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Apparently, this attitude is what led to the Feb 19 quote from Accredited Home Lenders:
""We have eight different warehouse lenders; I would say the majority of them are acting very rationally," [Stuart Marvin, executive vice president, Accredited Home Lenders] said. "There is one that is acting somewhat irrationally, although I won't mention them by name. We have migrated the fundings away from that warehouse lender to one of the other seven until they begin to act more rationally again."
Industry publication National Mortgage News said this week that Merrill Lynch has been making margins calls. A Merrill spokesman declined to comment."
They're acting irrationally; gravity has been superceded.
Having been present in more than a couple of these "negotiating" sessions wherein the seller of loans demands that the buyer of loans relax its due diligence levels, I can attest to the fact that it's widespread. And also to the fact that the idiot buyers sit there thinking, "Oh, cool, I can buy all this great paper AND lay off half my due diligence underwriters! This will save me a ton of money that I can use to outbid the competition for New Century loans."
It's not just the originators who have more 23-year-olds than maybe they need.
Notice the story is on WaPo's page A01, the front page.
The borrowers never actually paid 2-3x T-bills, right? The income was booked as the (2-3x T-bill rate - borrower pay rate) was added to the loan balance, yes?
So what happens if the borrower defaults? I guess it's time to find out if the approrpriate tranches were insured.
The borrowers never actually paid 2-3x T-bills, right?
In 2005? When a treasury note with the probable term of these endlessly refi'd loans was what, 4.00? Sure you had borrowers paying two or three times that. Especially if you held one of those nice low-rated tranches.
Insurance (CDS) absolutely does not cover any fraudulent loans. It is enough for them to scan papers carefully, find something bogus and buy-buy!
It just keeps getting better:
Hedge fund firm Ellington Management Group has agreed to buy $170 million in loans from subprime mortgage provider New Century Financial.
According to a report by Bloomberg, Ellington is buying the loans for less than 30 cents on the dollar, agreeing to pay $58 million for them in a court-supervised auction. Many of the loans, however, are likely to be difficult to collect or completely worthless
HedgeFund.net: Public news from HedgeNews
Remember the big tempest in the NYT teapot about gain-on-sale accounting at NEW?
Yeah, not so much.
http://sev.prnewswire.com/banking-financial-services/20070506/CLSU00106052007-1.html
"Hedge fund firm Ellington Management Group has agreed to buy $170 million in loans from subprime mortgage provider New Century Financial.
According to a report by Bloomberg, Ellington is buying the loans for less than 30 cents on the dollar, agreeing to pay $58 million for them in a court-supervised auction. Many of the loans, however, are likely to be difficult to collect or completely worthless"
Translation:
On closer inspection, the scratch and dent portfolio appeared to be of similar composition to carcasses collected from a foggy freeway after one of those 80-car pileups.
On closer inspection, the scratch and dent portfolio appeared to be of similar composition to carcasses collected from a foggy freeway after one of those 80-car pileups.
We are, therefore, not publically releasing the data on the "nuclear waste," given where the "scratch & dent" ended up.
I hope everybody knows that it is possible to settle a loan sale trade where the purchase price for the loans is negative. It has happened before and it will happen again.
The question remains as to whether CDS's caused subprime credit risk to be, "dispersed", as the NY Fed would argue, or "concentrated" (in levered hedge fund portfolios) as the bears argue.
The NY Fed won round one, which was the "mark to market" event.
Round two is the "mark to bond ratings" event.
Round three is the "mark to loss models" event.
I still give the bears have a good shot. The implication, though, is that hedge funds are sitting on un-accounted-for losses in illiquid investments. In that position, you would sell liquid stuff raise cash for the inevitable margin calls, and that process is known as contagion. Maybe that explains alt-a spreads more than any new-found prudence on the part of the "that'll be two and twenty now, your capital back later" hedge fund community.
A trader buddy of mine just sent me color on last week's subprime whole loan activity:
On the whole loan front activity pick up from last week with $1bn out for bid however only one package traded. Loan prices for cleaner packages (e.g. revised guidelines) are now trading north of par on an all-in basis with subsets of pools occasionally trading above 101.
