OK, this may be the whopper of the week - we anticipated the subprime problems - can they really say that with a straight face? Do they have the same PR counsel as Dick Syron?
"The brokerage firms have done something curious: they are not abandoning subprime mortgage origination; they are taking positions, Mr. Hintz said.
In December, Merrill Lynch completed a $1.3 billion acquisition of First Franklin, which was among the 10 biggest subprime lenders last year, and Morgan Stanley bought Saxon Capital for $706 million.
Bank executives say they anticipated the problems in subprime and they have been buying lenders because they want to better control lending standards in the industry.
Saxon was a long-term strategic decision, said Anthony Tufariello, who heads the securitized product group at Morgan Stanley. And we are happy we made that decision because we bought it as a servicing platform with the expectation that the market would undergo dislocation.
I can only think that Merril is large enough to either carry those losses with or without government aid in that carriage.
Expeditious to have someone like Paulson there to ensure that the burden will be supported if the need arises.
"In a push to recoup losses, HSBC, which recently added $1.76 billion to its bad-debt costs for 2006 to cover ailing mortgages, has sued several small lenders in federal court in Illinois after they refused HSBC's repurchase requests."
I couldn't find anything about a federal court case by HSBC, anyone else find it? I was wondering who they were suing.
I think the absolute key, key, key question is who was buying the non-agency mortgage-backed securities?
Commenters should really, really try to answer that question.
Forget about the travails at the other end: the phony docs, the predatory lenders. All that stuff was in the service of, yes, the guys who were selling this crap. But who were they selling it to? That is absolutely the key question.
Mom and Pop? Joe Sixpack? L'homme moyen? I think not.
TIAA-CREF? Probably. And what will TIAA-CREF do now? Well, they do NOT want to have this stuff anywhere near them. These non-agency (and probably agency too) securitized mortgages are RADIOACTIVE and all those retirees who think TIAA is going to cushion their golden years are going to be mighty angry (can you say, CLASS ACTION SUIT?) if it turns out that TIAA was dabbling in this stuff.
China? Definitely. Do you think China is going to buy any more of it?
So, yes, the guys with the Beemers here in the States have a few problems, but one of them is surely beginning to look like the fact that they can securitize it, but, after they do, about the only place they can place it is where the sun don't shine.
"Citi is pleased to be able to provide working capital to ACC Capital
Holdings," said Jeffrey A. Perlowitz, head of global securitization in
Citi's Fixed Income, Currencies and Commodities unit. "We have extensively reviewed ACH's progress in strengthening its operations and business practices, and are impressed with what the company has accomplished."
That makes it sound like Jeffrey is as confident as a shark with a diver's leg in his jaws that he can sell the stuff. I like the word "global" in that context.
Hmmmmmmm.
If the yen carry trade is such a hot ticket, why wouldn't the guys in China and Japan make the bet?
Borrow in yen, buy income producing instruments in dollars.
That's where Jeffrey comes in. Maybe TIAA (I hope) is not completely stupid, but Jeffrey isn't selling to TIAA. He's selling to China and Japan. And, just conceivably, China and Japan are a little less familiar with HELOC and MEW and QRSTUVW than Jeff's peers.
I would say that any Asian buyers of securitized mortgage debt would have to actually lose money before they would stop buying. However, once that happens, I think Jeffrey can throw away his beeper.
Jeff's been making a ton of money for at least a decade. It is hard to stop.
Pension funds and municipalities? Apparently they enjoy having their faces ripped off from what I've read. Although, the central bank probably deserves the blame. If it weren't for all the free money, then pensions funds wouldn't be forced to walk the plank of risk in an attempt to provide a decent retirement. But then again, taking the easy way out is about all that leaderless groups do, so I'm not sure the public would tolerate the central bank acting any differently. They can't be bothered with wondering why free money for everybody is a bad idea. They've got the mortgage, gas prices, and the Joneses on their mind so a little free money sounds awfully nice.
Richard Bove has been following US Banks for many years and when he says the Banks dont know how much Sub prime exposure they have I am inclined to believe him. Banks are companies in which agency risks run rampant - the temptation for individual bankers to do overly risky business and take poor quality risks which they can effectively bury for long enough in the balance sheet of the bank to get paid large annual bonuses overwhelms the risk controls the banks have in place. This disfunction has paid a larger part of each of the succesive blowups from the SL Boom Bust, to Third World Debt, Venture Capital and now Sub Prime.
The investment banks links with the sub prime borrowers is similar to the symbiotic relationship that the same institutions have with Hedge Funds. A network of smaller shops (HFs and Sub Prime)are being lent money to produce to the point of dependency (several of the sub primes closed shop when ONE bank excecised its put options on mortgages it had originated according to what I've read recently).
It is my guess that a lot of the lower quality mortgage exposure is sitting on IB balance sheets, their poor quality being marked by an inoffensive mark at acquisition or book value , and the real value market is only just being discovered now, but thankfully its after the bonus checks for last yer cleared
I asked that same question over a year ago, who buys nonagency debt, especially the subprime stuff?
The answer seemed to be just about every manner of big player, pension funds, insurance companies, mutual funds, hedge funds. Even the banks buy debt originated at other banks. You could buy these bonds on Etrade. A lot were sold overseas, but foreign central banks stuck to Treasuries with a dash of agency debt.
I'm a Canadian portfolio manager (private & institutional) and I was forever getting calls from these US investment bankers trying to sell me their CDOs and other crap.
So pension funds, mutual funds, private portfolios, seg funds... most anyone funding his/her retirement will get hurt by these.
