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Please don't feed the trolls.
um..do you mean 98% were fixed rate? Wouldn't that be a GOOD thing?
Wouldn't that be a GOOD thing?
Sure, if these "good" fixed rates weren't defaulting at this rate. My point was that rate shocks on the second lien didn't do these loans in, and fixing the rate obviously didn't mitigate enough risk.
Historically, you know, a "purchase-money" percentage of 81% would have been considered GOOD, too.
The trouble with a fixed-rate second is that unless you put it behind a fixed rate first lien, you still have adjustment-shock risk. The other problem, of course, is starting out with a 44% DTI.
Jim - These are SECOND liens, not first. So if the borrower can't pay, it's not going to matter if it's fixed or not.
Moody's deserves most of the blame. Methinks they will eventually be sued out of existence.
Nice catch Tanta. Mish has been following a similarly toxic pool out of WaMu. I understand the motivations of the originators and Mother Merrill (big commissions I assume).
What about the buyers of these things? Were they just buying anything that Moody's or S&P rated AAA without any due diligence of their own? Did they have cash coming in that they had to "put to work" no matter what? What did the managers of these Funds risk if they put the money into Treasuries instead?
Moody's deserves most of the blame.
I think Norris's point, which is perfectly legitimate, is that there just cannot be an institutional investor who could have missed the fact that ML had these loans to securitize because they'd had to take over the loans in Ownit's warehouse, and that Ownit was flaming out spectacularly.
The rating agencies have a lot to answer for, but so do investors who apparently read three characters (AAA) out of a 200+ page prospectus.
Nice example, Tanta, and a big jaw-drop that the rating agencies could give this AAA. I teach a related university course and will post this one to warn the students.
They See It In Atlanta:
As Fulton's chief appraiser, Burt Manning finds it hard to believe any parcel in Fulton is worth less than $10,000.
Still, real estate listings prove they are.
"We are trying to understand all these things," said Manning. "What's the right answer? We don't know. It's tough. I've got entire neighborhoods where all I've got is distressed sales. I don't have any good sales."
In fact, seven of Atlanta's least-expensive homes are listed on average for $8,800 but taxed at an average value of nearly $93,000.
The cheapest, at 336 Adelle Street in the Lakewood area, comes in at $5,900. Tax records list its value at $101,700.
The problems are pronounced in areas like West End, Lakewood and Vine City.
Wayne Flanagan, a RE/MAX agent who sells bank-owned properties, said in zip codes like 30310 and 30315 values have taken a nosedive faster than public officials can account for.
"There are some price ranges like $20,000-$80,000 where 90 percent of the properties on the market are foreclosures," Flanagan said. "You've got one bank competing against another. It's a spiraling situation, downward."
Atlanta Metro News | ajc.com
If you can't trust Moody's and friends, they should be out of business. Smaller inverstors have no choice but to trust a ratings agency.
This sort of feels the same as our president lying to get into war. Colin Powell was Moody's.
Mel
Except that the president probably thought he was telling the truth. Could the folk issuing this security have believed it deserved AAA?
S.& P. is even more negative than Moodys about the likely recoveries from securities backed by piggyback loans, and wants nothing more to do with such deals. Citing an unprecedented level of loan performance deterioration, it announced this month that it would no longer rate such securities.
correct me if I'm wrong, but this would seem to have serious complications with future 80/20 and 80/10/10 loans and so on, right?
I remember a long time ago, maybe it was six months, someone asked how much more yield investors were looking for in order to assume these huge risks,...the answer was," Don't ask, it'll make you want to cry." So true.
Nice piece Tanta, its an example that is central to understanding this crisis.
Congress really should consider abolishing the special legal status of the ratings agencies. Letting anyone compete on a level-playing field will bring new competition to the ratings game, drive innovation, and give investors better information.
who apparently read three characters (AAA) out of a 200+ page prospectus.
ROFL. best line of the week. however, it highlights a problem IMO.
as Buffett said, you have to read some umpteen thousand pages just to "understand" one CDO (or was it a CDS?).
the investors relaxed (and were blinded by greed) because at least somebody was doing some due diligence (the ratings agencies).
but now we see that was all hoo-hockey. so we have a bunch of incomprehensible structures that can likely never be understood. that's gotta hurt.
in the end, I think this is what is spurring the Fed to do what it does... it looks into the abyss and doesn't like what it sees. I can imagine a firm like Bear going down, and it taking YEARS for people to figure out if they're solvent or not.
but how to put it back together? in the end, these deals going forward are still incomprehensible!
this of course has little to do with this particular deal, because the newspapers were blaring out what a bad deal it was...