Getting an occasional bid of 101+ all in (including your servicing rights) for part of some POS deal you need 105 on to break even is not gonna keep anybody in leopard-print office furniture.
Tanta wrote: "We are, therefore, not publically releasing the data on the "nuclear waste," given where the "scratch & dent" ended up.
Not to worry, the nuclear waste is being packaged and sold at 35-40% discounts to dentists. The salesmen (also offering time shares and condotels!) are earning 10% commissions.
I would advise all readers to get any pending dental work done this year; the profession may be somewhat grumpy over the following few years.
Tanta,
So let me get it right.
Until now MBS were not sold (since Feb) but now are selling at 4% loss ?
who is selling at a loss and why ?
Who is buying if before they did not want to touch it ?
NEW Knew News
Hix Nix Stix Pix
The actual bonds are dispersed (except foreign central banks), but CDS are concentrated in hedge fund community. Well, that's not actual knowledge on mine, but comes from reading internet.
According to a report by Bloomberg, Ellington is buying the loans for less than 30 cents on the dollar, agreeing to pay $58 million for them in a court-supervised auction. Many of the loans, however, are likely to be difficult to collect or completely worthless
Its good to know that the toxic waste isn't so toxic that the 'fungus of the financial system' can't recycle it.
As long as that's still functioning everything will be fine... in time.
Getting an occasional bid of 101+ all in (including your servicing rights) for part of some POS deal you need 105 on to break even is not gonna keep anybody in leopard-print office furniture.
I've had leopard prints on my mind all morning after that story... makes me want to have somebody explain something to me 47,000 freaking times... though I'm not sure exactly what.
Its all your fault.
who is selling at a loss and why ?
For the same reason anyone ever sells at a loss, Yal. Because there are days when losing 4% today beats losing 6% next month. Or, because having $101 dollars in actual cash today beats having $105 dollars in an IOU today, if your candy-assed middle managers are standing around demanding paychecks every Friday.
And the people who are buying today at 101 might well be the same people who refused to touch it for 105. When people tell you that "no packages are trading," they don't necessarily mean that no bids are offered. They sometimes mean that bids were offered, but the prospective seller got huffy about it and refused to trade. It looks to me like a few parties may well have re-considered that strategy and are now willing to take 101, because the Godfather's counteroffer is never worth taking.
Any adult participant in the subprime business with sufficient capital to get any credit rating at all should be able to take the odd 4% loss on a loan pool and live to tell about it. The question remains whether we're down to the adults with capital yet or not.
Its all your fault.
I feel sorry for anyone who can't get into a blog post.
NEW Knew News? I'm shocked, deeply shocked.
But it's a much better story than the Enron slant ...attributing failure to a 'few bad apples' is much easier conceptually, psychologically, and methodologically; it means everyone can just keep moving along after sufficient time morbidly gawking and commenting, "isn't that awful" to other passersby.
System failure OTOH is complex, scary and resistant to systematic investigation; one of the reasons (of many) why what CR does and how CR does it is highly commendable and, frankly, not typical.
tanta-
Did the borrowers actually remit 8-12%, or did they remit 2-4% then the rest of the payment was added to their debt balance (which apparently was counted as income throughout the financial chain)?
I realize refis complicate the matter, but ultimately after refis the borrower would just be in a different loan.
If the borrower goes bankrupt, and the originator goes bankrupt, who's holding the bag at that point?
roxy-
See above. How does the CDS equation balance when the originators go bankrupt, as did New Century?
"The stress in that place was ungodly. It was like selling your soul," said Hardiman, who worked for New Century in 2004 and 2005. "There was instant notification to everyone as soon as you rejected a loan. And you dreaded doing it because you paid for it. Two guys would come with a bat, and they were all [ticked] off because you cut their deals."
my favorite part of the story was this anecdote, and imagining the reaction from tanta if a couple of 23-year-olds came to her desk with a bat for rejecting a loan showing something like $100,000 in annual income for a department store cashier.
ok, so i kind of not understand the reference to meryll? does it mean that meryll was not playing along with new century or which of the companies has not been writing/accepting "toilet paper loans", wau my first creative finance inovation
But it's a much better story than the Enron slant
It is.