Joe Blo's house will go down and so will his pension and benefits
No wait Personal saving was a negative 1.2% in January, so no savings, home values (opportunity for HELOC) dropping, and wages rising slightly...what happens to ¾ of the economy?
John M., that headline change is very interesting. Especially because Asian markets went down again. Papering over, so to speak, the cracks, to avoid jitters. We are seeing this behavior Greenspan's alleged words yesterday(paraphrased and dramatized) "I said possible --not probable-- recession!")
Feel like someone's trying to hand me some soma...
BTW, I was probably hallucinating or I didnt have enough coffee, but I swear there was no negative signs on personal savings column when I looked at that PI release the first time.
Of course, I could have been looking at the wrong column.
The marginal buyers of subprime paper (particularly the low rated tranches) in the last two years were the CDOs. Things will really get ugly when a few of them blow up. I heard from a trader last night that the CDO bid for subprime paper dried up yesterday. The results of the NovaStar securitization would seem to confirm that.
Ah, Danielle, if you didn't exist I would have had to invent you!
But you do exist (and have a lovely name too), and, let me see if I have this straight, the purveyors of MBS/CDO etc. were calling you all the time?
Gentlemen and gentlewomen, we are witnessing the perfect crime. I am truly, truly impressed. I would say that only MaxedOutMama is capable of adequately describing this.
Borrowers? [rhymes with rued] blue.
Purchasers of the debt? Ditto.
The guys who put it together and sucked the marrow out of it? Vacationing in Maui.
Oh, I do give credit (no pun) where credit is due. You're Jeffrey Perlowitz. Stock market crash? Irrelevant. Mass foreclosures? Irrelevant. Pension funds going belly-up? Boring. Etc. etc.
Ken Lay himself is being forced by the Devil to watch this unfold. It must be torture for him.
When Dick Syron took the President's role at Thermo, the company was a basket case. He started his tenure firing people who should have been gone years earlier. He streamlined business units (previously, Thermo companies under different public subsidiaries were cutting each other's throats to gain market share from each other). Soon, he hired professional managers to replace the old political operators who were destroying the company.
In one case, one of his managers laid off 28 of 30 employees at a small subsidiary, Thermo MIE. The sub continued to grow it's top line with no impediments.
Dick Syron is brilliant and extremely honest, but not the best public speaker. And yes, I was at Thermo at the time.
So that's an off-topic remark, but I've read some comments about Dick Syron that I think are off-base.
At the time, we were stunned at how quickly he moved the old behemoth in the right direction. FreddieMac is lucky to have him.
"Volume is falling. Production of nonagency mortgage securities fell almost 50 percent between January and February, according to preliminary numbers compiled by Inside Mortgage Finance. The data indicate that new subprime and Alt-A loans fell significantly in February."
This would indicate that tightening lending standards had a significant impact on home sales in February.
Two other significant line items in that report are that nonfarm proprietors' incomes dropped in Jan vs. Dec, although they remain marginally higher than June.
In further testament to the housing oversupply, rental income is down since Sept 2006, although it did rise somewhat in Jan.
Defaults are beginning to creep up on stuff like auto loans, and I can tell you that the credit card companies are stepping up collection efforts.
Manufacturing and goods-producing payrolls declined from Dec-Jan. Services are picking up the slack, but how long can they do so?
Most (.6) of the 1.0 increase in personal income was bonuses/stock options. We need a much broader increase than that in order to sustain consumer spending while gradually reducing negative savings.
So far CR has been right on the button with his comments about the effects of MEW. I have major mental reservations about the proposition that high-paying service jobs can pick up the slack for a manufacturing/construction slump.
On the other hand, collections workers do get paid with bonuses and sometimes commissions.... But it seems like eating the seed corn to me.
Lama, I bought FRE the day they announced Syron's appointment. I no longer own those shares, merely because I was raising cash a while ago and cleaned out my equity position (don't credit me for any strategic thinking, marketwise). But I made a little coin on the deal.
I hope I wasn't one of the ones who made too much fun of Syron. I just thought he did deserve some mild beating over the remark about how it's too paternalistic to tell people who wanted into the RE frenzy in 2005 that they shouldn't be enabled in this unhedged risk taking by a government-sponsored enterprise. I like my coffee black and my GSEs looking out for Joe and Jane Borrower, thanks. Sure, maybe they can spare a thought for TIAA, but TIAA is supposed to have its own grownups in charge. Yeah, I know.
Snow day at work here in Omaha. Watching CNBC. Topic d'jure is the Yen carry trade. Art Cashin calls the market action a liquidity event.
One commentator (Marc Chandler) says that the Yen action is a lot of "real" money going back to Japan as Japanese investors bring their money home and international investors move into Japanese assets. So even if the carry trade is unwinding, it is a secondary impact on the recent appreciation of the Yen.
This is the part of the NYT piece I liked (buried at the end of page 2, of course):
The big banks optimism is based in large part on the structure of these bonds. For one thing, most bonds collect more in interest payments than they are obligated to pay out. They also include a cash reserve, or residual, that can be dipped into if interest payments fall short because of defaulting borrowers.
You can have a pretty long period of stress before you start to see actual write-downs, said Anthony V. Thompson, who heads research of asset-backed securities at Deutsche Bank Securities.
Much depends on the strength of these bonds structure, which is determined largely by agencies like Moodys Investors Service, Standard & Poors and Fitch Ratings.
Why am I "optimistic"? Because I believe that complex structures never before stress-tested in the marketplace are going to save us from the fact that the underlying assets are starting to look like they can't generate enough spiff! That's why! Next question?
Even so, big banks' loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.
