Dubious mortgages are now a growing share of the mortgage-backed market, so there is scope for more trouble. Of the $1.02 trillion of MBSs issued in the first half of this year, over 40% was linked to subprime loans, up from 6-8% in 2000-03, ...
Combined third-quarter profits for the country's nine largest mortgage lenders were $991m, less than half the level for the same period last year. ....
I was wondering the same thing about Citi (even before this post), not least because I have accounts there. I'll probably be switching banks in the spring (for other reasons), and I have to wonder if there is any reaonable way for a nonexpert to have a clue about the actual soundness of the bank one is using; I can't see how we can get out of this mess without some bank failures.
Maybe I'm being obtuse again Tanta, but last I checked "cyclical" and "secular" were bond industry/market slang for "things that happen in a repeating boom/bust cycle due to supply and demand shifts in the specific market area" and "things that happen as an overall up or down trend because of macro/market forces outside of the boom/bust cycle -- i.e., acts of God and population/world economy."
In otherwords I think they're saying there that they expect the down cycle to hit and drive consolidation. They are also expecting some of these outside secular forces to probably also hit the industry negatively, and praying/hoping that they won't hit.
I suppose it's worth noting that Sandy Weil and Chuck Prince are two of the slimiest players in US finance. Their speciality is crooked lending to homeowners just above or at the poverty line.
Andrew, I guess I was just startled by the fact that the "secular" forces they listed here were hardly "acts of God or the world economy" outside of deck-chair rearranging in the mortgage industry. I was also just riffing of the idea that "secular" in my mind tends to imply a slightly longer time horizon than "recent shifts" that play out "next year."
Merrill's First Franklin purchase is suppose to close in the next 14 days. I havent reviewed the merger doc, but I have to imagine ML's lawyers are going through it in detail to either MAC out of it altogether or at least significantly reduce price. Any thoughts?
My industry contacts have indicated that FF has been one of the worst violators of underwriting standards over the past 2 years. Not shocking when you consider that it was built by same guy who subsequently founded and ran OWNIT into insolvency....
cmad, I have to say I'm rooting for Gnat City here (the underdog or the underbug?). I have no inside dope, nor do I predict that the Cleveland boys can outlawyer ML; I just want for public-spirited reasons to see FF get off the books of an insured depository and I couldn't care less if ML gets to be the bagholder.
It ain't just Cerberus that has three heads. All the "bottom barkers" out there must come similarly equipped with all the Yip, Yip, Yip-ing going on these days.
Just FYI, Aozora Bank (the blue sky bank) is less a Japanese bank then a puppet of Cerberus Capital. It used to be a bank called Long Term Credit Bank (Choki Shinyoh Ginkoh) which looked like it was going out of business in the late 90s, and got bought out by Cerberus, reorganized, and changed its name to Aozora. Before getting bought out by Cerberus, I think a lot of its bad loans were bailed out by the gov't, a significant annoyance to Japanese taxpayers. Aozora is now 61.84% owned by a Cerberus-related holding company.
So don't take this as a sign that there's foreign investor interest in GMAC. There may be, but this ain't it.
No, bailey, I haven't given up sleeping. I just go to bed at 8:00 p.m. these days. So when I'm up at 3:30 a.m., there's this long dark quiet stretch with just me, my coffee pot, my dsl connection, and some doofusness from Citicorp . . .
Musical chairs or old maid?
Same game as it ever was- buy a pile o 'excrement, repackage it to dumb junk bond buyers- where o where is Robert Citron when you need him....
Mish is firmly in the no inflation camp- here we see the credit machine beginning the process of getting all of those blown out houses into their greedy hands to resell to the next round of suckers. Crank up the loose lending and get these things sold!! The industry makes a huge amount of profits off of the churn, and dang the bond holders. I would have closed my puppy shop up too- right after my last big round of bonuses, and long enough that the feds can see some red ink handed to ML- while I move to my nice new villa...
Tanta, lets buy all kinds of bad crumbs and wring out some big profits on a few and then sell the entire portfolio to the next big sucker.
Got to be some underwater tranches somewhere reeeaaaaalllly cheap.
Since returning loans to shallow-pocketed originators is not really a meaningful option, I don't see why the big dogs wouldn't want to press forward at warp speed toward vertical integration -- and then turn up in DC with their "too big to fail" hats on for a bailout. Systemic risk plus the well-being of millions of American households adds up to a compelling argument for some kind of Brady-bond-like reshuffle of the liabilities. Handsome fees for all this repackaging will be an added incentive. Team Wall Street wins again -- and the game continues. What's the problem?
Allenm, I have some expertise in nonperforming, reperforming, and scratch & dent. Unfortunately, I mean loans, not businesses. Remind me if I ever take another due diligence job to get paid up front. In cash.
Tanta: interesting and detailed: Your analysis sparked the following thoughts.
It seems that the Mortgage industry which you know in great detail is suffering from what I consider a flood of money, like Katrina but instead of water, its credit creation thats causing the dikes to break.
Katrina simply stressed out the dikes and pumps built over the years.
The mortgage industry iteself had its own dikes and pumps, built to handle a certain flow of dollars and volume. These are represented in traditional ways of handling loans and managing risk.
Suddenly the industry became over loaded and swamped. Lending standards disappear, volume's and margins explode beyond what prudent traditional members of the mortgage community (like yourself) could imagine.
At some point the money flow reaches a peak, the dikes begin's to be rebuilt and money gets pumped out of the flooded sector, leaving a changed landscape.
Once the pumping action gets going the money overflows another sector such as recent private equity markets (LBO) and stock market.
Just my simple mind trying to cope and understand whats going on.
