The co-issue correspondent controls the entire loan process from application to closing. This arrangement particularly suits large originators who have the ability to deliver on an automated basis. Reflecting this delegated underwriting authority, co-issue correspondents are subject to more extensive credit and quality control
reviews. Contractually, the co-issue correspondent is obligated to make certain representations and warranties and is required to repurchase loans in the event of fraud or misrepresentation in the origination process or for certain other reasons.
Anthony Fleming,
I read as much as I could (pressed for time). It does not appear that Wells will have any buybacks on the co-issues. I looked at both that individual footnote then searched for any concentration risk language.
One thing for the horizon is that those service fees revenues may change drastically. On the one side, late payments could generate windfalls of interest and fees. On the other, if foreclosures accelerate, there will be lower volume and the fees will terminate and accumulated fees retire uncollectible.
I don't really know enough about the dynamics of the industry to even guess about the impact.
As someone else asked in a previous comment thread---I am struck with Lehman's statement that they have their downside exposure to the subprime carnage "fully hedged" -- who are the counter parties holding the risk? or is Lehman a good short?
I clearly remember that about one month ago Wells Fargo said that it had no risk to this kind of loan at all - in that regard it seemed a bit dishonest by Fargo to allow its good name to implicitly make some statement about a product it did not in some way guarantee. However no risk is no risk. Maybe i am getting confused with some other subprime loan that fargo was saying it had no exposure relative to subprime where fargos name appeared in some capacity as an issuer.
bofizz & Anthony: we'll have to go into the details of the contractual arrangements between WF and the buyers of the loans. I don't have those details, but lama's post above suggests that WF doesn't have the liability to repurchase the loans. That is very interesting and I hope we get more & deeper details of it.
"Wells Fargo has a number of important co-issue arrangements in the correspondent channel in which Wells Fargo becomes the servicer while avoiding any involvement in the securitization or seller liability. While co-issue volume is included in our origination volume activity, there is no gain on sale since we never take legal possession of the loans. "
I was expecting FED and DSL to come down before CFC. I also did not think WM will start a down trend so soon.
Things are happening in a much faster rate than I imagined possible.
I am not the doom and gloom guy. It worries me (as s short seller) that most sources I relay for advice are not just projecting mortgage banks demise and declining R/E prices but go all the way to falling green-back and a Big D marking the demise of US economy is the world.
While many empires have fallen from grace this doom and gloom is too much so I tried to listen to the other bullish voice and got that from a CNBC commentator:
(Paraphrasing) "Oh, the liquidity is still there, if the consumer is not going to buy real-estate they will spend it elsewhere: Autos, Travel and other investments the stock market could benefits from the decline in residential real-estate in fact it may a good time to invest in commercial R/E"
So CR please help me: Who is more delusional?
Is liquidity via crazy HELOC the motor for US economy? If we take away the HELOC the ripple effect (multiplier effect of rolling money) will shrink GDP by more than the 7% directly attributed to HELOC ? Do we have a double plankton theory:
Sub-Prime fuled the move up real-estate market
HELOC (to pay off credit cards) fuel the economy.
I never had more than 1-2 credit cards, never carried a balance, never had a HELOC, saved until I had 50% cash for my apartment down payment and worked hard to pay my mortgage more than the minimum payment until it was paid in full so I don't have the right attitude to understand US consumer can someone tell me what is going on ? Is there a decline in employment in Ca. ?
Here is the doom and gloom from Peter Schiff. You guys don't know me but it worries me greatly when someone is even more worried than me - how can that be possible ? but here it is:
"In reality, the problem goes way beyond housing. Nearly every big ticket item that Americans consume is paid for with borrowed money, with foreign lenders supplying the credit. Without access to low cost credit, the spending stops. When the spending stops the service sector jobs associated with robust spending will disappear as well. Without paychecks, even those with low fixed-rate mortgages and high credit scores will not make their payments.
The bursting of the technology stock bubble of the 1990s was simply the opening act. What we are about to experience with the real estate bubble is the main event. In that respect, though it may be March of 2007 it sure feels a lot like March of 2000. However, instead of a mild recession, this collapse will be followed by the most severe recession since the Great Depression. The main risk is that Ben Bernanke and his buddies at the Fed panic, producing something far worse; a hyper-inflationary bust similar to the one experienced by the Weimar Republic in Germany. Lets hope that cooler heads prevail, but get your wheelbarrow ready just in case."
I never had more than 1-2 credit cards, never carried a balance, never had a HELOC, saved until I had 50% cash for my apartment down payment and worked hard to pay my mortgage more than the minimum payment until it was paid in full so I don't have the right attitude to understand US consumer can someone tell me what is going on ? Is there a decline in employment in Ca. ?
I can't understand why so many people like debt so much. Maybe someone else can explain what is going on.
Payday Lending Basics Page Not Found Payday lending has grown rapidly over the last several years. In 2000, the industry consisted of 7,000 to 10,000 payday loan offices, which accounted for 41 million transactions and $1.4 billion in fees. By the end of 2003, according to industry sources, there were approximately 22,000 payday offices generating $6 billion in fees from around 100 million transactions. Total sales volume grew from $10 billion in 2000 to $40 billion in 2003. In other words, the payday lending industry quadrupled in size within three years.
The growth in the payday industry has been fueled by very high profitsan estimated 34% pre-tax return. Payday lenders need only a small amount of cash to make loans. After the first loan, the borrowers is simply reborrowing the money they just repaid, minus the fee. Moreover, these lenders charge annual interest rates of 400% or more, which is much higher than the risk these loans carry. In comparison, the highest credit card rates rarely exceed 29% APR -- less than one-tenth the APR charged on a payday loan -- even though credit cards and payday loans have similar rates of default.
Yal, I don't know what is going to happen. There are so many conflicting view points, a lot of which, knowingly or unknowingly being governed by their own agendas. It seems to be a constant battle between the bulls and the bears to dominate the current sentiment. All I do know is that booms are always followed by busts, period. When sentiment starts a major turn, as it has over the last few weeks, is it possible for the bulls to grapple back the confindence of the markets?
Senate Weighs Aid to 2.2 Million Subprime Borrowers
You guessed it, there is a proposal to have the responsible American tax payers bail out those who now are facing the repercussions of a toxic loan, in order to save housing and the economy! If this happens, I don't know what I'll do?
I know that the only predicable thing about the future is it's unpredictability. What I am trying to understand is the situation in places such as California Now.
Are people worried? do they think the problem is only about immigrants who are "sub-prime" Are people loosing their Job ? Taking more time to find one? Are freelancers finding less and less demand? Signs of Car dealers having to give more discounts? i.e. early signs on the ground of a looming recession ????
And on the other hand: Do people "in the know" (bankers, execs etc ) start speaking behind closed doors about the unthinkable big D ?
Is there a sign of people (Amricans, Forigners, corporations) moving large capital outside of the US ?
In my opinion, it is easier to be a bull than a bear.
If you are a bull you simply buy some stock and sleep well at night.
Unfortunately, if you are a bear you still have 2 choices to make.
Inflation.
Deflation.
