Archive for the ‘subprime’ Category
“If the chain of title of the note is broken, then the borrower no longer owes any money on the loan” | Subprime redux
I have been reading John Mauldins weekly emails for a while and I gain tons of insight through it. Tonights note including quotes from David Kotok at (www.cumber.com) almost made me fall off my chair. Like everyone I have heard that US banks are pressing pause on foreclosures and there was some talk of fraudulent foreclosure notices with what I thought I heard about shortcuts. The issue is much deeper.
The Subprime Debacle: Act 2 | John Mauldin
"Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper…only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan.
"The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.
"So somewhere between the REMICs (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes) and MERS (Mortgage Electronic Registration System), the chain of title was broken”
In simple terms the mortgages placed with Freddie Mac/ Fannie Mae, were broken up into tranches where each mortgage was no longer whole … bits went into high grade securities, and bits went into junk bonds. This was the attraction of the new vehicles with different rates of return. In order to maintain chain of ownership between borrower and (original) lender the use of REMIC and MERS was designed to do that.
It failed. The chain of ownership was broken between the borrower and the holder of the note. That break in the chain says that the borrower no longer owes any money on the loan. The issue of transparency has always been there with Mortgage Backed Securities MBS). This goes much further than transparency. The question is one of legality in creation of MBS and the methodology that supported them.
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This is huge. This is why Ally Financial (formerly GMAC), JP Morgan Chase, and Bank of America have suspended mortgage foreclosures. They run the risk of all the foreclosure actions being declared null and void. This story is about to get big.
The last time saw a graphic such as this was 2007, when the schedule for mortgage resets on US sub prime mortgages pointed to an inevitable crash beginning end of 2007 and through early 2008.
Well here is the next picture that is eerily similar with forward predictions of similar catastrophe in 2011. The US option ARM. Apparently these are not necessarily sub-prime at least right now. The real danger exists in the event that interest rates increase meaningfully to co-incide with the reset dates.
Also we must look at this in the context of the Banks rushing to repay government TARP / SCAP money. It is quite possible the reverse will be happening with some banks in trouble again in 2011.
Option ARMs: Paying $98 a month on a $350 Thousand Mortgage | Calculated Risk
About 1 million option ARMs are estimated to reset higher in the next four years, according to real estate data firm First American CoreLogic of Santa Ana, California. About three quarters of those loans will adjust next year and in 2011, with the peak coming in August 2011 when about 54,000 loans recast, the data show.
“The option ARM recasts will drive up the foreclosure supply, undermining the recovery in the housing market,” [Susan Wachter, a professor of real estate finance at the University of Pennsylvania’s Wharton School in Philadelphia] said in an interview. “The option ARMs will be part of the reason that the path to recovery will be long and slow.”
A remarkable forward looking piece from Andrew at the ft. Some of the implications:
- Russia extends influence through economic investment
- Stock values are one half of today’s value
- Interest rates are close to zero
- Dividends are at zero
- Central Banks are in complete control of regulation and of banks
- Banks are almost completely owned by the government
- A man from Fife is in charge of the world [scary]
By Andrew Hill
What a week! The utility-dominated FTSE 100 celebrated the fifth anniversary of the crash of 2008 with a 2 per cent gain to close at 1,950, its biggest five-day surge since early 2009.
The excitement followed indications from Oleg Deripaska, executive chairman of BP, that the Russo-British energy group might resume dividends next year, breaking away from the pack of UK-listed blue-chips that have been husbanding cash since demand for their goods and services slumped and recession began four years ago.
Britain’s co-premier David Cameron – one half of the country’s “Double-Dave” unity government with David Miliband –
Copyright The Financial Times Limited 2008
Relevance to Bankwatch:
This is not a good future, and one we need to avoid at all costs.
The announcement today of the Bretton Woods 2 conference in November leads folks to think of the worst, where neo-liberalism / socialism of finance and the world is one possible outcome.
As reported today in the Globe and Mail with the headline Wanted: a new financial order the prospect for extremely dysfunctional changes is readily apparent. Bretton Woods 1 at least had John Maynard Keynes at the helm. He was a qualified and capable economist. When we look at the photo of the folks
involved in this debate it’s too easy to see political influence working harder than common sense and economic relevance for the future. Keynes saw the future in terms of 100 years – what is their perspective?
