How many of these things are out there to be downgraded? Now I know most on this board will say all of them, but can we break it down a little...at what point are we going to get the headline "S&P downgrades last of xyz Securities"
How many of these things are out there to be downgraded?
I was wondering the same thing - you almost need a program or a 'handicappers cheat sheet' just to keep track of all the horses coming up, race after race.
Does anybody know how this re-rating affects the related ABX? As MaxedOutMama pointed out the other day, when a prime borrower is in trouble, they refinance into a subprime. So the prime foreclosure numbers are falsely low. Is this same phenomenon going on with the ABX (or CDO's, shh)? I.e. does this garbage MBS stop degrading the AAA index, thereby falsely keeping it high?
Of course, yesterday on the stock-whore channel (cnbc) David Wyss was underplaying the downgrades. Nice timing, Dave, liar.
Also, did anybody else see the Bloomberg TV subprime show last night? FRE's Dick Syron was quite straight-forward with statements like, 'what do you expect, we had a bubble', and 'I'd like to think we're in the fifth inning, but there's a lot more pain to come', and finally, 'the downturn will continue for a least another one and a half years."
The show also featured PIMCO's Paul McCulley, who royally slammed the investment banks (!!!); and Jim Chanos, Bob Shiller. Lockhart from the OFHEO was also trying his best to underplay the problem, even denying that prices are negative yoy. It was an entertaining show, which was the best exposure yet on MSM.
"Closed end" means that the entire loan amount was disbursed at closing, and cannot increase by future advances. (If it's neg am, the balance can increase because of capitalizing interest, but not by the borrower drawing more funds out.) It is used in reference to second liens to distinguish them from lines of credit, or HELOCs, where the initial disbursement at closing can be a fraction of the credit limit.
Some people use HEL to mean closed-end second and HELOC to mean line of credit. Since HEL and HELOC are easy to confuse, the more formal term "closed end" is used for the HELs.
A closed end lien is a true second lien (HELOAN), not a revolving line of credit (HELOC). When the loan is originated, the borrowers are given the entire loan amount and then it is amortized. They can't take additional draws like on a line of credit.
Dotcommunist,
I worked at a company where Syron came in as CEO. He turned around the failing company in a few years.
If Syron doesn't give you brilliance with easy to understand presentation, he's having a bad day.
Meanwhile, Bear Stearns, which last month said it would offer a $1.6 billion loan to shore up the more "conservative" of the two funds and help it sell its assets, nonchalantly reported yesterday that about $1.4 billion of the loan remains untapped, the New York Times said.
So, in other words, it appears Bear Sterns was able to either sell or take down internally all the holdings of the funds at a level that wipes out customers, but leaves the firm fairly well covered.
Nice catch by a reader over at DealBreaker.com on the BearStearns apology letter to hedgefund investors:
"the best line is "The risk management function at BSAM has been restructured so that it will now report up to Mike Alix, Bear Stearns chief risk officer, creating an additional layer of oversight."
So wait, let me get this straight: prior to this month (week?) risk management in the Asset Management group DIDN'T report to the Chief Risk Officer??????
Gee, its a wonder why these funds tanked in light of this little gem, oy!
OK, I looked at 18 of prospectuses of ABX 2007-1 securities (I couldn't locate Structured Asset Securities and J.P. Morgan Mortgage Acquisition Trust; there are some spelling variants in Edgar that are difficult to search).
The balance of second liens is (starting from Fremont, ending with Citygroup as in ABX-HE-AAA 07-1 constituents description):
6.0%
4.2%
3.11%
0%
5.96%
2.7-3.2% (depending on pool)
? (Structured Asset)
3.23%
? (J.P. Morgan)
6.29%
3.53%
6.23%
6.01%
0%
trace (GSAMP, I couldn't understand the prospectus but based on the average coupon the fraction of 2nds cannot be high)
1.58%
6.29%
3.99%
0.80%
4.48%
This is too little to be a major problem (but they are likely contributing to the worse performance). Of course quite a lot of first liens have piggybacks not pooled in these securities.
The securities downgraded by S&P are totally or mostly second-liens.
Tanta, i was going to say it would wound and fester, but gouge and crater works. i guess my question really is how long will the s&d market be there? what if there's still a wave of alt-a paper that needs a home and a someone like a reit has no s&d market to sell into? and why is AHM down so much again???
There are 3 possible situations for the pool of mortgages:
First liens (no piggybacks)
First liens with silent second liens (with piggybacks included in the same or other pool)
Second-liens
In the ABX index pools there little second-liens but there is usually a quite large fraction of first-liens with piggybacks. These piggybacks are often securitized separately. Such securities (usually with "SL" or "S suffix) are performing badly and were downgraded by S&P in this report.
Bernanke in testimony stating that subprime related losses will be $50 to $100 Billion. What I'd like to know is where he gets the estimate that consumers may pull back from spending $0.09 for every dollar of wealth lost..
WASHINGTON (Reuters) -- Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending, but he sought to reassure lawmakers that the central bank was working quickly to strengthen lending regulations.
