Sub-Prime Crises Overhyped Baloney?

[adios]

I'm starting to believe it is. I have no doubt that there was a panic in the secondary MBS markets but as far as liquidity for lending on real estate I'm starting to think the problems don't exist. That is there's plenty of money for qualified buyers but not sure about "jumbo" mortgage loans. Just my take based on anecdotal evidence.

How about a conspiracy theory to ponder. I watch a fair amount of financial shows on TV. In fact my wife has stated that she's constantly amazed at how many I watch. Of course I'm not looking for ideas on trading. I do it to find out what the various talking heads are saying as one way to gauge sentitment, albeit a crude one I'll admit (sometimes there worth a chuckle because people say some ridiculous things on these shows on occasion). Anyway I caught a little bit of Cramer on some CNBC market show and he stated that he believed that the Bush administration wanted to drive the smaller to intermediate lenders out of the mortgage market and leave it to the big banks more or less. Maybe and I found that take interesting. Housing is slow in some areas no doubt. No doubt that builders over built in places too. No doubt that prices in certain areas got to be overpriced too. However, sub prime lending represents a very small portion of total mortgage lending. I understand the transparency issue with CDOs and the securities issued but I'm wondering how bad the rating agencies got it when this all said and done. For example of MBS rated BBB- what are the default rates compared to corporate BBB-? I think it was TheDaveR on another forum that the bond market basically didn't believe the ratings on many of the MBS but not sure how bad the defaults are turning out to be.

[DcifrThs]

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I'm starting to believe it is. I have no doubt that there was a panic in the secondary MBS markets but as far as liquidity for lending on real estate I'm starting to think the problems don't exist. That is there's plenty of money for qualified buyers but not sure about "jumbo" mortgage loans. Just my take based on anecdotal evidence.

How about a conspiracy theory to ponder. I watch a fair amount of financial shows on TV. In fact my wife has stated that she's constantly amazed at how many I watch. Of course I'm not looking for ideas on trading. I do it to find out what the various talking heads are saying as one way to gauge sentitment, albeit a crude one I'll admit (sometimes there worth a chuckle because people say some ridiculous things on these shows on occasion). Anyway I caught a little bit of Cramer on some CNBC market show and he stated that he believed that the Bush administration wanted to drive the smaller to intermediate lenders out of the mortgage market and leave it to the big banks more or less. Maybe and I found that take interesting. Housing is slow in some areas no doubt. No doubt that builders over built in places too. No doubt that prices in certain areas got to be overpriced too. However, sub prime lending represents a very small portion of total mortgage lending. I understand the transparency issue with CDOs and the securities issued but I'm wondering how bad the rating agencies got it when this all said and done. For example of MBS rated BBB- what are the default rates compared to corporate BBB-? I think it was TheDaveR on another forum that the bond market basically didn't believe the ratings on many of the MBS but not sure how bad the defaults are turning out to be.

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the bond markets didn't believe it from early on in terms of yield. the yield was pricing higher default rates.

investors, however (i.e. banks and SIVs and conduits), were taking to them as a result of the limitations of their business model. they purchased those things and acquired funding for them in the S-T paper market. their higher ratings and higher yields seemed too good to be true...

and they were. the yields are what turned out to be correct.

the default rates will likely be higher than bbb- corporates. realized defaults though i don't have data on for AAA rated RMBS structured from subprime mortgages vs. AAA rated products structured from both agency backed mortgages and other cash flows.

that'd be a good ex post study.

Barron

[Phone Booth]

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I'm starting to believe it is. I have no doubt that there was a panic in the secondary MBS markets but as far as liquidity for lending on real estate I'm starting to think the problems don't exist. That is there's plenty of money for qualified buyers but not sure about "jumbo" mortgage loans. Just my take based on anecdotal evidence.

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Everybody knows that agency-conforming loans haven't had much trouble clearing the market - why would they? You can sell those forward on a TBA basis, so there's absolutely no liquidity issue and credit-wise, these are guaranteed by fannie or freddie.

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Anyway I caught a little bit of Cramer on some CNBC market show and he stated that he believed that the Bush administration wanted to drive the smaller to intermediate lenders out of the mortgage market and leave it to the big banks more or less.

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The Bush administration didn't really take an active part in the debacle, other than perhaps in the build-up phase.

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Maybe and I found that take interesting. Housing is slow in some areas no doubt. No doubt that builders over built in places too. No doubt that prices in certain areas got to be overpriced too. However, sub prime lending represents a very small portion of total mortgage lending.


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What's in trouble is *all* non-agency conforming mortgage lending, not just subprime. That's not a small portion of total mortgage lending. And this is likely the worst housing market anyone here has seen in the US.