Which one is coming? I can't say. We have debt that implies deflation (think Great Depression). That implies you should be in cash. We have a government that can print cash though (think 1970s) and has a fondness for dropping it out of helicopters (Ben Bernanke's speech). That implies you should NOT be in cash.
So far, in my opinion, the government has managed to walk the tightrope between deflation and inflation.
Here's something else to think about. Stocks do not have to go down during bad times. The 1970s were pretty bad. Stocks were flat. Further, from what I understand stocks were extremely overvalued headed into the 1970s (we just put a man on the moon!).
If our currency actually did fall apart like many fiat currencies before it (I'm not predicting this outcome but you never know), there is no limit to how high the Dow could go or how little bread a wheelbarrow of money could buy. It would NOT be good for those shorting the stock market using US dollars, by any stretch of the imagination. If we did enter hyperinflation, I'd expect the stock market to go up. It wouldn't necessarily make you money to own stocks though. Imagine owning a share of Microsoft stock worth $10k but a loaf of bread costs $20k!
Therefore, shorting the stock market is a bit too much like shorting inflation to me. Given enough printed money, ANYTHING can inflate relative to it.
I live in Seattle. A lot of people from California seem to move up here each year. I think that has a LOT to do with why Seattle's housing market is doing okay. My tax preparer told me last year that she sees a lot of people move up here and pay cash.
A friend moved down to California a few years ago. His home doubled in price and he moved back. That wasn't the only reason he moved back though. He was a computer software test manager. His job (and the jobs of his coworkers) was outsourced to India. He claims PhDs in India will test software for $5 an hour. How could he compete?
If this is the trend, how can things not end very badly? If globalization is the great equalizer, prepare to be equalized. It seems only logical that it is only a matter of time.
People like these flippers (any single flipper) actually cause all of us this problem of high cost of housing.
They fuel demand which rase home prices. One higher comp raises the whole area. An area rase the zip code, the zip code raise the median in the town etc......
How many flippers it takes to drive Ca. homes by 10% on Avg ?
100 ? 1000 ? It may be enough for 5,000 10,000 homes bought by flippers over a year or two to raise Ca. home prices by 15%-20%. This is a guess - I wish someone could do it more academically than me.
These people are in my book criminals who deprived others from owning a home.
I think folks need to be very careful trying to short these stocks and looking to buy puts in the sector. The time to do that was a month or two back. I am as bearish as anyone and have a long list of puts, but they will circle the wagons at some point. Look at the news on PHH - Expired
I am sure the buyers see tremendous value even though they have missed filing deadlines. Be careful out there.
"SAN FRANCISCO (MarketWatch) -- It seemed so obvious at the time, back at the peak of the Internet bubble seven years ago this month. Profits no longer mattered.
You see, it was different this time. It was a new paradigm. Internet companies were changing the world and old measurements of success, such as profitability, didn't apply anymore.
Until of course, they did. And we're still living with the fallout from the resulting collapse in Internet stocks and tech stocks in general, seven years later.
The parallel with what's happening in the mortgage market seems eerily familiar. In the media, the general rule of thumb is that the next big crisis in the financial markets will come from something totally unexpected. An earthquake in Japan (Barings collapse); a plunge in Asian and Russian currencies and debt (Long-Term Capital Management); a shell game in the executive suite at one of America's most respected new economy companies (Enron).
The thing about the brewing mortgage debacle, however, is that everyone saw it coming. They just refused to believe it."
Someone commented yesterday that with options expiring this Friday, that lots of short positions were being covered and that as much as anything produced upside momentum.
Is it smart to clear your positions short or long and then reestablish your positions on Monday?
I guess everyone will be watching the inflation stuff today, but I have been fascinated with where the Feds are headed with all their bluster about a bailout for subprime that they really don't understand and that we really can't afford. Didn't the S&L bailout cost us $500 billion in the early 90's?
If they do rush to bail out the first sector that turns bad, what would they do in a real recession and liquidity crunch where corporations can't refinance their junk debt and are forced out of business. Are they going to rush to bail out everyone or just the most egregious offenders who happened to crack first.
NEW was the first big player to implode, now LEND.
I have a feeling that the behavior of many sub-prime lenders was nearly identical (they had to compete with each other after all). The variable may be the timing of when each lender adopted the fast & loose approach and how hast they transitioned.
Are we just seeing the "early adopters" drop first? Who's next?
CR, maybe I could set up something like my "March Madness" spreadsheet for the group and take bets?
Win a So. Cal bungalo!
Political pressure aside - and it will be enormous - the Fed really is not in the business of micro-managing various sectors of the economy. They still have to weigh the internal problem of ripple-through from the collapse of the credit bubble against the external problem of a stampede out of dollar investments. I wouldn't sleep well if I had to make that call; I think it will be Bernanke's first great moment of truth.
By the end of the summer we will know the man in ways we now do not.
The LA Times profiled a poor, distressed about-to-lose-home subprime homeowner over the weekend. Turns out she is a flipper, bought three during the bubble and, the kicker, is a REALTOR. Any comments Senator Dodd?
As the prophet said, for every loan there is a servicer, and a reason for every transaction under heaven.
Perhaps what we should be focussing on here is not just the relative risk of this kind of transaction to Wells Fargo. Perhaps we should be asking what kind of lending this strategy enabled.
What you had going here--and "had" is the operative term, I think--was a situation of a "concurrent trade": a loan is originated, an Investment Bank buys the asset concurrently with WFC buying the servicing rights, and then the IB and WFC can "co-issue" the security. One assumes it gets to count as a true "co-issue" because WFC isn't just the hired subservicer for the trust, but the actual owner of the servicing rights (MSR) in question. That ought to mean WFC has a real asset on its books, the MSR, unless it has "sold" those MSR to an SPE. (That's the UberNerdly question I'm struggling with at the moment--on whose books those MSR live. That's why I've been confused about this "co-issue" thing from the beginning.) So who originated the loan?
I'm not really interested at the moment in "who" as in what exact originator, but in "who" as what type of originator: someone who either does not have the capacity to service its own loans, or didn't want to service its own loans, or just couldn't pass up the SRP Wells was paying for those servicing rights. Exactly the kind of originator who isn't likely to survive the current implosions, I suggest. The IB partner may have some putback problems in this regard; besides the question of the capacity of the originator to buy back the loans (highly doubtful, as we've seen), pretty much by definition we're talking about originators without the capacity to service a bought-back loan. If an actual buy-back of the asset does take place, I think it's likelier than not that the servicing rights will remain with WFC. That could present some unique problems for Wells; servicing for a bankrupt investor is quite a challenge. If I had to guess--just a guess--I'd say that WFC's backup plan is probably to buy the assets themselves (at the fire sale price) from the IB/security trust, so that it isn't dealing with a bankrupt noteholder--and make the IB go after its loss from the originator. The only way to figure this out is to read the prospectus and attached loan sale/servicing agreements for these "co-issues," and no, I haven't done that yet. I am, however, wondering about how many of the buyback problems of non-servicing non-depository subprime lenders we're hearing about may or may not be ending up, at some price or another, with the party who seems to have purchased the lion's share of the servicing rights to them over the last year.