"The credit losses associated with subprime have come to light and they are fairly significant," Bernanke told the Senate Banking Committee in a second day of testimony on the Fed's twice-yearly economic report.
"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems," he said, referring to a segment of the mortgage market that caters to borrowers with shaky credit.
Bernanke said that the most reliable indicators show U.S. home prices have not declined nationally and that the housing slump had so far not led U.S. consumers to cut back on spending.
He said, however, that if prices did drop, consumers might trim spending by as much as 9 cents for each dollar of wealth lost.
As a result of the weaker-than-expected housing sector, the Fed has lowered its growth forecasts for this year and next, but the U.S. central bank believes the drag should ease over time.
Bernanke outlined steps the Fed has taken or plans to take to ensure that the subprime problems do not recur, but sharp questions from members of the committee showed some lawmakers think the Fed was not acting swiftly enough as foreclosure rates soar.
He testified that the central bank was progressing as fast as it responsibly could."
...
Bloomberg, MGIC Investment Corp., the largest U.S. mortgage insurer, said second-quarter profit plunged 49 percent as it paid more in claims. MGIC, which protects banks against defaults on home loans, said losses climbed 61 percent to $235.2 million.
We know California is a developing problem. We know Florida is a developing problem, said Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc. Its simply the amplitude thats the surprise in the quarter. Were going to need help from management and a lot more color on specifically what happened.
Scratch & Dent Loan Pricing Will Continue to Decline
Loan sale pricing is not going to improve in the foreseeable future; in fact, it will probably get worse. Unless you are prepared to hold the loans to maturity, our advice is to liquidate your inventory now. You may not like todays pricing, but you will like tomorrows even less.
As everyone in the industry now knows, most mortgage loans ultimately wind up on Wall Street in a securitization trust. The securitization market thus plays a vital role not only in pricing in the secondary market, but also in establishing underwriting criteria. An illustration of market-driven tighter lending standards was provided by todays announcement that subprime 2/28 ARM loans will no longer be purchased by many investors. This is a direct result of recent changes by the rating agencies (Standard & Poors, Moodys, etc.), who determine the subordination and overcollateralization levels necessary for the different risk grades (or tranches) of the securitization trusts. If you have any such loans in your inventory it is probably too late to sell them except in the scratch & dent market.
Separately, several recent events are having a significant adverse effect on loan pricing, of all credit grades. The bankruptcies of a number of large subprime lenders (the latest being Alliance Bancorp, last week) is well known, but what is not widely understood is that their portfolios are being dumped on the market in huge volumes by their creditors. Similarly, a pair of highly-leveraged mortgage hedge funds managed by Bear Stearns recently collapsed, causing near-total losses to their investors. Their portfolios are being liquidated, but the sales apparently are not going well; rumor has it that only a small portion has yet been sold, and at a significantly higher discount than anticipated.
These massive sales are depressing pricing across the board. Prices on the ABX indices (used by mortgage bond traders to manage risk) have declined severely in just the last week. The trend lines for the AAA and BBB- tranches (the highest and lowest risk grades, respectively) are shown in the graphs above. Note that the AAA line, which was stable for so long, has now collapsed. Investors in these highest-quality bonds, who once thought they were immune to credit quality issues in the underlying loans, are now not so sure. The BBB- tranche, which is necessary to support pricing for all the higher grades, is trading for half of what it was in January.
What this all means to lenders is that loan prices are dropping precipitously, and you should complete any pending sales (premium as well as scratch & dent) as quickly as possible. If you have received a bid on a pool but have not yet decided whether to accept it, check with your investor; the bid may no longer be there. If it is, hit it now.
Please contact your loan sale advisor at Nautilus Capital to discuss market conditions or assist in selling
Boy -- so many good "Bubble Popping" stories this morning -- and CR is nowhere to be seen.
From Reuters:
From Reuters. Troubles in mortgageland may get worse before they get better, especially for the so-called subprime borrowers whose spotty credit histories put them into more costly loans.
Its an amorphous blob of trouble, says Keith Gumbinger of HSH Associates, a mortgage research firm. And theres more pain to come.
In the first quarter of this year, roughly one of every 41 subprime loans was entering foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association. Those are the worst mortgage default statistics since the Great Depression.
And its likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality.
Tanta, thats not completely accurate regarding "HEL". In the ABS market, HEL is synonymous with Subprime - it is inclusive of both first and second lien collaterl. This misnomer came into being a couple of decades back when HELOCs and Closed End Second Liens (CES) were the bulk of the collateral in the ABS market. And ABX is just first liens I'm pretty sure.
The BS bull on with Jim Rogers and Marc Faber was Ken Fisher. If you ever view a Forbes.com article, the irritating autoplay flash ad is Ken Fisher shilling his investment company. His global supply argument was incredibly hollow. It was funny to see Faber and Rogers grinning after listening to Ken's shilling.
