rat shit before cooking-the other option was to toss the rice in water and watch the pellets disappear by melting into the water. One way was slow but sure, the other was fast but sure could be deadly. And the dark pellets that happened to be stones instead of rat shit would crack your teeth even after cooking.
Maybe make that, "a chaos that can't be fixed without even bigger chains"
Had we allowed these risks to remain "concentrated," we might be seeing a "concentrated" effort to resolve some of them. - Tanta
If I understand this correctly, we'd prefer soap on a rope. We'd have 2 risks, but at least they'd be concentrated and therefore more manageable.
Unfortunately, we've got soap AND a rope. The soap is under a foot and the noose is around the neck. Not only does it increase the chances of stumbling, but also makes the recovery somewhat more difficult.
(I'm hoping I've pulled off a first here today. On topic AND gallows humor.
)
"That means, among other things, that the risk premium these borrowers are paying is likely causing their defaults; if they werent subprime the day they got the loan, they are now. The theorists of "perfect" pricing of credit risk have some explaining to do. "
It seems much of that added risk that they were put into went as production fees for the whole chain:
Loan broker
Mortgage bank
Wall street securatiztion.
They made the money upfront.
Milken Institute Conference on financial innovation? THAT's irony!
The Problem isn't just limited to those who need their loans restructured. I just finished representing a client who was attempting to sell a plot of land and when the title commitment came out found that his property had been encumbered by an already securitized deed of trust.
Even though the Borrower under the Deed of Trust never owned the property it encumbered, and we could prove it, it took us 6 months to finally get someone to release the property, as the servicer, originator, and trustee all pointed fingers because they could not go back to the bondholder. We ended up having to shell out like $5,000 for a REMIC opinion stating that the scriveners error did not affect the rating of the securities, not to mention our legal fees over the six month period to get the property released before the prospective purchaser purchased the property. It was nightmare.
"as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA. That's a pretty profound statement"
The understatement of the year, I think. I always assumed there were some exotic loans went to people who could have qualified for conventional loans. Either because they were steered, lured by the teaser, or because they were too clever by half and took the teaser assuming they could refi before the payment shock. But I assumed there weren't that many. That the great bulk of the exotics really did go to people who otherwise couldn't have afforded to buy.
This puts another face on bailout proposals. If there are a great many people in unaffordable exotics who could (still?) qualify for a conventional loan, at least if one could get round appraisal problems, there will be pressure to find ways to refi them into conventional loans.
Jim,
How can you qual to a conv loan if you could only afford the teaser rate ?
The "exotic" drove prices up. Now that home prices are going down (not enough) would someone reduce the loan amount owed ?
you can not turn back the clock and restart the whole process with a new loan and a new price-tag for the home.
If there are a great many people in unaffordable exotics who could (still?) qualify for a conventional loan, at least if one could get round appraisal problems, there will be pressure to find ways to refi them into conventional loans.
Well, yes, and that's what Fannie and Freddie both stood up last week and said in front of the House of Representatives, and a whole bunch of people went batshit over "bailouts."
The thing is, just because the loan is GSE-quality doesn't mean the GSEs have to be the buyer; any of these bozos could be issuing private-label pass-throughs full of agency-quality loans. But they won't do it, because they can't make the bucks on that.
WAMU and Citi and everyone else who has so publically committed funds lately for workouts are just cutting losses, and the fact they're willing to do that tells you that they see a bunch of loans whose quality justifies a rate step-down. If that isn't a public admission that predation has gone on, what is?
Program on PBS last night
Past Due and Pay Day . NOW | PBS
Housing in the United States is taking a big hit as "too-good-to-be-true" home loans fail, refinancing dries up, and foreclosures surge. How did the market plummet so quickly -- and are current homeowners paying the price? NOW revisits a California town whose real estate fortunes have taken a hard turn for the worse.
Yal, you're missing the point. If 50% of those loans qualified under Fannie, Freddie, or FHA rules, then they could have afforded the payment. That's what that means.
The other 50% are the ones who could only qualify with a 1% teaser OA.
The other 50% are the ones who could only qualify with a 1% teaser OA.
So, what fraction of those who could have qualified under GSE rules but unknowingly went exotic, is considered an acceptable figure?
It may seem difficult to get 'everyone' to agree to loss-mitigate this MBS mess, but during the 1998 LTCM collapse/global financial armaggedon, the NY FED summoned the head-honchos of the major financial institutions/lenders to LTCM and basically said "You guys are not leaving until you figure out how to fix this disaster". The NY Fed didn't need to lease a convention hall, football stadium; no lawyers; just the CEOs in the room, and CEOs figured out a plan.
So, why not just get the CEOs of the major financial institutions with the biggest stakes in this MBS mess and not them leave the meeting until they figure out how to loss-mitigate?
So, why not just get the CEOs of the major financial institutions with the biggest stakes in this MBS mess
Who would that be? The major financial institutions who securitized this stuff in the first place precisely in order to get those "stakes" off their books?
Do you really think the Fed could withstand the wrath of 8,000 bondholders who saw their holdings go up in smoke while Bernanke cut a deal with Citicorp?
FMOSOYFMT:
Because the problem is too big.
Lightning starts fire at Okla. refinery
Yahoo! 404 - Page Not Found
Flames and smoke boiled hundreds of feet into the air from two 80,000-gallon tanks in the Wynnewood Refinery complex, officials said.
The refinery processes about 50,000 barrels of oil a day and employs about 185 people
Maybe we are all coming to Jesus at the moment? If nothing is done then the US economy will implode and the whole world will go down with it.
Inconsequential bondholders can be destroyed...important ones bailed out....
Lets be optimistic here
The chinese have $1,300,000,000,000-00, and you have all been wondering what it is going to be spent on. If that does not get spent the world implodes. God knows how many billion chinese will then rip the chinese leadership apart. Its an easy call:-)
So, what fraction of those who could have qualified under GSE rules but unknowingly went exotic, is considered an acceptable figure?
