Sub-Prime Crises Overhyped Baloney?

[SossMan]

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What's in trouble is *all* non-agency conforming mortgage lending, not just subprime.

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Could you elaborate on this. This doesn't seem to be the case to me.


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I wasn't actually just talking about mortgage lending going forward - a lot of Alt-A mortgages have been originated under extremely dubious standards and as those loans get sorted out, the housing market will stay terrible for a while. In fact Alt-A as we knew it doesn't really exist any more - just about every lender is out. People mix up terms a lot, so they refer to all "bad" loans as subprime (hence the trouble is contained to the subprime portion), but when they try to calculate the percentage of the mortgage market that is subprime, they use the industry term, which is largely based on fico (generally below 600-620 or so) and the loan program that one qualified under (mainly a function of fico, but there was some predation going on).

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Anecdotal evidence for sure but I'm getting numerous constant offers to refinance from mortgage companies I've never heard of. Perhaps they all eventually sell the loans to FNM but I have my doubts. I have to believe that the big banks like Bank of America are doing mortgages without FNM but could be convinced otherwise.

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They don't have to sell those loans to fannie or freddie - as long as they are guaranteed by them. You can package those loans in a mortgage pool (called agency passthroughs) and sell them in a liquid agency MBS market. Right now, no one, not BofA, not Countrywide, not Citi, has any economic reason to sell conforming loans any other way. It's not so much relying on GSEs as much as simply selling loans at the highest possible price.

You can see this dislocation in the conforming/jumbo spread (difference in rates between conforming loans and jumbo loans that would otherwise be conforming but for size). For 30-year fixed, it's at 80-90 bps (almost 1 percent!). Note that jumbo loans should be *better* credit overall than otherwise conforming loans because fixed foreclosure costs lead to less severe loss in the event of default. Granted, worse convexity (borrowers prepay more optimally with larger loan balances, so the prepayment option embedded within the loan is effectively worth more for the borrower with a larger loan) means the actual yield difference is much less (don't have an OAS calc in front of me, but maybe 50bps? what I mean isn't a difference in OAS, but rather the equivalent difference in mortgage rate with loan size held the same; does anyone have access to mortage analytics?) but still very significant and unusually high. And this discrepancy is due purely to no one else wanting to take on mortgage credit risk at anywhere near the same price charged by the GSEs

And the offers you're getting in the mail are either for conforming loans or predatory scams. The percentage of homeowners that can benefit from refinancing into a non-agency mortgage (and haven't in the past 4 years) is low enough that there's no way that it justifies the cost of advertising.

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ummm, yeah. ^^ What he said.