The other sharp-shooter on the Subprime Shockwaves show was the OC Treasurer Chriss Street. I think OC can breathe easy as he seems as far away from Citron as one could be.
And, yes, the host Brian Sullivan was a little clownish with the 'How do we fix this?' question. Shiller's answer was great: fix? Only through years of pain and reversion to the mean.
OT: David Wyss yesterday claimed that only a few billion was at risk from the subprime contagion. Today Bernanke said that between 50 and 100 billion was likely to disappear. Same thing Barclays wrote last week (I think they said between 75 and 100 billion.)
If that doesn't discredit that shyster Wyss, nothing can. Except another several years of downgrades, proving the original ratings as all quid pro quo.
bacon dreamz, I doubt the s&d market will recover for a long time. I never produced more than a modest share of it--you know us prissy goddam midwestern banker types--and what I did have I regularly unloaded on RFC or C-BASS. They don't appear to have limitless appetities any longer, and did you see the Newcastle deal of the Fremont POS? Hell, even a hedge fund kicked out something like $700MM out of that deal if I remember correctly. If the hedgies won't eat it, who will?
My guess with AHM has to do with my general sense that AHM's management cannot keep its mouth shut, and whatever they say at this point isn't helping. (I don't mean official statements. I mean the-mortgage-biz-is-still-a-smaller-town-than-you-think kind of stuff.) But that's a guess.
He testified that the central bank was progressing as fast as it responsibly could. Gee, as fast as it could would probably have meant cutting off the floodgates BEFORE borrowers started drowning in debt, not trolling the lake picking up bodies and hoping for survivors.
Aren't second liens protected a little more because the lender can go after the borrower for repayment where with the first lien all you can do is take the property?
If they are silent (truly) then how can we tell them from stand alone firsts?
They are called "silent" in the prospectus but obviously they are known to the originator. They don't know, however, if somebody subsequently takes a HELOC. So there are some even more silent piggybacks.
"If you have received a bid on a pool but have not yet decided whether to accept it, check with your investor; the bid may no longer be there. If it is, hit it now"
Anon, thanks for post. As the pools dry up and bids go away, doesn't this mean that mortgage rates should rise? They are lower (slightly) than a month ago and yet ABX is still crashing and has cratered during that time. Hard for this ubernerd to make sense of this connundrum.
the ABS market, HEL is synonymous with Subprime - it is inclusive of both first and second lien collaterl.
I'll have to take your word for it. When I hear people use the term "Home Equity Loan" to refer to a first lien, I find another seat further down the bar. But then I'm an MBS and RMBS kid. My momma didn't let me play with the ABS crowd . . .
California Inland Empire and San Bernadino Markets in "Free Fall"!
From Housing Bubble Blog:
The Press Enterprise reports from California. Inland Southern Californias home sales last month were the worst in a decade in Riverside County and the worst on record in San Bernardino County. In June, Riverside County posted 3,359 home sales, down more than 47 percent from June 2006. San Bernardino County recorded 2,190 home sales, a drop of more than 50 percent. The slowing market took a toll on sales prices.
We have seen rising foreclosure activity through the year and no sign it is done climbing, and we are now seeing some real steep declines in prices. It is very difficult to say where bottom is, said Andrew LePage, analyst for DataQuick.
The move-up market has almost disappeared, which has cut demand for homes in the $400,000 to $700,000 price range, said Scott Chappell, a director of the Inland Valley Association of Realtors. He said as a result home prices in Riversides Orangecrest area have dropped 15 percent in the past 18 months.
Bill Santoro, broker owner of National Realty Group in Moreno Valley, described the market there as almost in a free fall. Every time we move the price down to get ahead of the pack, the competition comes back just as fierce, dropping their price further.
What are the direct ramifications of these downgrades? A repricing of mark-to-market of the CDOs holding them (when that mark happens?) Increased margin calls?
And doesn't today seem just like March 2000, with the Dow determined to close above 14000 in the face of overwhelming evidence of overvaluation, exhaustion, and a significant downturn ahead?
I think the Mortgage Lender Implode-o-meter hitting 100 was a much more revelatory milestone.
Jim a, in all fairness that policy was already set by Greenspan, who was notorious for being anti-regulation, far before Bernanke got the job. Ben has only been there a short time and was faced with the choice of continuing the policy and hoping it would work out, or regulating and guaranteeing that something ugly would happen as it rocked an already unstable boat.
"losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent"
"Our model was broken, we have fixed our model, we hope although we have no experience with the current conditions."
I am increasingly of the opinion that the ratings agencies should be regulated or eliminated. Their past giuadance has proven misleading and their current guiadance is a self admitted guess. And the penalty for this amateur behavior?
The convertible they issued is semi-toxic. AHM has to issue more shares as their stock price goes down. From the 8-k it appears the minimum conversion price is a bit above $15 per share(original conversion price was around $39 per share). So this can account for some, but not all of the recent slide in the stock price.
"the market there as almost in a free fall. Every time we move the price down to get ahead of the pack, the competition comes back just as fierce, dropping their price further."
