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Mortgage Backed Securities


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2006 Oct 9, 10:26am   18,348 views  253 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Ultimately, most of the money that financed the bubble is owed to the owners of mortgage-backed securities. What are these securities? Who owns them? Do these investors realize the risk?

It would be very interesting to see graphs of mortgage-backed bonds trading. Does anyone know the ticker symbols for these bonds and a free way to look up the graphs?

Patrick

#housing

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1   HARM   2006 Oct 9, 10:59am  

Fannie Mae = FNM
bloomberg.com/apps/quote?ticker=FNM:US
Freddie Mac = FRE
bloomberg.com/apps/quote?ticker=FRE:US
Ginnie Mae = GNMA*
*not sure if Ginnie shares can be purchased directly --may require purchasing via mutual funds, like Fidelity's BGNMX

2   Patrick   2006 Oct 9, 11:07am  

FNM and FRE and GNMA are just the tickers of the stocks that issue the mortgage-backed bonds, right? I was hoping to get symbols for the actual bonds, their maturities, and the discount, if any, from the stated interest rate.

3   Allah   2006 Oct 9, 11:08am  

Wall street is already trying to get the lenders to buy back their notes gone bad. It won't be long before wall street decides not to buy these bad investments.

4   HARM   2006 Oct 9, 11:10am  

Who owns them?

A: Check out the prospectus on your supposedly "safe" mutual funds. You know, the ones your company retirement plans and most IRA/401k/403b plans automatically invest in. Most index or broad-market bond funds have them, and some could be positively loaded with FRE/FNM. Other large-scale MBS investors would include CBs of China, Japan, S. Korea, Western Europe and the big hedge funds.

I've tried looking for a nice neat break-down of MBS "ownership" stats before (even posted a thread on it myself some months back), but such information doesn't appear to exist --at least, not in the public domain. Some information exists (in scattered form) for the GSEs, but there's practically zilch when it comes to privately issued, non-GSE MBS/CDOs (aka "non-conforming"/toxic waste tranches).

5   Allah   2006 Oct 9, 11:10am  

In fact, here is a complete discussion on it.

6   HARM   2006 Oct 9, 11:21am  

Thanks, allah --nice discussion and some good links there too. The phrase "systemic risk" readily comes to mind.

7   Peter P   2006 Oct 9, 11:29am  

Thanks, allah –nice discussion and some good links there too. The phrase “systemic risk” readily comes to mind.

Systemic risks include the unchecked proliferation of vegetarianism.

8   FormerAptBroker   2006 Oct 9, 11:34am  

HARM Says:

> Who owns them? A: Check out the prospectus on
> your supposedly “safe” mutual funds. You know,
> the ones your company retirement plans and most
> IRA/401k/403b plans automatically invest in.

Any mutual fund that calls itself “safe” that invests in CMBS will only own the “safe” traunches that I could almost argue are “almost as safe as” US Government treasuries. The bond market agrees with me and buys the safe CMBS traunches for just a small spread over treasuries.

The CMBS “B Pieces” or “First Loss Pieces” are a different story, but the guys buying them are like VC investors and they know the risks. The difference between safe CMBS and the first loss guys is like investing in Pacific Gas & Electric Bonds and investing with a San Hill road VC firm that wants to start a utility in China…

P.S. CMBS bonds are like all other bonds in that they have interest rate risk, but unlike most bonds many actually get “safer” as their value drops since the value of the homes (the security for the bonds) with low interest fixed rate assumable loans will increase…

9   astrid   2006 Oct 9, 11:36am  

Peter P,

Vegetarianism isn't a problem as long as they don't try to impose their beliefs on meat eaters. In fact, if the world was 80% strict vegetarian, we meat eaters would have a bigger supply of sushi and good beef at better prices.

As with most belief systems, the problem comes when they want to impose their world view on non-believers.

10   Peter P   2006 Oct 9, 11:43am  

Vegetarianism isn’t a problem as long as they don’t try to impose their beliefs on meat eaters.

I agree. But many "animal rights" activists are being very aggressive in either seeking ban on meat or making life difficult for food businesses. They produce propaganda movies and attempt to liken meat-producing farms to Nazi concentration camps. (My friend showed me such video. Fortunately, I was completely unaffected.)

