patrick.net

Malcolm,

RE:
#1: I agree, IF the bank either owns the loan or gets the consent of the MBS owner first.

#2. Sort of agree with one caveat: isn't giving preferential terms to a FB creating yet another moral hazard? As in, "We're willing to give a 2% fixed-rate work-out to Mr. FB in perpetuity because he can't afford a 'real' mortgage and we were too lazy and irresponsible to qualify him in the first place. Unfortunately, we won't extend this deal to YOU, because you made the unfortunate mistake of being responsible."

Whatever happened to taking your lumps, writing down the bad debt and moving on? Or (*gasp*) learning from past mistakes and trying not to repeat them? I realize the banks want to try to minimize losses, but how is keeping zillions of zombie loans on the books in perpetuity vs. a few painful quick write-downs in the best interest's of shareholders? I get the distinct impression most of these guys just want to hide the losses as long as possible, so they have enough time to divest their personal holding and bail out with golden parachutes.

Eburd, that's exactly how it worked. I said it earlier, once the loans are handed off the original underwriters don't care. They made their money from points, fees, and lender kickbacks for higher than market interest rates.

It's the ones that went sour early that put New Century and Accredited and those guys in the red because of the return clauses.

It's just like the movie 'Traffic.' As soon as the traffickers start losing money bodies start showing up. It is white collar gang wars literally. They just use the courts but it is the same thing. Rats eat eachother when they get hungry enough.

RE: HF's actually hedging against losses in the MBS market, the irony is that the original HFs indeed strategized to hedge against bear market losses with derivatives, etc. Nowadays, hedge funds are all about leverage, maximizing returns, and risky bets.

On a slightly OT note, but relevant to the HF issue, an editorial in the NYT business section this Sunday re: is there a new Silly Valley bubble? (of course there is!):

http://www.nytimes.com/2007/06/03/weekinreview/03rivlin.html

(login required), has a little aside from one "entrepreneur":

Another difference: Those seeking little else but gold are not descending on Silicon Valley in great numbers as they did in the late 1990s.

“The same carpetbaggers who came to Silicon Valley to hit it rich last time are now looking for jobs with hedge funds,” said Mark J. Pincus, an entrepreneur working on his fifth start-up.

Comments like this do not bode well for the health of HFs in general. I'd be worried about a looming HF crisis in the near future.

That could be the "minefield" HARM spoke of. When banks wrote and funded their own loans, I guess it was their right to rengotiate as they saw fit. When the whole securitization process ramped up, did they surrender that right altogether? Wouldn't they really just be a middleman these days?

Harm, agree with your points to my ethical framework. I believe in holding people to their agreements personally. I also believe in the freedom of others to pursue their own business interests so even though I agree with you, it is not our place to approve or disapprove. Obviously they think it will lessen their losses.

Malcolm,

Do you know roughly how long it usually takes before a MBS loan batch becomes "seasoned" (beyond the repurchase agreement limit)?

DinOr, I'd say so if it were the bondholders who were not happy with renegotiating. We don't have X-ray vision so we can only use what we see. It is the side betting against the value of the bonds that are upset, therefore me personally, I can only conclude that the servicers are acting in the bondholder's best interest.

Whatever happened to taking your lumps, writing down the bad debt and moving on? Or (*gasp*) learning from past mistakes and trying not to repeat them?

HARM,
I know not what you speak of! Taking responsibility? learning from mistakes? What gobbledy-gook are you talking about? In this country, we do not, I repeat, DO NOT accept responsibility for our actions. It's the American way (TM) !

Harm, I think it was something like 6 months. From the prior readings I got the feeling it seemed like an awfully short amount of time.

Why is median price still going up in Santa Clara County?

Peter P,

Your "provocative" little post got lost in the shuffle - but I had read that link previously. Sounds plausible to me, and it affirms the theories of many here. One factor unaccounted for in that analysis is that lot size and neighborhood quality are not factored into the numbers - it seems it would be harder to do that analysis, unless the guy was willing to break down sales by zip code and to track down the lot sizes of each and every sale.

However, I would imagine adding those factors into the equation would only bolster the idea that the sales actually closing are skewing towards higher quality.

At some point though, the stalling of the entry market (under $800k in the BA) will probably affect the move-up market (up to $1.2M) to some extent as those looking to move up cannot sell to the willing and ready FB who now can't get a subprime loan. The high-end market (above $3M) will probably be immune to this.

I think we can expect more of that phenomenon. The tightening of credit has removed 21% of potential buyers from the market. These tend to be the lower price tier buyers so don't be surprised. It will all even out in the end with the foreclosure auctions.

With all the discussions about how mortgage servicers work, I went looking for more info on them.

Calculated Risk linky

servicers have a built-in incentive to keep the loan going, where the investor might like to see it foreclosed. The whole uproar over servicers doing “modifications” as if it were only a way to “hide” losses misses the point that the servicer’s financial incentive is to keep getting its quarter every month.

Malcom,

Yeah, I lost my X-ray glasses at the beach and I haven't been back there since!