Let's consider how it is that this estimate is derived.
Just about every lender in the universe runs all its loan apps through Fannie or Freddie AUS first, as a prequal measure. They don't have to sell the loan to the GSEs in order to do that; the GSEs just take their $30 a pop or whatever the current charge is for using the AUS and the originator can do whatever it wants to do with the loan.
But the GSEs therefore know how many apps are hitting their dbs, getting an "accept" response, but going elsewhere. The reason these numbers being tossed around are estimates is that someone is sitting down and trying to map those loans the GSEs know about with the loans that got originated into subprime securities.
So we can just stop, pretty much, obsessively focussing on borrower ignorance, if it is in fact a fact that the originator knew all along that the loan could go GSE. That is the implication of this data.
What's acceptable? You tell me. Do you think there is any fiduciary responsibility of a loan originator to put you in the best product you qualify for?
Worried if you want to worry some more:
FSO Editorials: "China's Great Depression" by Krassimir Petrov,
PhD 09/02/2004
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After watching the NOW program, I'm conflicted over the demise of people who are in these situations. On the one hand, I hear their stories and think that they were just a bit greedy and didn't want to know what could happen if the market took a turn for the worse and where they would be when or if it could happen, and just buried their heads in the sand. On the other hand, and this will sound like I think I'm smarter than most of them, maybe they just don't have the intelligence to see the big picture. But either way, they don't come out looking too good in all of this.
What's acceptable? You tell me. Do you think there is any fiduciary responsibility of a loan originator to put you in the best product you qualify for?
I guess that was a loaded question.
I would say that there's no acceptable figure from the borrowers' perspective, but from the originators' point of view, there must be some amount of GSE-qualified borrowers that originate with a higher interest rate and don't default. Also, the regulators must have some threshold (probably below 50%) before they consider the activity "predatory"
It would be a wonderful world indeed if the vast majority of these FBs were genuinely duped by their LO into taking a higher rate than they needed to. I just can't believe people were that stupid.
Tanta, btw I know ALL about syntax. It's the extra fee that hooker charged me last time i was in las vegas!!!
"as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA"
I'm not sure I buy this statement. The missing half is this: home prices wildly outran incomes for about 4 years. If home prices had not done so, people would not have resorted to 'exotics' in the first place. The "housing mess" is not simply a loan issue, it is also a price issue - there IS a bubble. The confluence of the price bubble and the mortgage abuses is what makes this as severe a problem as it appears to be.
Max
I think you are being unfair. The system itself encouraged people to take out exotic loans they could not afford in order to get a head start towards the wealth that many of us in some manner leveraged off our parents to obtain. Was that fair? No. And that system implicitly gauranteed the borrowers loans by historically preventing recessions by several times allowing easy credit rather than cleansing recessions.
Because the borrowers knew deep down that they were taking part in an unreal wealth creation sanctioned at the very highest level of the system it did not really matter to them that the whole scheme seemed stupid or impossible. If they were daily bombarded with advertisements that you just had to do this thing under the watchful eye of all the authorities, then how bad could this bad thing they were doing turn out to be? They knew they were doing something bad but the bad system said it was ok. Surely with such a belief system it would then be hard to believe that it was possible to actually get a better deal via a government agency such as FHA? They felt fraudulent but i think they deserve some slack because the fraud when all the way to the top.
But wally, why does that make you doubt the 50% number?
Try it this way:
To be honest, I hear a lot of this "I can't believe people are that stupid" from people who--present company excepted, of course--wouldn't know what the current coupon is on a conforming loan if I gave them the entire internet and three hours to find it. And sure, all these hindsight TV shows that have all the intellectually-superior in a knicker-twist are now telling you how bad these deals are, but what were they telling everyone two years ago?
And finally, I have no intention whatsoever of bashing Lew Ranieiri--he's a smart guy and he's doing his best to put it all right. But the fact is that he didn't see where all this was headed. And there are a shitload of institutional investors and miscellaneous masters of the universe who bought these bonds with no idea what their true risks were. I remain overwhelmed with disgust, frankly, that these folks get a pass, but just rank and file normal decent garden variety people like my parents, who couldn't define neg am if you put a gun to their heads, are expected to outwit Wall Street.
We need to keep more than one idea in our heads at the same time.
Both Gold and R/E are less apealing lately ?
kitco.com - Site Info from Alexa
It wasn't clear to me, you know, what this meant:
Note: This is a rush transcript, not a final one, of oral remarks.
but, you know, after the first sentence I, you know, got it:
People asked, you know, is financial innovation, you know, reaching a...
A couple of things stood out for me: the narrowness of the window (from the end of the 3rd quarter of 05) through which most of the trouble came through; the many, many, (you know, a bunch, a whole bunch) people who got into housing who might not otherwise have; the remark that half of these clients did not need to resort to sub-prime.
Can we have the envelope that states how many people got into these loans...who were not already "playing games"? (The % ownership stats from q305 to the present day would be close enough for me. Weren't we already on 68 or 69% --up from the traditional 65%?).
The robbers plea that they were lightening the burdens and providing a service for their victims has not changed much over the years. (It B their lawyers, lawyers lightening the burdens of their own clients who are too witless to notice this lack of imagination, no?)
Totally convincing:
Securitization of loans did not, actually, eliminate the risks inherent in property markets; it seems to be capable, in fact, of magnifying those risks.
Tanta,
I do not doubt the implications of what Ranieri said - it is an excellent point that actually has come up, marginally, on this blog before (for instance, in discussions about Wells as a loan 'servicer'... what rights and obligations do they have in the foreclosure process) and I really am not qualified to say if 50% is a good number or not - but I bet Ranieri simply pulled that number out.
However, the point remains: you cannot move people from the current higher combined rates to a lesser agency one even if all entanglements were removed because a deal has already been struck on the underlying property at too high a price. That is the essence of the bubble.