Meat eaters never tried to outlaw veggies, but vegetarians are using every opportunity to force their beliefs upon everyone.

11   Peter P   2006 Oct 9, 11:47am  

How is this related to the housing bubble? It matters if the state is heavily influenced by fascist fundamentalists. Even if housing is affordable, what good is it if basic a human right - food - is severely curtailed?

12   Peter P   2006 Oct 9, 11:47am  

Sorry for ranting. Let's go back to housing.

13   frank649   2006 Oct 9, 1:38pm  

"Alan Greenspan says flood of cheap labor from nations like China..."

Ok, the republicans are really reaching now. Bring back ole Greenspam to reassure the FBs after Ben's nasty rate hikes. What a f'king circus this country has become.

14   Peter P   2006 Oct 9, 2:17pm  

Everytime I look in on this blog I have noticed that the discussion has turned to food .

Huh? What are you talking about? :roll:

15   astrid   2006 Oct 9, 2:21pm  

Housing Wizard,

It's mostly Peter P. He works hard to remind us of the truly important thing in life. I've personally been so persuaded that I think people with impaired smell and tastebuds deserve federal disability categorization.

16   Peter P   2006 Oct 9, 2:26pm  

I think people with impaired smell and tastebuds deserve federal disability categorization.

That should not be difficult to fix. Just commit yourself to a few weeks of bland, watery food. Then add flavors one by one. Your "touch" will be back in no time. :-P

17   Randy H   2006 Oct 9, 3:09pm  

HARM,

MBS and CDO are tranched, and most mutual funds only purchase the prime tranche as commercial paper or cash equivalent. This tranche, as FAB said, is probably as safe as US Gov't Bonds themselves, except but for the prepayment risk. The US Gov't cannot prepay their bonds and take them away from you (generally), but top-tier MBS debt can be prepaid and often is, causing it to be slightly less "safe" (in terms of volatility) than US bills.

Even the tranches below prime aren't bad investments; in fact they can be better because of lower prepayment risk. The big re-insurers like Swiss Re use such debt heavily to offset insurance positions.

What is at risk is known as the bottom 1 or 2 tranches, known as "toxic waste". This tranche is bought almost exclusively by those seeking very high returns in trade for high risk/volatility. Hedge funds have been big buyers of toxic waste, as have some foreign investors. If they get slammed by defaults, well, that's the way the cookie crumbles. Buy a Junk Bond and you get Junk.

18   lex   2006 Oct 9, 4:20pm  

$3 trillion in ARMs set to adjust in the next 12 months

http://www.lewrockwell.com/englund/englund35.html

Is it much?

It's $ three zero zero zero zero zero zero zero zero zero zero zero zero in ARMs set to adjust in the next 12 months

It's $3,000,000,000,000 in ARMs set to adjust in the next 12 months

It's 6,000,000 FBs each owing $500,000 in ARMs set to adjust in the next 12 months

It their rates adjust up in average by 1%, it means 6,000,000 overly stretched FBs will pay $5,000 more a year ($416 more a month).

It their rates adjust up in average by 2%, it means 6,000,000 overly stretched FBs will pay $10,000 more a year ($832 more a month).

I got a feeling that's gonna be ugly. Very ugly.

19   Randy H   2006 Oct 9, 11:49pm  

Some of us are and some of us have have gotten out of funds that contain MBS, in fact some of us are all cash in certain non U.S. curencies in certain non U.S. banks for the next two years because we feel that the transaction and opportunity costs are justified by the high level of risk at the present time.

Which non US currency at which non US bank are you invested in that has less MBS/CDO than any average US Mutual fund? Maybe Russia. Good luck with that. In fact, most US Mutual funds have higher grade debt as cash equivalent than most foreign central banks.

20   DinOR   2006 Oct 10, 12:32am  

Randy H,

I agree with your overall assessment and I'm fine with the "mechanics" involved, where I have issues is with the quality of the collateral. If the safety nets were taken away would we be as eager to throw money at MBS? I realize this is a "hypo" but given the consensus that most res. RE markets have peaked and are in some state of decline, at what point SHOULD we be concerned?

