Wall Street On Edge NOW: 6.5 Trillion Mortgage Market Crisis - Regulators Scrambling

Scary how deep the corruption runs...

You've got underwriters issuing unjustifiably optimistic ratings on the companies they represent and have a stake in...

You've got credit agencies maintaining investment grade ratings on securities that are well-below investment grade...

You've got a fed chairman playing down the potential fallout from the housing market and the adverse effects it would have on the economy...

And at the center of it all, you've got the companies specializing in sub-prime lending, which have remained eerily silent in the face of imminent collapse. Not a word about their integral role in what may turn out to be an unparalleled crisis for the housing market, the effects of which would be catastrophic for the economy.

That's alright. The pensioners will pick up the slack.
 
I have heard that lawyers are running adds in parts of California looking for sub prime borrowers who did not understand their loans and want to sue because they are being foreclosed. its just like the internet stocks it was all good when it was going up, but once it stopped everyone sued everyone.
 
This article is causing shock waves already.

It will be Topic A on every media source this week, and now any retail investor other than comatose ones will realize something very bad is happening, even if they fail to appreciate the magnitude.

Then there's the rub, which is that something really bad is really happening.

It is now quickly rising as one of the most 'read' and 'emailed' news stories on the web, is number 2 on the NYT list, and will soon be number 1 with staying power.

Gretchen Morgenson has, in very meticulous fashion, just blown the cover off the greatest financial crisis since the S&L crisis of the 80s (this one is clearly bigger than the S&L one, with much broader and more far reaching consequences to the financial markets), and there is no where to hide this issue now.

0311-biz-MORTGAGE.gif
 
Quote from mrmoose:

I have heard that lawyers are running adds in parts of California looking for sub prime borrowers who did not understand their loans and want to sue because they are being foreclosed.
More...

To eliminate any confusion about my opinion of such lawyers, I preface this post with the following: THEY ARE SCUM.

However, the teaser rate loans behind many of the defaults today are purposely misleading.

They turned home buying into a get rich quick scheme.

They specifically target that segment of the population that lacks the wherewithal to buy a home.

They encourage fraud on the part of the borrower, hence "liar loans."

They NECESSARILY result in substantial losses for the borrower in any market where home values aren't literally skyrocketing.

Are lawsuits the answer? I doubt it. However, if these companies -- and many others -- are not held to account, then we're basically endorsing such behavior in the future.
 
Quote from CalScholar:

To eliminate any confusion about my opinion of such lawyers, I preface this post with the following: THEY ARE SCUM.

However, the teaser rate loans behind many of the defaults today are purposely misleading.

They turned home buying into a get rich quick scheme.

They specifically target that segment of the population that lacks the wherewithal to buy a home.

They encourage fraud on the part of the borrower, hence "liar loans."

They NECESSARILY result in substantial losses for the borrower in any market where home values aren't literally skyrocketing.

Are lawsuits the answer? I doubt it. However, if these companies -- and many others -- are not held to account, then we're basically endorsing such behavior in the future.
More...

I will defend the legal community here.

For all their flaws, and there are many, who else will ever cause people to ever be held accountable in our system - whether this, or for lies that tobacco doesn't cause cancer, or a whole host of other issues?

What the hell do our politicians and regulators ever do?

Even the tobacco settlement had to be engineered with the assistance of tort lawyers. The government can't negotiate itself out of a paper bag.

At least it was something.

I believe in economic Darwinism to a good degree, but aspects of the great residential real estate run of the 2001-2006 era are clearly fraudulent to a degree that mitigates some of the exuberance of the masses.
 
Quote from ByLoSellHi:

I will defend the legal community here.

For all their flaws, and their are many, who else will ever cause people to ever be held accountable in our system - whether this, or for lies that tobacco doesn't cause cancer, or a whole host of other issues?

What the hell do our politicians and regulators ever do?

Even the tobacco settlement had to engineered with the assistance of tort lawyers. The government can't negotiate itself out of a paper bag.

At least it was something.

I believe in economic Darwinism to a good degree, but aspects of the great residential real estate run of the 2001-2006 era are clearly fraudulent to a degree that mitigates some of the exuberance of the masses.
More...