Yeah, ron, we've been through something like this before (although not quite on this scale), when the big M&A "spin-ins" stop looking so brilliant and the "spin-offs" start. On the one hand, yes, you have reduced capacity (your "changed landscape") to absorb what is of course reduced demand for the service. On the other hand, you have had beaucoup-jillions of dollars and expert human beings extracted out of the industry in the process, along with urban and suburban landscapes littered with those eerie empty mortgage finance buildings. So each time this happens, it restarts with a combination of greenhorn and embittered employees meeting the New Boss, who turns out to be just as clueless as the Old Boss but on a smaller scale until the boom starts up again. Meanwhile, the money goes to refloat some other boat, and first-time homebuyer wannabees can go pick up a free copy of the local apartment rental rag down at the laundromat.
Oh, wait, I forgot. Online lending is going to make all this obsolete. Never mind.
"There's an interesting little story concerning buybacks making the rounds (that I can't confirm) and it goes like this: midsized lender has been getting stung by buyback requests. The primary owner has staved off the problem, somehow, for months but the day of reckoning is approaching. His firm has a decent net worth but the buybacks it faces would put him out of business. So what does he do? He plans on bankrupting his current mortgage firm, shifting all the assets over to a new one. Sound crazy? One banker I ran it by had this to say: "Not crazy at all. Makes perfect sense to me. Why let the greedy Wall Street bankers making billions of dollars a year take you down?" Stay tuned..."
I think if this happened Wall Street could potentially turn off the spigot. If they are left holding the bag for the lenders not meeting up to the underwriting standards they are claiming to have, then the pricing Wall Street is getting doesn't compensate for the risk they are taking.
In other mortgage news, and I've heard this several times but yet to hear it confirmed, that 2/28 hybrid arms aren't covered by nontraditional mortgage guidance. I heard about this about a month ago but still cant figure out why they wouldnt be covered by the guidance.
Todays inflation reading was amazingboth CPI and core CPI. This is the third straight month of zero or falling inflation. All those inflation hawks circling the sky out theredesperately searching for a rise in consumer priceswell, they just got bit in the rear.
Take a look at the last three big reports:
Retail sales: Wednesdays beautiful retail number handily beat market forecasts. The strong showing demonstrated (once again) the remarkable resiliency of U.S. consumers. Incidentally, this development takes any hypothetical zero Q4 GDP off the table. Sorry permabears
Employment: Last Fridays strong employment report blew away Krugmanite recessionists. The November jobs report was stronger than expected and increased by 132,000. Unemployment remains at a historically low 4 ½ percent. Theres no recession in these numbers.
Inflation: Todays flat report is another bright, shining, example of why the U.S. economy remains the greatest story never told. CPI is up just 2 percent in the past year, following a 0.5 percent decline in September and October. Core inflation has risen at a 1.6% annual rate in the past three months, the slowest growth since June 2005.Inflation appears contained.
The remarkably strong retail report dealt a big body blow to the recession scenario.
This unexpected 1% gain is a big number. It took most people by surprise. Its another sign pointing to the resiliency of the U.S. consumer.
The key point here is that it virtually eliminates the zero percent Q4 scenario from recession bears like Nouriel Roubini. You can't get zero here - toss that scenario in the garbage.
The U.S. consumers are alive and well.
The key themes are strong job creation, low unemployment, and rising wages.
Despite all the gloomy forecasts from the perma-bear camp, all the talk about housing, etc, the great American economy rolls on.
Cal, the 2/28s not being "covered" is partly an issue that that's the main product of nondepository subprime lenders, who aren't covered under the guidance (unless they get nabbed by the states), and partly--insofar as regulated lenders handle them--that the "product" itself isn't considered the problem, as the Option ARMs or IOs, for instance, are. The problem with 2/28s is that the borrowers have bad credit and high LTVs and the collateral is going to hell. (I'm not saying that a 2/28 ARM is a great deal, mind you, just that it isn't used like standard IO hybrids or OAs to put "prime credit" borrowers into high-risk loans.) I'm getting really worried that people are focusing on certain "products" (loan types) being "bad" or "good" and not on LTVs, DTIs, documenting income, appraisals, monitoring broker practices, etc.
You sure that quote you have there isn't from Bill Dallas?
You know I thought "OWNIT" when I read it, but they already went under (and may be executing that strategy).
See, what I am confused by, the nontraditional mortgage guidance talks about LTV, DTI, documentation etc. And I never got the impression that it was saying "Only Option ARM" with these characteristics were covered. It was the practices themselves, which seem inherent in nontraditional mortgages, that were covered.
I guess I have to read the whole darn thing a fourth time lol, dagnabbit.
Where others see "Nontraditional mortgage" as the products, I saw "Nontraditional mortgage" as the underwriting.
If a place underwrote a 30 year fixed with no-doc, 100% financing, 70% DTI, I see that as being covered. It is still risk layering.
"Aegis Closes 2 Operations Centers
Aegis Mortgage Corp., Houston, which said goodbye to its longtime chief executive last month, has closed two subprime operation centers, laying off an undisclosed number of workers. The move comes one month after it also combined two operating units -- Aegis Funding Corp. and Aegis Wholesale Corp. -- and parted ways with its longtime chief Rick Thompson. AFC was a subprime wholesaler. AWC (the surviving name) is a prime and alternative-A funder. A spokeswoman for Aegis, which is owned by Cerberus Capital, said she did not know how many workers lost their jobs with the closure of the two op centers. She stressed that no account executives have been let go, and would not comment on Mr. Thompson's departure. (Sources told MortgageWire that he was forced out.) She also would not comment on Aegis' production volumes, but said that business, in general, is good. (For full details, see the Dec. 18 issue of National Mortgage News.) " BrokerUniverse - Origination News
/m I am really wrong on the guidance, boy it is not very helpful (except it makes people go into fully amortizing loans to avoid the guidance, which is something).