U.S. stocks dived again at the open on Thursday as nervousness in Asian markets, rumors about distressed lenders and the latest U.S. inflation figures, rekindled the selling pressure that sent the market plunging two days ago.
Tanta,
You'll have to do better than that to kick me out of your fan club. Maybe someone, anyone in our government should have offered an independent credit counseling program for home buyers. There are non-profits that do this, but how many people know about them?
Actually, if you feel you owe me one, tell me how a career auditor/accountant can get some work out of all this? My boss and I had a discussion about what kind of consulting services we could posture for. We're a bit pricey to review loan apps, but I have a feeling there's some legal support work out there somewhere.
Any thoughts?
Here's the key exchange (paraphrasing) "Q: Aren't you a little late to the party with these changes to subprime guidelines? A: These loans weren't a problem until recently. When short term interest rates were low and house prices were going up by more than 5% a year, even if the subprime borrower had to pay 5 points to refi, he still came out ahead. It's only lately that these loans have had problems."
So in other words, if everything went perfectly (unsustainably low rates, house prices going up as far as the eye could see) they might be able to refi. This is banking? This is prudent lending?
To me, this Alfred E. Newman approach to credit risk very neatly encapsulates why we have the mortgage problems that we have. I have never met the man, nor have I studied Freddie closely, so perhaps I can be faulted for taking this out of a broader context when the guy was having a bad day. However, my experience is company cultures, values and leadership expose their true selves in times of stress. His performance was not reassuring in that regard.
ISM looked like early signs of a small business expansion to me.
I am extraordinarily bullish on the environment for small businesses with one exception - they are all constrained by access to knowledgeable labor.
Continuing unemployment rose sharply YoY. If big business constrains hiring enough, small businesses might pick up enough bodies before credit worries multiply to carry us through this.
You quoted this part of the NYT story: "The big banks optimism is based in large part on the structure of these bonds. For one thing, most bonds collect more in interest payments than they are obligated to pay out. They also include a cash reserve, or residual, that can be dipped into if interest payments fall short because of defaulting borrowers."
Now, if I remember correctly, you explained in "Mortgage servicing for ubernerds" that the servicers have to pass along the interest payments to the investors, even the interest payments from borrowers in default. Isn't that right, or am I remembering wrong?
Maybe the servicer is on the hook for the first 90 days of delinquency, and after that, the investors tap their residuals?
Brian,
Only the commercial will play. I can't get the interview to load. The comment you cite is less than I would expect from him.
Regarding your paraphrase, wasn't most of the subprime market out of FreddieMac's control? He could be speaking matter of factly, rather than making an ethical judgement. He's a not the warm, fuzzy type.
Holden, let me first say that servicing agreements for private label structured securities are not always "standard." People who are worried these days because there's not enough transparency in the deal structures themselves (or the rating agencies' methodologies or whatever) are right to be so worried, and if you want more to worry about, remember that you don't always understand the servicing arrangements, either, unless the servicing agreement is included as an exhibit to the prospectus.
That said. The servicer advances of interest get paid back by that very "reserve" we are talking about. The servicer is not an investor in principal in this context. (The servicer could be the same company who is the issuer or an investor in the security, but we should not be confused by such "high level" washing of debits and credits.) In other words, the "reserves" are available to pay interest or principal to bondholders only after the servicer has been compensated, as a matter of "equity." As a matter of how the process works, the servicer's advances are used to keep the cash-flow going to the bondholders for up to 90 days or so, but those become, at the time they're happening, liabilities of the trust (the servicer has to get paid back for the interest advances).
If somebody out there has a servicing agreement in which the servicer doesn't get paid back for those interest advances, somebody has some explaining to do to the auditors, because that would make the servicer have the same liabilities as the holder of the residual, namely, a first-loss position. That's not any kind of kosher, as far as I know. The servicer's advances of interest should always be repaid from liquidation of the loan (or from the borrower making back payments and therefore coming current, which is of course the preferred method). If liquidation of the loan doesn't generate enough money to repay the servicer's expenses and the bondholder's principal, then the bondholder (or its reserves) pays the difference.
My boss and I had a discussion about what kind of consulting services we could posture for. We're a bit pricey to review loan apps, but I have a feeling there's some legal support work out there somewhere.
Oh my dear, I think legal support work you will find. Who do you want to work for, the receivers or the potential survivors? Fools like I can review loan apps all day long. Someone is going to have to take my report and turn it into a portfolio valuation. Somebody may not want to pay you to do that, but I'm guessing that somebody's regulator or majority owner might make them pay you to do that. And since all I do is scribble "So, basically, you're hosed!" on the bottom of my reports, I'll leave you a lot of work to do.
Try pushing the play button again after the commercial plays, it works for me.
I realize Freddie wasn't the primary offender here, but the gist of his comment is that it was OK to qualify people for the 2/28s at teaser rates as long as HPA was marching merrily along. That is just plain irresponsible coming from a lender, IMO.
I suspect that when this is all over we will see a very different perspective from the people at the top of the big mortgage lending ops. That tends to happen after you have had been summoned to certain venues and start the proceedings by raising your right hand and say "I promise to tell the truth, the whole truth..."
"Somebody may not want to pay you to do that.."
Hey, that's the story of my life. One place didn't want to pay me to tell them they couldn't keep the money if a customer double paid. Another paid me to tell them that their circuit boards were worthless (through indepth analysis, I determined that they had spiders living in the inventory). At one place, they nicknamed me "The Assasin". I didn't think that was very nice.
So maybe I can take scribbles and quantify them into Excel Pivot Tables?
