You've probably seen the news already, but don't miss the immolation at Ownit Mortgage, which just shut its doors virtually overnight. I've seen the subprime industry implode before (back in 1998) and we could see something similar this time if the debt markets start tightening up.

Here's a Marketwatch story on the topic:

MarketWatch.com

Here are my thoughts ...
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I think the problems in the subprime industry have been a long time coming ... and it's relatively common knowledge that lenders are having problems. Several companies have discussed the surge in first-payment/early payment defaults and I've seen news stories about end investors putting a lot more loans back to originators. Bloomberg also had a story or two about how spreads on higher risk mortgage bonds are widening. And of course, this week, both the Wall Street Journal and the New York Times reported on how subprime mortgages are performing very poorly. Who knows exactly what the details (how long management knew about the problems, for instance) are in this case. I certainly don't. But I will say that in 1998, when things last blew up in subprime-land, the timeline from initial trouble to outright shutdowns/office padlockings was very short.

Tanta,

I think most of the big investment banks have their figures in this pie. Who said they can't be foolish?

"Yes, repurchase requests can make an undercapitalized counterparty go "poof." I imagine somebody's checking some pools to see how many Ownit-originated loans are in there."

Tanta, perhaps you can help me with something that's been bugging me re: the '05 vintage (or older). All of this vintage I'm guessing is too old, by its terms, for repurchase enforcement, but I'm wondering if the investors holding this paper may ask their lawyers to explore other avenues to enforce a buyback. Perhaps something along the lines of originators ignoring sound lending standards, "should have known" kinda stuff.

Do these contracts contain repurchase provisions based on negligence on the part of the seller? Gross negligence? Fraud?

winjr, the average mortgage loan sale agreement has 30-50 specific representations/warranties regarding the loans, and I've seen more than that. (This doesn't count all the other reps/warranties regarding the lender, etc.) The thing that makes EPDs so different, and so icky, is that an early payment delinquency is, in most contracts, sufficient grounds for repurchase. You don't have to have farkled anything up. It goes bad in the EPD period, you take it back. Once a loan is out of the EPD period, a delinquency is not in and of itself grounds for buyback. But.

There are potentially jillions of other reasons why you would have to take back a loan "for cause," as it were. Failure to follow the guidelines required. Misrepresentation and omission. Negligence and fraud. Sloppy stupid stuff like a screwed up mortgage document that could potentially cloud title. Failure to get an MI policy cert. There are two things about these kinds of repurchases: they are at least arguable, and investors and originators negotiate/rebut/work things out all the time--or at least, they do in a normal market. My impression of the last 12 months is that investors are pushing really hard. The other thing is that unless the contract specifies otherwise, and it generally won't, your repurchase liability is life of loan. The investor is under no obligation to "find" these problems in a timely fashion. They usually don't get "found" until the first late payment, when the loan goes through an automatic full-dress QC review.

So we're probably through the EPDs for 2005, but the uglies of that vintage will continue to crawl out from under the loan files for some time.