Just a comment on the inflation stats today: Yes, the CPI news was supposedly great. But am I the only one who noticed that a whopping 1-point rally in the long bonds right after the number came out was completely reversed and bonds actually finished down on the day? Maybe the bond market is saying the best news on inflation is behind us for now. Just speculatin' ... more comments at my blog if you're interested:
... and then turn up in DC with their "too big to fail" hats on for a bailout.
4shzl:
I was thinking the exact same thing. The only innocent explanation I can possibly fathom is the survivor bias selecting for maximum optimism and risk taking among management. The more depressing explanations are squeezing profits from a bailout arbitrage or an oligarchical consolidation to allow for the situation to be "managed" more effectively. If subprime mortgages are blowing the financial system apart at the seams then it is better to get as much of the problem under as few umbrellas of control as possible.
I'm finding it harder and harder making doom-and-gloom jokes these days. Things are getting very serious.
Mike_in_Fl:
Bernanke is in China. If in fact, CR's virtuous cycle is developing into a vicious cycle, watch out! Regardless of what China can do, if it really is fundamentally being driven by a market feedback mechanism then attempting to stand in front of the pendulum swinging back the other direction is going to look like something out of Final Destination (great horror movie series for people that like complex systems because of the rube goldbergesque death sequences).
Let's not forget, WaMu recently brought in Citi boys to run their sub-prime operation. Let's also not forget that Citi almost bellied-up in 1990? because they were lending on "actuarial" instead of credit principles. It took a special meeting of the Fed and a Saudi prince with a spare $3.1 billion cash to get them out of that one.
"I'm getting really worried that people are focusing on certain "products" (loan types) being "bad" or "good" and not on LTVs, DTIs, documenting income, appraisals, monitoring broker practices, etc."
certainly you aren't suggesting that FIs would adhere to something that looks like sound underwriting???!!
it's not just happening in consumer lending but also in corporate as well... underwriting has gotten looser and looser, and if a default covenant gets tripped, just modify the covenant, refi the deal, or waive it all together... amortization is so last millenium too...
but seriously you're right... no product is immune from poor underwriting... the fact that the new nontraditional mortgage guidance focuses on those products kind of misses the whole issue: sound underwriting is being sacrificed at the altar of increased origination, reduced warehousing (gotta get more product in the warehouse quicker to securitize it), and the ever-popular fee income projection for the quarter...
as one of my colleagues said, the FIs are pushing financial "crack" on a lot of retail as well as investor "junkies" out there...
"Let's also not forget that Citi almost bellied-up in 1990? ..."
And in the early '80s, too (on Latin American debt). The raison d'etre of the Federal Reserve is to bail out the stockholders of Citi and the other too-big-to-fail banks every 10-15 years by lowering short-term rates sufficiently below long-term rates that they can make up losses of virtually any magnitude by borrowing short and lending long. This effectively extracts the needed funds from the small savers who are compelled by their need for safety and liquidity to keep their money in CDs.
I would be incredibly surprised if the Franklin deal closes with the same terms and conditions.
Merrill owned 15% or 20% of OWNIT and let it fold. That was a like nuclear enema to Franklin.
The value of Franklin's inventory has recently taken a haircut.
What we may never see or know is what the representations and the warranties are in the Definitive Agreement. If the deal does close at or near the publicized price, I can absolutely guarantee that ML has a huge "hold back" amount escrowed against future losses.
Franklin has no real choice but to take any new terms and conditions, given the current market.
"Cal, the 2/28s not being "covered" is partly an issue that that's the main product of nondepository subprime lenders, who aren't covered under the guidance"
I have a question. As to the nondepository subprime lenders, do you think their buyers will squeeze them on the new guidelines (assuming the lenders are operating in a non-adopting state)? In other words, the lender says "Ok, here's my tranche for sale", and the buyer says "Did you follow guidelines on these loans?", and the seller says "Er, no", and the buyer says "Well, in that case, we ain't paying you "x" like we have in the past. Instead, we'll only pay you less than "x"."
Citigroup made the GMAC investment as a private equity investment--not a strategic investment. And pretty small at that, less than a billion dollars. Citi is taking a greater risk by leading a syndicated credit facility for GMAC, but that will be spread amongst plenty of other lenders and secured by assets. It has risks, but not take-down-the-bank risks.
The equity investment decision was based mostly on valuation. GMAC was purchased for less than 1.0x tangible book value. That's a fantastic deal for high-quality financial assets, which most of GMAC's auto and mortgage loans are.
First, noboby ever says "no, we didn't follow the guidance." Everybody says, "Damn, Verne, we tried to, but you know how confusing regulatory documents are and besides we're innocent victims of borrowers who lie to us and really you should ask Mr. Dallas but for some reason he's not answering his Blackberrry this morning." The buyer of the loans says, "Thank Dog I didn't get an admission out of you; I have my own story to tell the regulators and I hate going down on omission of material fact."
What may happen--you can laugh if you want, but it might--is that the damned buyers might actually start performing pre-purchase due diligence on these loan pools that involve more than a ten-minute flip through the file to find the check dupes. That costs real money, which is why everything in the boom days is strictly on a rep-and-warrant basis: just take promises from people and then try to get the warranties later. The price paid for the loans will go down when the packagers have to actually reflect the true cost of managing the risk prior to purchase, not after defaults explode.
