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Wanna be really terrified?
Old 10-20-2006, 02:30 PM   #1
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Wanna be really terrified?

http://www.fdic.gov/news/conferences...k/whitney.html

I think I will go hide under a rock now...
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Re: Wanna be really terrified?
Old 10-20-2006, 02:52 PM   #2
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Re: Wanna be really terrified?

You have to look for the bright side. She said 90% of corporate and consumer America looks good!
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Re: Wanna be really terrified?
Old 10-20-2006, 02:57 PM   #3
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Re: Wanna be really terrified?

What's wrong Brewer? 26% of US population lives at, near, or below the poverty level, but she didn't say they are hungry!

Mach1

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Re: Wanna be really terrified?
Old 10-20-2006, 03:30 PM   #4
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Re: Wanna be really terrified?

Quote:
Originally Posted by Mach1
What's wrong Brewer? 26% of US population lives at, near, or below the poverty level, but she didn't say they are hungry!

Mach1

Nope, but the 10% on the bubble are more than enough t wreck the economy.
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Re: Wanna be really terrified?
Old 10-20-2006, 03:40 PM   #5
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Re: Wanna be really terrified?

Quote:
Originally Posted by brewer12345
Nope, but the 10% on the bubble are more than enough t wreck the economy.
This is triage at its finest. 26% can't sink the ship, because they never got onboard. 64% are comfortably seated. But 10% could swamp the thing as they scramble around.

Ha
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Re: Wanna be really terrified?
Old 10-20-2006, 04:15 PM   #6
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Re: Wanna be really terrified?

I'm not so sure I trust the presenter when she says things like:

Quote:
Again, I want to talk about why someone would do this to themselves, why someone would take on an adjustable-rate product when you know short-term rates are rising. That doesn't make any sense. The only conclusion that you can draw from this is that, otherwise, these homes would not be affordable to these consumers.
She ignores the fact that many people who can easily afford their homes get ARMs because they don't need to pay for the security of a fixed rate.
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Re: Wanna be really terrified?
Old 10-20-2006, 07:02 PM   #7
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Re: Wanna be really terrified?

Quote:
Originally Posted by free4now

She ignores the fact that many people who can easily afford their homes get ARMs because they don't need to pay for the security of a fixed rate.
I don't know about this point. What data do you base your opinion on? My information says that the highest percentage of "creative"mortgages are in the big bubble states, like California, Colorado. Here in Colorado we now have the highest mortgage foreclosure rate in the country. http://www.rockymountainnews.com/drm...704390,00.html

In California, foreclosures are rising. http://www.palmbeachpost.com/busines...ures_1014.html

Thousands of ARMs are due to adjust upwards in 2007. It's too soon to conclude how it will affect the economy, but logic says that the majority of those with creative mortgages acquired them because they couldn't afford the house in the first place.
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Re: Wanna be really terrified?
Old 10-20-2006, 08:27 PM   #8
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Re: Wanna be really terrified?

Quote:
Originally Posted by HaHa
This is triage at its finest. 26% can't sink the ship, because they never got onboard. 64% are comfortably seated. But 10% could swamp the thing as they scramble around.

Ha
Ha, suppose 10% of all mortgages go delinquent in the next 18 months. Considering how absurdly leveraged every part of the mortgage lending/holding/securitization apparatus is, what do you think the consequences would be? Anyone remember the Resolution Trust Co.?

I am becoming increasingly convinced that we will be entering a housing-lead recession late 2007/early 2008. By then, a number of banks will wish they had never heard of an option ARM.
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Re: Wanna be really terrified?
Old 10-21-2006, 09:20 AM   #9
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Re: Wanna be really terrified?

Yeah, that is a fascinating but sobering article. It'll be interesting to see how this plays out. It does seem as if the recent drop in gas prices would have given the consumer group at risk a bit of a reprieve - they were squeezed harder earlier in the year than they are now. Maybe this will draw things out more gradually?

I don't have any idea how the "2007 ARMS reset" will affect things. Does this mean that for a bunch of homeowners their mortgage suddenly goes up in early 2007?

Do you really think this can "wreck" the economy? - that implies no recovery. I guess you mean a recession.

Audrey
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Re: Wanna be really terrified?
Old 10-21-2006, 10:28 AM   #10
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Re: Wanna be really terrified?

Quote:
Originally Posted by brewer12345
... By then, a number of banks will wish they had never heard of an option ARM.
Does anyone know how the ownership of consumer housing debt breaks down? In the past, it was mostly banks, but now with securitization so common, it seems that it's anyone's guess who actually owns the debt.

My concern is that while we understand how a real estate bubble unwinds when the debt is owned by FDIC insured or semi-insured banks, we may be looking at a different animal this time.