Calmo, I think the best that can be said on that particular point is that Ranieri left out a couple steps in his argument. You're right, of course, that we didn't goose the homeowner percent in just the last six quarters.
What we seem to have done--looking at the vintage analyses--is just finally jumped the shark in the last six quarters. In other words, I think Ranieri is saying that it would have been manageable--if not exactly a walk in the park--until all hell broke loose, finally and fully, with standards in 2005. That is not to justify what went on prior to that (certainly not for me, and I don't think for Ranieri).
Wally, if people can carry the payments on a price that's too high, why not let them? Why force them into foreclosure? If you are correct and it is simply factually false that there are significant numbers of borrowers who can carry those loans at a near-prime interest rate, then we'll find that out. But I'd personally be surprised if Ranieri is getting made-up data from somebody and doesn't know it.
A few disagreements and notes on the last few hours.
1) Tanta - Ranieri doesn't give a source in this transcript, and I'd be surprised if it was much more than a SWAG, and doubt that it's from AU apps. To get that number from AU Apps, you'd note some wild guess about FHA (because FHA doesn't keep any kind of track of these apps) and you'd need to know how many loans are being run through both systems vs. just 1, and you'd need both GSEs to share all that privileged information. They don't even publicly release the number of submitted apps. I'm guessing that it's just Loan Performance data. And if either of us is right, it misses an important point - without the gonzo overdrive underwriting (or lack thereof) of the last couple of years, prices would be lower and more people could afford conventional or FHA payments, so wouldn't have been forced into the other stuff.
2) Tanta - not sure that I'd agree that this is proof that the loan terms are causing the defaults. Remember, he included FHA, so many of thse 'could have qualifieds' probably could have qualified FHA. And FHA is predicting a cumulative claim rate of almost 20%, right in line with the projected subprime claim rates that the industry derides. So if you moved a bunch of risky borrowers from subprime status to FHA status, why would you expect much of a change in default? I think the general observation is true - somebody paying $1200 a month is less likely to default than the same somebody paying $1800 a month, but I don't know that these stats constitute any additional evidence.
Finally, Ranieri's transcript talks about triggering 1099s, which sounds like he's talking about 1099s to the borrowers for loan forgivenness, but the bigger accounting issue, that he mentions but doesn't go into, is the Q election. The pool has to be passive or it can't be a pool, but if the pool is doing loan mods then that's active behavior, and inconsistent with their election to be a 'passive conduit' and remain untaxed. The natural leader for any restructuring is prohibited from leading - that will be the biggest issue going forward.
90 days warnning: (???)
The Big Picture
" if people can carry the payments on a price that's too high, why not let them?"
For all the same reasons that loan-to-value-ratios have been and always will be important.
mort_fin, as far as I can tell that 50% number being bandied about is coming from Mudd and Syron. Did you read their testimony last week? They explicitly made reference to data gathered from AUS responses in their testimony.
Wouldn't you expect FHA's projected defaults to change if some hypothetical pool of decent quality borrowers had not been siphoned off in to either GSE or this hypothetically mispriced "subprime"? I have my concerns about the quality of the FHA portfolio, but I still also think it's getting cherry-picked. So I'm not yet inclined to agree fully that borrower direction back into FHA would make matters worse.
Tanta,
Hmmmm, more or less as I surmised a week or so back.
Seems to me we have a Prisoners' Dilemma here, with the added problem of time constraint. If so, I would expect Neal's excellent analogy of "herding angry, wounded cats" to prevent timely restructuring unless there is heavy coercion from above.
This level of coercion is unlikely until at least some horror stories have impacted upon the collective consciousness.
wally, I don't understand your response. You can have a loan at 100% LTV--or 125% LTV--that is "performing." That means the borrower is making the payments. If a borrower is willing and able to continue to make payments on an upside down loan, why should we not allow them to do that?
tanta - no I didn't read their testimony, just the press coverage (always a mistake). So it's probably a better SWAG then I was imagining, but still is a SWAG, as there are a lot of unknowns that have to be guesstimated, and if the GSEs ever tried sharing their apps data I think there are some antitrust litigators who would be fascinated at the news.
I'm not maintaining that a move from subprime to FHA would make defaults worse, just doubting that it would make defaults better.
You know, mort_fin, the first thing I thought of when I read Mudd's statement last week was, holy shit, the subpoenas are coming. If those litigators aren't finding those feedback certs stuffed into the back of those subprime loan files, they'll be asking the GSEs to cough up.
And sure, all these hindsight TV shows that have all the intellectually-superior in a knicker-twist are now telling you how bad these deals are, but what were they telling everyone two years ago?
I remain overwhelmed with disgust, frankly, that these folks get a pass, but just rank and file normal decent garden variety people like my parents, who couldn't define neg am if you put a gun to their heads, are expected to outwit Wall Street.
I don't think anybody is giving them a pass. I just think the borrowers deserve some culpability here. One of the great things about capitalism is the variety in the marketplace. Didn't any of these borrowers shop around a bit before making the biggest financial decision in their lives? Even if TV told them to do it?
Max, I'm not falling back on the "TV made me do it" thing.
You know, of course, that the whole idea of the mortgage broker is supposed to be that the broker has access to several dozen lenders, and so a borrower can deal with one broker and get "the benefits" of having his loan placed at the best possible price. Right?
If you're suggesting that we suggest to everyone that they talk to three different brokers (who are all working with the same several dozen wholesalers) to make sure that one of those brokers isn't steering toward the best back-end point deal, then we're getting to the point of establishing that the broker system is broke too. I'm in full agreement with that. That's my point about "fiduciaries." If you cannot hire someone to find you the best deal, then there is no point in hiring someone to find you a deal. But try finding a retail loan officer in most neighborhoods these days.
What a truly wonderful post and discussion! Oh, I love it!
Tanta, how dare you suggest that Chuck Prince permitted predatory lending at Citi! How dare you suggest that he threw sand in the eyes of borrowers to convince them to borrow from him at usurious rates when they could have had a GSE loan!