SRP = Servicing Release Premium, the usual term for the price paid to acquire servicing rights (MSR). SRP is in essence a present value calculation of the servicing income over time of a loan, less profit for the acquirer of the servicing rights. Like anything else in this business, that calculation depends very much on the prepayment assumptions one makes, as well as delinquency and default projections. For a servicer, MSR have more value when prepayments (refis, purchase turnovers) are lower, but also when defaults/delinquencies are lower.
So MSR--either originated or purchased servicing rights--are carried on the servicer's books at fair value, and are subject to the same kind of impairment that the asset is, meaning that as the environment changes, the value of the servicing rights held can change. But one needs to remember that the MSR can be, generally is, counter-cyclical to the asset: very high durations of the loan asset can crater their price, as the duration is generally a function of the fact that the loan has an interest rate below current required yield for new production. At the same time, though, extended durations mean more income for the servicer, hence higher, not lower, value to the MSR.
On the other hand, high delinquencies/defaults can eat up the value of the MSR income stream in servicer expenses.
So somewhere--either on WFC's balance sheet or on some SPE's balance sheet, there lies a big-ass pile of subprime MSR that might be extremely valuable or about to suck wind, depending on how the subprime thing plays out. Furthermore, insofar as the non-servicing originators of this stuff are going away, it's a steady income/asset source for WFC that is going away. There's the question of risk, and then there's the question of what WFC will do next to replace the subprime servicing rights gravy train it has been riding.
Feb 9, 2006, Reuters: COO of WF says 74% of first half of 2006 sub-prime passed directly through to others without any retained risk. Extended out, this means that 26% of 84 is about 22 billion in exposure in 2006.
On the bailout, 640 billion in subprime in 2006 alone, versus a "couple" billion in bailout. Can you say "peanuts"? A couple billion in rounding error in tha danger years of sub-prime. A couple billion spread out between 2.2 million borrowers in trouble is a one-month payment (if that). It's just window dressing. Save your outrage for the trillion plus dollars being wasted in Iraq and the near trillion to be wasted in guaranteed profits for Medicare drug companies.
March 13, 2007 -- LET'S say you'd like your kid to get all A's in school but you realize he's not very smart.
So you start expecting C's. But then he gets D's.
Eventually the D's are all right, too, because you realize that you aren't very smart either, so why should he be.
But then you start bragging to your friends that your kid gets straight D's, just like his dad. Naturally, they think you are nuts.
This is a lot like Wall Street these days.
The economy is getting C's right now - growth is slowing and a number of crucial industries are in serious trouble. Worse, gasoline prices are on the rise once again as speculators try to push consumers to the limit.
Still, Wall Street is just so damned proud - leaving those of us looking at this touching scene through critical eyes with a serious case of disbelief.
I'm going to make up a word here, so turn off your spellcheckers.
What we are experiencing is an idiotocracy - a system by which a bunch of really rich, well-dressed, but deluded, individuals (that would be Wall Street) believe that the rest of us poor slobs (that would be the remaining 99.9999 percent of the population) are idiots.
March 15 (Bloomberg) -- The number of U.S. workers filing first-time applications for state jobless benefits fell last week to the lowest level in more than a month, signaling the labor market remains healthy.
Initial jobless claims declined by 12,000 to 318,000 in the week that ended March 10, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, dropped to 329,250 from 339,500.
The report shows companies are holding on to workers to meet demand even as the housing market weakens and factory production cools. Growth in wages and an unemployment rate near a five-year low point to a labor market that will keep consumers spending, economists said.
Employment is relatively robust,'' said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina.Job conditions remain solid outside of housing and manufacturing.''
on the other hand it seems to be hard to find a job.
The number of people continuing to collect state unemployment benefits rose to 2.576 million in the week that ended March 3, from 2.528 million in the prior week. The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, rose to 2 percent, from 1.9 percent. These data are released with a one-week lag
Hmmmm Part of my job is doing web pages for housing folks. Should I confident that I am not housing? That is the rub, the indirect causes of problems, unforeseen until they happen. The bulls look at me as in advertising, but I sure hope my housing clients keep on selling.
When I last bought a house, I would have had to pay PMI (mortgage insurance) if I had less than 20% equity. The company named PMI (that provides the mortgage insurance) says they have limited exposure to sub-prime because the loans were securitized rather than insured. How does this "securitization" show up on the loan and payment forms-is it still called private mortgage. Is this where the windfall to investors came from?
There's the question of risk, and then there's the question of what WFC will do next to replace the subprime servicing rights gravy train it has been riding.
Thank you for explaining some of those technical details Tanta for us non-technicals. It appears WFC is under some PR stress to obscure that perhaps time sensitive "subprime servicing rights gravy train it has been riding" which may now be something other than "gravy". So many large investment interests lining up behind Dodds and other Rescuers gives one pause. Seeing Wells Fargo tag in there along with Citi and MS would be almost Pythonesque. [So why isn't it Pythonesque seeing the investment banks in there?]
Thanks for that larger perspective Neal. My view is that you might be under-estimating the "bailout" costs for the flopping housing soufflé.
Wells Fargo shows $17.6B in mortgage servicing rights on its balance sheet, almost 40% of capital. I guess that qualifies as a big-ass pile.
Pardon my ignorance, I haven't thought about bank accounting since the 1970s and this issue makes my head ache. But, what's in it for a public bank to retain servicing. The profit margin from servicing the loan is going to be offset by the amortization of the MSR so nothing flows through on the income statement, other than "actuarial" gains and losses (I realize there is some cash flow). So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
BTW, what's the going rate for servicing these days? Back in the dark ages I remember it being around 50bp (but aging may have dulled my memory).
"That could present some unique problems for Wells; servicing for a bankrupt investor is quite a challenge. If I had to guess--just a guess--I'd say that WFC's backup plan is probably to buy the assets themselves (at the fire sale price) from the IB/security trust, so that it isn't dealing with a bankrupt noteholder--and make the IB go after its loss from the originator"
That is absolutely not true..Serving foreclosure property is a lucrative part of servicing a mortgage. Remember the service provider, WFC in this case, charge all the fee for their service. And they will take the fee first before transmitting any money to the mortgage owner. Why would WFC bother to buy the loan?.. By the way there are specialized dealer buying all the scartch and dent loan (loan that is deliquented). WFC is not one of them. I understand this is a blog of RE/economy and not a stock blog. Please do more research before buying any prime/subprime or finance stocks. Based on what I read here, there seem to be a big gap of knowledge on what is the operation of some of these companies. Be care out there, it is as easy to loss money in stock as RE..
the problem for the go't and financial food chain is the real book value of both commerical and SFH RE. The longer they can keep up the illusion that the current book value is correct means the most financial companies are still solvent. This includes insurance,pension funds, investment banks, FDIC banks etc. This is a really big deal. The gov't bailout if and when it comes will be an attempt to slow down the mark down so to speak and provide a long time period for CPI to assist in the valuation process.IMHO
A couple of billion is the number being bandied about in Washington for a bailout, not my number. My estimate of costs to the economy is an order of magnitude greater.
and particularily, scroll down to the link that says:
"Tanta 2/20/2007: Mortgage Servicing for UberNerds"
We know the in-and-out of mortgage servicing basics and some (most) of us sure as heck know our way around the stock market. So if you want to visit our village, we'll serve you cake and coffee, on the house, but be polite and please provide challenging high-quality rebuttals, not cynical mockery of your hosts.