Jim
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Re: Wanna be really terrified?
Old 10-21-2006, 11:29 AM   #11
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Re: Wanna be really terrified?

Quote:
Originally Posted by magellan
Does anyone know how the ownership of consumer housing debt breaks down? In the past, it was mostly banks, but now with securitization so common, it seems that it's anyone's guess who actually owns the debt.

My concern is that while we understand how a real estate bubble unwinds when the debt is owned by FDIC insured or semi-insured banks, we may be looking at a different animal this time.

Jim
If you look at the presentation I linked, they actually make the point that banks now hold a higher % of assets in mortagges now than they have in many yeras, in part because corporations haven't been after banks for loans.
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Re: Wanna be really terrified?
Old 10-21-2006, 11:36 AM   #12
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Re: Wanna be really terrified?

Quote:
Originally Posted by brewer12345
Considering how absurdly leveraged every part of the mortgage lending/holding/securitization apparatus is, what do you think the consequences would be? Anyone remember the Resolution Trust Co.?
Quote:
Originally Posted by brewer12345
If you look at the presentation I linked, they actually make the point that banks now hold a higher % of assets in mortagges now than they have in many yeras, in part because corporations haven't been after banks for loans.
I'm re-reading Lynch's "Beating the Street", written when the S&L debacle was fresh in everyone's minds, and he implies that most of the trouble was caused by S&Ls loaning money out for corporate/commercial RE projects-- not individual homeowners.

I can see that a bank holding its own option ARM paper could get burned by the deadbeats. But what about a bank that's repackaged their loans and sold them? How could those foreclosures come back to haunt them?
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Re: Wanna be really terrified?
Old 10-21-2006, 12:30 PM   #13
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Re: Wanna be really terrified?

Quote:
Originally Posted by brewer12345
If you look at the presentation I linked, they actually make the point that banks now hold a higher % of assets in mortagges now than they have in many yeras, in part because corporations haven't been after banks for loans.
That figure (which I missed, thanks) says that we need to worry about banks still, but it doesn't indicate who else we need to worry about, which was my question.

The $1 trillion+ loss in the S&L crisis mainly affected owners of banks and taxpayers. If there was a similar size loss today (adjusted for % GDP), who would get hit?

One statistic from Freddie MAC's web site indicates that only 24% of mortgage debt is held by banks, and 42% is held by investment management firms. I'm not sure how accurate this is, but it makes sense. The data is from a pie chart at the bottom of the page at http://www.freddiemac.com/mbs/)

My concern is about how a big wave of forclosures foreclosures might ripple through the economy. Maybe I'm all wet, but it seems like we're in unchartered water. Depending on how concentrated or leveraged the 42% of investment manager ownership is, it could unravel badly. On the other hand, maybe in terms of impact to the economy, securitization will cause the pain to be more evenly distributed and it won't be as bad as before.

Jim

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Re: Wanna be really terrified?
Old 10-21-2006, 12:33 PM   #14
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Re: Wanna be really terrified?

Quote:
Originally Posted by Nords
I can see that a bank holding its own option ARM paper could get burned by the deadbeats. But what about a bank that's repackaged their loans and sold them? How could those foreclosures come back to haunt them?
My understanding is that the banks have to make reps about the default rates of the lower tranches, so they may have to buy them back if the default rate is higher than they rep'd.
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Re: Wanna be really terrified?
Old 10-21-2006, 12:35 PM   #15
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Re: Wanna be really terrified?

Quote:
Originally Posted by magellan


My concern is about how a big wave of forclosures might ripple through the economy. Maybe I'm all wet, but it seems like we're in unchartered water. .

Jim

Maybe no one else noticed, but I found "Magellan" talking about waves,
ripples, being all wet and in uncharted (sic) waters slightly amusing.

JG
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Re: Wanna be really terrified?
Old 10-21-2006, 12:58 PM   #16
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Re: Wanna be really terrified?

Quote:
Originally Posted by Mr._johngalt
Maybe no one else noticed, but I found "Magellan" talking about waves,
ripples, being all wet and in uncharted (sic) waters slightly amusing.
I wish I could say it was my "dry" wit coming to the fore, but unfortunately it was completely accidental.

Maybe the references came from my subconscious as a result of symptoms of this horrible flu I'm fighting. I do feel a bit like I'm drowning at times...

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Re: Wanna be really terrified?
Old 10-21-2006, 01:02 PM   #17
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Re: Wanna be really terrified?

Quote:
Originally Posted by magellan
That figure (which I missed, thanks) says that we need to worry about banks still, but it doesn't indicate who else we need to worry about, which was my question.

The $1 trillion+ loss in the S&L crisis mainly affected owners of banks and taxpayers. If there was a similar size loss today (adjusted for % GDP), who would get hit?