Un-American doesn't even begin to cover it. You are allied with Al Qaeda at the very least!
And you most assuredly have explained to me why there are two views of risk on Wall Street. Oh, that is coming into focus like crazy. There is the perpetually depressed bear view that, once again, confuses ignorance with understanding and there is...Chuck Prince, who promotes ignorance with all the purebred fiber in his sleek, tanned, personally-trained body.
Tanta, you are a Communist, and I suspect you are allied with Hillary Clinton.
A great book about Lewis Ranieri and how he started the MBS market at Salomon Brothers is Liars Poker by Michael Lewis.
If you cannot hire someone to find you the best deal, then there is no point in hiring someone to find you a deal.
Point taken. I've never been a very trusting soul myself; that's why I'm so incredulous when I hear these tales of woe from the borrowers' side. It's hard to keep your own perspective from coloring the argument.
The emotions buyers carried with them into this short-lived but crazy boom were created and fueled by constant and carefully targeted marketing by realtors and bankers, and their lapdogs in the media.
And don't forget- there was a dual drumbeat pounded out by profiteers: Fear was just as loud a beat as greed. If joe homebuyer didn't buy now, prices would keep going up and he'd forever be priced out.
Not only are these homebuyers folks not the chief culprits, they also can't help insure the losses aren't socialized.
Monday-morning bashing of them for 'stupidity' solves nothing and avoids the more important matter at hand -- making sure those who took the money and ran get caught and pay their fair share of cleanup costs.
Tanta,
There are some fundamental reasons why you don't want them carrying 125% LTV.
First, the likelihood of continued performance is much less, even for primes. No seller ever wants to take a check to a closing and for many, no matter how 'prime' they are, it is not even an option.
Second, the overall market price gets permantly displaced upward compared to income. That perpetuates a problem of imbalance that will bite and bite and bite until it is removed.
If you could restructure your way out of a price bubble, the Dutch would have done it 370 years ago.
Does anyone know why Citibank is sending letters to existing morgagees with Spanish names demanding proof of citizenship?
Certainly this must be for national security reasons and not for loss mitigation purposes.
So the MBS system is broke. But where's the pain? So far there's been a lot of coverage of the pain inflicted on originators and servicers, but I think suspiciously little of investors' pain. And given the proliferation of RE investment in the last few years, shouldn't the effects of MBS system being broke be - well, systemic? Is that to be expected in the near future?
Abe, try this link from yesterday's Bloomberg. A Florida insurer suing Credit Suisse over losses in an MBS investment, claiming that the loans were fraudulent. Also suing Triad for not paying the PMI claims. We are just now starting to hear of investor pain.
Credit Suisse Sued Over Losses on Subprime-Loan Bonds (Update3) - Bloomberg.com
wally, I'm still confused.
Mortgage loans are not callable for any reason other than default or sale of the security property. No mortgage lender can foreclose on you just because you're upside down.
So you have borrower A, who is making the payments on time and who intends to continue to do so, on a loan that is now upside down.
You have borrower B, who is would like to make those payments, but is struggling to do so because they're $300 a month too high.
It may or may not be in either borrower's best interest to continue with either loan, but since they have little chance of selling without taking a loss they can't afford, there it is.
You seem to be saying that the lender should FC borrower B, just because the loan is upside down. That won't help the lender any, and it will destroy B's credit history, making future credit much more expensive. But I guess you assume B can rent for less than the mortgage payment.
Meanwhile, A continues to make payments. A's loan cannot be FC'd. A will have to wait out the housing market or just get used to paying a lot for housing.
Neither I nor Ranieri is talking about saving HPA. We're talking about saving homeowners from foreclosure. It is perfectly possible that keeping people in those loans--and that only works if they want to stay in them--will help stabilize values by limiting the REO flood. You're right that that won't help bring house prices down. But I'm struggling with the idea that lenders should be in the business of bringing prices down for future homeowners by refusing to do workouts with current homeowners, if in fact those current homeowners can carry the debt at the "corrected" interest rate.
Personal opinion, Abe, but I think: yes, it is to be expected.
The housing-investment-to-recession link has been pursued by many analysts, but there is also the fundamental notion that we are in a bubble that is a debt bubble, not just a bubble of overprices houses. If so, that must correct.
I was checking through a list of insurance companies a couple of weeks ago, considering stock investment options. Most hold significant amounts of mortgage backed securities in their portfolios. Of those MBS holdings, clearly some will underperform... leading to investment underperformance by the insurance company... leading to a decreased stock price. And so it goes. The $64,000 question is: when does the underperformance ship hit the sand of leverage?
Reading here about how the Finance side of the economy has been operating lately reminds me of an old saying from the Manufacturing side:
"The solution to pollution is dilution"
Even if there could be some universal workpout understanding hammered out, it's my belief that a high percentage won't get worked out anyhow, in the long run.
Prices are the problem that required fancy ARM loans in the bubble markets in the first place. SOunds like a new gravy train is being engineered for the mtg business that only delays the inevitable foreclosures or spreads them out a little which will lengthen the downturn into a prolonged grinding recession.
No one actually gives a shit about the few unwary honest borrowers that may have gotten snagged (and I doubt there were truly that many in the first place). This is strictly about protecting the lenders and bondholders so the market remains orderly.
Tanta,
I'm not sure why you are asking this question; you know as well or better than I do why LTVs are important... and not just to the mortgage business but to all banking and financing in general.
It may be Ranieri's myopic problem to clean up a mess he sees immediately around him, but it is in the long-term interest of ANY business to keep the fundamentals in order. And beyond that, it is a social issue. "Stabilized" values is a fine short-term goal, but stabilizing them at an out-of-whack level is nothing but a postponement of the inevitable. Pay now or pay later.
...one of my friends [who is] now running one of the best of the combat servicing operations...
Boy do I hope that "combat servicing" is not the new growth industry.