Every time, therefore, you see these rants like Citi's about "economies of scale" and margin-slicing, bear in mind that the margins being sliced are not just yields, but the investment in "fiduciary" expertise that could stop a lot of this crap in its tracks if some of these record profits were returned to due diligence efforts.
Someday I'll wish upon a star, and wake up where the clouds are far behind meeeee . . .
mullacc, I certainly agree that the GMAC deal wasn't any kind of as stupid as some of this other stuff. For starters, GMAC is a huge servicer, which gives it a recession hedge (rates go up, prepays slow down, mortgage servicing rights have value again). I would certainly put my money in GMAC (even GMAC-RFC) before I'd get anywhere near some regulatory-liability-black-hole like Ameriquest or Option One.
That said, GMAC doesn't just service its own loans; it is a subservicer for a very large number of smaller and more vulnerable outfits, and foreclosure waves are not profitable for servicers who have to advance the costs to the investors until they get paid off by the insurers or the liquidation sale. I suppose time will tell.
Tanta, I'm still perplexed, and in all liklihood I just don't understand "the biz", so bear with me and school me as appropriate.
The new guidelines still don't apply to non-depository lenders in, i.e., California (unless the state just adopted this overnight).
So if a five-and-dime lender in this state had been qualifying subprimers at a teaser rate (as opposed to a fully indexed rate), that was basically allowable, no? My assumption would be that when the loan was packaged, this fact would not be omitted and the buyer would know that the loan he purchased was qualified at a teaser rate, and he'd go get whatever CDO product he needed.
Now fast forward to today. New guidelines say "Thall shalt not qualify at the teaser rate". That's fine, but it doesn't constrain our five-and-dimer, because he operates in California and is non-depositary. But when he now attempts to sell this loan, will the purchaser say "Sorry. Our CDO is now more expensive on this teaser-qualified stuff, so you get less from us".
I suppose what I'm trying to flesh out is a thought that the new guidelines will affect prices even in those states where they've not been adopted -- that buyers of the loans, or sellers of the CDO's will use the guidelines to squeeze more from the lenders, even in those instances where the guidelines don't control.
winjr, I don't think you're missing anything, really, it's just that you're forgetting that the buyers of the loans set the underwriting guidelines. I have a whole pile of Wall Street conduit guidelines in my file drawers, and frankly if I didn't have them under the terms of a confidentiality agreement I'd get CR to post them so you could all see what I'm talking about.
So this is really how it works:
Option A: Investment Bank says, we buy loans in this product (teaser-rate ARM) for this credit score (miserable) qualified at the start rate (because otherwise the loan won't work). Five&Dime says, yep! that's what we did with these here loans we're selling you. If Investment bank, which is not a depository regulated by the Fed, and Five&Dime, which isn't regulated by the state, agree on this, then nobody gets to complain. If the loan goes bad, Investment Bank is screwed because the loans met the published guidelines and there is no recourse to the originator. End investor might have wanted to pay a little more attention to the fine print in the prospectus, but these things happen.
Option B: Investment Bank says we buy these teaser ARMs qualified at the teaser rate, and Five&Dime says, can't do, friend, the state is now threatening to shut us down for that. Investment bank either gets fewer loans, because fewer qualify under the new rules, or investment bank buys Five&Dime and bloody well makes them originate the loans (could happen, huh?), or maybe Investment Bank re-writes its guidelines to incorporate the better rules and then yields drop on the loans purchased and securitized because they now carry less risk.
You are of course correct that those CDOs just ain't gonna fly with prime yields on prime loans.
Certainly if our suspicions here that the Street might go to Washington looking for a bailout someday are justified, they won't be in a super position to do so if they've spent the last year "arbitraging" uneven state-level regulations. I know, like that would matter to Washington, but it's still a risky game for them to play.
Does that make sense? I could have another cuppa coffee and try again.
R.I.P. Tanta. The above thread was a great example of your kindness, honesty, and intellect. I wish more would have listened when they had the opportunity. Thanks for teaching a stranger to fish.
thanks / danke from germany
this is from the economist
Dubious mortgages are now a growing share of the mortgage-backed market, so there is scope for more trouble. Of the $1.02 trillion of MBSs issued in the first half of this year, over 40% was linked to subprime loans, up from 6-8% in 2000-03, ...
Combined third-quarter profits for the country's nine largest mortgage lenders were $991m, less than half the level for the same period last year. ....
Is Citi going under?
I was wondering the same thing about Citi (even before this post), not least because I have accounts there. I'll probably be switching banks in the spring (for other reasons), and I have to wonder if there is any reaonable way for a nonexpert to have a clue about the actual soundness of the bank one is using; I can't see how we can get out of this mess without some bank failures.
C hits 53.91, I guess investors haven't read today's CR!
If the bank fails, does the brokerage associated with the bank fail?
Citibank Investment Services.
Do they go up in smoke, taking with them the investments that their customers thought they had?
What questions to be asking! Thank you Alan Greenspan.
"Accredited Home Lenders Holding (LEND : accredited home lendrs hldg com
News , chart, profile, more
Last: 27.57+0.57+2.11%
11:32am 12/15/2006
LEND was upgraded to outperform from peer perform at Bear Stearns. The firm set a year-end 2007 price target of $32."
I think I might throw up.
Maybe I'm being obtuse again Tanta, but last I checked "cyclical" and "secular" were bond industry/market slang for "things that happen in a repeating boom/bust cycle due to supply and demand shifts in the specific market area" and "things that happen as an overall up or down trend because of macro/market forces outside of the boom/bust cycle -- i.e., acts of God and population/world economy."