Living in dairy country as I do, I note down in the depths of the BEA news release that farm income almost exactly doubled from Jun06 to Jan07. That's good news to those of us who like to eat food...
China? Definitely. Do you think China is going to buy any more of it?
I asked Setser in the comments of one of his posts a few weeks ago if China was buying this stuff... He said he didn't think so, that they have stuck to the high credit 'prime' product only... AS FAR AS HE KNEW.
Setser knows more than most in this game so I'd go with his hunch until evidence proves otherwise.
So I don't think it is the Chinese who have the 'Old Maid'. Probably a whole lot closer to home.
That has been my guess all along... that and any bond fund or money market advertising wildly 'superior' yields. If the ground wasn't frozen (with two feet of fresh snow on it) I'd be burying hard money in 'tomato cans' today.
I am extraordinarily bullish on the environment for small businesses with one exception - they are all constrained by access to knowledgeable labor.
Not so MOM - there is ton's of it out there, they just have to pay for it.
I was on the phone today with a friend who was being recruited to be a sub-rep for a small biz. They 'offered' him $35K without benies or expenses and an addition 3% spiff on anything he sells over $300K... This is covering a large Midwestern state calling on other small businesses & retailers (specialty recreational products - accounts all over & decentralized - it will cost him MORE than $35K to stay on the road).
I was stunned. There is no way he can make any money doing this. Yet they laid the offer on the table with a completely straight face.
I see this nonsense all the time from small biz owners. Complain there is no 'skilled labor' then use as an example that no one will take an offer to work for 1970s wages.
Tanta and Lama:
My colleagues and I run a temporary legal placement service providing attorneys, under contract, principally for document review on major, document heavy, litigation. We try to go directly to the litigant, not his law firm, in order to provide the cheapest service -- cut out the middle man you know?
Right now we are looking into the cases filed in Illinois Federal Courts by HSBC, presumably to force originators to take back FPDs and EPDs, but we aren't finding much. Also we aren't sure which side of the issue we want to be on -- originator, warehouseman, securitizer, investor, whathaveyou.
Any bright ideas which party will need the help and have the (some) money to pay for it?
Ethan,
That was my question to Tanta. Her take was to first offer to regulators. You might have to work through a bigger placement firm that already has a track record with that agency. Wherever there are two parties with deep pockets fighting, I think either side would do fine. If either party is weak financially, there's nothing there for you. If you think of anything more, please let me know. Thanks,
Any bright ideas which party will need the help and have the (some) money to pay for it?
That last little caveat probably excludes the originators right about now. My guess is their pockets weren't too deep to start with & they just ripped a big hole in what was there.
I [Ethan, no ordinary middleman] run a temporary legal placement service providing attorneys, under contract, principally for document review on major, document heavy, litigation
Well, on behalf of Ethan (and the other interested parties not so much), I too, can try to go directly to the litigant, not his law firm, in order to provide the cheapest service -- cut out the middle man you know?
So if you act now before Midnight Friday for only $9.95 you can get an exclusive propriety list of contacts to ensure that your exemplary anti-middleman efforts are not wasted on dubious clients.
Normally I put great stock in your comments, but you clearly don't know what you are talking about here, and it makes me doubt what you say elsewhere.
You see the current model is that the law firm (not the litigant) goes to the temp agency to get the temporary lawyers, and of course bills the litigant/client a mark up. This is what we are trying to avoid.
Sure, the litigant could "distintermediate" the temp agency as well as the law firm by posting his needs on Monster or some such, but that is not really efficient. For one thing if the litigant puts a bunch of new lawyers on his payroll, he can easily mess up his benefit plans with the new hires claiming they are entitled, etc.
Besides we, the temp agency, provide supervisory services for the scads of new lawyers we place on a project, and we don't charge law firm sized fees to do it.
So be a little more circumspect with your next post.
Thanks and Regards,
OK, this may be the whopper of the week - we anticipated the subprime problems - can they really say that with a straight face? Do they have the same PR counsel as Dick Syron?
"The brokerage firms have done something curious: they are not abandoning subprime mortgage origination; they are taking positions, Mr. Hintz said.
In December, Merrill Lynch completed a $1.3 billion acquisition of First Franklin, which was among the 10 biggest subprime lenders last year, and Morgan Stanley bought Saxon Capital for $706 million.
Bank executives say they anticipated the problems in subprime and they have been buying lenders because they want to better control lending standards in the industry.
Saxon was a long-term strategic decision, said Anthony Tufariello, who heads the securitized product group at Morgan Stanley. And we are happy we made that decision because we bought it as a servicing platform with the expectation that the market would undergo dislocation.
Doesn't look too calm in Asia tonight...
Major World Indices - Yahoo! Finance
I can only think that Merril is large enough to either carry those losses with or without government aid in that carriage.
Expeditious to have someone like Paulson there to ensure that the burden will be supported if the need arises.
San Diego Source > News > Banks try to return risky loans to originators
"Banks try to return risky loans to originators"
"In a push to recoup losses, HSBC, which recently added $1.76 billion to its bad-debt costs for 2006 to cover ailing mortgages, has sued several small lenders in federal court in Illinois after they refused HSBC's repurchase requests."
I couldn't find anything about a federal court case by HSBC, anyone else find it? I was wondering who they were suing.
Brian:
When the going gets tough, the tough get Too Big Too Fail.
I think the absolute key, key, key question is who was buying the non-agency mortgage-backed securities?
Commenters should really, really try to answer that question.
Forget about the travails at the other end: the phony docs, the predatory lenders. All that stuff was in the service of, yes, the guys who were selling this crap. But who were they selling it to? That is absolutely the key question.