One statistic from Freddie MAC's web site indicates that only 24% of mortgage debt is held by banks, and 42% is held by investment management firms. I'm not sure how accurate this is, but it makes sense. The data is from a pie chart at the bottom of the page at http://www.freddiemac.com/mbs/)

My concern is about how a big wave of forclosures foreclosures might ripple through the economy. Maybe I'm all wet, but it seems like we're in unchartered water. Depending on how concentrated or leveraged the 42% of investment manager ownership is, it could unravel badly. On the other hand, maybe in terms of impact to the economy, securitization will cause the pain to be more evenly distributed and it won't be as bad as before.

Jim

What matters is not who holds the most $$$ in mortgages, but who hiolds the risk. When a bank securitizes a pool of subprime mortgages, they sell most of the value and retain most of the risk, at least at first. Some of them sell off the toxic waste tranche they retain, but all of them maintain substantial exposure.
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Re: Wanna be really terrified?
Old 10-21-2006, 01:22 PM   #18
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Re: Wanna be really terrified?

Quote:
Originally Posted by brewer12345
What matters is not who holds the most $$$ in mortgages, but who hiolds the risk. When a bank securitizes a pool of subprime mortgages, they sell most of the value and retain most of the risk, at least at first. Some of them sell off the toxic waste tranche they retain, but all of them maintain substantial exposure.
I seem to be a bit out of my element here. I thought the whole point of securitizing the loan was to transfer the risk from the originator of the mortgage to the buyer of the mortgage backed security.

If the borrower fails to repay, it's the security holder that gets caught holding the bag, not the originator. So by my math, the banks hold only 25% of the risk of residential mortgages.

Is that incorrect?
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Re: Wanna be really terrified?
Old 10-21-2006, 01:57 PM   #19
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Re: Wanna be really terrified?

Quote:
Originally Posted by magellan
I seem to be a bit out of my element here. I thought the whole point of securitizing the loan was to transfer the risk from the originator of the mortgage to the buyer of the mortgage backed security.

If the borrower fails to repay, it's the security holder that gets caught holding the bag, not the originator. So by my math, the banks hold only 25% of the risk of residential mortgages.

Is that incorrect?
In the interest of clarifying the debate, I think it is time for Securitization 101:

1. Bank or other lender has a pool of receivables that flow cash and they wish to use to raise money. We are talking about mortgages, but you can securitize almost any kind of cash flow: credit card receivables, auto loans, personal loans, commercial mortagges, etc. David Bowie even securitized a stream of royalties on his old albums.

2. Bank sticks these receivables in a special bankruptcy remote trust. The loans are all the trust holds, and if the bank goes bust, it doesn't involve the trust.

3. The trust then sells debt backed by the assets it holds. The debt usually is tiered WRT priority. A very simple structure might have three sets of notes issued: A, B, and C. A would be worth maybe 75% of the assets. This class would have first priority, so if there were problems with the underlying loans, these notes would be the last to be hit. Typically, this is AAA or AA rated debt (very high quality). The B notes might be worth 10 to 15% of the value of the assets. These notes come behind the A notes, but ahead of the C notes. At the outset, these notes would be rated BBB (still investment grade). The C notes are often referred to as the "equity" tranche. They are first in line to soak up the beating if there is a problem with the assets, and they don't get paid until the A and B notes are paid.

4. The A notes are sold to everyone: mutual funds, life insurance companies, banks, individuals, foundations, etc. They are very high quality stuff, so it is easy to sell. Yield might be LIBOR + .5%. The B notes are a little tougher to sell, but there are buyers that specialize in this paper. Yield might be LIBOR + 1.5% or so. The C tranche is usually retained by the nbank, although they can sometimes sell it at the outset or after the deal has "seasoned" for a while.

There are lots of permutations, bells & whistles, and flavors to this, but the above is the basic structure. Given this structure, you can see why banks that deal in junky mortgages might still have most of the risk still on their hands even though they may have sold most of the value of the loans. They still have the first loss piece.
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Re: Wanna be really terrified?
Old 10-21-2006, 02:43 PM   #20
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Re: Wanna be really terrified?


Quote:
Originally Posted by brewer12345
In the interest of clarifying the debate, I think it is time for Securitization 101:
Thanks, that was very helpful, except now I'm starting to get really terrified...

If I understand this correctly, even though the banks only own a relatively small percentage of the value of the all outstanding mortgage loans (25%), they own more consumer debt as a percentage of total assets than they used to, and the part of it they own is of far lower quality than it was before securitization.

Sounds like a recipe for disaster.

Also, it sounds like my original concern about the non-bank holders isn't an issue because they mostly own higher quality tranches so they should be relatively immune to problems when the defaults start rolling in.

Did I get that right?

Jim
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