81% purchases in a pool, is not an "ugly" attribute.
Neither is the fact that 98% of loans are fixed-rate.
A WA DTI of 44.27%, on the other hand, is just downright FUGLY!
Patrick writes:
Mel
Except that the president probably thought he was telling the truth. Could the folk issuing this security have believed it deserved AAA?
Maybe Bush is intellectually challenged, but his cabinet wasn't. Maybe Moody's thought no one would notice, but Powell knew lives were going to get lost. Merrill did it for the buck, Moody's to save a buck, Bush for politics, Powell for military obedience. No body was in it for the investor/voter.
lets stick to mortgages. They are complicated enough without bringing the war into this.
Mel:
'Moody's to save a buck' - you're saying they did a quick and sloppy job? Certainly seems like it.
But can anyone provide a link to where Moody's or other agencies supposedly indicated years ago that AAA on these securities wasn't intended to mean the same as AAA on corporates? And maybe that the possibility (surely always a 10% chance) of a big drop in house prices was explicitly excluded from consideration.
LEH, MS, MER, JPM, BSC... all the banks are slashing jobs like there's no tomorrow.
Expired
Presumably higher paying positions. Then there are the knock-on effects. NYC might be in for a bumpy ride over the next year or so as this trend continues. It's no surprise, really. The question is, what were these people doing to contribute to the economy? Not much of anything positive, I'm sure.
Yesterday there was a piece on seeking alpha telling people they should just stop paying the second loan if they are under financial stress. This might get worse.
This deal had 14.6% staring overcollaterization which was gone after 10 months. It's pretty amazing. However, this relatively large overcollaterization means that the AAA tranches might not suffer as much as some older deals where overcollaterization was thin and was supposed to grow from the excess spread which has never materialized. My candidate for the worst deal (for the investors) is GSAMP Trust 2006-S5 which is going to default on the original AAA tranches as early as next month and where all the tranches below AAA have already defaulted. This deal had only 2% of the starting overcollaterization.
What about the buyers of these things? Were they just buying anything that Moody's or S&P rated AAA without any due diligence of their own?
Are there any cases in which a financial advisor has used as his/her sole defense after a recommendation blew up that it was rated AAA?
MEL:
You should examine your facts about what everyone was saying about Iraq & Saddam. To keep it off this thread, look at the following with Al Gore, Clinton, Kerry saying the SAME things. In 1992 Gore accused Bush 41 of lying by minimizing the threat that Saddam posed to the US and the world.
Clinton, Kerry, Gore call for War against Saddam’s Iraq (15 videos) « What Do You Believe?
Hot Air » Blog Archive » AlGore Video: Bush (41) Lied, People Died — 1992 edition
Don;t get caught up in partisanship. I believe that ALMOST ALL of the politicians in DC are inept - look at all the Wall Street bailouts - but to accuse Bush specifically of lying, etc., is intellectually bankrupt when everyone including our Euro allies were saying the same thing.
Unfortunately I can tell you from experience that here is MA the rates where anywhere between 11-13.875 on these seconds; Whatever it took to make the deal pass high cost
"LaSalle Bank National Association, Wilshire Credit Corporation, Litton Loan Servicing LP, Countrywide Home Loans Servicing LP, Citibank, N.A"
Someone actually expected this thing to perform with THIS bunch of thieves involved in it? The fact that Wilshire and Litton are involved would make me run for the hills. The fact that Wilshire is involved raises red flags all over the place since Wilshire is Merrill's servicing arm. IF Wilshire creates the defaults. it collects the late fees, BPO bloat, etc. and keeps the profit in-house for Merrill.
Let's see what the PSA says about "additional servicing compensation".
"Each Servicer is also entitled to receive, as additional servicing compensation, Prepayment Interest Excesses, excess proceeds from REO Property sales and all service-related fees, including all late payment charges, insufficient funds charges, assumption fees, modification fees, extension fees and other similar charges (other than prepayment charges), all investment income earned on, and benefits arising from, amounts on deposit in the Collection Accounts and amounts on deposit in escrow accounts not required to be paid to the Mortgagors."