Mom and Pop? Joe Sixpack? L'homme moyen? I think not.
TIAA-CREF? Probably. And what will TIAA-CREF do now? Well, they do NOT want to have this stuff anywhere near them. These non-agency (and probably agency too) securitized mortgages are RADIOACTIVE and all those retirees who think TIAA is going to cushion their golden years are going to be mighty angry (can you say, CLASS ACTION SUIT?) if it turns out that TIAA was dabbling in this stuff.
China? Definitely. Do you think China is going to buy any more of it?
So, yes, the guys with the Beemers here in the States have a few problems, but one of them is surely beginning to look like the fact that they can securitize it, but, after they do, about the only place they can place it is where the sun don't shine.
This is a crisis.
Okay, here's a face to put on the question:
"Citi is pleased to be able to provide working capital to ACC Capital
Holdings," said Jeffrey A. Perlowitz, head of global securitization in
Citi's Fixed Income, Currencies and Commodities unit. "We have extensively reviewed ACH's progress in strengthening its operations and business practices, and are impressed with what the company has accomplished."
That makes it sound like Jeffrey is as confident as a shark with a diver's leg in his jaws that he can sell the stuff. I like the word "global" in that context.
Hmmmmmmm.
If the yen carry trade is such a hot ticket, why wouldn't the guys in China and Japan make the bet?
Borrow in yen, buy income producing instruments in dollars.
That's where Jeffrey comes in. Maybe TIAA (I hope) is not completely stupid, but Jeffrey isn't selling to TIAA. He's selling to China and Japan. And, just conceivably, China and Japan are a little less familiar with HELOC and MEW and QRSTUVW than Jeff's peers.
I would say that any Asian buyers of securitized mortgage debt would have to actually lose money before they would stop buying. However, once that happens, I think Jeffrey can throw away his beeper.
Jeff's been making a ton of money for at least a decade. It is hard to stop.
Okay, I'm going on and on.
Jeffrey wouldn't exist if it weren't for Fannie Mae and Freddie Mac.
And I defy anyone to tell me that Fannie and Freddie have not sold billions, nay, trillions of their dreck to Asia.
That kind of action (let's see, what's 0.25% of a trillion dollars?) attracts Jeffrey and his peers the way bush pigs attract a cobra.
Fannie and Freddie. When they went corrupt, all this became inevitable.
But who were they selling it to?
Pension funds and municipalities? Apparently they enjoy having their faces ripped off from what I've read. Although, the central bank probably deserves the blame. If it weren't for all the free money, then pensions funds wouldn't be forced to walk the plank of risk in an attempt to provide a decent retirement. But then again, taking the easy way out is about all that leaderless groups do, so I'm not sure the public would tolerate the central bank acting any differently. They can't be bothered with wondering why free money for everybody is a bad idea. They've got the mortgage, gas prices, and the Joneses on their mind so a little free money sounds awfully nice.
Vote Free Lunch Party 2008!
So the good old US taxpayer gets to pick up the tab for
a) garbage mortgage loans
b) Iraq
Democracy isn't cheap. Not in the US.
auto loans:
MarketWatch.com
Charts showing the Fed has been doing a great job:
http://voiceofsandiego.org/toscano/9999explainer.txt
Richard Bove has been following US Banks for many years and when he says the Banks dont know how much Sub prime exposure they have I am inclined to believe him. Banks are companies in which agency risks run rampant - the temptation for individual bankers to do overly risky business and take poor quality risks which they can effectively bury for long enough in the balance sheet of the bank to get paid large annual bonuses overwhelms the risk controls the banks have in place. This disfunction has paid a larger part of each of the succesive blowups from the SL Boom Bust, to Third World Debt, Venture Capital and now Sub Prime.
The investment banks links with the sub prime borrowers is similar to the symbiotic relationship that the same institutions have with Hedge Funds. A network of smaller shops (HFs and Sub Prime)are being lent money to produce to the point of dependency (several of the sub primes closed shop when ONE bank excecised its put options on mortgages it had originated according to what I've read recently).
It is my guess that a lot of the lower quality mortgage exposure is sitting on IB balance sheets, their poor quality being marked by an inoffensive mark at acquisition or book value , and the real value market is only just being discovered now, but thankfully its after the bonus checks for last yer cleared
I asked that same question over a year ago, who buys nonagency debt, especially the subprime stuff?
The answer seemed to be just about every manner of big player, pension funds, insurance companies, mutual funds, hedge funds. Even the banks buy debt originated at other banks. You could buy these bonds on Etrade. A lot were sold overseas, but foreign central banks stuck to Treasuries with a dash of agency debt.
Curiously, the NYT story has since been rebranded as: "Soothing Words and a Stock Market Rebound"
I'm a Canadian portfolio manager (private & institutional) and I was forever getting calls from these US investment bankers trying to sell me their CDOs and other crap.
So pension funds, mutual funds, private portfolios, seg funds... most anyone funding his/her retirement will get hurt by these.
Joe Blo's house will go down and so will his pension and benefits
Interesting:
Personal income and spending:
News Release: Personal Income and Outlays, October 2009
Personal savings is now positive?
(Am I reading this right...?)
Regards,
No wait Personal saving was a negative 1.2% in January, so no savings, home values (opportunity for HELOC) dropping, and wages rising slightly...what happens to ¾ of the economy?
Regards all,
John M., that headline change is very interesting. Especially because Asian markets went down again. Papering over, so to speak, the cracks, to avoid jitters. We are seeing this behavior Greenspan's alleged words yesterday(paraphrased and dramatized) "I said possible --not probable-- recession!")
Feel like someone's trying to hand me some soma...