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I understand the transparency issue with CDOs and the securities issued but I'm wondering how bad the rating agencies got it when this all said and done. For example of MBS rated BBB- what are the default rates compared to corporate BBB-? I think it was TheDaveR on another forum that the bond market basically didn't believe the ratings on many of the MBS but not sure how bad the defaults are turning out to be.

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I don't think the rating agencies did that bad of a job on most MBS/ABS deals on likely credit performance going forward - CDOs are a whole another story, however.

[pig4bill]

This is only the tip of the iceberg of the mortgage mess. When the mountains of overvalued paper finally get marked down to it's true value, some organizations will be insolvent. So far, everyone is trying to hold off, hoping the housing market turns around so that worthless paper becomes worth something again. They hold off on filing mortgage insurance default claims, fearing that it would trigger an avalanche of claims, wiping out the highly leveraged insurance companies. Every day that goes by without improvement means bigger and bigger losses for the paper holders, until eventually they won't be able to take it any more. Some foreign organizations have not held off, witness the German banks that nearly went belly-up.

[adios]

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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. 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.

[adios]

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I'm starting to believe it is. I have no doubt that there was a panic in the secondary MBS markets but as far as liquidity for lending on real estate I'm starting to think the problems don't exist. That is there's plenty of money for qualified buyers but not sure about "jumbo" mortgage loans. Just my take based on anecdotal evidence.

How about a conspiracy theory to ponder. I watch a fair amount of financial shows on TV. In fact my wife has stated that she's constantly amazed at how many I watch. Of course I'm not looking for ideas on trading. I do it to find out what the various talking heads are saying as one way to gauge sentitment, albeit a crude one I'll admit (sometimes there worth a chuckle because people say some ridiculous things on these shows on occasion). Anyway I caught a little bit of Cramer on some CNBC market show and he stated that he believed that the Bush administration wanted to drive the smaller to intermediate lenders out of the mortgage market and leave it to the big banks more or less. Maybe and I found that take interesting. Housing is slow in some areas no doubt. No doubt that builders over built in places too. No doubt that prices in certain areas got to be overpriced too. However, sub prime lending represents a very small portion of total mortgage lending. I understand the transparency issue with CDOs and the securities issued but I'm wondering how bad the rating agencies got it when this all said and done. For example of MBS rated BBB- what are the default rates compared to corporate BBB-? I think it was TheDaveR on another forum that the bond market basically didn't believe the ratings on many of the MBS but not sure how bad the defaults are turning out to be.

[/ QUOTE ]

the bond markets didn't believe it from early on in terms of yield. the yield was pricing higher default rates.

investors, however (i.e. banks and SIVs and conduits), were taking to them as a result of the limitations of their business model. they purchased those things and acquired funding for them in the S-T paper market. their higher ratings and higher yields seemed too good to be true...

and they were. the yields are what turned out to be correct.

the default rates will likely be higher than bbb- corporates. realized defaults though i don't have data on for AAA rated RMBS structured from subprime mortgages vs. AAA rated products structured from both agency backed mortgages and other cash flows.

that'd be a good ex post study.

Barron

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I would imagine that AAA rated RMBS structured from subprime mortgages are doing fine but could be convinced otherwise. Not hard to lock in funding for those bonds. When this thing is all played out I agree that it would be a good ex post study.

[adios]

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This is only the tip of the iceberg of the mortgage mess. When the mountains of overvalued paper finally get marked down to it's true value, some organizations will be insolvent. So far, everyone is trying to hold off, hoping the housing market turns around so that worthless paper becomes worth something again. They hold off on filing mortgage insurance default claims, fearing that it would trigger an avalanche of claims, wiping out the highly leveraged insurance companies. Every day that goes by without improvement means bigger and bigger losses for the paper holders, until eventually they won't be able to take it any more. Some foreign organizations have not held off, witness the German banks that nearly went belly-up.

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The problems to me were more of perceptions rather than reality in defaults. A lot of the reasons that highly leveraged entities had problems were related to liquidity in short term financing. People didn't want to provide short term funding because they feared defaults. The paper many of these entities collapsed and when that happened the highly leveraged entitities received margin calls on the money that had been lent. This is basically what CFC and TMA went through among others. TMA has never had a thing to do with subprime lending yet they almost went belly up do to the crash in the secondary MBS market. They got margin calls on their repo agreements.

[eastbay]

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The problems to me were more of perceptions rather than reality in defaults.

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1 in 31 homes are in foreclosure in my neighborhood. I've never seen anything like that before. Every street has brown lawns with garbage piling up in them.

The realities of default are local.

eastbay

[ubiestmea]

[Phone Booth]

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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.