patrick.net

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!

===============================================
Looking for housing in the south bay? My husband and I recently purchased a rental property in Cupertino. It will be on the market for July 1 occupancy.

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

------------------------------
http://sfbay.craigslist.org/sby/apa/344780731.html

Conveniently located near 280 Fwy and Wolfe Road.

Walking distance to top rated Cupertino schools - Eaton Elementary, Lawson Middle and Cupertino High.

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

Features:

* 1800 square feet
* 2 car garage
* New interior paint throughout
* New Pergo Wood floors
* New carpets throughout
* New furnace and A/C
* New kitchen counter tops
* Equipped with refrigerator and washer/dryer
* 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

I highly recommend the links HARM listed to the Fitch reports on the Calculated Risk blog. This little gem was posted over at Ben's blog by Englishman in NJ.

Either way, it’s hard to overstate what a pain in the butt this [delays in foreclosure and recovery of principal] is for Trustees, and especially the “Master Servicers” who are responsible for managing the foreclosure process and recovering the principal. Another point, during this process, the Master Servicer is responsible for making “advances of principal and interest” to the MBS holders during the period in which the borrower is delinquent. This should lead to very interesting times for the major Master Servicers out there….names such as Countrywide, Washington Mutual, Wells Fargo, Citigroup.
Hmmm.... this seems like an added incentive to do more loan workouts. Others have pointed out (see Fitch report) that servicers have the MBS holders over a barrel; they don't want to see the servicer go under as a new servicer would charge an arm and a leg to manage the toxic waste dump of a security that they are holding.

skibum and SP :

The FED will raise the interest rates if the market wants it to. The Fed Funds futures have been remarkably good at predicting Fed's next move.

So in addition to the slippery game of trying to manage inflation expectations, the spineless FED also doesn't want to surprise the markets. If Fed funds futures are showing significant chance of a raise, then almost everyone is expecting them to raise rates, then it means it's not wrong to increase the rates and then increasing them won't be a political suicide.

Does everyone think we need to go to war with Iraq ? OK. Then let me vote to give the president the supreme powers. Oh, now everyone is fed up with the war ? OK. Then let me chant "bring back the troops".

The politicians (including Fed governors) discovered "Wisdom of the crowds" eons earlier than the techies.

skibum says: 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.

Except that money is neither created nor destroyed (except in very special cases). So whoever got paid for the houses still got a lot of money. I've always been curious where that money went.

HaHa: The logic still doesn't hold. They bought those bigger houses from someone else. What did that person do in turn? Even if you had a house built for you, that means you paid a builder, who paid for materials and labor, and the materials company paid its employees, who spend in the economy... and so on.

It's the same argument about stocks. If I pay $1000 for a stock, take a bath and sell for $100, I still paid someone else $1000. From an individual standpoint people can be big winners and big losers. But viewed as an economy, that money is neither created nor destroyed. So it must be collecting somewhere. I am curious where.

HaHa

Or put it into Vanguard's Municipal Money Market

So it must be collecting somewhere. I am curious where.

The answer (only half kidding): hedge fund and investment house manager bonuses!

And the HF and IB managers then plow those bonuses into mansions in Greenwich, CT or the Hamptons... thus completing the full RE circle.

trader,

Thanks for the "real skinny". It's not like anyone here was shedding a tear for specuvestors anyway but it's nice to have the full details.

Right in line w/ "No one knows who owns your loan" is Kathleen Pender's article on www.sfgate.com. In "Struggling borrowers" she talks about the growing lack of effectiveness in the BA for loss mitigation. Caller ID (and the fact that people LIED to get their stated income loans) coupled with flippers and specuvestors that show their loan as a "primary residence" seems are gumming the works?

This is not a contract enforcement issue. Parties in a contract can amend it if they all agree. Trader did a very nice job of laying it all out and supporting my point that hedge betters are third parties.

In my investment group, the servicer can amend the loan with the borrower if we vote to permit the change. Terms are changed quite routinely, normally things like loan extensions, but sometimes it can even be forgiveness of late fees and interest if the borrower is facing trouble but another lender wants to refinance him but needs to be below a limit. The scenarios can get pretty interesting as to why you need to change a loan around.

Except that money is neither created nor destroyed (except in very special cases).

Is this the Law of Conservation of Money Supply? Elegant theory, but... not so sure I agree with this view, especially when the Fed is pumping M3 like mad (which they conveniently stopped reporting last year), and M1 & M2 are also growing at a healthy clip YoY: http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply.svg

Perhaps money is neither "created nor destroyed" outright, but it sure gets debased on a regular basis.

Would you elaborate a little more on China, and its relative economic power especially as it applies to debasing the United State's economy? I am one who sees China as a greater threat than a benefit so I'd be very interested to hear a counter point. I don't normally hear people downplay their growing role.

"The guy took out 600k MEW before the foreclosure. Nice. That's a nice foreclosure golden parachute."

My guess is that it was the MEW that got him THIS far! Redfin says it's "in foreclosure" so I'm not sure if the guy might be able to engineer a short sale or if it's already bank owned?

So he was able to milk (on avg.) about 66k per year out of it? Not bad. He did manage to buy at just about the darkest hour, didn't he? So what happened? What went wrong? With all that appreciation you'd think there'd be no way to lose! Yet somehow these people are managing.