But I wouldn't write off an eventual Enron-like 'official' slant just yet... There were LOTSA stories accurately describing the sick systems at Enron (SPE's) & the problems with the dereg model in general (ease with which the spot energy markets get manipulated)... Yet at the end of the day the meme that stuck was 'bad apples'.
If I had to bet that'll be the eventual story here too - given time.
Did the borrowers actually remit 8-12%, or did they remit 2-4% then the rest of the payment was added to their debt balance (which apparently was counted as income throughout the financial chain)?
In 2005 on a subprime pool from NEW? I'm sure it was overwhelmingly cash interest. OAs were still only ramping up in volume then, and they have been some subprime, but mostly Alt-A.
But it really doesn't matter, you know. "Earnings" has never been the same thing as "cash flow." (Ever bought a savings bond?) If the loan goes belly-up, you foreclose on it, just like you do any other loan, and you get that deferred interest back in cash from liquidation of the REO. There were very few FCs in 2005, and for those there were, the originator probably recovered 100%.
Sure, one or two of us at the time suggested that that would change, but that's the point of this story. Back in 2005 everything looked great.
imagining the reaction from tanta if a couple of 23-year-olds came to her desk with a bat
Let's just say that my chair wasn't upholstered in leopard hide.
Tnx Tanta.
So those extra 4% - what do they mean as far as mortgagaes interest rates ?
If the originator knows he is looisng 4% (or 6% next month) by how much he should raise the loan to the end borrower ?
If the originator knows he is looisng 4% (or 6% next month) by how much he should raise the loan to the end borrower ?
You can't raise the interest rate to the end borrower, Yal. First of all, they're already paying more than they can afford (see FC rate). Second, if there's any competition left in the marketplace, there will be someone out there to make a loan cheaper than you can.
You either just take the loss this quarter and hope the analysts and day traders don't lose their minds, or you start laying off candy-assed middle managers. (Some people might think you could peel back executive bonuses, but this is the subprime industry we're talking about. Not likely, even in BK court, will they let go of their bonuses.)
We all need to step back and remember that in financial markets generally, and mortgage banking in particular, people take hits now and then. It'd be a business with some risks. And taking a 400 bps hit on one whole loan trade is neither unheard of nor should it make everybody run for the hills.
It's only shocking to some people these days like home price declines are shocking to some people these days: the TV said this would never happen! Oh no!
My point in bringing up a little trade color was to indicate that the subprime whole loan market has not exactly "bounced back." Well, and to suggest that if you do happen to be marking something to market, well, damn. Some people like to pretend that "there are no bids" instead of admitting that "the bids suck" because if there is a functioning observable market price for your loans, you gotta use it in the M2M. You can only pretend there is no M2M price if you pretend that the whole-loan market has been on holiday for six weeks.
By "on holiday," I mean that the way they meant it in Chicken Run.
i guess Tanta prefers the zebra print office furniture. I think it would have been funnier if the broker had dollar signs on her chair.
I guess Tanta prefers zebra print office furniture. It is much classier, so I can't disagree. Leopard print is so new jersey.
stupid comments aren't working right for me!!!
When people pay 30 cents on the dollar they usually are quite willing to collect 75 cents on dollar. Lets see what that does to real estate values.
If someone bought the portfolio at 30 cents on the dollar seems like a huge discount. Even if 70% of the loans default you will still be left with some salvage value from the foreclosure. Did the buyer make an absolute killing on this deal or did I miss something?
Also Tanta (or others) I was wondering what the market is like for these things? Is it a transparent trading floor or are they sealed bids where people offer a price and it is not discussed with other bidders? Do they get many bids or are people just hopeless waiting for the phone to ring.
.......
So Tanta you don't think this 400bps is a new adjustement for risk ?
Do you think it is only this quarter and it will go away the next ?
If not they must re-align their whole biz and raise rates to the end customer
Yal,
Shouldn't it be close to 7,000bps...
............
