Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.
At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.
Most loans, even ‘Prime’ 30-year fixed with 20% down, made from 2003-2007 should have been classified as ‘exotic’ at origination. This is mostly by virtue of the extremely lax underwriting guidelines that allowed things such as 50% debt-to-income ratios, qualifying at the interest only payment on an ARM (that will turn fully amortized at some point in the future), stated income, high CLTV second mortgages, etc. But due to a skewed sense of risk, everything but the very worst got dumped into the ‘Prime’ bucket, including most Pay Option ARMs.
Most loans made during that time are definitely ‘at-risk’ and exotic now. In addition to the list above, this is mostly due to the amount house prices have fallen. The majority of home owners in the highly populated bubble states are in a negative or near-negative equity position, rendering them unable to refi or sell. This promotes default and/or walking away. Throw in the macro-economic conditions, and most mortgage debt created from 2003-2007 is a high-risk play regardless of classification.
Most banks that own whole loans and MBS that have not been publicly attacked by the raters still have them valued at face in the case of whole loans or through a discounted cash flow model in the case of a security. They are doing this despite the fact that they get back only 30-50% of the note amount in foreclosure.
The industry has never seen anything like this before, and it has only been happening a year. Tumbling house prices have rendered all mortgage debt highly suspect and most institutions that hold it insolvent. This is the exact reason why the banks will not allow principal balance reduction mortgage modifications: the credit hits would be too great.
Anyway, back to the story. The real reasons why whole loans and securities are not worth anywhere near what their owners say they are is becoming understood quickly. But the story below is not.
When pools of loans are sold, they come on an Excel type spreadsheet with dozens of columns of data on each loan. Back in the day, most investors never performed deep due-diligence into the pools they were buying, relying on spot checks at best.
This two minute clip says it all — the ramifications of this go far beyond borrowers lying about their income by a grand or two.
This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.
**Request…If any of you know anyone at Markit, I would love to help out in the creation of this index. I am absolutely positive that with the proper inputs from the right people, a very accurate tracking index can be made for all Prime securities, including Jumbo Prime. This index is very necessary, especially given the government is likely going to be buying this stuff on the tax payer dime and the Fed holds hundreds of billions as collateral for loans — that the tax payer will ultimately have to pay for as well.– Best, Mr Mortgage
The Next Financial WMD?
12/17/08 – 09:49 AM EST
The creators of an index that some say gave hedge funds the fuse they needed to blow up the subprime mortgage market postponed the expected launch of a new benchmark to track U.S. prime mortgage securities.
Markit, a 1,000-person financial technology and data firm that is highly influential among derivatives dealers such as Morgan Stanley, Goldman Sachs, JPMorgan Chase and Deutsche Bank, said in a statement Wednesday that it had “put on hold” the launch of an index of synthetic U.S. prime mortgage-backed securities after “extensive discussions” with major market participants.
Markit had been expected to disclose further details on the new index on Wednesday, a source close to the talks had told TheStreet.com. The company acknowledged the talks, but not the timing of an announcement. Market participants held a vote on the potential launch Tuesday evening, after TheStreet.com reported on the index.
Markit said it would reassess the index’s launch in 2009.
Financial companies around the world, including large banks such as Citigroup, Bank of America and Wells Fargo, collectively hold trillions of dollars worth of prime mortgage securities on their books, but they have a great deal of latitude in how they price them. A prime mortgage index would take away a lot of this latitude, as banks carrying mortgages on their books at a significantly higher price than the index would have a lot of explaining to do to their auditors. That could lead to new writedowns on a massive scale.
PLEASE READ THE REST OF THE STORY – ITS GOOD. LINK HERE.
Both stories about found at MortgageNewsClips.com
More Mr Mortgage
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