I get back to the states Monday, I´ll talk to a buddy of mine in the WF loan dept to see if I can get some additional skinny regarding their exposure. When I talked to him a month ago about this stuff was "We´re not crazy like some folks".
We´ll see what´s changed.
I´ll also run down my mortgage biz buddy, last I heard was that he was do training nationwide for rookie brokers, now is back in Phoenix putting out some serious fires.
Does 'servicing' including handling paperwork and legal work for notices of default and foreclosure?
Is that the responsibility of the servicer? Yes, it is. Whether it is an expense that is reimbursed by the noteholder or just overhead that comes out of the servicing fee will depend on the terms of the specific servicing contract signed.
That is absolutely not true..Serving foreclosure property is a lucrative part of servicing a mortgage. Remember the service provider, WFC in this case, charge all the fee for their service. And they will take the fee first before transmitting any money to the mortgage owner.
fruitcake--great handle--you missed my point, which was about what happens when the mortgage owner goes bankrupt, not when the borrower does. If you're such an expert on mortgage servicing, why don't you explain to us all how a servicer handles a foreclosure when the owner of the asset, who has legal rights to control how the servicer disposes of it, isn't answering its phones because it just ceased to exist as a going concern.
That qualifies, in my mind, as "a challenge."
Jay, it has been a while for you. I don't know what WFC was paying for subprime SRP, but I'd bet they paid well over 100 bps to the originator. Perhaps Cal the industrious (we love you, Cal) can root up a subprime rate sheet that has an SRP schedule on it. That might be hard to do, as a lot of them these days are paying an "all-in" price for the loan and so the rate sheet doesn't break out asset and servicing rights.
So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
Well, Jay, apparently a whole lotta originators thought exactly in those terms. So they sold those servicing rights. To Wells Fargo. Somebody has to be the last servicer left standing, no?
Tanta: So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
Well, Jay, apparently a whole lotta originators thought exactly in those terms. So they sold those servicing rights. To Wells Fargo. Somebody has to be the last servicer left standing, no?
I think that xofruitcake might be trying to say that Wells could make a profit as the liquidator of any REO that landed in it's lap by default or at some fire sale price. This assumes that WFC can drink from that fire hose without dribbling. I kind of doubt it myself.
I think that xofruitcake might be trying to say that Wells could make a profit as the liquidator of any REO that landed in it's lap by default or at some fire sale price.
Let's all remind ourselves how this works. The home belongs to the borrower. If the borrower stops paying, the lender can foreclose by sale. This means that the property is sold at public auction, with any proceeds used to satisfy the debt to the lender (balance, accrued interest, and expenses) first. Anything left over after that belongs to the borrower. Lenders usually bid the loan amount in a foreclosure auction, to put a floor under the price. The lender usually always wins in a distessed market or high LTV loan, which is what makes the property become REO (if an oustide buyer wins, the property is never REO because the lender never had to take title to it). Then the lender markets the REO with a listing agent, in hopes of getting a better price than what a forced auction would generate. When the REO is sold, the lender may or may not be made whole, depending on what its expenses were and how high the original LTV was. This is precisely what keeps predators from buying up low LTV loans that are a few days late on the payment and then foreclosing: there will be competition at the foreclosure sale, and any proceeds over loan amount and expenses belong to the borrower.
If there's a "fire sale price" on some of these loans, it's probably because there was some fraud involved in the transaction, or the original appraisal was a POS and the loan is underwater or something. Those are not scenarios in which anyone is going to make any money off REO liquidation; the "fire sale price" is the discount off the original loan amount based on the expectation of loss. The only money anyone is going to make is fee for services (handling the FC, marketing the REO, etc.) that will have to come out of the sales price of the REO.
The only reason I can imagine anyone like Wells wanting to buy such loans is the kind of reason that a second lien holder might have to buy out the first lien: since the second lien holder has the most to lose in a foreclosure, that party might prefer to buy out the first lien holder so that it becomes the one who controls the process. That only works if the second lien holder thinks it can or might get a better price for the REO (enough to pay off both liens) than the first lien lender can/would. The second lien lender never does this to make a profit; it's a question of taking a smaller loss.
The only way to make money as a foreclosure servicer is to have someone else paying a fee or commission for your services. "Someone else" in this context is the noteholder. Once you become the noteholder yourself, you are paying yourself to service the distressed loan, and therefore your "income" as servicer is offset by your "loss" as noteholder.
Could it be that the co-issuer is just an arms length vehicle set up by Wells Fargo to legally distance itself from the liabilities involved in buying back all those predatory loans that so many web pages are accusing them of going after?
.....This is precisely what keeps predators from buying up low LTV loans that are a few days late on the payment and then foreclosing: there will be competition at the foreclosure sale, and any proceeds over loan amount and expenses belong to the borrower.
can you draw me a picture on the predator thinking?
Prior to the fourth quarter, the banking company included co-issue loans, or mortgages for which it had bought the servicing rights while an investor such as an investment bank purchased the underlying loans.
Great reporting Wells Fargo!!!
Nice how their reporting changes when things move to good to bad. Sounds like the Feds CPI reports.
CR's on overdrive today!!
thanks as usual!
anonymous, thanks. I hope this clears up the issue of Wells Fargo's exposure to subprime.
Best to all.
What are co-issue loans?
The co-issue correspondent controls the entire loan process from application to closing. This arrangement particularly suits large originators who have the ability to deliver on an automated basis. Reflecting this delegated underwriting authority, co-issue correspondents are subject to more extensive credit and quality control
reviews. Contractually, the co-issue correspondent is obligated to make certain representations and warranties and is required to repurchase loans in the event of fraud or misrepresentation in the origination process or for certain other reasons.
Re. above post about co-issue loans: I pulled the description from sec.edgar-online.com/1997/01/ 08/00/0000950135-97-000045/Section11.asp
Nice PDXrenter. So does Wells Fargo have the obligation to buyback co-issue loans if they do not meet standards?
Anthony Fleming,
I read as much as I could (pressed for time). It does not appear that Wells will have any buybacks on the co-issues. I looked at both that individual footnote then searched for any concentration risk language.
One thing for the horizon is that those service fees revenues may change drastically. On the one side, late payments could generate windfalls of interest and fees. On the other, if foreclosures accelerate, there will be lower volume and the fees will terminate and accumulated fees retire uncollectible.
I don't really know enough about the dynamics of the industry to even guess about the impact.
As someone else asked in a previous comment thread---I am struck with Lehman's statement that they have their downside exposure to the subprime carnage "fully hedged" -- who are the counter parties holding the risk? or is Lehman a good short?
$7.4 billion x 4 = 29.6 very rough estimate for the year (probably more)
puts them in the top ten as far as I can estimate... nothing to crow about!