BTW, I was probably hallucinating or I didnt have enough coffee, but I swear there was no negative signs on personal savings column when I looked at that PI release the first time.
Of course, I could have been looking at the wrong column.
All,
The marginal buyers of subprime paper (particularly the low rated tranches) in the last two years were the CDOs. Things will really get ugly when a few of them blow up. I heard from a trader last night that the CDO bid for subprime paper dried up yesterday. The results of the NovaStar securitization would seem to confirm that.
Ah, Danielle, if you didn't exist I would have had to invent you!
But you do exist (and have a lovely name too), and, let me see if I have this straight, the purveyors of MBS/CDO etc. were calling you all the time?
Gentlemen and gentlewomen, we are witnessing the perfect crime. I am truly, truly impressed. I would say that only MaxedOutMama is capable of adequately describing this.
Borrowers? [rhymes with rued] blue.
Purchasers of the debt? Ditto.
The guys who put it together and sucked the marrow out of it? Vacationing in Maui.
Oh, I do give credit (no pun) where credit is due. You're Jeffrey Perlowitz. Stock market crash? Irrelevant. Mass foreclosures? Irrelevant. Pension funds going belly-up? Boring. Etc. etc.
Ken Lay himself is being forced by the Devil to watch this unfold. It must be torture for him.
When Dick Syron took the President's role at Thermo, the company was a basket case. He started his tenure firing people who should have been gone years earlier. He streamlined business units (previously, Thermo companies under different public subsidiaries were cutting each other's throats to gain market share from each other). Soon, he hired professional managers to replace the old political operators who were destroying the company.
In one case, one of his managers laid off 28 of 30 employees at a small subsidiary, Thermo MIE. The sub continued to grow it's top line with no impediments.
Dick Syron is brilliant and extremely honest, but not the best public speaker. And yes, I was at Thermo at the time.
So that's an off-topic remark, but I've read some comments about Dick Syron that I think are off-base.
At the time, we were stunned at how quickly he moved the old behemoth in the right direction. FreddieMac is lucky to have him.
"Volume is falling. Production of nonagency mortgage securities fell almost 50 percent between January and February, according to preliminary numbers compiled by Inside Mortgage Finance. The data indicate that new subprime and Alt-A loans fell significantly in February."
This would indicate that tightening lending standards had a significant impact on home sales in February.
Two other significant line items in that report are that nonfarm proprietors' incomes dropped in Jan vs. Dec, although they remain marginally higher than June.
In further testament to the housing oversupply, rental income is down since Sept 2006, although it did rise somewhat in Jan.
Personal savings:
Jun: -146.6
Jul: -164.2
Aug: -139.8
Sep: -95.0
Oct: -100.5
Nov: -109.8
Dec: -134.2
Jan: -116.4
Defaults are beginning to creep up on stuff like auto loans, and I can tell you that the credit card companies are stepping up collection efforts.
Manufacturing and goods-producing payrolls declined from Dec-Jan. Services are picking up the slack, but how long can they do so?
Most (.6) of the 1.0 increase in personal income was bonuses/stock options. We need a much broader increase than that in order to sustain consumer spending while gradually reducing negative savings.
So far CR has been right on the button with his comments about the effects of MEW. I have major mental reservations about the proposition that high-paying service jobs can pick up the slack for a manufacturing/construction slump.
On the other hand, collections workers do get paid with bonuses and sometimes commissions.... But it seems like eating the seed corn to me.
Construction spending worse than expected...down 0.8% vs expected down 0.5%....I'll leave the details to CR.
Lama, I bought FRE the day they announced Syron's appointment. I no longer own those shares, merely because I was raising cash a while ago and cleaned out my equity position (don't credit me for any strategic thinking, marketwise). But I made a little coin on the deal.
I hope I wasn't one of the ones who made too much fun of Syron. I just thought he did deserve some mild beating over the remark about how it's too paternalistic to tell people who wanted into the RE frenzy in 2005 that they shouldn't be enabled in this unhedged risk taking by a government-sponsored enterprise. I like my coffee black and my GSEs looking out for Joe and Jane Borrower, thanks. Sure, maybe they can spare a thought for TIAA, but TIAA is supposed to have its own grownups in charge. Yeah, I know.
Snow day at work here in Omaha. Watching CNBC. Topic d'jure is the Yen carry trade. Art Cashin calls the market action a liquidity event.
One commentator (Marc Chandler) says that the Yen action is a lot of "real" money going back to Japan as Japanese investors bring their money home and international investors move into Japanese assets. So even if the carry trade is unwinding, it is a secondary impact on the recent appreciation of the Yen.
This is the part of the NYT piece I liked (buried at the end of page 2, of course):
The big banks optimism is based in large part on the structure of these bonds. For one thing, most bonds collect more in interest payments than they are obligated to pay out. They also include a cash reserve, or residual, that can be dipped into if interest payments fall short because of defaulting borrowers.
You can have a pretty long period of stress before you start to see actual write-downs, said Anthony V. Thompson, who heads research of asset-backed securities at Deutsche Bank Securities.
Much depends on the strength of these bonds structure, which is determined largely by agencies like Moodys Investors Service, Standard & Poors and Fitch Ratings.
Why am I "optimistic"? Because I believe that complex structures never before stress-tested in the marketplace are going to save us from the fact that the underlying assets are starting to look like they can't generate enough spiff! That's why! Next question?
Lender Woes Go Beyond Subprime
Lender Woes Go Beyond Subprime
Even so, big banks' loans are souring. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December, 2006, vs. December, 2005, at banks with more than $10 billion in assets, says SNL Financial. Some are setting more money aside or buying extra insurance to cover losses. Countrywide plans to buy insurance on up to $19 billion in loans, roughly a fourth of its portfolio.