I don't want to say I have no interest in seeing bondholders being treated ethically or FB's keep their homes. Even though I "hope" things work out for all parties involved if I were being honest I see about a zilch chance of that happening. Even if the banks can salvage 3 out of 5 work-outs that's still a huge number of repo's back on the market and even further downward pressure on pricing. Whether or not HF's suck up the losses or whatever it's not going to change the over all picture that much. That would be dark.... and fading.

Not sure what happened with the post. Probably didn't close the link properly. Here's the link again.

Dammit. Still not working. Probably forgot a " or something. Gonna try this one last time.

Dammit. Still not working. Probably forgot a " or something. Gonna try this one last time.

mortgage issuers would just bend over and take it without even trying to grease up? Wasn’t this factored into their models, or at least specifically protected in writing by their contracts?

SP,
LOL - Yet another great analogy from you! The imagery is just hilarious, yet disturbing. It might make the act less painful, but in the end, the reaming must go on. I'd like to see a "lube job" clause in one of these contracts...

Sorry about the double post. At least I got the link right this time.

Agree with SP 100%. Although hedgies need to be short-sighted, since their investors WILL leave en masse after a few months of bad performance.

They get the .25% annually paid monthly on the loan balances, that's correct.

For instance, I make my living in a mini version of the front end of this. Not the hedge side.

I participate with other investors through a broker. They find a deal, we fund it. They make money from the points, we get monthly interest checks. That broker has a servicing department who collects payments and acts on our behalf. They either take $7.50 per payment as their servicing fee, or they take .5% annually if involved in servicing the fund. So I am in the fund right now, I'm a shareholder (Bondholder for this actual example) out of a note at 12%, 1% is our fund manager's salary, the servicer takes .5% and .5% is set aside for other management costs. So from a 12% note, the fund gets 10% interest.

MtViewRenter,

Yes, they WILL leave, and post haste! They'll need "fresh meat" and I mean fast. What will they be able to do to attract assets?

Malcolm,

Wow, 12% interest.... Isn't that more toxic than subprime?

DinOR,

They'll probably come after small fish like us. Quick, run!

12% is the going rate on hard money constructions loans. I don't lend on individual home financing. These loans are more for bridge or quick rehabilitation loans normally on commercial or multi unit properties.

Malcom,

While I've yet to have any direct involvement with them, clients tell me that the loan servicing companies are well worth what you pay them. They basically do everything from an admin. standpoint. From issuing monthly statements (and late payments) to collections and tax preparation. From what I understand it's VERY labor intensive.

Off topic, but here's a rental for those of you looking to get access to Cupertino's fine schools.

Isn't the purpose of a rental to be cash flow positive? Maybe they put 60% down to make it a "good investment". Look honey, we are getting income from day one!

===============================================
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If interested, please reply xxxxx with your name, phone number, and proposed move-in date.

------------------------------
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Only a few blocks from the new AMC theater in the renovated Vallco Shopping Center.

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* 2 car garage
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* Double-pane windows
* Working brick fireplace
* Dish washer
* New vanities, new bathtubs and new tile floors in both bathrooms
* Private back patio
* Front driveway with grass yard

Monthly rent is $2400, with 1 month deposit required. Water & Gardner included.

Currently being remodeled. Available for occupancy after July 1.

Pets on approval only.

If you can get the real address, you can find out what their mortgage amount is...

Yeah, I figured I would wait for it to pop up in recent sales. I will try to keep an eye on it.

DinOR
I tend to agree. The price for the value is more than fair. Sometimes I feel a little nickeled and dimed just because being the same company as the servicing branch, when they put together a 2 million dollar loan, they charge the borrower 3-5 points, but they do have to pay for the nice shiny building, and they do conduct a lot of due dilligence on our behalf. No investor has ever lost money in the 20 years my broker has been in business. Of course times are a little different now, the Titanic had a perfectly good safety record right up until in bumped into the iceberg.

A couple of new excellent posts over at CalculatedRisk on the legal implications of MBS post-securitization loan "modifications" (aka 'FB work-outs'):

Fitch Report on Loan Modifications
Fitch: New U.S. RMBS Criteria Reflects Greater Use of Loan Modifications

@SP,

Yup - you nailed it.

One of things that none of the articles has touched much on so far is precisely what sort of "work-out" is being done here.

--Are we talking about drastically discounted fixed-interest rates once the FB hits the neg-am "reset ceiling" (115-120% LTV limit)?
--Are we talking about greatly extended neg-am and/or teaser-rate periods and new, much higher LTV ceilings (such as 150%)?
--Are we talking about bank "forgiveness" on (already booked-as-profit) unpaid negatively amortized interest and/or loan principal?