I clearly remember that about one month ago Wells Fargo said that it had no risk to this kind of loan at all - in that regard it seemed a bit dishonest by Fargo to allow its good name to implicitly make some statement about a product it did not in some way guarantee. However no risk is no risk. Maybe i am getting confused with some other subprime loan that fargo was saying it had no exposure relative to subprime where fargos name appeared in some capacity as an issuer.
PDX_renter: so is this a good thing for Wells Forgot or a bad thing?
[another PDX person]
bofizz & Anthony: we'll have to go into the details of the contractual arrangements between WF and the buyers of the loans. I don't have those details, but lama's post above suggests that WF doesn't have the liability to repurchase the loans. That is very interesting and I hope we get more & deeper details of it.
"Including co-issues in our nonprime loan production was confusing investors and others," said Wells Fargo spokesman Jay Lawrence
More likely it was making them soilt their pants.
Does this resolve it or just confuse more?
Q3 2006 Wells Fargo & Company Pre-Recorded Earnings Conference Call - Final - - insurancenewsnet.com
"Wells Fargo has a number of important co-issue arrangements in the correspondent channel in which Wells Fargo becomes the servicer while avoiding any involvement in the securitization or seller liability. While co-issue volume is included in our origination volume activity, there is no gain on sale since we never take legal possession of the loans. "
There is now a blog focused on CFC short sale.
Irreverant Stock List
I was expecting FED and DSL to come down before CFC. I also did not think WM will start a down trend so soon.
Things are happening in a much faster rate than I imagined possible.
I am not the doom and gloom guy. It worries me (as s short seller) that most sources I relay for advice are not just projecting mortgage banks demise and declining R/E prices but go all the way to falling green-back and a Big D marking the demise of US economy is the world.
While many empires have fallen from grace this doom and gloom is too much so I tried to listen to the other bullish voice and got that from a CNBC commentator:
(Paraphrasing) "Oh, the liquidity is still there, if the consumer is not going to buy real-estate they will spend it elsewhere: Autos, Travel and other investments the stock market could benefits from the decline in residential real-estate in fact it may a good time to invest in commercial R/E"
So CR please help me: Who is more delusional?
Is liquidity via crazy HELOC the motor for US economy? If we take away the HELOC the ripple effect (multiplier effect of rolling money) will shrink GDP by more than the 7% directly attributed to HELOC ? Do we have a double plankton theory:
Sub-Prime fuled the move up real-estate market
HELOC (to pay off credit cards) fuel the economy.
I never had more than 1-2 credit cards, never carried a balance, never had a HELOC, saved until I had 50% cash for my apartment down payment and worked hard to pay my mortgage more than the minimum payment until it was paid in full so I don't have the right attitude to understand US consumer can someone tell me what is going on ? Is there a decline in employment in Ca. ?
Here is the doom and gloom from Peter Schiff. You guys don't know me but it worries me greatly when someone is even more worried than me - how can that be possible ? but here it is:
"In reality, the problem goes way beyond housing. Nearly every big ticket item that Americans consume is paid for with borrowed money, with foreign lenders supplying the credit. Without access to low cost credit, the spending stops. When the spending stops the service sector jobs associated with robust spending will disappear as well. Without paychecks, even those with low fixed-rate mortgages and high credit scores will not make their payments.
The bursting of the technology stock bubble of the 1990s was simply the opening act. What we are about to experience with the real estate bubble is the main event. In that respect, though it may be March of 2007 it sure feels a lot like March of 2000. However, instead of a mild recession, this collapse will be followed by the most severe recession since the Great Depression. The main risk is that Ben Bernanke and his buddies at the Fed panic, producing something far worse; a hyper-inflationary bust similar to the one experienced by the Weimar Republic in Germany. Lets hope that cooler heads prevail, but get your wheelbarrow ready just in case."
FSU Editorial: "From the Sub-Prime to the Ridiculous" by Peter
Schiff 03/14/2007
FSU Editorial:"World Liquidity Crisis Emerging"; by Christopher
Laird 03/14/2007
I never had more than 1-2 credit cards, never carried a balance, never had a HELOC, saved until I had 50% cash for my apartment down payment and worked hard to pay my mortgage more than the minimum payment until it was paid in full so I don't have the right attitude to understand US consumer can someone tell me what is going on ? Is there a decline in employment in Ca. ?
I can't understand why so many people like debt so much. Maybe someone else can explain what is going on.
Payday Lending Basics
Page Not Found
Payday lending has grown rapidly over the last several years. In 2000, the industry consisted of 7,000 to 10,000 payday loan offices, which accounted for 41 million transactions and $1.4 billion in fees. By the end of 2003, according to industry sources, there were approximately 22,000 payday offices generating $6 billion in fees from around 100 million transactions. Total sales volume grew from $10 billion in 2000 to $40 billion in 2003. In other words, the payday lending industry quadrupled in size within three years.
The growth in the payday industry has been fueled by very high profitsan estimated 34% pre-tax return. Payday lenders need only a small amount of cash to make loans. After the first loan, the borrowers is simply reborrowing the money they just repaid, minus the fee. Moreover, these lenders charge annual interest rates of 400% or more, which is much higher than the risk these loans carry. In comparison, the highest credit card rates rarely exceed 29% APR -- less than one-tenth the APR charged on a payday loan -- even though credit cards and payday loans have similar rates of default.
Yal, I don't know what is going to happen. There are so many conflicting view points, a lot of which, knowingly or unknowingly being governed by their own agendas. It seems to be a constant battle between the bulls and the bears to dominate the current sentiment. All I do know is that booms are always followed by busts, period. When sentiment starts a major turn, as it has over the last few weeks, is it possible for the bulls to grapple back the confindence of the markets?
Get fired up! Congress considering bailing out SUB PRIME!
Senate Weighs Aid to 2.2 Million Subprime Borrowers (Update4) - Bloomberg.com
Senate Weighs Aid to 2.2 Million Subprime Borrowers
You guessed it, there is a proposal to have the responsible American tax payers bail out those who now are facing the repercussions of a toxic loan, in order to save housing and the economy! If this happens, I don't know what I'll do?
Mark, Anthony,
Thanks.
I know that the only predicable thing about the future is it's unpredictability. What I am trying to understand is the situation in places such as California Now.
Are people worried? do they think the problem is only about immigrants who are "sub-prime" Are people loosing their Job ? Taking more time to find one? Are freelancers finding less and less demand? Signs of Car dealers having to give more discounts? i.e. early signs on the ground of a looming recession ????
And on the other hand: Do people "in the know" (bankers, execs etc ) start speaking behind closed doors about the unthinkable big D ?
Is there a sign of people (Amricans, Forigners, corporations) moving large capital outside of the US ?
Anthony & Yal,
In my opinion, it is easier to be a bull than a bear.
If you are a bull you simply buy some stock and sleep well at night.
Unfortunately, if you are a bear you still have 2 choices to make.
Which one is coming? I can't say. We have debt that implies deflation (think Great Depression). That implies you should be in cash. We have a government that can print cash though (think 1970s) and has a fondness for dropping it out of helicopters (Ben Bernanke's speech). That implies you should NOT be in cash.