Since ABX HE BBB/A is crashing, how can Country Wide or any other bank buy insurance without taking a hit on profit?
Interesting numbers today.
Jobless claims continue to creep up, but thus far they're still only consistent with a slowing economy and not recessionary.
The big news was the ISM report. Pretty strong report and suggests the manufacturing concerns might be overblown. Even employment was above 50.
Great phrase found in this Marketwatch story
U.S. stocks dived again at the open on Thursday as nervousness in Asian markets, rumors about distressed lenders and the latest U.S. inflation figures, rekindled the selling pressure that sent the market plunging two days ago.
Love them rumors...
Tanta,
You'll have to do better than that to kick me out of your fan club. Maybe someone, anyone in our government should have offered an independent credit counseling program for home buyers. There are non-profits that do this, but how many people know about them?
Actually, if you feel you owe me one, tell me how a career auditor/accountant can get some work out of all this? My boss and I had a discussion about what kind of consulting services we could posture for. We're a bit pricey to review loan apps, but I have a feeling there's some legal support work out there somewhere.
Any thoughts?
Lama,
I was the guy who took Syron to task. This video is what prompted my comments. Please take a look at it.
Video - CNBC.com
Here's the key exchange (paraphrasing) "Q: Aren't you a little late to the party with these changes to subprime guidelines? A: These loans weren't a problem until recently. When short term interest rates were low and house prices were going up by more than 5% a year, even if the subprime borrower had to pay 5 points to refi, he still came out ahead. It's only lately that these loans have had problems."
So in other words, if everything went perfectly (unsustainably low rates, house prices going up as far as the eye could see) they might be able to refi. This is banking? This is prudent lending?
To me, this Alfred E. Newman approach to credit risk very neatly encapsulates why we have the mortgage problems that we have. I have never met the man, nor have I studied Freddie closely, so perhaps I can be faulted for taking this out of a broader context when the guy was having a bad day. However, my experience is company cultures, values and leadership expose their true selves in times of stress. His performance was not reassuring in that regard.
ISM looked like early signs of a small business expansion to me.
I am extraordinarily bullish on the environment for small businesses with one exception - they are all constrained by access to knowledgeable labor.
Continuing unemployment rose sharply YoY. If big business constrains hiring enough, small businesses might pick up enough bodies before credit worries multiply to carry us through this.
Tanta, I got a question for you.
You quoted this part of the NYT story: "The big banks optimism is based in large part on the structure of these bonds. For one thing, most bonds collect more in interest payments than they are obligated to pay out. They also include a cash reserve, or residual, that can be dipped into if interest payments fall short because of defaulting borrowers."
Now, if I remember correctly, you explained in "Mortgage servicing for ubernerds" that the servicers have to pass along the interest payments to the investors, even the interest payments from borrowers in default. Isn't that right, or am I remembering wrong?
Maybe the servicer is on the hook for the first 90 days of delinquency, and after that, the investors tap their residuals?
It is impossible to get a number. And I dont think they even know.
Who is on the other side of the investment banks' reverse repo deals?
Hedgies?
Brian,
Only the commercial will play. I can't get the interview to load. The comment you cite is less than I would expect from him.
Regarding your paraphrase, wasn't most of the subprime market out of FreddieMac's control? He could be speaking matter of factly, rather than making an ethical judgement. He's a not the warm, fuzzy type.
Holden, let me first say that servicing agreements for private label structured securities are not always "standard." People who are worried these days because there's not enough transparency in the deal structures themselves (or the rating agencies' methodologies or whatever) are right to be so worried, and if you want more to worry about, remember that you don't always understand the servicing arrangements, either, unless the servicing agreement is included as an exhibit to the prospectus.
That said. The servicer advances of interest get paid back by that very "reserve" we are talking about. The servicer is not an investor in principal in this context. (The servicer could be the same company who is the issuer or an investor in the security, but we should not be confused by such "high level" washing of debits and credits.) In other words, the "reserves" are available to pay interest or principal to bondholders only after the servicer has been compensated, as a matter of "equity." As a matter of how the process works, the servicer's advances are used to keep the cash-flow going to the bondholders for up to 90 days or so, but those become, at the time they're happening, liabilities of the trust (the servicer has to get paid back for the interest advances).
If somebody out there has a servicing agreement in which the servicer doesn't get paid back for those interest advances, somebody has some explaining to do to the auditors, because that would make the servicer have the same liabilities as the holder of the residual, namely, a first-loss position. That's not any kind of kosher, as far as I know. The servicer's advances of interest should always be repaid from liquidation of the loan (or from the borrower making back payments and therefore coming current, which is of course the preferred method). If liquidation of the loan doesn't generate enough money to repay the servicer's expenses and the bondholder's principal, then the bondholder (or its reserves) pays the difference.
My boss and I had a discussion about what kind of consulting services we could posture for. We're a bit pricey to review loan apps, but I have a feeling there's some legal support work out there somewhere.
Oh my dear, I think legal support work you will find. Who do you want to work for, the receivers or the potential survivors? Fools like I can review loan apps all day long. Someone is going to have to take my report and turn it into a portfolio valuation. Somebody may not want to pay you to do that, but I'm guessing that somebody's regulator or majority owner might make them pay you to do that. And since all I do is scribble "So, basically, you're hosed!" on the bottom of my reports, I'll leave you a lot of work to do.
Thanks, Tanta. That was exactly the answer I was looking for.