But don't color me optimistic.
wally, the more a lender forecloses, the further values will fall. I think we agree on that general market mechanism.
The further values fall, the more loans in a given book are underwater. More of them will fail as sale is not an option. Therefore, there will be more FCs, and values will plummet further, creating a new round of high-LTV loans.
What are you suggesting? That lenders keep driving LTVs up until everybody's underwater?
I'm sorry if I'm being dense here, but I just don't get it. Of course there's a social issue here, but I'm not sure that those conservative folks who have 60% LTVs today and will have 100% LTVs next year by the time we're done with the wholesale foreclosures are going to feel that their interests have been furthered.
Of course there's no perfect solution to this, either way. But I have more fear of a credit crunch and the effects of foreclosure epidemics than I do of modest levels of workout loans. I am not at all suggesting that there shouldn't be some punishment here for the lenders--far from it. But I'm afraid we're not going to punish anyone but the borrowers.
Hi Tanta,
"did not anticipate the difficulties of modifying securitized loans, given the constraints of the true-sale requirement (which means that the sponsor/servicer cannot control the collateral, and youd have to get 400 bond holders in the Coliseum to vote on a loan modification). "
What's the difference betweeen modifing a loan on a foreclosure Vs refinance? Shouldn't the same constraints hold good for refinancing as well?
I'm sorry if you have already answered this question.
REBear, to an MBS, a refinance is a payoff: the borrower goes and gets a new loan from someone--paying all the closing costs again in cash or in the loan--and the loan proceeds pay off the principal held by the MBS. This is also called a "take out." That is, someone else takes out the loan.
A modification of a delinquent (not yet foreclosed) loan means that the noteholder/servicer makes some modification to the contractual terms of the loan without paying it off. Usually, it's a matter of reducing the rate, reducing the ARM margin, rolling some past-due payments onto the balance and recasting the payments, moving the maturity date out (which lowers the monthly payment), and so on. In extreme cases it could involve debt forgiveness (where the lender just reduces the loan balance).
The problem here is that refinances are no longer options for these borrowers in a lot of cases. Now that that party's over, the only workouts on the table are modifications (or short sales, which cost at least as much as mods).
What Fannie and Freddie are stepping up with, by the way, is an attempt at providing a refi option for that class of borrowers they believe can, actually, qualify under a better set of loan terms. It will mean that the agencies will be taking higher LTVs and recent mortgage lates in a refi--those are two things that are keeping these loans from being "refinanceable." Insofar as this strategy works, it means the GSEs will be "taking out" the loans from these subprime MBS.
Tanta,
If a modest level of workout loans would mean no credit crunch, then: great. But I don't think that will do it.
Maybe my perception of what is the problem differs from yours. I think the whiz-bang mortgage artistry is a fine sideshow, but too many people borrowing too high a percentage of their incomes to buy things for which they paid too much is something that won't go away without pain. That pain is going to come back on them, on appraisers, on mortgage originators, on mortgage securities investors, on homebuilders (already has) and on other homeowners who innocently had nothing to do with anything (but who now think they are rich but are not and who will pay higher property taxes on values that do not exist and who may borrow home equity to spiff up the place so someday they can sell it for a a price they will never get).
Oh well, maybe I'm just in one of those moods.
And, completely off topic: are you solidly in the ranks of cancer 'survivors' at this point? Or is that not a discussion for this board?
I'm certainly surviving cancer so far, Wally. My odds of having a recurrence are very high; that's just a fact about ovarian cancer. (Median 5-year survival for cancers at the stage mine was at diagnosis is still about 20%.) But I have no evidence of metastasis at this point and I feel a great deal better than I have since my last round of chemo ended. I still have some problems related to old surgical complications, but they are receding as my immune system improves. I may never run the 4-minute mile again, but by jimminy I can still type 90 wpm. I beat the odds every day just by getting up in the morning. Anything more lively than that is just gravy. And I will take all the gravy I can get.
Thanks for asking.
Tanta, another fine, fine job.
IMO, which may well be wrong, current legalities imply that most of these loans will have to be reworked as payoffs. I don't think there is room in these MBS structures to do the type of wholesale mods that would do the job. It's not just the passive/active issue - it's also the highly tranched structure. My guess is that the result of major loan modifications would weigh unequally on trancheholders, and thus spawn a legion of lawsuits. Your thoughts? You know way more about this than I do.
Another major question to me is that if we take the people who could pay out of these subprime pools, what will the resulting losses look like? One way or another, the takeout now looks like it will happen. It seems to me that the questionable issues rely heavily on getting a relatively high payout from those who can be milked further in order to balance the high default losses.
It might be better if law changes were made to allow retaining the loans and doing reworks. Just a thought.
PS: If you are a communist for your ideas on this issue, than I must be a communist. I'm guessing that the vast majority of American citizens would also be communists by that definition.
FYI
The link to the FASB 140 rule is:
FASB: Financial Accounting Standards Board
It will make your eyes glaze over and your head spin.
Acronym of the Day:
WASS (WeAreSoScrewed)
Rock on, Tanta - you are in our thoughts and in our dance clubs:
YouTube -
It's not just the passive/active issue - it's also the highly tranched structure. My guess is that the result of major loan modifications would weigh unequally on trancheholders, and thus spawn a legion of lawsuits.
MOM, I think you are probably right about that. Interestingly enough, CS just came out with a special report (behind the paywall, sorry):
Loan modifications are a double-edged sword. They can lessen ultimate losses, but may also reduce excess spread, delay losses to when excess spread is lower, and mask true borrower hardship. For these reasons, servicers should utilize loan modifications prudently and should enhance their current modification reporting.
Moody's also says this:
Some residential mortgage securitizations have limits on the percentage of loans in any one securitization pool that the servicer may modify. Moody's believes that restrictions in securitizations which limit a servicer's flexibility to modify distressed loans are generally not beneficial to the holders of the bonds. Loan modifications, when used judiciously, can mitigate losses on mortgage loans. Consequently, while loan modifications cannot eliminate losses or generate more credit enhancement for a given transaction, we believe that they typically have
positive credit implications for securities backed by subprime mortgage loans.