Yal, subprime lenders are going to have to do the following:
I'm not saying that one week's bid color tells us how this will play out in macro terms. It suggests to me that now would be a good time for these subprime players to look at their profit margins. I personally think that everybody in the industry has to do that. So you might want to quit obsessing on REITs and start shorting Hawaiian corporate resorts.
I hope everybody knows that it is possible to settle a loan sale trade where the purchase price for the loans is negative. It has happened before and it will happen again.
Sounds like there's a good story in there.
Also Tanta (or others) I was wondering what the market is like for these things? Is it a transparent trading floor or are they sealed bids where people offer a price and it is not discussed with other bidders?
It depends on what you're talking about. We seem to have two conversations going at once. On that NEW portfolio purchase? That was an auction with BK court approval. Everybody on the creditor committee got to discuss that, so that means everybody in the industry. If there's a bank worth more than $10 that didn't lend money to NEW, I'd be shocked.
Whole loan trades are simultaneous auction-type things, either a seller on the phone with four dealers at once, or an on-line bid process. "Officially" if you lose a bid you do not necessarily know who won or for how much. Sometimes you may ask for and get information on how bad you lost.
Unofficially? There was a secret once in the mortgage business--back in '92--and it involved Mary Ellen's surprise baby shower.
March consumer borrowing increased at 6.7%
FRB: G.19 Release--Consumer Credit--November 6, 2009
Yet, consumer spending was moderate in March? Greater reliance on credit to maintain lifestyle?
Sounds like there's a good story in there
Yeah, it's a great story. Think "negative escrow balance."
It hurts to take 30 cents on the dollar for your loans. It hurts even worse if you've been paying these folks's property taxes and hazard insurance since the inception of the loan. Net that, and it's like those folks who have to bring cash to closing in order to sell their properties.
I think it would have been funnier if the broker had dollar signs on her chair.
That's her tattoo... fake leopard skin chair & dollar sign tattoo.
U.S. Consumer Credit Increased $13.5 Bln in March (Update1) - Bloomberg.com
And by lifestyle I mean new leopard print chairs...
http://www.livechatinc.com 2
Consumers tap credit cards as housing ATM collapses:
U.S. Consumer Credit Increased $13.5 Bln in March (Update1) - Bloomberg.com
No contagion to see here, move along...
imagining the reaction from tanta if a couple of 23-year-olds came to her desk with a bat
I doubt anyone here would put up with that sh!t.
More credit card debt... I don't understand it. Are people insane? Inflation expectations are incredible, "cash is trash". Did they try to ask their employer if they can get a 6% raise before increasing the debt at 6% annual rate? Do they hope money will be thrown down from helicopters?
I doubt anyone here would put up with that sh!t.
Right. But the person whose desk is getting beaten up is probably also 23. And if she has no manager behind her, and she needs her check, she'll try "putting up with it."
theroxylandr, as bizzare as this is it makes sense. MEW is toast, incomes aren't going up very much, JULS is strapped and the last thing to do is rack up the credit cards. IMHO, this is a ringing bell and the consumer recession has now begun.
On that NEW portfolio purchase?
Correct, and thanks for the answer. I'm still a little confused why people with skin in the game would accept 30 cents on the dollar, but then again I've heard of bigger steals... Tho I dont know if they involved a semi-transparent market with time and many potential buyers... Odd...
Credit cards are magical pieces of plastic that create this warm fuzzy feeling inside. Even intelligent and rational people can justify using the hell out of them.....
........
Right. But the person whose desk is getting beaten up is probably also 23. And if she has no manager behind her, and she needs her check, she'll try "putting up with it."
Or 43 with a funny mortgage herself, credit card bills up the wazoo, enough savings to last until Thursday and did I mention her husband's job is even shakier than hers? At least she and her FAMILY have medical insurance as long as she can continue to put up with the abuse.
To add insult injury her boss is probably the one dragging the bat bag for the salesman.
Put up with shit? Only until she gets a new job.
"More credit card debt... I don't understand it. Are people insane?"
No; they're just trying to get through the month. And next month, they'll try to get through the next month. And pray it all works out somehow. Even though they haven't got a clue how.
Not that much different that the finance and investment community, as it turns out.