This is known as chasing the market down. The only way to play it is to get WELL ahead of the pack and just undercut the hell out of your competition. That's if you can afford to...
Seems to me the drums are becoming louder and louder in the "something oughta to be done about it" camp, and I expect we are going to see the GSE's pressed to loosen standards to extricate subprime borrowers from their predicament.
It is important to note that 127 of the classes affected by todays rating actions have been previously downgraded. In fact, prior to today, Standard & Poors had already lowered its ratings on 197 classes of U.S. RMBS backed by closed-end second-lien collateral issued between the beginning of January 2005 and the end of December 2006. Some of the classes affected by todays rating actions have been downgraded multiple times for a total of 275 previous downgrade actions.
This is known as chasing the market down. The only way to play it is to get WELL ahead of the pack and just undercut the hell out of your competition. That's if you can afford to...
Plus you have to be sure you can sell (exit) at that 'out front' price or it is just one more step in the race chasing the market down.
Way too often what an individual thinks is 'getting out in front' is really just keeping up with the pack - you're not likely to find your exit doing that.
Slightly off-topic: The graphs seem to have been removed from Markit's ABX historical page. Has anyone else experienced this? I'm thinking maybe they want to make it a bit more difficult for people to get a visual on how bad things are getting.
I expect we are going to see the GSE's pressed to loosen standards to extricate subprime borrowers from their predicament.
Syron doesn't sound like he feels it is FRE's place to bail-out the bad loans.
They even announced last week that they will buy less.
Yes, a bailout is good for the investment banks and ratings agencies, but finding a willing bailout partner might get difficult. Syron doesn't want to be the guy who willingly destroyed all semblance of solvency remaining in Freddie Mac.
Let the trickster investment banks fail, like a free market would. They will fail once the lawsuits get rolling. Or do our free-marketeers not want a free market anymore? (Hint: they never did.) Banker nanny state, anyone?
Tanta, in addition to big mouths, i think they also own several billion of private label investment grade RMBS...what happened to spreads on those this week? what are the repo haircuts on that stuff now? i don't think the s&d market will recover either, i was trying to say i think it's going to get much worse.
ok, am I too early, or can I officially say "eek!" yet?
I wonder how much longer until each agency finally finishes downgrading
And the winner is: GSAMP Trust 2006-S3. From AAA to BBB, AA->B, B (originally A)->CCC, CCC (originally BBB+)->D. I still think S&P is generous.
Serious question,
How many of these things are out there to be downgraded? Now I know most on this board will say all of them, but can we break it down a little...at what point are we going to get the headline "S&P downgrades last of xyz Securities"
Vega,
Let us know if you hear anything else....that is pretty big.
How many of these things are out there to be downgraded?
I was wondering the same thing - you almost need a program or a 'handicappers cheat sheet' just to keep track of all the horses coming up, race after race.
OT: Breaking news. "Bernanke sees housing demand stabilizing 'soon'".
I need a Downgrade-o-meter, categorazed by each agency.
In leetspeak:
Pzowned!!11!!!
Pwnage!!1!!1!
OT: Breaking news. "Bernanke sees housing demand stabilizing 'soon'".
poszi
I agree. When it hits 0, it will stabilize.
By "demand" he doesn't mean that people will buy a house. They will just "demand" a house. Not the same thing.
S&P downgrades 8 MBS from AAA to BBB
Does anybody know how this re-rating affects the related ABX? As MaxedOutMama pointed out the other day, when a prime borrower is in trouble, they refinance into a subprime. So the prime foreclosure numbers are falsely low. Is this same phenomenon going on with the ABX (or CDO's, shh)? I.e. does this garbage MBS stop degrading the AAA index, thereby falsely keeping it high?
Tanta? MOM? Thanks.
Of course, yesterday on the stock-whore channel (cnbc) David Wyss was underplaying the downgrades. Nice timing, Dave, liar.
Also, did anybody else see the Bloomberg TV subprime show last night? FRE's Dick Syron was quite straight-forward with statements like, 'what do you expect, we had a bubble', and 'I'd like to think we're in the fifth inning, but there's a lot more pain to come', and finally, 'the downturn will continue for a least another one and a half years."
The show also featured PIMCO's Paul McCulley, who royally slammed the investment banks (!!!); and Jim Chanos, Bob Shiller. Lockhart from the OFHEO was also trying his best to underplay the problem, even denying that prices are negative yoy. It was an entertaining show, which was the best exposure yet on MSM.
Hopefully they replay it this weekend.
dotcommunist,
ABX has only first-lien-backed securities. First-liens look grim but not so bad as second-liens.
ABX has only first-lien-backed securities
Uh, are you sure about that?
Thanks, poszi.
I thought the HE stood for home equity lines, or second liens.
By the looks of the ABX, I guess that means the overall picture is even grimmer than I thought. Ouch.
wake me when they downgrade alt-a.
Uh, are you sure about that?
Well, I'm not sure there are absolutely no second liens but these are not securities backed by second-liens such as these downgraded by S&P.