But there will always be tranches who believe they have been screwed, and undoubtedly will be some who do get screwed. So it will be interesting to see how the "class warfare" plays out.
Barly is correct: Prices are the problem.
Thanks Tanta.
Tanta - I think REBear and others are getting at a good point. What are the differences between 'workout' and 'refi' - the practical differences, not the formal differences. There are two sets of issues that Ithink matter. One is that the holder of the credit risk is an existing bag holder, and the holder of the credit risk for the new loan is a new bagholder. In some circumstances, the old and new bagholder are the same, so this makes life easy. A reason for FHA streamline refinances is that FHA is the current bagholder, and even if the loan is underwater or the borrower has employment issues, FHA can't be worse off with a new loan on better terms than they were with the old loan - they don't increase their risk by refinancing even a pretty shakey FHA loan. To the extent that the credit risk bag holder on a troubled loan can be identified and agree to take the risk on a new loan, this isn't an impediment to using refis in place of work outs. But in a highly tranched world, with insurance and reinsurance and CDOs, oh my, it's hard to identify one bagholder who might agree to remain the bagholder with a new loan, because their odds are a little better.
The other issue is one of costs. A new loan entails new origination costs, recordation fees, etc., which can be pretty nasty in some jurisdictions. And there's a prepay penalty issue with a lot of these loans - a mod isn't necessarily a prepay that triggers the penalty, but a refi clearly is.
Tanta,
You write like a dream. I wish you the exceptionally very, very best with your cancer. I pray for you.
Changing the subject to mortgages, what appears to be the case is that there are a ton of basically dishonest loans out there which the weasels have deceived folks into signing.
What I fear is that the weasels are going to get those loans fixed up at taxpayer's expense under the cover of helping poor people out of a jam...kind of like Halliburton rebuilding Iraq.
mort_fin:
If the Banker's Life in your Bloomberg article is the same crew referenced in the posts at this URL:
Conseco Insurance Scandal Follows Movie Plot | Tortdeform
then I would say that there is a just God and that cosmic, financial Karma has turned around and bit them.
Tanta, an exceptional piece. Once again, you're way ahead of the MSM in terms of analysis! Seriously, you should be charging for your thoughts. I am grateful you aren't though.
Cathy-
Some people took these deals because they thought it was their last chance to get a house. It's easy on this list to laugh at them, but the crowd has miscalculated before: Katrina, Long Term Capital Mortgage, Enron.
I think it's an interesting problem, and represents a huge opportunity for an entrepeneur with a knowledge of building computer-networked markets.
Even informally, setting up group blog-like structures to work these deals out would be a major step forward in the right direction.
Maybe imbed this with prediction markets somehow, so you're negotiating while trading in different probabilities of default.
In short, this looks like a big but not insurmountable problem. You'd do much better looking for ways to solve it than hoping for Armageddon.
MOM writes:
It seems to me that the questionable issues rely heavily on getting a relatively high payout from those who can be milked further in order to balance the high default losses.
and this concern is related to wally's general thrust that prices have to come down (ok, wages up then) as those that have milked the system for all they could get, have collapsed the cow.
The investors who thought that they were owed a double digit return just for having money are the only ones with the milk and there seems to be a sliding scale about who is going to milk who in that crowd.
Don't see how housing gets back to normal (roll the clock back 6 years) and inclined to think we don't see a more equitable distribution of income/wealth that allows people to buy homes from wages/salaries in the next few years.
A self-asphyxiating housing market in an economy that is short on alternative breathing apparatuses.
"But I'm afraid we're not going to punish anyone but the borrowers."
Who shall be punished, that is the question. Those who borrowed irresponsibly, or those who refused to?
"collapsed the cow"?
I love that one!
NorkaWest
As John Lennon sang
Instant Karma's gonna get you,
Gonna knock you right on the head
Amusing that they are suing Triad over not paying claims. I notice that post says that they are part of Conseco. There's an outfit that should know a thing or two about mortgages.
If I was a holder of AAA tranche why would I ever agree to any workout? Workouts are to save the borrower and lower quality tranches. I wasn't paid for the risk, so why should I bear any loss? Am I wrong?
Lurker, it might depend on how old your nice pretty AAA is and how many future losses you think you might take. If you let the subs get whacked on early defaults while the whole deal's still a year old or less, then there may not be much credit support left for you in a year or two when the "normal" defaults set in. Of course you may assume you'll be paid off by then. Or that a notch down to AA+ (not because you lost anything, but because your CE is down) won't hurt you.
"As I said earlier, we're in a housing recession but more importantly, they argued that looking at the production, the subprime production, in those five or six quarters that as much as 50 percent of that production could have gone to the agencies, meaning, Fannie, Freddie and FHA. That's a pretty profound statement because a subprime loan is, at best, [an] eight plus coupon."
I would love to chat with Ranieri about this comment/opinion. Ranieri may know how to securitize a loan, but he must know zero about credit and qualification. The fact is VERY FEW of these so called subprime borrowers would have qualified for A paper loans.
This blog has spent a lot of time criticizing the loan standards(or lack thereof) that had evolved during the time home appreciation was canceling out loan delinquency. How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?
Anyone who shares a belief in this theory just does not know any better or is being dishonest.
"How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?"
If you admit to one dishonesty, how can you claim innocence of other charges on the fact you admitted to that dishonesty.
The missing half is this: home prices wildly outran incomes for about 4 years. If home prices had not done so, people would not have resorted to 'exotics' in the first place
Prices are driven by wealth -- be it cash or credit, rising household (nominal) wages, falling interest rates, loan structuring innovations (eg teaser rate), speculative demand for the asset class, and the wider public sentiment to not be left out of the mania/party.
