Countrywide

[maxtower]

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It's gonna get worse within the next year or so.


The amount of ARMs that are going to re-adjust with higher interest rates are going to be 3-4x the amount of ARMs re-adjusted this year and the last which caused the big fiasco this month.


That's my speculation from talking with a lot of real estate investors.

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Why would the amount of ARMS adjusting be three or four times higher in any one period?

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I don't know if it would be 3-4x higher, but the later years in the bubble saw higher ratios of ARMS to traditional loans. Also there were more loans made.

[gonebroke2]

Countrywide trying to prevent a bank run:
http://biz.yahoo.com/prnews/070817/laf055.html?.v=74

I wouldn't let them hold my money. Same goes with WAMU.

[Fishhead24]

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Countrywide trying to prevent a bank run:
http://biz.yahoo.com/prnews/070817/laf055.html?.v=74

I wouldn't let them hold my money. Same goes with WAMU.

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After reading the statement.........why do you say that?

[jaydub]

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A lot of the ones blowing up this year are probably the 2 year variety. Next year, you'll see the 3-yr ARMS blowing up. Were there more 3 yr than 2 yr?

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The real risk is in 2006 and later 2005 loans. Stuff written in 2004 was written at prices before the bubble peaked, so the homes can be sold for closer to what is owed. And two year ARMs are probably the biggest risk since the borrowers were more likely to choose them because they couldn't afford the higher rates of a 3,5, or fixed. Plenty of two year ARMs left to reset this year and next.

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DC,

Good points. I will add that as time went on standards became even more lax wrt stated incomes and LTV, which when combined with the rising prices you mention is a true double whammy.

My recollection from some credit suisse reports is that 2008 is when the resets truly peak but regardless, we are only in the second inning or so at this point.

J

[cbloom]

I still don't get why this is a surprise to anyone. I thought everyone saw the lending practices in the bubble and knew what was going on. How could you possibly buy a mortgage bundle from Countrywide and think it was a AAA security?!?!?

[talentdeficit]

cbloom,

the problem is that the investment banks were packaging multiple loans into multiple CDOs (asset backed securities). rather than selling the idiot fund the smith, jones and taylor mortgages, and the moronic fund the yang, ho and li mortgages, they packaged 90% of each mortgage into a A rated security, 8% to a B rated security and 2% to an 'equity' security. when someone defaults, the equity security takes the entire hit, until busto. then the B security starts taking hits. the A security doesn't get hit until more than 1 in 10 mortgages are in default.

so the A securities are safe, right? well, sort of. third party banks can issue derivatives based on the credit risk of securities. theoretically, these are used to hedge against your bond's guarantor disappearing or whatever. in practice though, they're a fun thing to trade and speculate on! awesome! so lots get issued. way more than the underlying securities, since you don't need to actually own anything to issue them. you're just betting on the movement of the credit profiles of the guys issuing these mortgage backed securities.

then, of course, since these derivatives are structured as a sort of insurance policy where you get a steady income stream over a fixed period (sort of like a mortgage), these get sliced up into CDOs like our mortgages, structured like those CDOs. then more third parties create derivatives of those, which are also structured suspiciously like mortgages. and those are traded.

so now, the problem is that altho our original A mortgage backed securities are relatively safe, and even if something insane like 25% of our mortages go into default they're not going to be valueless, there's so many derivatives of them sliced up and reissued and used to create more derivatives et cetera, that even a relatively small drop in value of the original securities can be disasterous for the issuers and holders of the derivatives of those securities. also, since you can continue creating derivatives and issuing CDOs based on them basically to infinity, things get messy and no one is really sure what they're buying.

[kyleb]

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booya just bought 10000 shares

suck it dudes

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Nice play...up another 11% today.

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ship iiiiiiiiiiiiiiiiiiiiit

[DesertCat]

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cbloom,

they packaged 90% of each mortgage into a A rated security, 8% to a B rated security and 2% to an 'equity' security. when someone defaults, the equity security takes the entire hit, until busto. then the B security starts taking hits. the A security doesn't get hit until more than 1 in 10 mortgages are in default.

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The A rated securities are even safer than this. Because the mortgages as a whole are yielding 8%-9% and the A rated securities are being paid less than 6% (and B rated paying less than 7%), there is another 2% per year to cover losses. And all prepayments pay down the AAA securities first. So in one trust I've examined that was started in 2005, a $1B trust full of subprime mortgages sold $800M of AAA, $180M of BBB, and had $20M equity as over-collateralization. The equity gets all the excess cash flow which was considerable the first two years.

But now the ARMs have reset. Losses are increasing, but since the ARMs have reset to 9% there is so much excess cash flow that it's been covering the losses. This trust is recovering about 60% on any loans in foreclosure, so with excess cash flow of 3%-ish it can send 7.5% of it's loans through foreclosure in any year without touching the O/C. But it takes a while for a loan to work it's way to foreclosure so it's still uncertain how many will end up there.

But right now the A securities have been paid down to around $200M (reset ARMs trigger lots of refis, but refis happen at a good rate even before reset), so the A securities are protected by almost 2x the amount of mortgages. I can't see the A's getting touched no matter how bad things get.

Speculation that I've heard is that some hedge funds that blew up were betting on the B rated securities, with leverage. That's pretty speculative IMHO.

[gonebroke2]

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I still don't get why this is a surprise to anyone. I thought everyone saw the lending practices in the bubble and knew what was going on. How could you possibly buy a mortgage bundle from Countrywide and think it was a AAA security?!?!?

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Because Moodys, S&P, and other rating agencies were lying. They give AAA ratings on worthless paper.

[gonebroke2]

Here is an ARM reset schedule:

http://www.itulip.com/images/armadjust.gif