Let me go through the prospectuses.
What are "closed-end" leins?
im pretty sure there are some second liens in those ABX pools.
CR did a post on the "green shoe" on the blackstone IPO. he should check out the MF offering today.
"Closed end" means that the entire loan amount was disbursed at closing, and cannot increase by future advances. (If it's neg am, the balance can increase because of capitalizing interest, but not by the borrower drawing more funds out.) It is used in reference to second liens to distinguish them from lines of credit, or HELOCs, where the initial disbursement at closing can be a fraction of the credit limit.
Some people use HEL to mean closed-end second and HELOC to mean line of credit. Since HEL and HELOC are easy to confuse, the more formal term "closed end" is used for the HELs.
Jim a
A closed end lien is a true second lien (HELOAN), not a revolving line of credit (HELOC). When the loan is originated, the borrowers are given the entire loan amount and then it is amortized. They can't take additional draws like on a line of credit.
dotcommunist,
The ABX.HE index pools are static; if a component gets a rating downgrade from AAA to BBB it stays in the AAA pool.
Dotcommunist,
I worked at a company where Syron came in as CEO. He turned around the failing company in a few years.
If Syron doesn't give you brilliance with easy to understand presentation, he's having a bad day.
Thanks, Pablo. I guess the question now is how many in the AAA pools will still be AAA in 6 months.
does anybody have a guess at how much product the scratch and dent market is capable of absorbing (or willing to absorb)?
If Syron doesn't give you brilliance with easy to understand presentation, he's having a bad day.
lama - he was having a good day during the Bloomberg interview. Worth watching - everyone - before it gets pushed off the server.
does anybody have a guess at how much product the scratch and dent market is capable of absorbing (or willing to absorb)?
If banker was here I'd bet he'd say something like...
All of it... but at what price?
That's gonna get interesting. I think there were some links yesterday saying hedgies are already starting to drool & lick their beaks, vulture like.
Mish's Global Economic Trend Analysis: The Alt-A Word
Meanwhile, Bear Stearns, which last month said it would offer a $1.6 billion loan to shore up the more "conservative" of the two funds and help it sell its assets, nonchalantly reported yesterday that about $1.4 billion of the loan remains untapped, the New York Times said.
So, in other words, it appears Bear Sterns was able to either sell or take down internally all the holdings of the funds at a level that wipes out customers, but leaves the firm fairly well covered.
Bloomberg program was spot on last night...who was the bull investor with all the hand motions in the leather chair "franklin or something?
Nice catch by a reader over at DealBreaker.com on the BearStearns apology letter to hedgefund investors:
"the best line is "The risk management function at BSAM has been restructured so that it will now report up to Mike Alix, Bear Stearns chief risk officer, creating an additional layer of oversight."
So wait, let me get this straight: prior to this month (week?) risk management in the Asset Management group DIDN'T report to the Chief Risk Officer??????
Gee, its a wonder why these funds tanked in light of this little gem, oy!
bacon dreamz, I think the actual scratch & dent market is still there, at least to some extent.
But this stuff is gouge and crater, not scratch and dent. And as far as I can tell there isn't much going on at the G&C desk . . .
OK, I looked at 18 of prospectuses of ABX 2007-1 securities (I couldn't locate Structured Asset Securities and J.P. Morgan Mortgage Acquisition Trust; there are some spelling variants in Edgar that are difficult to search).
The balance of second liens is (starting from Fremont, ending with Citygroup as in ABX-HE-AAA 07-1 constituents description):
6.0%
4.2%
3.11%
0%
5.96%
2.7-3.2% (depending on pool)
? (Structured Asset)
3.23%
? (J.P. Morgan)
6.29%
3.53%
6.23%
6.01%
0%
trace (GSAMP, I couldn't understand the prospectus but based on the average coupon the fraction of 2nds cannot be high)
1.58%
6.29%
3.99%
0.80%
4.48%
This is too little to be a major problem (but they are likely contributing to the worse performance). Of course quite a lot of first liens have piggybacks not pooled in these securities.
The securities downgraded by S&P are totally or mostly second-liens.
poszi,
So you are saying that piggy backs show up as smaller seperate firsts? rather than seconds? or tieed into firsts or not at all?
The Bloomberg video was good, Syron and Shiller both good points, though the talking head was a bit of a chucklehead.
"Housing prices are declining . . . How can we fix this?"
Falling prices ARE the fix to a bubble. People can be so obtuse.
the box head was Faber
It son Bloomberg TV
McCulley, Faber and Rogers on Subprime:shockwaves was the program.
Tanta, i was going to say it would wound and fester, but gouge and crater works. i guess my question really is how long will the s&d market be there? what if there's still a wave of alt-a paper that needs a home and a someone like a reit has no s&d market to sell into? and why is AHM down so much again???