In the 90s in the SF Bay Area, the dotcom IPO mania brought immense cash wealth to the area, which saw a RE bubble blow through 1998-2001.
Prices cooled off a bit in 2002, only to be driven up again by the increased availability of mortgage credit (lowered credit standards wrt FICO, LTV, reserve funds), falling interest rates, borrower qualification on only the teaser rate payment, and speculator flippers who were able to abuse the above to fuel the demand side even more.
In short, I believe wally's above statement is putting the cart before the horse.
How could one complain that we were making loans to people who really could'nt/should'nt qualify for them and then agree with the notion that they could have got the same loan with better financing through the Agencies?
Obviously these aren't completely compatible.
If 50% "could" have gone through GSE agencies as a conforming loan, then the subprimers are much better credit risks than has been supposed and the hedge funds buying the subprimes from the imploding lenders will really win.
Somehow I doubt this is true. 50% may have been 'theoretically' able to get GSE loans if the numbers were honest but they probably aren't. Do they really have cash for 10% or 20% down?
The people who are good credit risks are probably furiously attempting to refinance right now and pay those egregious fees.
Matthew - one of the problems is that because of loan terms, some of these borrowers may now be in more trouble and less likely to get refis. Sure, they could originally have gotten close to prime rates, but now they may have been pushed further out on the plank by higher interest rates and funkier loan terms combined with declining home values.
The unpleasant reality is that a few hundred dollars a month often makes a big long-term difference to such borrowers. Write good loans for them, and they can wind up prime in a few years. Write bad loans for them, and they can easily be pushed firmly into the subprime camp. Many of these borrowers in the more bubbly areas are now underwater when they weren't, and they now have drained their reserves and run up the CC debt more.
This is not a proud moment in the lending industry, for good reason.
"However, the point remains: you cannot move people from the current higher combined rates to a lesser agency one even if all entanglements were removed because a deal has already been struck on the underlying property at too high a price. That is the essence of the bubble."
Lets not forget that this is a world wide credit bubble so unwinding will be dificult, consider getting all the players into the same room with the same objective: bailing out everyone in the room!
good luck!
Tanta: You quoted Moody's suggesting that limits on the percentage of loans that can be modified in a securitization may limit a servicer's flexibility. I am interested in the implications of this for MGIC's C-BASS, which holds the residuals of a lot of subprime securitizations. In a much older post, you spoke favorably of MGIC (or maybe specifically of C-BASS), suggesting that at one time they had a great loss mitigation department. But does the Moody's comment generalize to C-BASS? (I realize you are not likely to have specific information about MGIC, but I am trying to understand the parameters of the problem.) Thanks, and best of luck with your health -
I"f you admit to one dishonesty, how can you claim innocence of other charges on the fact you admitted to that dishonesty."
Huh?
Although I have no doubt that customers were steered into lower quality, higher fee generating loans... can the highly questionable 50% number be due to gross overstatement of borrower incomes? Yes, the income would have to be verified for a GSE, but it never got that far did it?
IMO this is just another nail in the coffin. No amount of "workouts" will save this market. The money simply isn't there and never has been.
Very good read Tanta - thought provoking.
Tanta, thanks for sharing that. That really puts some cherry on the icing for the arrogant innovators, whose greed and short-sightedness has build up the greatest housing bubble in history.
Somehow, I'm not convinced this accounting dilemma rests at the exclusive 05-06 subprimes, though.
This Lew Ranieiri speech reminds me of Greenspan's recent speeches trying to warn in code that the end is nigh, while wrapping it in the language of Manageable Problem to keep those not in the know from panicing.
Everyone should have known that if you don't have skin in the game, you are subject to moral hazard and shouldn't be originating loans. I personally feel the subprime mortgage industry was deliberately constructed to reap as much fee and interest money as possible and then disappear into bankruptcy courts, thus hiding the true robbers from prosecution.
But none of them would have had so damn much money to lend in the first place, if it had not been for bank deregulation in the 1990's, and the Fed's easy money policies making all that credit available. Any person who listened to Greenspan during the recession and took out an adjustable loan should have KNOWN that if the Fed could not keep rates low, they would be screwed.
Is the Fed guilty of enabling a massive pump and dump? Frankly I think the Austrians are right. Ban private central banking.
Thank you, Calvert. I'm not exactly sure, but I would wager that the "best of the combat servicing operations" Ranieri is referring to here is C-BASS. Before reading Ranieri's remarks, I would have been skeptical of the idea that C-BASS would be running its loss-mit "magic" (that's an old MGIC joke) without knowing damned well what its legal rights are or are not. Ranieri's comments suggest that servicers are at more litigation risk than I at least have thought. That is uncomfortable, to say the least.
It does shed some heat, if not light, on that business of Banker's Life including Triad in its suit against CS, which I have to say sounds pretty ridiculous to me on the face of it, but I don't have the complaint in front of me, just the Bloomberg piece. MIs are famous, far and wide, for being big loss mit proponents. If the MI policy is good only to the extent that the MI's loss mit rules are followed, and the security won't/can't follow the loss mit rules, well, someone's going to court. The MIs won't stand around paying claims left and right for insta-foreclosures with no effort to even try working out the loan in eligible cases first. And they will not and never have paid for fraud or misrep. That's not even in the fine print of the policies; I believe it's in bold italic caps somewhere near the second paragraph. So suing Triad for refusing to cover claims on fraudulent loans is pretty rich, especially coming from a life insurer!
This is going to end up looking like nickel beer night in Mos Eisley.
Tanta, this post and the comments also shed some light on the quarrels over MI insurers not paying off on some current claims.
We really could be looking at a lawyers' heaven and a borrowers' hell. This is a hefty helping of food for thought.
I have no sympathy for the vast majority of people who took out these loans. Remember, two things motivate people - fear and greed. The greed pushed them to the point of stupidity (buying homes at presale hoping to flip them at huge profits) and now it is fear that has them all crying foul. (the music stopped and they were left without a chair).