In otherwords I think they're saying there that they expect the down cycle to hit and drive consolidation. They are also expecting some of these outside secular forces to probably also hit the industry negatively, and praying/hoping that they won't hit.
I suppose it's worth noting that Sandy Weil and Chuck Prince are two of the slimiest players in US finance. Their speciality is crooked lending to homeowners just above or at the poverty line.
Andrew, I guess I was just startled by the fact that the "secular" forces they listed here were hardly "acts of God or the world economy" outside of deck-chair rearranging in the mortgage industry. I was also just riffing of the idea that "secular" in my mind tends to imply a slightly longer time horizon than "recent shifts" that play out "next year."
Well written Tanta.
Merrill's First Franklin purchase is suppose to close in the next 14 days. I havent reviewed the merger doc, but I have to imagine ML's lawyers are going through it in detail to either MAC out of it altogether or at least significantly reduce price. Any thoughts?
My industry contacts have indicated that FF has been one of the worst violators of underwriting standards over the past 2 years. Not shocking when you consider that it was built by same guy who subsequently founded and ran OWNIT into insolvency....
cmad, I have to say I'm rooting for Gnat City here (the underdog or the underbug?). I have no inside dope, nor do I predict that the Cleveland boys can outlawyer ML; I just want for public-spirited reasons to see FF get off the books of an insured depository and I couldn't care less if ML gets to be the bagholder.
It ain't just Cerberus that has three heads. All the "bottom barkers" out there must come similarly equipped with all the Yip, Yip, Yip-ing going on these days.
I only meant it as a another potential signal that the great Wall Street Securitizing machine may be in trouble.....
Usual stellar job, Maxine. Have you given up sleeping?
ac: ah, yes, the "third tier" gives way to the "third terriers." Yip, yip, yip.
Just FYI, Aozora Bank (the blue sky bank) is less a Japanese bank then a puppet of Cerberus Capital. It used to be a bank called Long Term Credit Bank (Choki Shinyoh Ginkoh) which looked like it was going out of business in the late 90s, and got bought out by Cerberus, reorganized, and changed its name to Aozora. Before getting bought out by Cerberus, I think a lot of its bad loans were bailed out by the gov't, a significant annoyance to Japanese taxpayers. Aozora is now 61.84% owned by a Cerberus-related holding company.
So don't take this as a sign that there's foreign investor interest in GMAC. There may be, but this ain't it.
No, bailey, I haven't given up sleeping. I just go to bed at 8:00 p.m. these days. So when I'm up at 3:30 a.m., there's this long dark quiet stretch with just me, my coffee pot, my dsl connection, and some doofusness from Citicorp . . .
LCTB had the sweetest building in Hibiya, fwiw. Glass box foyer at ground level with an elevated building above it.
My industry contacts have indicated that FF
FF owns, or soon will own, Casey Serin's first speculative buy; 'nuff said.
Casey Serin - SDCIA Message Board
Here's a picture of LTCB's former digs:
http://www.japan-photo.de/D-BANK07-06.jpg
Is ML actively trying to get out of the FF deal, or are you assuming they are based on where this market has gone since they announced?
Tanta,
I think with the First Franklin sale, Gnat City (heehee) has to keep most of the loans on it's books. ML is mainly buying the sales structure.
I have puts on LEND, but luckily they are already in the black and don't expire until jan 2007.
Troy,
That building looks a little hollow...
Musical chairs or old maid?
Same game as it ever was- buy a pile o 'excrement, repackage it to dumb junk bond buyers- where o where is Robert Citron when you need him....
Mish is firmly in the no inflation camp- here we see the credit machine beginning the process of getting all of those blown out houses into their greedy hands to resell to the next round of suckers. Crank up the loose lending and get these things sold!! The industry makes a huge amount of profits off of the churn, and dang the bond holders. I would have closed my puppy shop up too- right after my last big round of bonuses, and long enough that the feds can see some red ink handed to ML- while I move to my nice new villa...
Tanta, lets buy all kinds of bad crumbs and wring out some big profits on a few and then sell the entire portfolio to the next big sucker.
Got to be some underwater tranches somewhere reeeaaaaalllly cheap.
Toxic waste anyone? How about a whoops bond?
Since returning loans to shallow-pocketed originators is not really a meaningful option, I don't see why the big dogs wouldn't want to press forward at warp speed toward vertical integration -- and then turn up in DC with their "too big to fail" hats on for a bailout. Systemic risk plus the well-being of millions of American households adds up to a compelling argument for some kind of Brady-bond-like reshuffle of the liabilities. Handsome fees for all this repackaging will be an added incentive. Team Wall Street wins again -- and the game continues. What's the problem?
So Bob_in_MA (or anyone else who knows), what is ML (presumably) buying from GnCC for $1.5B? Assets? Slimy loan officers? Goodwill?
(I mean the accounting goodwill, not the socks goodwill.)
4shzl, I am so afraid you're right.
Allenm, I have some expertise in nonperforming, reperforming, and scratch & dent. Unfortunately, I mean loans, not businesses. Remind me if I ever take another due diligence job to get paid up front. In cash.
Allenm
"Crank up the loose lending and get these things sold!! The industry makes a huge amount of profits off of the churn, and dang the bond holders."
Doesn't loose lending help bond holders? Rates and discount value move inverse right?
Tanta: interesting and detailed: Your analysis sparked the following thoughts.
It seems that the Mortgage industry which you know in great detail is suffering from what I consider a flood of money, like Katrina but instead of water, its credit creation thats causing the dikes to break.
Katrina simply stressed out the dikes and pumps built over the years.