We can only hope they minimise the shifts to those that will address the immediate problems, and take time about long term systemic changes.
Thoughts on this one, especially from any economist folks, couch or otherwise, welcome.
Managing leverage combined with sound lending practices are essential for Banks | Wachovia failed on both
The Wachovia situation is a good example to illustrate the point I have been making insufficient capital at Banks, and their extended leverage.
Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.
They are saying in effect that the $312 bn loan portfolio has significant bad debts and that Citi will absorb up to $42 Bn. If we look at the last balance sheet here, Wachovia’s capital base was $74 Bn at the last quarter. If the $42 Bn is correct, then Wachovia’s capital would be more than cut in half. If the losses are greater, then the entire capital base could be erased.
Managing leverage and sound lending practices are essential for Banks, and Wachovia is a good example of how bad lending practices combined with high leverage is a disastrous combination.
The official Federal Reserve announcement signalling that the US government is not prepared to let AIG fail. This after letting Lehman Brothers fail, and pressuring Merrill Lynch into a sale to Barclays.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance
More here at the FT
The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
The Fed said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.
Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.
Earlier this week, Maurice R. ‘Hank’ Greenberg, who served as chairman and chief executive of American International Group from 1967 until 2005, wrote
A federal bridge loan is appropriate because it is in our national interest to save AIG. AIG operates in approximately 130 countries and has more than 100,000 employees. It provides credit protection to tens of thousands of financial institutions and other companies around the world. Its failure would pose systemic risk to the US and international financial systems.
How did AIG get to this point? Clearly, risk management controls disappeared or were weakened. In recent years, AIG grew for the sake of growth, without regard for profitability, and its financial products businesses spun out of control.
In the clearest sign yet of impacts on the Banks from the subprime crisis, US consumers are shifting to cash or debit and away from credit cards.
Mainstream retailers are reporting that shoppers are opting for debit cards or cash instead of credit cards as they face tighter credit limits, illustrating how the wider credit crunch is being transferred to main street spending.
However the message is clouded by the fact that while certain retailers are noting the shift, Visa and Mastercard are seeing card usage relatively unchanged. The shift was first noted by Walmart, and is now followed by Lowe’s, Kohl’s and Target.
It may be that the economic impact on consumers is affecting lower income first.
As predicted, here is the first example of Asian Banks seeking positive investment opportunities amongst the American Banks. In this case they are being characteristically careful and investing in one they already know.
The second is that the would-be buyer is Japanese. Mitsubishi UFJ wants to buy the 35 per cent it does not already own of UnionBanCal for $63 a share, implying a valuation of $8.8bn for the owner of Union Bank of California. Relatively unscathed, Japanese banks have already lent a financial hand to struggling global peers. MUFJ has bigger plans.
Two down, and approx 88 to go if current estimates are correct. There is an update due in August, and I would not be surprised to see the 90 estimate increased.
Two weeks after the Federal Deposit Insurance Corp seized IndyMac, the Office of the Comptroller of the Currency said it closed First National Bank of Nevada and First Heritage Bank NA of California.
This has to be the most depressing piece on the true underbelly of the subprime situation in America.
Note how lenders have shifted to fee revenue to optimise the high personal debt situation.
Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 — a difference that adds billions of dollars in interest charges annually to credit card bills.
“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.
For decades, America’s shift from thrift could be summed up in this familiar phrase: When the going gets tough, the tough go shopping. Whether for a car, home, vacation or college degree, the nation’s lenders stood ready to assist.
But as happens with many debt-laden Americans, an unexpected illness helped push Ms. McLeod over the edge. In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.
UPDATE: to post 14th July 2008
Fannie/ Freddie collectively have $5,300 billion in mortgage credits against $ 81 bn in capital.
Any revaluation of their mortgages by more than 1.5% discount will wipe out their capital base.
More than half their loans are from the peak years of 2005 – 2007.
Valuation of their mortgages is difficult, but it is certain they are
worth something less than face value. While they had a rule of not lending greater than 80% of home value, this rule was broken through top up loans, and potentially through loans purchased from investment dealers.
Nonetheless its no small leap to realise that the US government is now on the hook until the underlying asset value is clarified.