Excess proceeds from REO sales? Wouldn't that mean that, collectively, the entities involved are profiting more than simply P&I and "fees"? Does this not translate to "any excess EQUITY"? Where in any mortgage contract does the mortgagor agree to relinquish any and all "excess" equity that they may have in a property? It has always been my understanding that any "excess" equity was to be returned to the mortgagor after a FC sale. Oh wait, we're talking about REO sales not FC sales. At the point that an REO sale takes place, the note holder owns the property which means that the note holder most likely purchased the property for the amount due on the loan thereby wiping out any equity that the mortgagor may have had.
Here's where the red flag goes up because of Wilshire's involvement - and Litton, Countrywide, and everyone else servicing for that matter - but especially Wilshire. We know, factually, that servicers will hold mortgagor payments until past due, thereby creating late fees for themselves. As Wilshire is owned by Merrill, Wilshire would simply need to hold X number of payments to the pool beyond grace periods in order to create "additional servicing compensation" for themselves and, ultimately, Merrill. Litton et al could create the same "default" situations as well. As long as the monthly disbursement to Merrill is covered, why would Merrill care?
Until and unless the manner in which servicers are "compensated" is rectified OR the entire securitization process is unwound this bullshit is going to continue.Which do you think has a better chance of happening? This is Mortgage Servicing Fraud at it's core.
The Senate Committee on the Judiciary held a hearing before the Subcommittee on Administrative Oversight and the Courts on Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis? May 6th. http://www.senate.gov/cgi-bin/404s.pl?urlminushost=/hearing.cfm&remote_addr=67.170.2.103&httphost=judiciary.senate.gov - This page cannot be found.
This is exactly what the testimony from Professor Katherine Porter, Trustee Debra Miller and Director Clifford White's addressed - albeit from a bankruptcy perspective.
With regard to subcommittee hearing, all I can say is that bankruptcy does not create Mortgage Servicing Fraud, Mortgage Servicing Fraud creates bankruptcy.
As I see it, it's the Fuhrerbunker mentality: They knew what would happen, but kept going through the motions, moving imaginary armies around on the big map.
Lemmings.
So what is the Fed going to do with all this stuff?
"So what is the Fed going to do with all this stuff?"
They'll securitize it.
"R0h1tp writes:
MEL:
You should examine your facts about what everyone was saying about Iraq & Saddam. To keep it off this thread, look at the following with Al Gore, Clinton, Kerry saying the SAME things. In 1992 Gore accused Bush 41 of lying by minimizing the threat that Saddam posed to the US and the world."
2 points--the buck stops where? and the above mentioned were given faulty intelligence deliberately.
As for Gore, 1992 was not 2002--circumstances change. This isn't partisanship on my part, Pelosi could end this shit and doesn't. She's married to this fiasco.
Back on topic, Moody's and friends only raison d'etre is to give accurate, in depth information. To call this crap AAA means they are useless. They were in a conspiracy with Wall St to fleece the believers--the cop was on the take.
Poszi, I don't know... GSAMP 2006-S3 has achieved near legend status. To the point where Goldman's is probably wishing they'd printed it on toilet paper, both for utility and a$$ covering. Not to mention you could flush it.
What's indefensible isn't any individual attributes but the layering of risk. To think you're going to get a AAA bond out of a pool of high CLTV low doc purchase transactions is absurd. How can you predict an aggregate behaviour when there is no solid information on any of the individual loans? What's even worse is that these are 2nd liens. What's your recourse if the loan defaults?
A mistake to avoid in investing by Mish.
"those shorting interest rate futures or treasuries based on prices at the grocery store have had their heads handed to them on a platter"
Mish's Global etc.
What's your recourse if the loan defaults?
Why do you hate America? It's people like you asking questions like these that are going to drive our economy into the ground. Go buy an SUV, say ten -Our Fathers- and go forth and sin no more.
R0h1tp - Thank you.
Moody's, MCO, last week advanced from $39.44 on Monday to close yesterday at $45.00. I know, I was short. People who think the market is a discounting mechanism have bought into a lie. This was a short massacre plain and simple.