So far, in my opinion, the government has managed to walk the tightrope between deflation and inflation.
Here's something else to think about. Stocks do not have to go down during bad times. The 1970s were pretty bad. Stocks were flat. Further, from what I understand stocks were extremely overvalued headed into the 1970s (we just put a man on the moon!).
If our currency actually did fall apart like many fiat currencies before it (I'm not predicting this outcome but you never know), there is no limit to how high the Dow could go or how little bread a wheelbarrow of money could buy. It would NOT be good for those shorting the stock market using US dollars, by any stretch of the imagination. If we did enter hyperinflation, I'd expect the stock market to go up. It wouldn't necessarily make you money to own stocks though. Imagine owning a share of Microsoft stock worth $10k but a loaf of bread costs $20k!
Therefore, shorting the stock market is a bit too much like shorting inflation to me. Given enough printed money, ANYTHING can inflate relative to it.
Just my 2 cents, for what it is worth.
Are people worried?
I live in Seattle. A lot of people from California seem to move up here each year. I think that has a LOT to do with why Seattle's housing market is doing okay. My tax preparer told me last year that she sees a lot of people move up here and pay cash.
A friend moved down to California a few years ago. His home doubled in price and he moved back. That wasn't the only reason he moved back though. He was a computer software test manager. His job (and the jobs of his coworkers) was outsourced to India. He claims PhDs in India will test software for $5 an hour. How could he compete?
If this is the trend, how can things not end very badly? If globalization is the great equalizer, prepare to be equalized. It seems only logical that it is only a matter of time.
Thanks.
I just love this so I wanted to share with you:
Bank of America
The anon above is me.
I browsed the refinance options and they are sufficiently horrifying.
It seems the more desperate you are to get your initial payments down, the worse your long-term rate will be.
The $200k Mortgage for under $643/month is especially cringe worthy.
Great story:
Thank You Los Angeles Times
and another great story:
downtrodden victims
People like these flippers (any single flipper) actually cause all of us this problem of high cost of housing.
They fuel demand which rase home prices. One higher comp raises the whole area. An area rase the zip code, the zip code raise the median in the town etc......
How many flippers it takes to drive Ca. homes by 10% on Avg ?
100 ? 1000 ? It may be enough for 5,000 10,000 homes bought by flippers over a year or two to raise Ca. home prices by 15%-20%. This is a guess - I wish someone could do it more academically than me.
These people are in my book criminals who deprived others from owning a home.
btw, to all shorties outthere:
We may see a rally in the next few days. up to 10% up on CFC.
I still hold my shorts and PUTs. The trend is clear.
I think folks need to be very careful trying to short these stocks and looking to buy puts in the sector. The time to do that was a month or two back. I am as bearish as anyone and have a long list of puts, but they will circle the wagons at some point. Look at the news on PHH - Expired
I am sure the buyers see tremendous value even though they have missed filing deadlines. Be careful out there.
In subprime mess, another dumb Wall Street theory falls David Callaway - MarketWatch
"SAN FRANCISCO (MarketWatch) -- It seemed so obvious at the time, back at the peak of the Internet bubble seven years ago this month. Profits no longer mattered.
You see, it was different this time. It was a new paradigm. Internet companies were changing the world and old measurements of success, such as profitability, didn't apply anymore.
Until of course, they did. And we're still living with the fallout from the resulting collapse in Internet stocks and tech stocks in general, seven years later.
The parallel with what's happening in the mortgage market seems eerily familiar. In the media, the general rule of thumb is that the next big crisis in the financial markets will come from something totally unexpected. An earthquake in Japan (Barings collapse); a plunge in Asian and Russian currencies and debt (Long-Term Capital Management); a shell game in the executive suite at one of America's most respected new economy companies (Enron).
The thing about the brewing mortgage debacle, however, is that everyone saw it coming. They just refused to believe it."
Someone commented yesterday that with options expiring this Friday, that lots of short positions were being covered and that as much as anything produced upside momentum.
Is it smart to clear your positions short or long and then reestablish your positions on Monday?
I guess everyone will be watching the inflation stuff today, but I have been fascinated with where the Feds are headed with all their bluster about a bailout for subprime that they really don't understand and that we really can't afford. Didn't the S&L bailout cost us $500 billion in the early 90's?
If they do rush to bail out the first sector that turns bad, what would they do in a real recession and liquidity crunch where corporations can't refinance their junk debt and are forced out of business. Are they going to rush to bail out everyone or just the most egregious offenders who happened to crack first.
NEW was the first big player to implode, now LEND.
I have a feeling that the behavior of many sub-prime lenders was nearly identical (they had to compete with each other after all). The variable may be the timing of when each lender adopted the fast & loose approach and how hast they transitioned.
Are we just seeing the "early adopters" drop first? Who's next?
CR, maybe I could set up something like my "March Madness" spreadsheet for the group and take bets?
Win a So. Cal bungalo!
Political pressure aside - and it will be enormous - the Fed really is not in the business of micro-managing various sectors of the economy. They still have to weigh the internal problem of ripple-through from the collapse of the credit bubble against the external problem of a stampede out of dollar investments. I wouldn't sleep well if I had to make that call; I think it will be Bernanke's first great moment of truth.
By the end of the summer we will know the man in ways we now do not.
Check out this example of blogger investigative journalism shaming the MSM:
http://bubbletracking.blogspot.com/
The LA Times profiled a poor, distressed about-to-lose-home subprime homeowner over the weekend. Turns out she is a flipper, bought three during the bubble and, the kicker, is a REALTOR. Any comments Senator Dodd?
As the prophet said, for every loan there is a servicer, and a reason for every transaction under heaven.
Perhaps what we should be focussing on here is not just the relative risk of this kind of transaction to Wells Fargo. Perhaps we should be asking what kind of lending this strategy enabled.
What you had going here--and "had" is the operative term, I think--was a situation of a "concurrent trade": a loan is originated, an Investment Bank buys the asset concurrently with WFC buying the servicing rights, and then the IB and WFC can "co-issue" the security. One assumes it gets to count as a true "co-issue" because WFC isn't just the hired subservicer for the trust, but the actual owner of the servicing rights (MSR) in question. That ought to mean WFC has a real asset on its books, the MSR, unless it has "sold" those MSR to an SPE. (That's the UberNerdly question I'm struggling with at the moment--on whose books those MSR live. That's why I've been confused about this "co-issue" thing from the beginning.) So who originated the loan?