It seems to me that for the bulk of late-vintage FBs, anything short of drastic measures like the above would not do much other than delay the FB's and MBS investor's eventual day of reckoning. Of course, if 6 months is all it takes to "season" a MBS (get it beyond the originator's repurchase agreement limit), then a short-term delay may be precisely the whole idea. ;-)

SP Says:
June 4th, 2007 at 3:43 pm
Malcolm Says:
If a bank can renegotiate a loan to save it, it probably should do so, if the FB can realistically qualify.
"if and only if the bank has not resold any interest (long OR short) in the security to another party."

I'd ask why you assert this. Short sales and renegotiations are complicated by the food chain of approvals, but if the stakeholders buy in, what is the problem? Both articles I have read, I'm going to check out the new one, state that the hedge funds are made aware of the possibility of renegotiation, and that legally the servicers can modify the loans with everyone's buyin.

Harm, the issues you are talking about would be built in to the costing of the new bonds. In fact, one of the main themes from your links is that the renegotiations are causing trouble because the costing models don't know how to value the instruments.

I really think it is a bit of a stretch to say that banks are going to take junk loans, repackage them, and sell them back to the same bondholders who returned them in the first place. I value different points of view, and I could easily be completely wrong, but it does seem to me that this is just a hoopla raised by some pissed off shorters on the hedge side. I'm just not seeing a big conspiracy here, I'm just seeing some really big numbers that are scary to those on the losing side.

Oh, I definitely agree with you. I'm glad to just be a spectator, and I don't think we should entirely put a damper on the entertainment value. This whole thing is a cluster fuck, we all seem to be watching the same drama. Securities aren't my expertise either, but man the human nature elements at play are hysterical.

Didn't they say a year ago that all of this was going to be nicely contained?

MBS Investor: "Waiter, I asked for a plate of 'well seasoned' Alt-A MBS steak. But all you brought me was this steaming pile of turd, garnished with flies."

Bankster: "But, sir, that steaming turd is the 'well seasoned' Alt-A MBS steak."

MBS Investor: "This is unacceptable. How can you expect me to eat shit?? I demand this be returned to the kitchen at once!"

Bankster: "I'm terribly sorry, sir, but I can't do that. You see, the fine print of our customer 'repurchase agreement' clearly states that any 'well seasoned' Alt-A MBS steaks cannot be returned once ordered. You should have read your menu more carefully."

MBS Investor: "This is completely ridiculous --I demand to see the chef at once."

Bankster: "I'm sorry, sir, but Chef Bernanke is a little busy right now with other problems. The kitchen help is out protesting for permanent work visas, while the restaurant owners (banks) are demanding that he cover their legal liability for having sold these steaks in the first place. The other customers are all pretty angry that the cost of steak is going down compared to what they paid. It may be some time before he can see you. Would you care for a CMO aperitif while you wait?"

It is baffling to see people losing money in all of this no matter where they put it. They lend it, they lose it. They buy bonds that pass the repurchase stage, the bonds lose value. The hedge funds betting that the bonds lose a certain amount of value, lose money due to restructuring. You gotta admit, it is rare that everyone loses money at the same time. I keep saying it though, it's not how the money is being lost, but who is losing it that all of a sudden it is a big crisis.

Katrina victims, and insurance companies ah, that's life. Political friends and campaign contributing fund managers and members, uh oh, we have a national crisis. Like the Eddie Murphy joke, black guy doing crack, that's a drug problem, white parents find out their kids are doing it, now it's an epidemic.

It is baffling to see people losing money in all of this no matter where they put it. They lend it, they lose it.

Well, with national RE prices are declining, that loss of "paper wealth" will hit participants from all segments of this process in their pockets, and some of those paper losses do translate to real losses. So, to me, it's not surprising that everyone gets hurt a little bit.

Besides, it's not clear from those articles that the HFs have truly lost any money at all from loan restructuring. They seem mainly to be raising a stink about the practice.

The general economy. Too funny.

So you think it is a preemptive fuss as to avoid my criticism early on so that it doesn't give the appearance of sour grapes when they really do lose money? I tend to thing betting against the bond values in the long term is probably the correct move.

I see some validity because they might just be getting nervous at the possibility. Does anyone think in the longer term any renegotiations are going to have a significant impact? I think that is why the government seems to be backing off from bailout talk. When someone just looks at how really F'd these FBs are they realize it would take more than is even feasible to bail them out. You can't save someone who borrowed twice what the house is worth, I don't care how creative you get.

The Federal Reserve is facing growing pressure to consider raising interest rates as soon as December.

SP,
I think this is still unlikely at this point. Inflation would have to REALLY get out of control, meaning, the highly manipulated inflation measures the Fed says they rely on, which have so far been slightly above their targets, get measurably out of control.

So far, the Fed under Bendover Ben has only been giving lip service to inflation fighting. Every friggin' statement since they've held rates steady last year has been essentially, "Inflation pressures remain. We are vigilant. And don't think we wouldn't be willing to raise rates more - cause believe us - we're willing to do it!"

I think they are trying to curb inflation expectations without actually raising rates any further. A neat trick, if they can pull it off.

The current battle between banksters and hedgies over who gets to be bagholder reminds me of a favorite quote:

“If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
–J. Paul Getty