Perhaps I was a bit harsh. :D
 
Quote from scriabinop23:

I don't really think this is new news to buyers of MBS bonds. I read a similar article about a month ago from Jubak explaining how true risk level ratings are not fairly ascertained into the credit quality of the tranches, since default risk is spread amongst the large group.

but think about it - lets say foreclosure rate is 10% annually on the loans in these tranches, and banks foreclose on the collateral. Realistically at least 75% of the principal gets returned on that 10%, so risk for loss is actually relatively small (net 2.5%). This is assuming those that foreclose bought at the very top of the market, have contributed 0 equity, and bank forecloses at 25% below market price (very realistic for a negative argument). A 2.5% drop in any security's value is not great, but not something to get overly carried away about. Lets also assume it continues that way for 3 yrs. [30% total foreclosure, 22.5% collateral recovery] Thats 7.5% lost ... not great, but we've seen other major markets move twice that in one night.

Even if foreclosure rate was 20% annually in the tranches with 75% recovery rate ... you're looking at 15% principal loss over 3 yrs. Entirely offset by dividends of just holding through that period of time. Not a great performer, but not that much a loser.

now the forced selling part that results from downgrades - that is scary. But is the potential for downgrade overblown considering the risk profile I point out? I dunno, I'm not a professional bond analyst.

NEW is clearly a mess, and a result of poor risk management. But I don't know if I quite agree these tranches share the same fate. The media can create a frenzy out of mere unknowns that isn't equal to the actual significance of the problem. Easy to do here when you throw around huge notional total loan values and conveniently leave out the fact that these notional values are backed by PHYSICAL property, most of which has at least 10%(even in the subprime world) already paid off by the subprime borrower. This increases your net avg recovery expectation.

If the shit really hits the fan, and foreclosures at selling 25-30% below market, time to acquire some rental condos.
More...

You can see what these types of places are selling for, in MA for example it looks like the ones that are selling are selling at a 15-20% discount. The problem is that even at this discount they are not selling much. I think this is why those in the know are talking about things getting worse before they get better. Lots of new bank inventory will be coming on line at the same time stretched sellers who can't take the arm/teaser rate reajustment need to get out of their obligations. This spring could be nasty unfortunately.

http://www.elitetrader.com/vb/showthread.php?s=&postid=1389031#post1389031
 
Quote from scriabinop23:

I don't really think this is new news to buyers of MBS bonds. I read a similar article about a month ago from Jubak explaining how true risk level ratings are not fairly ascertained into the credit quality of the tranches, since default risk is spread amongst the large group.

but think about it - lets say foreclosure rate is 10% annually on the loans in these tranches, and banks foreclose on the collateral. Realistically at least 75% of the principal gets returned on that 10%, so risk for loss is actually relatively small (net 2.5%). This is assuming those that foreclose bought at the very top of the market, have contributed 0 equity, and bank forecloses at 25% below market price (very realistic for a negative argument). A 2.5% drop in any security's value is not great, but not something to get overly carried away about. Lets also assume it continues that way for 3 yrs. [30% total foreclosure, 22.5% collateral recovery] Thats 7.5% lost ... not great, but we've seen other major markets move twice that in one night.

Even if foreclosure rate was 20% annually in the tranches with 75% recovery rate ... you're looking at 15% principal loss over 3 yrs. Entirely offset by dividends of just holding through that period of time. Not a great performer, but not that much a loser.

now the forced selling part that results from downgrades - that is scary. But is the potential for downgrade overblown considering the risk profile I point out? I dunno, I'm not a professional bond analyst.

NEW is clearly a mess, and a result of poor risk management. But I don't know if I quite agree these tranches share the same fate. The media can create a frenzy out of mere unknowns that isn't equal to the actual significance of the problem. Easy to do here when you throw around huge notional total loan values and conveniently leave out the fact that these notional values are backed by PHYSICAL property, most of which has at least 10%(even in the subprime world) already paid off by the subprime borrower. This increases your net avg recovery expectation.

If the shit really hits the fan, and foreclosures at selling 25-30% below market, time to acquire some rental condos.
More...

You make some good points, but there are some things I would like to mention in addition to your comments:

- higher risk means that higher returns on investment will be expected by investors in these pools, in order to compensate them for the risk. The question is - what levels of return would be required to invest in MBS pools that essentially have the certainty of capital losses? You mention that it wouldn't take much for investors to break even, but investors want to do much better than just break even.

- this in turn would mean that the interest rates for "easy" credit would be likely to rise, which means that the pain could continue for years, since many borrowers hold variable interest rate debt

- institutions facing potential future downgrades of the affected MBS pools could start liquidating their holdings early. Wouldn't you do so if you were the fund manager for one of these institutions?
 
You must log in or register to reply here.
Back
Top