Right now any one of us can attain a 5.85% return from Senior Subordinated Debt (Bank Loans) tied to LIBOR w/considerably less risk. Typically loan concentrations are below .34% of AUM. Yeah, they eat defaults from time to time (telecom, airlines etc.) who doesn't? It's just my way of side stepping this whole issue. It's not my job to "prop up" MBS as an asset class and I couldn't if I wanted to! The "pecking order" in the event of a default is:

1. The employees

2. The gub'ment

3. ME!

I'm o.k with that.

21   DinOR   2006 Oct 10, 12:37am  

Randy H,

I agree with your overall assessment and I'm fine with the "mechanics" involved, where I have issues is with the quality of the collateral. If the safety nets were taken away would we be as eager to throw money at MBS? I realize this is a "hypo" but given the consensus that most res. RE markets have peaked and are in some state of decline, at what point SHOULD we be concerned?

Right now any one of us can attain a 5.85% return from Senior Subordinated Debt (Bank Loans) tied to LIBOR w/considerably less risk. Typically loan concentrations are below .34% of AUM. Yeah, they eat defaults from time to time (telecom, airlines etc.) who doesn't? It's just my way of side stepping this whole issue. It's not my job to "prop up" MBS as an asset class and I couldn't if I wanted to! The "pecking order" in the event of a default is:

1. The employees

2. The gub'ment

3. ME!

I'm o.k with that.

22   Patrick   2006 Oct 10, 1:36am  

Sorry for the slowness of the site this morning. I talked to the ISP, Hurricane Electric, and the rebooted the server. Hope that fixes it...

23   Randy H   2006 Oct 10, 1:46am  

DinOR

Your points are well taken. I would be very concerned were I running a hedge fund and relying on subprime MBS tranches for part of my strategy. There is actually a lot of talk about the markets mispricing the risk premium, so it's entirely likely that the "pricing correction" will come abruptly and unpleasantly.

As to senior subordinated debt, if you're talking about the average public corp's debt notes, then a lot of that is secured against the assets of the company, the most liquid of which being cash & equivalents, which are in turn commercial paper, mbs, etc. Correct me if I'm wrong, but it's a bit of a big circle isn't it? I do agree that SSD is safer to some degree, though.

24   Doug H   2006 Oct 10, 2:20am  

Max Headroom lives!

http://www.browardbesthomes.com/

Run your cursor around the real estate dude...creepy

25   DinOR   2006 Oct 10, 2:23am  

Randy H,

To a large degree that's true. These two have as much in common as they do differences but the big advantage (in my mind anyway) is that this brand of comm. paper has already had it's "turn in the barrel" if you will. During the tech/telecom meltdown defaults were in the double digits. Double digits! Since the "dark hours" things have stabilized and defaults are reverting back to their historic norms. Being as these instruments are considered "Ultra-short" in their duration and reset as quickly as 30 days there's not much correlation to traditional investments.

There's not much of a secondary market and the loans themselves aren't exactly liquid so many of these portfolios have "redemption windows" so if you miss them, you're out another 90 days. Some of the more established ones though do "offer" daily liquidity (but prefer you kind of call in advance) if you're selling a sizeable stake! You can get away with it once in awhile but grading comm. loans is labor intensive (not to mention a real drag) so they appreciate when you don't make a habit of dropping 1 mil. sell order 15 minutes before the close.......! Arghhh.

Typical holdings would be things like:

R. H. Donnelley, Charter Comm., MGM Studios, Fed. Mogul etc.

26   DinOR   2006 Oct 10, 2:28am  

Oh, sorry about the double post above! Check this for a goof.

www.luxuryestatesatadiscount.com

27   DinOR   2006 Oct 10, 2:34am  

How difficult is it to picture these abandoned McAlbatrosses becoming your local "meth cooker's" new digs? You finish the "shell" and keep the profit! LOL!

28   Randy H   2006 Oct 10, 2:35am  

Thanks for the clarification DinOR.

29   DinOR   2006 Oct 10, 4:03am  

George,

Pretty spooky huh? *astrid has kidded us endlessly about the proliferation of ghost towns and this really helped me visualize it! The real "knee slapper" was the "click on thumbnail for larger view" feature they had on the site. Gee, I've always wanted to know what a bare wall of 'two-by-fours' looked like up close? Judging by the weed growth and weathering on these McShells (TM) I'd guess there hasn't been a full days work on them in at least...... 6 months?