Sorry, I've been in this business for 20+ years. 98% of the problem loans are due to consumer stupdity. I've told people they shouldn't buy a house, only to have them get indignant that I would pass such judgement on them. They went elsewhere, bought the house, and now they are in foreclosure. Good!
I won't deny that some were taken advantage of, but it's maybe 2%.
NorkaWest: WASS (WeAreSoScrewed)
Tanta, I think this is the most important post you've done to this point. SFAS 140 sales accounting is absolutely critical for keeping assets off-balance-sheet. A couple of years ago, there was loose talk of Fannie having to find up to $30 billion more capital because of sloppy QSPE documentation, and that was just the accounting. These vehicles are used to share risk (or maybe just to hide problems under the rug). Start tearing them down, and this whole house of cards may start to fall over.
How about a simpler view? Abroker has to by law offer any program available to them to any potential borrower that asks. If they think the borrower is committing fraud, the broker can't say no just on conjecture. If they do say no just because of a hunch, the broker will be sued for discrimination because the borrower was a Smurf or Cenobite or whatever flavor will make the jury cry. So we have even the most unsophiticated borrowers being educated by the MSM as to how to perpetrate a fraud. If they do get turned down they have garnered enough information during the turndown process to go to the next lender and next using each as a dress rehersal for the big lie.
The broker is a 'per piece' salesperson just like a car salsesman or the girl at Nordstroms that tol you how fine you looke in that puke green shirt.
houses prices should be at 2.5 times the borrowers income. Let me redress that; the LOAN should be at 2.5 times the annual income, down payment gets you into a nicer house. You buy a mortgage, not a house. Joe lunchbox got on board thinking that he had a new and novel idea called flipping. almost every case I've observed [I'm in the business of observing such things] have always involved a school teacher marries to a civil servant [more or less but the same lunchbox crew plus a liberal arts BA and a 401k]. Someone who just shouldn't be speculating, they should be saving. So here it is; 2.5 times incom plus downpayment is what neighborhoods will fall back to for pricing. Foreclosures will help drive the prices down, but the borrower shouldn't have been in that neighborhood anyway. Credit will go back to 1989 standards for home purchase. Appraisals will agian say that the value of the home was based on 'highest and best use' of RENTAL INCOME. The MSM seldom puts out a 'cry' story anymore without a disclaimer. The most brilliant one I saw recently started with an intro of someone losing the home they grew up in and ending with the fact that the turd took out a $170k mortgage to fix up the house and send a stepkid to college, then his wife quit work at the PETSHOP and he is quitting his job to tap his 401k in hopes of swaving the house.. So few of the buyers will lose the house reasons that they did not instigate. Lastly, why is it bad when food and gas prices increase but bad when houses decrease? It's shear greed to think that just because you lived in a home for 3 years you're entitled to make $200k more than you paid.
Sorry no spell check, I was in the moment. Please look at context and not at delivery skills
Ranieri's comments seem to be lumping Fannie, Freddie and FHA/Ginnie together. They serve two very different homeowner constituencies.
Ginnie focuses on first-time and low-income homebuyers. The explicit government guarantee is a way to support home ownership by people who previously didn't have access to ownership. 3% down, 97% LTV is typical.
I can't find a link for my source, but Congress and FHA bureaucrats have acknowledged that the FHA/Ginnie programs have not been well-marketed over the past few years, and many people who got subprime teaser-rate loans that are in pain now could have gotten an FHA loan if they'd only known about the program.
Contrast this with Fannie and Freddie, who, as best as I can tell, have no obligation to lend to anyone above an 80% LTV and strict underwriting requirements.
Also, Ranieri's comments about the difficulty of restructuring the loans should be applied differently to pools with guarantees vs. private-label MBS. Ginnie, Fannie and Freddie guarantee the payment of principal and interest for agency MBS. Bondholders don't have to "get together" because Fannie is the guarantor. The private-label stuff like CBASS pools carries no such guarantee.
"as much as 50 percent of that production could have gone to the agencies.."
Lou has lead you guya a little astray here ..
could have and would have are two differnt things ..
Yes FH/FN take 625 FICO's at 75% LTV and yes those loans are in these pools.
However, the capital markets are extremely effecient at getting full value for a mtg asset ..those loans went to these deals because the price was higher ..said another way ..FH//FN would have taken them and charged a very high fee to guarantee them ..then the fh/fn pool backed by them would have sold in the seconday maarket ..
during the drunken mtg orgy of 2005/2006 the bonds backed by these things were trading so tight that the seller could get more for them in a private deal than w/ a Fh/Fn deal net of the guarantee fee
..
thats more because of the rating agy's being completely asleep at the wheel
Lou is leaping to the conclusion that just because they can go Agy the homeowner would have netted a better deal. It's just as likely that the borrower got the same deal and the seller of the loan got a better deal..you can argue that as the market figured this out, competition may have netted the borroer a lower rate ..anyone looked at subprimme mtg rate in 1998 when FH/FN used to be relevant ?
It's a big market, I'm sure there are examples of everyone being at fault ...borrower/broker/underwriter/fed//
The dumbest is making a loan you know the borrower can't pay ..2yr pmt @ 50% DTI ..then payment goes to 100% DTI ?? I guess i'm just confused how the schmo that leant the money is to blame for the borrowers problem on that one..seems like the lender (bondholder) will get back 50c for every $ leant(invested) ..you gotta do allot of volume to make those economics work out !
There is a bright side to all of this ..very little of this risk sits on American balance sheets ..its in Arabia/ and the far east ...so that $75 dollar a barrel of oil gets sold ..and the dollar gets invested in this junk or, neg real rates, or any other ridiculously priced financial asset..then they lose 50%..
it's the circle of life for unsophisticated investors w/ allot of oil or labor that they are swapping for dollars.
markets always find the patsy ..in this market it's not the borrower ..it's the invetor
well this is my first ever response to a blog ..i hope when i hit Publish it doesnt evaporate !