The mortgage industry iteself had its own dikes and pumps, built to handle a certain flow of dollars and volume. These are represented in traditional ways of handling loans and managing risk.
Suddenly the industry became over loaded and swamped. Lending standards disappear, volume's and margins explode beyond what prudent traditional members of the mortgage community (like yourself) could imagine.
At some point the money flow reaches a peak, the dikes begin's to be rebuilt and money gets pumped out of the flooded sector, leaving a changed landscape.
Once the pumping action gets going the money overflows another sector such as recent private equity markets (LBO) and stock market.
Just my simple mind trying to cope and understand whats going on.
Yeah, ron, we've been through something like this before (although not quite on this scale), when the big M&A "spin-ins" stop looking so brilliant and the "spin-offs" start. On the one hand, yes, you have reduced capacity (your "changed landscape") to absorb what is of course reduced demand for the service. On the other hand, you have had beaucoup-jillions of dollars and expert human beings extracted out of the industry in the process, along with urban and suburban landscapes littered with those eerie empty mortgage finance buildings. So each time this happens, it restarts with a combination of greenhorn and embittered employees meeting the New Boss, who turns out to be just as clueless as the Old Boss but on a smaller scale until the boom starts up again. Meanwhile, the money goes to refloat some other boat, and first-time homebuyer wannabees can go pick up a free copy of the local apartment rental rag down at the laundromat.
Oh, wait, I forgot. Online lending is going to make all this obsolete. Never mind.
National Mortgage News - What We're Hearing
"There's an interesting little story concerning buybacks making the rounds (that I can't confirm) and it goes like this: midsized lender has been getting stung by buyback requests. The primary owner has staved off the problem, somehow, for months but the day of reckoning is approaching. His firm has a decent net worth but the buybacks it faces would put him out of business. So what does he do? He plans on bankrupting his current mortgage firm, shifting all the assets over to a new one. Sound crazy? One banker I ran it by had this to say: "Not crazy at all. Makes perfect sense to me. Why let the greedy Wall Street bankers making billions of dollars a year take you down?" Stay tuned..."
I think if this happened Wall Street could potentially turn off the spigot. If they are left holding the bag for the lenders not meeting up to the underwriting standards they are claiming to have, then the pricing Wall Street is getting doesn't compensate for the risk they are taking.
In other mortgage news, and I've heard this several times but yet to hear it confirmed, that 2/28 hybrid arms aren't covered by nontraditional mortgage guidance. I heard about this about a month ago but still cant figure out why they wouldnt be covered by the guidance.
Looking Good
Todays inflation reading was amazingboth CPI and core CPI. This is the third straight month of zero or falling inflation. All those inflation hawks circling the sky out theredesperately searching for a rise in consumer priceswell, they just got bit in the rear.
Take a look at the last three big reports:
Retail sales: Wednesdays beautiful retail number handily beat market forecasts. The strong showing demonstrated (once again) the remarkable resiliency of U.S. consumers. Incidentally, this development takes any hypothetical zero Q4 GDP off the table. Sorry permabears
Employment: Last Fridays strong employment report blew away Krugmanite recessionists. The November jobs report was stronger than expected and increased by 132,000. Unemployment remains at a historically low 4 ½ percent. Theres no recession in these numbers.
Inflation: Todays flat report is another bright, shining, example of why the U.S. economy remains the greatest story never told. CPI is up just 2 percent in the past year, following a 0.5 percent decline in September and October. Core inflation has risen at a 1.6% annual rate in the past three months, the slowest growth since June 2005.Inflation appears contained.
Looking good - looking very good...
Looking Good Goldilocks
Well, well, well.
The remarkably strong retail report dealt a big body blow to the recession scenario.
This unexpected 1% gain is a big number. It took most people by surprise. Its another sign pointing to the resiliency of the U.S. consumer.
The key point here is that it virtually eliminates the zero percent Q4 scenario from recession bears like Nouriel Roubini. You can't get zero here - toss that scenario in the garbage.
The U.S. consumers are alive and well.
The key themes are strong job creation, low unemployment, and rising wages.
Despite all the gloomy forecasts from the perma-bear camp, all the talk about housing, etc, the great American economy rolls on.
Cal, the 2/28s not being "covered" is partly an issue that that's the main product of nondepository subprime lenders, who aren't covered under the guidance (unless they get nabbed by the states), and partly--insofar as regulated lenders handle them--that the "product" itself isn't considered the problem, as the Option ARMs or IOs, for instance, are. The problem with 2/28s is that the borrowers have bad credit and high LTVs and the collateral is going to hell. (I'm not saying that a 2/28 ARM is a great deal, mind you, just that it isn't used like standard IO hybrids or OAs to put "prime credit" borrowers into high-risk loans.) I'm getting really worried that people are focusing on certain "products" (loan types) being "bad" or "good" and not on LTVs, DTIs, documenting income, appraisals, monitoring broker practices, etc.
You sure that quote you have there isn't from Bill Dallas?
Tanta
You know I thought "OWNIT" when I read it, but they already went under (and may be executing that strategy).
See, what I am confused by, the nontraditional mortgage guidance talks about LTV, DTI, documentation etc. And I never got the impression that it was saying "Only Option ARM" with these characteristics were covered. It was the practices themselves, which seem inherent in nontraditional mortgages, that were covered.
I guess I have to read the whole darn thing a fourth time lol, dagnabbit.
Where others see "Nontraditional mortgage" as the products, I saw "Nontraditional mortgage" as the underwriting.
If a place underwrote a 30 year fixed with no-doc, 100% financing, 70% DTI, I see that as being covered. It is still risk layering.
LK- since the consumer is doing so well why does he/she have a negative saving rate?