Anonymous,
There are 3 possible situations for the pool of mortgages:
First liens (no piggybacks)
First liens with silent second liens (with piggybacks included in the same or other pool)
Second-liens
In the ABX index pools there little second-liens but there is usually a quite large fraction of first-liens with piggybacks. These piggybacks are often securitized separately. Such securities (usually with "SL" or "S suffix) are performing badly and were downgraded by S&P in this report.
Bernanke in testimony stating that subprime related losses will be $50 to $100 Billion. What I'd like to know is where he gets the estimate that consumers may pull back from spending $0.09 for every dollar of wealth lost..
CNNMoney.com: 404 Page Not Found
WASHINGTON (Reuters) -- Federal Reserve Chairman Ben Bernanke said on Thursday that subprime mortgage losses could hit $100 billion and threaten consumer spending, but he sought to reassure lawmakers that the central bank was working quickly to strengthen lending regulations.
"The credit losses associated with subprime have come to light and they are fairly significant," Bernanke told the Senate Banking Committee in a second day of testimony on the Fed's twice-yearly economic report.
"Some estimates are in the order of between $50 billion and $100 billion of losses associated with subprime credit problems," he said, referring to a segment of the mortgage market that caters to borrowers with shaky credit.
Bernanke said that the most reliable indicators show U.S. home prices have not declined nationally and that the housing slump had so far not led U.S. consumers to cut back on spending.
He said, however, that if prices did drop, consumers might trim spending by as much as 9 cents for each dollar of wealth lost.
As a result of the weaker-than-expected housing sector, the Fed has lowered its growth forecasts for this year and next, but the U.S. central bank believes the drag should ease over time.
Bernanke outlined steps the Fed has taken or plans to take to ensure that the subprime problems do not recur, but sharp questions from members of the committee showed some lawmakers think the Fed was not acting swiftly enough as foreclosure rates soar.
He testified that the central bank was progressing as fast as it responsibly could."
...
From Housing Bubble Blog:
Bloomberg, MGIC Investment Corp., the largest U.S. mortgage insurer, said second-quarter profit plunged 49 percent as it paid more in claims. MGIC, which protects banks against defaults on home loans, said losses climbed 61 percent to $235.2 million.
We know California is a developing problem. We know Florida is a developing problem, said Geoffrey Dunn, analyst at Keefe Bruyette & Woods Inc. Its simply the amplitude thats the surprise in the quarter. Were going to need help from management and a lot more color on specifically what happened.
From Nautilus Capital Today
Scratch & Dent Loan Pricing Will Continue to Decline
Loan sale pricing is not going to improve in the foreseeable future; in fact, it will probably get worse. Unless you are prepared to hold the loans to maturity, our advice is to liquidate your inventory now. You may not like todays pricing, but you will like tomorrows even less.
As everyone in the industry now knows, most mortgage loans ultimately wind up on Wall Street in a securitization trust. The securitization market thus plays a vital role not only in pricing in the secondary market, but also in establishing underwriting criteria. An illustration of market-driven tighter lending standards was provided by todays announcement that subprime 2/28 ARM loans will no longer be purchased by many investors. This is a direct result of recent changes by the rating agencies (Standard & Poors, Moodys, etc.), who determine the subordination and overcollateralization levels necessary for the different risk grades (or tranches) of the securitization trusts. If you have any such loans in your inventory it is probably too late to sell them except in the scratch & dent market.
Separately, several recent events are having a significant adverse effect on loan pricing, of all credit grades. The bankruptcies of a number of large subprime lenders (the latest being Alliance Bancorp, last week) is well known, but what is not widely understood is that their portfolios are being dumped on the market in huge volumes by their creditors. Similarly, a pair of highly-leveraged mortgage hedge funds managed by Bear Stearns recently collapsed, causing near-total losses to their investors. Their portfolios are being liquidated, but the sales apparently are not going well; rumor has it that only a small portion has yet been sold, and at a significantly higher discount than anticipated.
These massive sales are depressing pricing across the board. Prices on the ABX indices (used by mortgage bond traders to manage risk) have declined severely in just the last week. The trend lines for the AAA and BBB- tranches (the highest and lowest risk grades, respectively) are shown in the graphs above. Note that the AAA line, which was stable for so long, has now collapsed. Investors in these highest-quality bonds, who once thought they were immune to credit quality issues in the underlying loans, are now not so sure. The BBB- tranche, which is necessary to support pricing for all the higher grades, is trading for half of what it was in January.
What this all means to lenders is that loan prices are dropping precipitously, and you should complete any pending sales (premium as well as scratch & dent) as quickly as possible. If you have received a bid on a pool but have not yet decided whether to accept it, check with your investor; the bid may no longer be there. If it is, hit it now.
Please contact your loan sale advisor at Nautilus Capital to discuss market conditions or assist in selling
Boy -- so many good "Bubble Popping" stories this morning -- and CR is nowhere to be seen.
From Reuters:
From Reuters. Troubles in mortgageland may get worse before they get better, especially for the so-called subprime borrowers whose spotty credit histories put them into more costly loans.
Its an amorphous blob of trouble, says Keith Gumbinger of HSH Associates, a mortgage research firm. And theres more pain to come.