30   skibum   2006 Oct 10, 4:18am  

@DinOR

www.luxuryestatesatadiscount.com

Thanks for my morning dose of bubble pics. Man, those things are ugly. Who the hell would want that biggest one at the bottom? With 9000+ sq feet, you could divide into at least 10 apartments, at least...

32   HARM   2006 Oct 10, 4:26am  

@George, :lol:

You know, I was thinking about doing a thread on that --sort of a "how to" for would-be McAlbatross squatters. There will be plenty of vacant inventory just sitting around rotting away for years to come, so why not? The Utilitarian in me despises the concept of letting all that housing capacity just sit idle while there are renters out there who could use a bigger, better place. Not to mention cheaper (how's free, everyone?).

I guess the key is figuring out how to get the lights on without attracting attention and/or eviction (Realtors, builders, the out-of-state specuvestors who might occasionally visit, etc.). For the REALLY ambitious squatter, you also have to figure out a way to stay put long enough to legally OWN the property. Looks like FL requires an 8-year stint, eh?

How would THAT be for "renter's revenge"? Living in a luxurious McAlbatross completely mortgage and rent-free for 8 years, and then taking legal POSSESSION of the place in the end? Talk about your bloodless coups!

33   DinOR   2006 Oct 10, 4:29am  

skibum,

Perhaps George can enlighten us as to exactly where in GA these McAlbatrosses are located? (Even by Patrick Regular's standards those pic's are about as "hardcore" as it gets!)

I have no idea where they are pulling those numbers out of and if making $1.7 mil. were that easy the first question anyone actually contemplating their proposal would have to ask themselves is, why aren't YOU GUYS finishing these projects?

It seems to me that their sources of lending are drying up like a puddle on Georgia asphalt? In the end, bankers look after themselves. If they're not lending on it, there's a reason. It would appear that we've rounded the bend down an even darker alley here. It wasn't that long ago that "if you don't do the bridge loan, someone else will!" When that liquidity dries up mid-stream it really tells us something!

34   DinOR   2006 Oct 10, 4:32am  

George,

We'd love to see 'em! Bring it.

35   HARM   2006 Oct 10, 4:35am  

Anyone out there have some good practical advice or anecdotal info about the how-to's of McAlbatross squatting? I'd heard rumors about this happening in Palmcaster (Lancaster-Palmdale for you non-SCALers) during the last bust in the early 90s, but I never met anyone who had actually done it. I also wonder what CA law has to say about it. As in, how long until the place is legally mine, free & clear? Any thoughts on this from the CA lawyers here? Joe Schmoe...?

36   DinOR   2006 Oct 10, 4:36am  

HARM,

And what's even better is that for 7 of those 8 years you wouldn't even have to contend with neighbors of any kind! If they ran me off from one, I'd just go down the road and get nice and "comfy" in an a bigger one!

My "ghost town/party like a dog" scenario is shaping up quite nicely.

37   HARM   2006 Oct 10, 4:50am  

Ok, then, it's settled. My goal is to become a McAlbatross squatter long enough to take legal possession of the place --all without spending a dime on mortgage or rent.

This is HARM's "American Dream" :-) .

I want to learn as much as I can about my new lifestyle, so I can avoid the common practical/legal pitfalls. What good is making it to year 7.9 in my shiny new McAlbatross if I come home from work on the next-to-last day and find the place padlocked by the local sheriff? Totally kills the climax.

Screw that sociopathic self-absorbed fuckknob, Casey Serin --don't give him anymore free advice! Instead, help ME achieve MY dreams!

38   Randy H   2006 Oct 10, 5:04am  

Am I being too hard on Casey? I decided recently to direct any Angst I may gather throughout the day on him, and not my innocent friends here.

It's actually quite therapeutic, although I feel a bit guilty picking on him and some of his supporters. Feels like eating Koi out of a backyard pond.

39   Peter P   2006 Oct 10, 5:09am  

Ok, I have become addicted to watching Casey Serin’s blog. It’s like a slow-mo train wreck, and he still doesn’t seem to get it.

You are not the only one. My wife also finds it interesting.

40   Peter P   2006 Oct 10, 5:09am  

It seems that Casey's blog has suddenly become the most popular bubble blog. :(

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