As long as they could stick it to the naive foreign investors why not? Why don't we have a tally of the winners and losers out of this fiasco? Maybe then we know the whole schemes were not so accidental.
"They knew what would happen, but kept going through the motions, moving imaginary armies around on the big map"
Basically. By removing reason from the entire arrangement and replacing it with silly models based on irrelevant nonsense. It sort of worked by accident, for a while. Piling on already record debtloads without increasing the means of servicing it couldn't possibly work. WHat was remarkable was how long the bubble lasted before the debtors cracked.
What's even more remarkable is the government is going to try to step in and support the house of cards they ignored during construction.
The GSE are trying to pump this bubble back up. This article make me realize the scope of the money and stupidity that it took to inflate the market in the first place. They might have the stupidity but they dont have the money to reinflate the bubble. TIMBER .....
Severely OT-
What sort of insects do you rejoice in, where YOU come from?' the Gnat inquired.I don't REJOICE in insects at all,' Alice explained,
Tanta, I'm addicted to Calculated Risk, but actually it's not my favorite blog! My favorite blog is http://whatsthatbug.com/
It's hosted by a couple art teachers. It's a nice gathering of bugs and people who "rejoice in insects"
If you ever feel the need to get away from the sordid chase after filthy lucre.
The scheme at the heart of the bubble works for a time, that is how they get going. Mid 2006 many of the players were still pointing to their 2004 and 2005 successes to argue that the scheme was working and rake in more fees.
I'm not sure when the high fives stopped but here is a blog post that captures an interesting moment in the life of the bubble.
link
oops, link to nowhere. newfangled interweb. Try this
Winter (Economic and Market) Watch » New Century and Novastar: the End of “Glory Days”
«If you can't trust Moody's and friends, they should be out of business. Smaller inverstors have no choice but to trust a ratings agency»
Those entirely justified AAA ratings encouraged a lot more CDO issuance, and thus a lot more ratings business and and a colossal rise in Moody's share price.
Moody's stock QUINTUPLED in a few years, and presumably Moody's management and analysts became very very wealthy thanks to lots of AAA ratings, all of course entirely justified on the basis of their best judgement. Look at this graph and you will see:
http://money.cnn.com/quote/chart/charts.popup.html?symb=MCO&time=30yr
Most of that stuff was bought by the retirement fund for the Norwegian village I think. I doubt if they'll be back soon.
Super yikes.
"...but to accuse Bush specifically of lying, etc., is intellectually bankrupt when everyone including our Euro allies were saying the same thing."
I call bullshit.
This is a quality blog and we don't need contrafactual nonsense posing as an argument here. You are dead wrong and sadly, there are thousands of real dead who have died as a result of this neocon wet dream.
""...but to accuse Bush specifically of lying, etc., is intellectually bankrupt when everyone including our Euro allies were saying the same thing."
Huh?
Has Bush ever told anything according to truth?
The only Euro that told the same lies as Bush was his poodle Tony.
All citizens of Dumbfuckistan should be tared and feathered for voting this lier into office TWICE!
"If you can't trust Moody's and friends, they should be out of business. Smaller inverstors have no choice but to trust a ratings agency."
Yes they do. Don't buy bonds you don't understand. I'm not defending the rating agencies here, but there's a lot more to investment than just default risk, which is all that a credit rating tells you. If you can't model the cashflows of a securitisation, you shouldn't be buying it. A credit rating tells you nothing about default timing, prepayment rates or recoveries (yet - that's about to change). You can't make sensible decisions about securitisations without thinking about those things. The rating agencies deserve a lot of blame for the subprime fiasco, but greedy and stupid investors deserve far more.
This is happening because the servicers have stopped servicing second liens. They tell the borrowers "forget about the second lien, let's focus on the first". I have been told by several sevicers that they have given up on the sector. Thay sacrifice the second lien for the benefit of the first lien. Never mind their obligations detailed in the pooling and servicing agreement.
I am a lawyer who prosecutes securities fraud cases, particularly class actions. My firm, Shapiro Haber & Urmy LLP in Boston, is investigating the Merrill Lynch Mortgage Investors Trust issuance that Norris wrote about (and other similar securities offerings). If anyone had the misfortune to be sold this offering or a similar offering, I would be very interested in talking to you about it. There would be no obligation on your part. I can be reached at 617-439-3939 or ehaber@shulaw.com.