Bottom line: The servicer is in line ahead of the investor.
Lama,
Try pushing the play button again after the commercial plays, it works for me.
I realize Freddie wasn't the primary offender here, but the gist of his comment is that it was OK to qualify people for the 2/28s at teaser rates as long as HPA was marching merrily along. That is just plain irresponsible coming from a lender, IMO.
I suspect that when this is all over we will see a very different perspective from the people at the top of the big mortgage lending ops. That tends to happen after you have had been summoned to certain venues and start the proceedings by raising your right hand and say "I promise to tell the truth, the whole truth..."
"Somebody may not want to pay you to do that.."
Hey, that's the story of my life. One place didn't want to pay me to tell them they couldn't keep the money if a customer double paid. Another paid me to tell them that their circuit boards were worthless (through indepth analysis, I determined that they had spiders living in the inventory). At one place, they nicknamed me "The Assasin". I didn't think that was very nice.
So maybe I can take scribbles and quantify them into Excel Pivot Tables?
Living in dairy country as I do, I note down in the depths of the BEA news release that farm income almost exactly doubled from Jun06 to Jan07. That's good news to those of us who like to eat food...
Jim,
You can thank Duane Andreas, Bob Dole and the rest of the ethanol lobby for that.
Brian
Thanks, I forgot we are now using our food as gas for the car to go get stuff we put on the credit card. (does this sound bizarre or what?)
None the less, my neighbors are doing a little better (paying down the operating loans they took out in years past to keep going)
The middle of the country will do much better than the coasts as this debacle unfolds...
China? Definitely. Do you think China is going to buy any more of it?
I asked Setser in the comments of one of his posts a few weeks ago if China was buying this stuff... He said he didn't think so, that they have stuck to the high credit 'prime' product only... AS FAR AS HE KNEW.
Setser knows more than most in this game so I'd go with his hunch until evidence proves otherwise.
So I don't think it is the Chinese who have the 'Old Maid'. Probably a whole lot closer to home.
And I defy anyone to tell me that Fannie and Freddie have not sold billions, nay, trillions of their dreck to Asia.
Bingo. But only the 'finest kind'... the 'seeds and stems' they set aside for the round eye market.
But who were they selling it to? - arbo
Pension funds and municipalities? - The Good Dr
That has been my guess all along... that and any bond fund or money market advertising wildly 'superior' yields. If the ground wasn't frozen (with two feet of fresh snow on it) I'd be burying hard money in 'tomato cans' today.
I am extraordinarily bullish on the environment for small businesses with one exception - they are all constrained by access to knowledgeable labor.
Not so MOM - there is ton's of it out there, they just have to pay for it.
I was on the phone today with a friend who was being recruited to be a sub-rep for a small biz. They 'offered' him $35K without benies or expenses and an addition 3% spiff on anything he sells over $300K... This is covering a large Midwestern state calling on other small businesses & retailers (specialty recreational products - accounts all over & decentralized - it will cost him MORE than $35K to stay on the road).
I was stunned. There is no way he can make any money doing this. Yet they laid the offer on the table with a completely straight face.
I see this nonsense all the time from small biz owners. Complain there is no 'skilled labor' then use as an example that no one will take an offer to work for 1970s wages.
Tanta and Lama:
My colleagues and I run a temporary legal placement service providing attorneys, under contract, principally for document review on major, document heavy, litigation. We try to go directly to the litigant, not his law firm, in order to provide the cheapest service -- cut out the middle man you know?
Right now we are looking into the cases filed in Illinois Federal Courts by HSBC, presumably to force originators to take back FPDs and EPDs, but we aren't finding much. Also we aren't sure which side of the issue we want to be on -- originator, warehouseman, securitizer, investor, whathaveyou.
Any bright ideas which party will need the help and have the (some) money to pay for it?
Ethan,
That was my question to Tanta. Her take was to first offer to regulators. You might have to work through a bigger placement firm that already has a track record with that agency. Wherever there are two parties with deep pockets fighting, I think either side would do fine. If either party is weak financially, there's nothing there for you. If you think of anything more, please let me know. Thanks,
Any bright ideas which party will need the help and have the (some) money to pay for it?
That last little caveat probably excludes the originators right about now. My guess is their pockets weren't too deep to start with & they just ripped a big hole in what was there.
Don't mind me honking back:
I [Ethan, no ordinary middleman] run a temporary legal placement service providing attorneys, under contract, principally for document review on major, document heavy, litigation
Well, on behalf of Ethan (and the other interested parties not so much), I too, can
try to go directly to the litigant, not his law firm, in order to provide the cheapest service -- cut out the middle man you know?
So if you act now before Midnight Friday for only $9.95 you can get an exclusive propriety list of contacts to ensure that your exemplary anti-middleman efforts are not wasted on dubious clients.
Calmo:
Normally I put great stock in your comments, but you clearly don't know what you are talking about here, and it makes me doubt what you say elsewhere.
You see the current model is that the law firm (not the litigant) goes to the temp agency to get the temporary lawyers, and of course bills the litigant/client a mark up. This is what we are trying to avoid.
Sure, the litigant could "distintermediate" the temp agency as well as the law firm by posting his needs on Monster or some such, but that is not really efficient. For one thing if the litigant puts a bunch of new lawyers on his payroll, he can easily mess up his benefit plans with the new hires claiming they are entitled, etc.
Besides we, the temp agency, provide supervisory services for the scads of new lawyers we place on a project, and we don't charge law firm sized fees to do it.
So be a little more circumspect with your next post.
Thanks and Regards,
Florida short sale is a foreclosure for teh bankrupt Florida short sale of real estate