Just saw that Aegis was owned by your big dog:
"Aegis Closes 2 Operations Centers
Aegis Mortgage Corp., Houston, which said goodbye to its longtime chief executive last month, has closed two subprime operation centers, laying off an undisclosed number of workers. The move comes one month after it also combined two operating units -- Aegis Funding Corp. and Aegis Wholesale Corp. -- and parted ways with its longtime chief Rick Thompson. AFC was a subprime wholesaler. AWC (the surviving name) is a prime and alternative-A funder. A spokeswoman for Aegis, which is owned by Cerberus Capital, said she did not know how many workers lost their jobs with the closure of the two op centers. She stressed that no account executives have been let go, and would not comment on Mr. Thompson's departure. (Sources told MortgageWire that he was forced out.) She also would not comment on Aegis' production volumes, but said that business, in general, is good. (For full details, see the Dec. 18 issue of National Mortgage News.) "
BrokerUniverse - Origination News
/m I am really wrong on the guidance, boy it is not very helpful (except it makes people go into fully amortizing loans to avoid the guidance, which is something).
Just a comment on the inflation stats today: Yes, the CPI news was supposedly great. But am I the only one who noticed that a whopping 1-point rally in the long bonds right after the number came out was completely reversed and bonds actually finished down on the day? Maybe the bond market is saying the best news on inflation is behind us for now. Just speculatin' ... more comments at my blog if you're interested:
Interest Rate Roundup
As for the whole credit discussion, I can't wait to see how the next couple of months play out.
... and then turn up in DC with their "too big to fail" hats on for a bailout.
4shzl:
I was thinking the exact same thing. The only innocent explanation I can possibly fathom is the survivor bias selecting for maximum optimism and risk taking among management. The more depressing explanations are squeezing profits from a bailout arbitrage or an oligarchical consolidation to allow for the situation to be "managed" more effectively. If subprime mortgages are blowing the financial system apart at the seams then it is better to get as much of the problem under as few umbrellas of control as possible.
I'm finding it harder and harder making doom-and-gloom jokes these days. Things are getting very serious.
Tanta, you are a true gem, thank you.
Mike_in_Fl:
Bernanke is in China. If in fact, CR's virtuous cycle is developing into a vicious cycle, watch out! Regardless of what China can do, if it really is fundamentally being driven by a market feedback mechanism then attempting to stand in front of the pendulum swinging back the other direction is going to look like something out of Final Destination (great horror movie series for people that like complex systems because of the rube goldbergesque death sequences).
WAY TO GO TANTA! OUTTA THE PARK!
Let's not forget, WaMu recently brought in Citi boys to run their sub-prime operation. Let's also not forget that Citi almost bellied-up in 1990? because they were lending on "actuarial" instead of credit principles. It took a special meeting of the Fed and a Saudi prince with a spare $3.1 billion cash to get them out of that one.
tanta said:
"I'm getting really worried that people are focusing on certain "products" (loan types) being "bad" or "good" and not on LTVs, DTIs, documenting income, appraisals, monitoring broker practices, etc."
certainly you aren't suggesting that FIs would adhere to something that looks like sound underwriting???!!
it's not just happening in consumer lending but also in corporate as well... underwriting has gotten looser and looser, and if a default covenant gets tripped, just modify the covenant, refi the deal, or waive it all together... amortization is so last millenium too...
but seriously you're right... no product is immune from poor underwriting... the fact that the new nontraditional mortgage guidance focuses on those products kind of misses the whole issue: sound underwriting is being sacrificed at the altar of increased origination, reduced warehousing (gotta get more product in the warehouse quicker to securitize it), and the ever-popular fee income projection for the quarter...
as one of my colleagues said, the FIs are pushing financial "crack" on a lot of retail as well as investor "junkies" out there...
Outstanding tanta - keep up the good work.
"Let's also not forget that Citi almost bellied-up in 1990? ..."
And in the early '80s, too (on Latin American debt). The raison d'etre of the Federal Reserve is to bail out the stockholders of Citi and the other too-big-to-fail banks every 10-15 years by lowering short-term rates sufficiently below long-term rates that they can make up losses of virtually any magnitude by borrowing short and lending long. This effectively extracts the needed funds from the small savers who are compelled by their need for safety and liquidity to keep their money in CDs.
Where is this Citigroup industry note on mortgages ?
citi.com or reprinted from WSJ ?
I would be incredibly surprised if the Franklin deal closes with the same terms and conditions.
Merrill owned 15% or 20% of OWNIT and let it fold. That was a like nuclear enema to Franklin.
The value of Franklin's inventory has recently taken a haircut.
What we may never see or know is what the representations and the warranties are in the Definitive Agreement. If the deal does close at or near the publicized price, I can absolutely guarantee that ML has a huge "hold back" amount escrowed against future losses.
Franklin has no real choice but to take any new terms and conditions, given the current market.
Here comes the old Wall Street CRAMDOWN.
Tanta, hope you're still following this thread -
"Cal, the 2/28s not being "covered" is partly an issue that that's the main product of nondepository subprime lenders, who aren't covered under the guidance"
I have a question. As to the nondepository subprime lenders, do you think their buyers will squeeze them on the new guidelines (assuming the lenders are operating in a non-adopting state)? In other words, the lender says "Ok, here's my tranche for sale", and the buyer says "Did you follow guidelines on these loans?", and the seller says "Er, no", and the buyer says "Well, in that case, we ain't paying you "x" like we have in the past. Instead, we'll only pay you less than "x"."
Who has the leverage?