In the first quarter of this year, roughly one of every 41 subprime loans was entering foreclosure, and more than one of every six were delinquent, according to the Mortgage Bankers Association. Those are the worst mortgage default statistics since the Great Depression.
And its likely to get worse because the 2006 crop of mortgages, which will start resetting next year, were of a particularly low quality.
Poszi,
If they are silent (truly) then how can we tell them from stand alone firsts?
Bloomberg News
Subprime shockwaves video from Bloomberg (40 minutes long), the first half is especially good.
Tanta, thats not completely accurate regarding "HEL". In the ABS market, HEL is synonymous with Subprime - it is inclusive of both first and second lien collaterl. This misnomer came into being a couple of decades back when HELOCs and Closed End Second Liens (CES) were the bulk of the collateral in the ABS market. And ABX is just first liens I'm pretty sure.
The BS bull on with Jim Rogers and Marc Faber was Ken Fisher. If you ever view a Forbes.com article, the irritating autoplay flash ad is Ken Fisher shilling his investment company. His global supply argument was incredibly hollow. It was funny to see Faber and Rogers grinning after listening to Ken's shilling.
The other sharp-shooter on the Subprime Shockwaves show was the OC Treasurer Chriss Street. I think OC can breathe easy as he seems as far away from Citron as one could be.
And, yes, the host Brian Sullivan was a little clownish with the 'How do we fix this?' question. Shiller's answer was great: fix? Only through years of pain and reversion to the mean.
OT: David Wyss yesterday claimed that only a few billion was at risk from the subprime contagion. Today Bernanke said that between 50 and 100 billion was likely to disappear. Same thing Barclays wrote last week (I think they said between 75 and 100 billion.)
If that doesn't discredit that shyster Wyss, nothing can. Except another several years of downgrades, proving the original ratings as all quid pro quo.
bacon dreamz, I doubt the s&d market will recover for a long time. I never produced more than a modest share of it--you know us prissy goddam midwestern banker types--and what I did have I regularly unloaded on RFC or C-BASS. They don't appear to have limitless appetities any longer, and did you see the Newcastle deal of the Fremont POS? Hell, even a hedge fund kicked out something like $700MM out of that deal if I remember correctly. If the hedgies won't eat it, who will?
My guess with AHM has to do with my general sense that AHM's management cannot keep its mouth shut, and whatever they say at this point isn't helping. (I don't mean official statements. I mean the-mortgage-biz-is-still-a-smaller-town-than-you-think kind of stuff.) But that's a guess.
do you think it is possible or a good idea to short HLT ?
It does not have any upside potential but if the deal fall through (no syndication of bonds) it can drop to pre-deal price or more ?
He testified that the central bank was progressing as fast as it responsibly could. Gee, as fast as it could would probably have meant cutting off the floodgates BEFORE borrowers started drowning in debt, not trolling the lake picking up bodies and hoping for survivors.
Aren't second liens protected a little more because the lender can go after the borrower for repayment where with the first lien all you can do is take the property?
If they are silent (truly) then how can we tell them from stand alone firsts?
They are called "silent" in the prospectus but obviously they are known to the originator. They don't know, however, if somebody subsequently takes a HELOC. So there are some even more silent piggybacks.
"If you have received a bid on a pool but have not yet decided whether to accept it, check with your investor; the bid may no longer be there. If it is, hit it now"
Anon, thanks for post. As the pools dry up and bids go away, doesn't this mean that mortgage rates should rise? They are lower (slightly) than a month ago and yet ABX is still crashing and has cratered during that time. Hard for this ubernerd to make sense of this connundrum.
the ABS market, HEL is synonymous with Subprime - it is inclusive of both first and second lien collaterl.
I'll have to take your word for it. When I hear people use the term "Home Equity Loan" to refer to a first lien, I find another seat further down the bar. But then I'm an MBS and RMBS kid. My momma didn't let me play with the ABS crowd . . .
California Inland Empire and San Bernadino Markets in "Free Fall"!
From Housing Bubble Blog:
The Press Enterprise reports from California. Inland Southern Californias home sales last month were the worst in a decade in Riverside County and the worst on record in San Bernardino County. In June, Riverside County posted 3,359 home sales, down more than 47 percent from June 2006. San Bernardino County recorded 2,190 home sales, a drop of more than 50 percent. The slowing market took a toll on sales prices.
We have seen rising foreclosure activity through the year and no sign it is done climbing, and we are now seeing some real steep declines in prices. It is very difficult to say where bottom is, said Andrew LePage, analyst for DataQuick.
The move-up market has almost disappeared, which has cut demand for homes in the $400,000 to $700,000 price range, said Scott Chappell, a director of the Inland Valley Association of Realtors. He said as a result home prices in Riversides Orangecrest area have dropped 15 percent in the past 18 months.
Bill Santoro, broker owner of National Realty Group in Moreno Valley, described the market there as almost in a free fall. Every time we move the price down to get ahead of the pack, the competition comes back just as fierce, dropping their price further.