I'm not really interested at the moment in "who" as in what exact originator, but in "who" as what type of originator: someone who either does not have the capacity to service its own loans, or didn't want to service its own loans, or just couldn't pass up the SRP Wells was paying for those servicing rights. Exactly the kind of originator who isn't likely to survive the current implosions, I suggest. The IB partner may have some putback problems in this regard; besides the question of the capacity of the originator to buy back the loans (highly doubtful, as we've seen), pretty much by definition we're talking about originators without the capacity to service a bought-back loan. If an actual buy-back of the asset does take place, I think it's likelier than not that the servicing rights will remain with WFC. That could present some unique problems for Wells; servicing for a bankrupt investor is quite a challenge. If I had to guess--just a guess--I'd say that WFC's backup plan is probably to buy the assets themselves (at the fire sale price) from the IB/security trust, so that it isn't dealing with a bankrupt noteholder--and make the IB go after its loss from the originator. The only way to figure this out is to read the prospectus and attached loan sale/servicing agreements for these "co-issues," and no, I haven't done that yet. I am, however, wondering about how many of the buyback problems of non-servicing non-depository subprime lenders we're hearing about may or may not be ending up, at some price or another, with the party who seems to have purchased the lion's share of the servicing rights to them over the last year.
SRP = Servicing Release Premium, the usual term for the price paid to acquire servicing rights (MSR). SRP is in essence a present value calculation of the servicing income over time of a loan, less profit for the acquirer of the servicing rights. Like anything else in this business, that calculation depends very much on the prepayment assumptions one makes, as well as delinquency and default projections. For a servicer, MSR have more value when prepayments (refis, purchase turnovers) are lower, but also when defaults/delinquencies are lower.
So MSR--either originated or purchased servicing rights--are carried on the servicer's books at fair value, and are subject to the same kind of impairment that the asset is, meaning that as the environment changes, the value of the servicing rights held can change. But one needs to remember that the MSR can be, generally is, counter-cyclical to the asset: very high durations of the loan asset can crater their price, as the duration is generally a function of the fact that the loan has an interest rate below current required yield for new production. At the same time, though, extended durations mean more income for the servicer, hence higher, not lower, value to the MSR.
On the other hand, high delinquencies/defaults can eat up the value of the MSR income stream in servicer expenses.
So somewhere--either on WFC's balance sheet or on some SPE's balance sheet, there lies a big-ass pile of subprime MSR that might be extremely valuable or about to suck wind, depending on how the subprime thing plays out. Furthermore, insofar as the non-servicing originators of this stuff are going away, it's a steady income/asset source for WFC that is going away. There's the question of risk, and then there's the question of what WFC will do next to replace the subprime servicing rights gravy train it has been riding.
Feb 9, 2006, Reuters: COO of WF says 74% of first half of 2006 sub-prime passed directly through to others without any retained risk. Extended out, this means that 26% of 84 is about 22 billion in exposure in 2006.
On the bailout, 640 billion in subprime in 2006 alone, versus a "couple" billion in bailout. Can you say "peanuts"? A couple billion in rounding error in tha danger years of sub-prime. A couple billion spread out between 2.2 million borrowers in trouble is a one-month payment (if that). It's just window dressing. Save your outrage for the trillion plus dollars being wasted in Iraq and the near trillion to be wasted in guaranteed profits for Medicare drug companies.
JOBS REPORT PROVES ECONOMY'S WEAK
March 13, 2007 -- LET'S say you'd like your kid to get all A's in school but you realize he's not very smart.
So you start expecting C's. But then he gets D's.
Eventually the D's are all right, too, because you realize that you aren't very smart either, so why should he be.
But then you start bragging to your friends that your kid gets straight D's, just like his dad. Naturally, they think you are nuts.
This is a lot like Wall Street these days.
The economy is getting C's right now - growth is slowing and a number of crucial industries are in serious trouble. Worse, gasoline prices are on the rise once again as speculators try to push consumers to the limit.
Still, Wall Street is just so damned proud - leaving those of us looking at this touching scene through critical eyes with a serious case of disbelief.
I'm going to make up a word here, so turn off your spellcheckers.
What we are experiencing is an idiotocracy - a system by which a bunch of really rich, well-dressed, but deluded, individuals (that would be Wall Street) believe that the rest of us poor slobs (that would be the remaining 99.9999 percent of the population) are idiots.
Producer-price index for finished goods rose 1.3%
Looks like those higher corn and soybean prices are starting to show up in finished foods.
Can you drink ethanol?...just till you go blind.
Hmm, increasing inflation and a credit crunch?
U.S. Initial Jobless Claims Fell Last Week to 318,000
March 15 (Bloomberg) -- The number of U.S. workers filing first-time applications for state jobless benefits fell last week to the lowest level in more than a month, signaling the labor market remains healthy.
Initial jobless claims declined by 12,000 to 318,000 in the week that ended March 10, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, dropped to 329,250 from 339,500.
The report shows companies are holding on to workers to meet demand even as the housing market weakens and factory production cools. Growth in wages and an unemployment rate near a five-year low point to a labor market that will keep consumers spending, economists said.
Employment is relatively robust,'' said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina.Job conditions remain solid outside of housing and manufacturing.''
on the other hand it seems to be hard to find a job.
The number of people continuing to collect state unemployment benefits rose to 2.576 million in the week that ended March 3, from 2.528 million in the prior week. The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, rose to 2 percent, from 1.9 percent. These data are released with a one-week lag
Hmmmm Part of my job is doing web pages for housing folks. Should I confident that I am not housing? That is the rub, the indirect causes of problems, unforeseen until they happen. The bulls look at me as in advertising, but I sure hope my housing clients keep on selling.
Question:
When I last bought a house, I would have had to pay PMI (mortgage insurance) if I had less than 20% equity. The company named PMI (that provides the mortgage insurance) says they have limited exposure to sub-prime because the loans were securitized rather than insured. How does this "securitization" show up on the loan and payment forms-is it still called private mortgage. Is this where the windfall to investors came from?
There's the question of risk, and then there's the question of what WFC will do next to replace the subprime servicing rights gravy train it has been riding.
Thanks for the excellent post regarding Wells.
Tanta, question on RMBS. Who bears risk of default? I think you wrote somewhere that GSEs guarantee their MBS for a small fee. What do they guarantee?
TIA.
Tanta,
Does 'servicing' including handling paperwork and legal work for notices of default and foreclosure?
Thank you for explaining some of those technical details Tanta for us non-technicals. It appears WFC is under some PR stress to obscure that perhaps time sensitive "subprime servicing rights gravy train it has been riding" which may now be something other than "gravy". So many large investment interests lining up behind Dodds and other Rescuers gives one pause. Seeing Wells Fargo tag in there along with Citi and MS would be almost Pythonesque. [So why isn't it Pythonesque seeing the investment banks in there?]
Thanks for that larger perspective Neal. My view is that you might be under-estimating the "bailout" costs for the flopping housing soufflé.
Tanta,
Wells Fargo shows $17.6B in mortgage servicing rights on its balance sheet, almost 40% of capital. I guess that qualifies as a big-ass pile.
Pardon my ignorance, I haven't thought about bank accounting since the 1970s and this issue makes my head ache. But, what's in it for a public bank to retain servicing. The profit margin from servicing the loan is going to be offset by the amortization of the MSR so nothing flows through on the income statement, other than "actuarial" gains and losses (I realize there is some cash flow). So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
BTW, what's the going rate for servicing these days? Back in the dark ages I remember it being around 50bp (but aging may have dulled my memory).