Citigroup made the GMAC investment as a private equity investment--not a strategic investment. And pretty small at that, less than a billion dollars. Citi is taking a greater risk by leading a syndicated credit facility for GMAC, but that will be spread amongst plenty of other lenders and secured by assets. It has risks, but not take-down-the-bank risks.
The equity investment decision was based mostly on valuation. GMAC was purchased for less than 1.0x tangible book value. That's a fantastic deal for high-quality financial assets, which most of GMAC's auto and mortgage loans are.
winjr, I'm still here if you are.
First, noboby ever says "no, we didn't follow the guidance." Everybody says, "Damn, Verne, we tried to, but you know how confusing regulatory documents are and besides we're innocent victims of borrowers who lie to us and really you should ask Mr. Dallas but for some reason he's not answering his Blackberrry this morning." The buyer of the loans says, "Thank Dog I didn't get an admission out of you; I have my own story to tell the regulators and I hate going down on omission of material fact."
What may happen--you can laugh if you want, but it might--is that the damned buyers might actually start performing pre-purchase due diligence on these loan pools that involve more than a ten-minute flip through the file to find the check dupes. That costs real money, which is why everything in the boom days is strictly on a rep-and-warrant basis: just take promises from people and then try to get the warranties later. The price paid for the loans will go down when the packagers have to actually reflect the true cost of managing the risk prior to purchase, not after defaults explode.
Every time, therefore, you see these rants like Citi's about "economies of scale" and margin-slicing, bear in mind that the margins being sliced are not just yields, but the investment in "fiduciary" expertise that could stop a lot of this crap in its tracks if some of these record profits were returned to due diligence efforts.
Someday I'll wish upon a star, and wake up where the clouds are far behind meeeee . . .
mullacc, I certainly agree that the GMAC deal wasn't any kind of as stupid as some of this other stuff. For starters, GMAC is a huge servicer, which gives it a recession hedge (rates go up, prepays slow down, mortgage servicing rights have value again). I would certainly put my money in GMAC (even GMAC-RFC) before I'd get anywhere near some regulatory-liability-black-hole like Ameriquest or Option One.
That said, GMAC doesn't just service its own loans; it is a subservicer for a very large number of smaller and more vulnerable outfits, and foreclosure waves are not profitable for servicers who have to advance the costs to the investors until they get paid off by the insurers or the liquidation sale. I suppose time will tell.
I'm still here!
Tanta, I'm still perplexed, and in all liklihood I just don't understand "the biz", so bear with me and school me as appropriate.
The new guidelines still don't apply to non-depository lenders in, i.e., California (unless the state just adopted this overnight).
So if a five-and-dime lender in this state had been qualifying subprimers at a teaser rate (as opposed to a fully indexed rate), that was basically allowable, no? My assumption would be that when the loan was packaged, this fact would not be omitted and the buyer would know that the loan he purchased was qualified at a teaser rate, and he'd go get whatever CDO product he needed.
Now fast forward to today. New guidelines say "Thall shalt not qualify at the teaser rate". That's fine, but it doesn't constrain our five-and-dimer, because he operates in California and is non-depositary. But when he now attempts to sell this loan, will the purchaser say "Sorry. Our CDO is now more expensive on this teaser-qualified stuff, so you get less from us".
I suppose what I'm trying to flesh out is a thought that the new guidelines will affect prices even in those states where they've not been adopted -- that buyers of the loans, or sellers of the CDO's will use the guidelines to squeeze more from the lenders, even in those instances where the guidelines don't control.
Am I missing something conceptually?
winjr, I don't think you're missing anything, really, it's just that you're forgetting that the buyers of the loans set the underwriting guidelines. I have a whole pile of Wall Street conduit guidelines in my file drawers, and frankly if I didn't have them under the terms of a confidentiality agreement I'd get CR to post them so you could all see what I'm talking about.
So this is really how it works:
Option A: Investment Bank says, we buy loans in this product (teaser-rate ARM) for this credit score (miserable) qualified at the start rate (because otherwise the loan won't work). Five&Dime says, yep! that's what we did with these here loans we're selling you. If Investment bank, which is not a depository regulated by the Fed, and Five&Dime, which isn't regulated by the state, agree on this, then nobody gets to complain. If the loan goes bad, Investment Bank is screwed because the loans met the published guidelines and there is no recourse to the originator. End investor might have wanted to pay a little more attention to the fine print in the prospectus, but these things happen.
Option B: Investment Bank says we buy these teaser ARMs qualified at the teaser rate, and Five&Dime says, can't do, friend, the state is now threatening to shut us down for that. Investment bank either gets fewer loans, because fewer qualify under the new rules, or investment bank buys Five&Dime and bloody well makes them originate the loans (could happen, huh?), or maybe Investment Bank re-writes its guidelines to incorporate the better rules and then yields drop on the loans purchased and securitized because they now carry less risk.
You are of course correct that those CDOs just ain't gonna fly with prime yields on prime loans.
Certainly if our suspicions here that the Street might go to Washington looking for a bailout someday are justified, they won't be in a super position to do so if they've spent the last year "arbitraging" uneven state-level regulations. I know, like that would matter to Washington, but it's still a risky game for them to play.
Does that make sense? I could have another cuppa coffee and try again.
Thanks, Tanta, I can see clearly now, the rain is gone. (Actually, just finished my second Pepsi.)
Thanks!
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Unlike others here...I have now howled in laughter. Somehow the truth is stranger than fiction.
Not to embarass myself, what the hech...thanks for the ideas that dreams are made of
(Should I be laughing?)
R.I.P. Tanta. The above thread was a great example of your kindness, honesty, and intellect. I wish more would have listened when they had the opportunity. Thanks for teaching a stranger to fish.