If it's a choice between radically changing your lifestyle, giving up the apartment, doing without a car to get to work, etc., or going deeper into debt, most people are going to choose debt. Because the consequences of going without what they need right now are immediate; but the consequences of increased debt are, well, in the future. And maybe it'll never happen. Or something. Like I said, it's a mindset we've seen in banks, mortgage companies, and investment housese.
I'm still a little confused why people with skin in the game would accept 30 cents on the dollar
I have no idea. All I can say is that these loans weren't purchased by a "combat servicer." That suggests that there's not much recoverable value there.
Tanta - you think 30 cents is maybe too high? I ask that because in an industrial BK - if you don't have the operational expertise in that arena zero cents on the dollar is too high.
I ran into a foundry that was bought at BK for way less than 30 cents on the dollar by a group that had some (not enough) operational expertise... and they burned through a couple more dollars on the dollar before they liquidated...
I saw that one from closer than I'd like. If these folks don't have 'combat' experience - do they even stand a chance?
The numbers given in the article are the SA numbers; actually real consumer debt hardly increased. But there's nothing wrong with the SA; last March consumer debt had been paid down by nearly 10 billion dollars from the previous month as opposed to this year's scant paydown of .9 billion.
So this doesn't represent borrowing to spend. It may represent an inability to pay back or it may represent less refinancing of homes and paying back CC debt by that mechanism.
If you scroll down and look at non-seasonally adjusted finance company non-revolving debt, you see an increase of 6.7 billion. That usually means higher rates and probably indicates smaller loans to poorer individuals. Consumer debt in securitized assets dropped significantly.
If these numbers aren't revised it looks like a meaningful indicator of stress. Another way to look at it is that in 2006, from Jan to March outstanding consumer debt dropped 25.7 billion. In 2007, from Jan to March outstanding consumer debt dropped only 15.1 billion. The pattern from Jan to Feb is very similar in both years. The culprit, then, looks like gas prices.
Hey, does this purchase include the collateral for the bad loans? (i.e. the houses)
If so, imagine the hidden invetory out there, waiting for the new buyer to figure out what's what. Consider the time it will take to clean up the empty houses and list them, kick out the ones where people have been living for free.
Ahhh... I never thought about the fact this could be be the stuff that didn't make it in to the crap tranches or was an EPD... I think I assumed it was an aggregate sample of their loans... Sounds more like the junk leftover that one throws out or donates at the end of a yard sale....
Thanks again !
..............
Risk v. Greed
Greed wins by a mile when there is no regulation.
And who is the only major Presidential candidate talking about regulation?
Hillary Clinto
And who is the only major Presidential candidate talking about regulation?
Hillary Clinton
Hey it's dirty work and SOMEBODY has to do it...
" There was a secret once in the mortgage business--back in '92--and it involved Mary Ellen's surprise baby shower."
That's what I call style!
"combat servicer." --Now that's an MOS I've never heard of. Is it in Finance or not so Public Affairs, now that's the question.
Or 43, with a funny mortgage herself
This is more likely, IMHO.
The 23 year old would be quietly setting up their mobile phone to record the whole thing, and then go call a lawyer.
Tanta,
You're correct with respect to the loans. Those were indeed loans New was required to repurchase. I don't know whether it was EPD or breach of representations. Only thing I'd like to add is that they were second liens.
With respect to "breach of representation" which allows a wholesale loan buyer to make the seller repurchase the loan, does this mean that the seller breaches only when they don't follow their guidelines (i.e. the soundness of the guidelines per se is irrelevant)? What exactly "breach of representation" mean?
However, don't you think that, absent those loans, the hit on the traditional, less than 80% LTV first lien loans will be minimal? And despite the RE decline, prices are still above the 2004 and sometimes even the 2005 levels so those loans will not get hit at all?
It is my understanding that several expenses with respect to foreclosure are assumed by the servicer, and are afterwards reimbursed by the lender only IF what's due to the lender is recoverable. Is my understanding correct?
Finally if, as you say, loans get bids at 101 % of their face value, shouldn't New century realize a tremendous liquidation value now?
Thanks in advance
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