Jay
"That could present some unique problems for Wells; servicing for a bankrupt investor is quite a challenge. If I had to guess--just a guess--I'd say that WFC's backup plan is probably to buy the assets themselves (at the fire sale price) from the IB/security trust, so that it isn't dealing with a bankrupt noteholder--and make the IB go after its loss from the originator"
That is absolutely not true..Serving foreclosure property is a lucrative part of servicing a mortgage. Remember the service provider, WFC in this case, charge all the fee for their service. And they will take the fee first before transmitting any money to the mortgage owner. Why would WFC bother to buy the loan?.. By the way there are specialized dealer buying all the scartch and dent loan (loan that is deliquented). WFC is not one of them. I understand this is a blog of RE/economy and not a stock blog. Please do more research before buying any prime/subprime or finance stocks. Based on what I read here, there seem to be a big gap of knowledge on what is the operation of some of these companies. Be care out there, it is as easy to loss money in stock as RE..
calmo:
the problem for the go't and financial food chain is the real book value of both commerical and SFH RE. The longer they can keep up the illusion that the current book value is correct means the most financial companies are still solvent. This includes insurance,pension funds, investment banks, FDIC banks etc. This is a really big deal. The gov't bailout if and when it comes will be an attempt to slow down the mark down so to speak and provide a long time period for CPI to assist in the valuation process.IMHO
Calmo:
A couple of billion is the number being bandied about in Washington for a bailout, not my number. My estimate of costs to the economy is an order of magnitude greater.
"WFC in this case, charge all the fee for their service. And they will take the fee first before transmitting any money to the mortgage owner."
OK... but how are they going to do that if no payment came in?
xofruitcake,
I don't think that you are aware of who it is that you're responding to (Tanta). For more info: please read the following:
Calculated Risk: Tanta on ...
and particularily, scroll down to the link that says:
"Tanta 2/20/2007: Mortgage Servicing for UberNerds"
We know the in-and-out of mortgage servicing basics and some (most) of us sure as heck know our way around the stock market. So if you want to visit our village, we'll serve you cake and coffee, on the house, but be polite and please provide challenging high-quality rebuttals, not cynical mockery of your hosts.
I get back to the states Monday, I´ll talk to a buddy of mine in the WF loan dept to see if I can get some additional skinny regarding their exposure. When I talked to him a month ago about this stuff was "We´re not crazy like some folks".
We´ll see what´s changed.
I´ll also run down my mortgage biz buddy, last I heard was that he was do training nationwide for rookie brokers, now is back in Phoenix putting out some serious fires.
Does 'servicing' including handling paperwork and legal work for notices of default and foreclosure?
Is that the responsibility of the servicer? Yes, it is. Whether it is an expense that is reimbursed by the noteholder or just overhead that comes out of the servicing fee will depend on the terms of the specific servicing contract signed.
That is absolutely not true..Serving foreclosure property is a lucrative part of servicing a mortgage. Remember the service provider, WFC in this case, charge all the fee for their service. And they will take the fee first before transmitting any money to the mortgage owner.
fruitcake--great handle--you missed my point, which was about what happens when the mortgage owner goes bankrupt, not when the borrower does. If you're such an expert on mortgage servicing, why don't you explain to us all how a servicer handles a foreclosure when the owner of the asset, who has legal rights to control how the servicer disposes of it, isn't answering its phones because it just ceased to exist as a going concern.
That qualifies, in my mind, as "a challenge."
Jay, it has been a while for you. I don't know what WFC was paying for subprime SRP, but I'd bet they paid well over 100 bps to the originator. Perhaps Cal the industrious (we love you, Cal) can root up a subprime rate sheet that has an SRP schedule on it. That might be hard to do, as a lot of them these days are paying an "all-in" price for the loan and so the rate sheet doesn't break out asset and servicing rights.
So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
Well, Jay, apparently a whole lotta originators thought exactly in those terms. So they sold those servicing rights. To Wells Fargo. Somebody has to be the last servicer left standing, no?
Tanta: So why not sell the servicing to someone else and let them deal with the fallout from refinance or foreclosure?
Well, Jay, apparently a whole lotta originators thought exactly in those terms. So they sold those servicing rights. To Wells Fargo. Somebody has to be the last servicer left standing, no?
I think that xofruitcake might be trying to say that Wells could make a profit as the liquidator of any REO that landed in it's lap by default or at some fire sale price. This assumes that WFC can drink from that fire hose without dribbling. I kind of doubt it myself.
The real question is...
When do they start coughing up exposure to Alt A?
I think that xofruitcake might be trying to say that Wells could make a profit as the liquidator of any REO that landed in it's lap by default or at some fire sale price.
Let's all remind ourselves how this works. The home belongs to the borrower. If the borrower stops paying, the lender can foreclose by sale. This means that the property is sold at public auction, with any proceeds used to satisfy the debt to the lender (balance, accrued interest, and expenses) first. Anything left over after that belongs to the borrower. Lenders usually bid the loan amount in a foreclosure auction, to put a floor under the price. The lender usually always wins in a distessed market or high LTV loan, which is what makes the property become REO (if an oustide buyer wins, the property is never REO because the lender never had to take title to it). Then the lender markets the REO with a listing agent, in hopes of getting a better price than what a forced auction would generate. When the REO is sold, the lender may or may not be made whole, depending on what its expenses were and how high the original LTV was. This is precisely what keeps predators from buying up low LTV loans that are a few days late on the payment and then foreclosing: there will be competition at the foreclosure sale, and any proceeds over loan amount and expenses belong to the borrower.
If there's a "fire sale price" on some of these loans, it's probably because there was some fraud involved in the transaction, or the original appraisal was a POS and the loan is underwater or something. Those are not scenarios in which anyone is going to make any money off REO liquidation; the "fire sale price" is the discount off the original loan amount based on the expectation of loss. The only money anyone is going to make is fee for services (handling the FC, marketing the REO, etc.) that will have to come out of the sales price of the REO.
The only reason I can imagine anyone like Wells wanting to buy such loans is the kind of reason that a second lien holder might have to buy out the first lien: since the second lien holder has the most to lose in a foreclosure, that party might prefer to buy out the first lien holder so that it becomes the one who controls the process. That only works if the second lien holder thinks it can or might get a better price for the REO (enough to pay off both liens) than the first lien lender can/would. The second lien lender never does this to make a profit; it's a question of taking a smaller loss.
The only way to make money as a foreclosure servicer is to have someone else paying a fee or commission for your services. "Someone else" in this context is the noteholder. Once you become the noteholder yourself, you are paying yourself to service the distressed loan, and therefore your "income" as servicer is offset by your "loss" as noteholder.
Could it be that the co-issuer is just an arms length vehicle set up by Wells Fargo to legally distance itself from the liabilities involved in buying back all those predatory loans that so many web pages are accusing them of going after?
Tanta:
.....This is precisely what keeps predators from buying up low LTV loans that are a few days late on the payment and then foreclosing: there will be competition at the foreclosure sale, and any proceeds over loan amount and expenses belong to the borrower.
can you draw me a picture on the predator thinking?
Prior to the fourth quarter, the banking company included co-issue loans, or mortgages for which it had bought the servicing rights while an investor such as an investment bank purchased the underlying loans.