What are the direct ramifications of these downgrades? A repricing of mark-to-market of the CDOs holding them (when that mark happens?) Increased margin calls?
Darth Toll,
Rates for subprime are higher. Option One increased rates by 75 bps since June.
And doesn't today seem just like March 2000, with the Dow determined to close above 14000 in the face of overwhelming evidence of overvaluation, exhaustion, and a significant downturn ahead?
I think the Mortgage Lender Implode-o-meter hitting 100 was a much more revelatory milestone.
The Mortgage Lender Implode-O-Meter - tracking the housing finance breakdown, related to Alt-A and subprime mortgages, lending fraud, predatory lending, housing bubble, mortgage banking, foreclosures, debt, consolidation, lawyers, class-action lawsuits (thanks, Aaron)
Darth,
Your welcome, sell em while they're hot.
DotCom,
Yes I owe an appology to Farber, I called his name instead of Fisher,,,
Now I know where he gets his brain power from , his head is pulled back from all the negative G's he is pulling in his fall from grace.
Amy,
It's not a repricing thats in order more of a reguidance on marking period.
Aynon Rano
Jim a, in all fairness that policy was already set by Greenspan, who was notorious for being anti-regulation, far before Bernanke got the job. Ben has only been there a short time and was faced with the choice of continuing the policy and hoping it would work out, or regulating and guaranteeing that something ugly would happen as it rocked an already unstable boat.
Yal-go after HOT or Starwood Hotels; they don't even have an offer.
So, Banker, is today a "coincidence" or not?
"losses on U.S. RMBS backed by closed-end second-lien collateral will significantly exceed historical precedent"
"Our model was broken, we have fixed our model, we hope although we have no experience with the current conditions."
I am increasingly of the opinion that the ratings agencies should be regulated or eliminated. Their past giuadance has proven misleading and their current guiadance is a self admitted guess. And the penalty for this amateur behavior?
Robert, second that sentiment.
Re -AHM
The convertible they issued is semi-toxic. AHM has to issue more shares as their stock price goes down. From the 8-k it appears the minimum conversion price is a bit above $15 per share(original conversion price was around $39 per share). So this can account for some, but not all of the recent slide in the stock price.
Liquidity?
"Rates for subprime are higher. Option One increased rates by 75 bps since June."
True, but ABX's have been crashing accross all tranches so this should affect AAA and AA, no?
Where o' where are my higher mortgage rates at?!?
"the market there as almost in a free fall. Every time we move the price down to get ahead of the pack, the competition comes back just as fierce, dropping their price further."
This is known as chasing the market down. The only way to play it is to get WELL ahead of the pack and just undercut the hell out of your competition. That's if you can afford to...
Seems to me the drums are becoming louder and louder in the "something oughta to be done about it" camp, and I expect we are going to see the GSE's pressed to loosen standards to extricate subprime borrowers from their predicament.
It is important to note that 127 of the classes affected by todays rating actions have been previously downgraded. In fact, prior to today, Standard & Poors had already lowered its ratings on 197 classes of U.S. RMBS backed by closed-end second-lien collateral issued between the beginning of January 2005 and the end of December 2006. Some of the classes affected by todays rating actions have been downgraded multiple times for a total of 275 previous downgrade actions.
Anon Ranon..
This is known as chasing the market down. The only way to play it is to get WELL ahead of the pack and just undercut the hell out of your competition. That's if you can afford to...
Plus you have to be sure you can sell (exit) at that 'out front' price or it is just one more step in the race chasing the market down.
Way too often what an individual thinks is 'getting out in front' is really just keeping up with the pack - you're not likely to find your exit doing that.
Slightly off-topic: The graphs seem to have been removed from Markit's ABX historical page. Has anyone else experienced this? I'm thinking maybe they want to make it a bit more difficult for people to get a visual on how bad things are getting.
I expect we are going to see the GSE's pressed to loosen standards to extricate subprime borrowers from their predicament.
Syron doesn't sound like he feels it is FRE's place to bail-out the bad loans.
They even announced last week that they will buy less.
Yes, a bailout is good for the investment banks and ratings agencies, but finding a willing bailout partner might get difficult. Syron doesn't want to be the guy who willingly destroyed all semblance of solvency remaining in Freddie Mac.
Let the trickster investment banks fail, like a free market would. They will fail once the lawsuits get rolling. Or do our free-marketeers not want a free market anymore? (Hint: they never did.) Banker nanny state, anyone?
Tanta, in addition to big mouths, i think they also own several billion of private label investment grade RMBS...what happened to spreads on those this week? what are the repo haircuts on that stuff now? i don't think the s&d market will recover either, i was trying to say i think it's going to get much worse.
The graphs seem to have been removed from Markit's ABX historical page.
They are still there on the ABX Index page - just not available for the 07-2 series yet (didn't load for me anyway).
ABX Indices
- click on any one lower than the 07-2 series...
Also FWIW - looks like ABX is rebounding too, at least the few I looked at - well off bottoms.