any merit to this commentary?

[captZEEbo]

http://news.morningstar.com/articlen...pos=Commentary

I have no idea where they get their "fair value" prices on the bottom, but on the whole it makes sense to me. Thoughts anyone?

[AvivaSimplex]

The author hasn't really done her homework on what those companies actually hold. She's assuming that the mortgage security problems are limited exclusively to sub-prime. There are plenty of other bombs that may or may not go off. CFC, for example, has a huge position in interest-only loans whose rates reset in the next year or 2. Odds are these will see substantial increases in defaults and foreclosures. E-Trade, for some reason, has billions of dollars in mortgage-backed securities.

"Fair value" is a wild ass guess. If alt-A, interest-only, and NINJA loans turn out to perform as their underwriters hoped, all of these companies will be great values. If not, bankruptcy is possible for one or more of them.

[DesertCat]

[ QUOTE ]
CFC, for example, has a huge position in interest-only loans whose rates reset in the next year or 2. Odds are these will see substantial increases in defaults and foreclosures. E-Trade, for some reason, has billions of dollars in mortgage-backed securities.

[/ QUOTE ]

I haven't looked at CFC or E-Trade, but most of these companies securitize. A securitized loan gives the company zero downside exposure to losses as the loans have been effectively been sold. The loans and the debt that funded the securitization will still appear on the company's balance sheet even though they are completely non-recourse. Companies that securitize still have problems, but they are future problems, i.e. funding new loans and whether they'll see any more residual income from previous securitizations.

Edit: I apologize if the securitization stuff was already obvious to you, but just in case I thought I'd point this stuff out for anyone reading who don't know it.

[pig4bill]

Except they have to buy them back if they turn out to be non-performing within a certain period of time. Plus they had to move a billion in mortgages that they couldn't dump from their "held for sale" portfolio to their "held for investment" portfolio in the first half of the year.

Etrade has been increasingly getting into the mortgage biz. The mortgage revenue was more than the brokerage revenue in the last earnings.

[DesertCat]

[ QUOTE ]
Except they have to buy them back if they turn out to be non-performing within a certain period of time. Plus they had to move a billion in mortgages that they couldn't dump from their "held for sale" portfolio to their "held for investment" portfolio in the first half of the year.

Etrade has been increasingly getting into the mortgage biz. The mortgage revenue was more than the brokerage revenue in the last earnings.

[/ QUOTE ]

Their buyback obligations are usually very limited, typically mortgages where the first payments are missed or where they dont meet underwriting standards such as the credit rating was below range or the documentation is missing. It's relatively rare and only happens in the first few months after the trust is established, after that the co. is off the hook.

Holding loans for investment is the future problem, I.e. They are getting hard to sell or securitize. The survivors will likely benefit from less competition or at least that's what I tell myself.

[jaydub]

[ QUOTE ]
[ QUOTE ]
Except they have to buy them back if they turn out to be non-performing within a certain period of time. Plus they had to move a billion in mortgages that they couldn't dump from their "held for sale" portfolio to their "held for investment" portfolio in the first half of the year.

Etrade has been increasingly getting into the mortgage biz. The mortgage revenue was more than the brokerage revenue in the last earnings.

[/ QUOTE ]

Their buyback obligations are usually very limited, typically mortgages where the first payments are missed or where they dont meet underwriting standards such as the credit rating was below range or the documentation is missing.

[/ QUOTE ]

Or if there is fraud. Oops.

J

[DesertCat]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Except they have to buy them back if they turn out to be non-performing within a certain period of time. Plus they had to move a billion in mortgages that they couldn't dump from their "held for sale" portfolio to their "held for investment" portfolio in the first half of the year.

Etrade has been increasingly getting into the mortgage biz. The mortgage revenue was more than the brokerage revenue in the last earnings.

[/ QUOTE ]

Their buyback obligations are usually very limited, typically mortgages where the first payments are missed or where they dont meet underwriting standards such as the credit rating was below range or the documentation is missing.

[/ QUOTE ]

Or if there is fraud. Oops.

J

[/ QUOTE ]

Yes but they aren't talking about people exagerating their salaries on a stated income loan. As I said it's rare. One i looked at had to reserve $2m to buy back loans out of a billion dollar loan sale. There are another $4m in claims they say they won't have to buy. Thats tiny in proportion to the trust.

[pig4bill]

[ QUOTE ]
[ QUOTE ]
Except they have to buy them back if they turn out to be non-performing within a certain period of time. Plus they had to move a billion in mortgages that they couldn't dump from their "held for sale" portfolio to their "held for investment" portfolio in the first half of the year.

Etrade has been increasingly getting into the mortgage biz. The mortgage revenue was more than the brokerage revenue in the last earnings.

[/ QUOTE ]

Their buyback obligations are usually very limited, typically mortgages where the first payments are missed or where they dont meet underwriting standards such as the credit rating was below range or the documentation is missing. It's relatively rare and only happens in the first few months after the trust is established, after that the co. is off the hook.

[/ QUOTE ]

It depends. I've heard of some that have a year time period.

[ QUOTE ]
Holding loans for investment is the future problem, I.e. They are getting hard to sell or securitize.

[/ QUOTE ]

It's not a future problem, it's a right now problem. When they can't unload this junk, they can't get any more money to lend. They are not "getting" hard to sell, they're virtually impossible to sell right now. That's why Countrywide had to tap the last of their credit line last week.